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Special Report

Impact investing

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Austria: Overcoming a troubled legacy

The challenge facing Austrian pension funds is their turbulent past rather than the new IORP II regulation 

Key points

• Pensionskassen are well prepared for IORP II
• General sentiment towards funded pensions is a concern
• The government has not fulfilled its promise to tackle the taxation of occupational pensions
• The authorities are late in implementing the EU’s portability directive

As defined contribution (DC) becomes the standard in many pension systems, it makes sense to look for best-practice models as well as poor examples. Austria encompasses both.

Few people are aware that Austria has one of the oldest purely DC occupational pension systems. Pensions rise and fall in line with market developments. Pensionskassen are putting aside buffers for worst-case scenarios. 

To keep people informed about developments in their pensions, Pensionskassen had to implement transparent governance and information systems early on. To avoid substantial losses, Austrian pension funds have also become good at making use of asset diversification and investment limits have – for the most part – been loose enough to allow them sufficient leeway. Sometimes a new strategy has had to be explained to the FMA supervisory body, but generally Pensionskassen have not felt restricted in their asset allocation choices. 

Analysts and experts have given providers good marks overall and the average long-term performance justifies the positive assessment and serves as a litmus test for the providers’ risk management: 5.55% since 1991, that is including two stockmarket crashes.

All this means that the implementation of the new Institutions for Occupational Retirement Provision (IORP) II directive is merely a formality for Austrian Pensionskassen. Governance is on target – only a few adjustments have to be made to the way information is presented to members. One of those adjustments is the way in which information for people who are about to retire is structured, including performance and cost structure.

The Austrian pension fund association, FVPK, welcomes the new prudent-person principle which is going to replace all investment caps in Austrian regulations. Pension fund representatives also claim that this will make their lives simpler.

The lack of growth in membership and the distrust some older members harbour for pension funds remains concerning. Much of this ill will has poisoned the mood against the occupational pension system for years.

Pension funds are themselves partly to blame – or at least the first representatives that helped set up the system in the 1990s. The first members to enter the new funded pension system had been poorly informed about the risks. The information policy was soon adjusted and individual choices (under a life-cycle model) were introduced, but resentment continued. 

Critics point to substantial pension cuts in certain years every time occupational pension are presented as part of the solution to a long-term funding problem in the pay-as-you-go first pillar. 

So, perversely, while Austrian Pensionskassen have easily met the European regulation on transparency and customer information for some years, it has been a lack of information, or rather the wrong kind of information, which has made life difficult for providers a quarter of a century later.

And here is where Austria went wrong. 

The first Pensionskassen members in the early 1990s were well-paid employees who had been promised enormous supplementary pensions by their employers – some of which were state-owned companies. When these promises threatened to overwhelm  their balance sheets, the companies decided to help the government set up a funded second pillar. But to save money only parts of the assets needed to cover liabilities were transferred in the hope that the capital markets would provide the rest of the funding necessary to pay out the promised pensions. Then the market correction in 2000 occurred when the technology equity bubble burst. 

austria

So the Austrian system started without organic growth and with people being assured that the investment returns from the capital markets would comfortably exceed 6% annual growth in subsequent decades. 

A decade later, the discount rate was capped at 3% and the new contracts were all for members gradually building an asset pool rather than having already accrued assets transferred. This meant their asset pool, along with their understanding of capital market opportunities and risks, was growing over time.

What stakeholders ignored when setting up the system was the almost complete lack of financial literacy in the population. Setting up a funded pension pillar needs a comprehensive plan for trust building and information policy – especially in Austria where there is no tradition of shareholding or stock-market participation. 

For such a campaign to work, however, it needs political support from all the main parties, but this is still lacking. Conservatives and right-wing parties have always more-or-less supported the idea of a supplementary, funded second pillar but have never put their weight behind it. The new conservative, far-right government elected last year has put a vague plan for occupational pensions in its legislative programme. But so far it has been pre-occupied with migration politics and its presidency of the EU council.

The Austrian pension fund industry is waiting patiently for the government to start strengthening the second pillar. Hopes are mainly placed in the tax overhaul the authorities want to begin tackling later this year. Eventually this could include tax incentives both for companies to introduce second-pillar plans as well as for individual members to match employer contributions. 

Some consultants propose a similar subsidy for small and medium-sized firms as well as for people on lower incomes. That would be in line with the approach adopted in Germany with the Betriebsrentenstärkungsgesetz (Act to Strengthen Company Pensions). 

Meanwhile, Austria is slowly implementing the EU’s portability directive. At the time of writing the amendments to national legislation were stuck somewhere between ministries and parliament. 

However, this directive has not been met with interest by Austrian stakeholders in the occupational pension industry. None of the providers has serious plans to internationalise its business. Especially not, when there is still a lot of business to be done at home. Only 20% of Austrian employees are accruing assets in a Pensionskasse or are already withdrawing a pension from this part of the pension system. 

Vorsorgekassen: shaping ESG 

In a way they were like little test balloons for some Pensionskassen – the provident funds set up in 2003 to hold assets for mandatory severance payouts. From the start these Vorsorgekassen competed with each other on who can become the most ethical or sustainable investor. When starting a new asset pool it is easier to exclude certain areas or companies as only relatively small amounts of money have to be allocated each year. 

Last autumn, the assets in the Vorsorgekassen, excluding fair-finance, broke the €10bn threshold. Some smaller providers among the eight competitors in the market remain under the €1bn mark. But as it is a mandatory system the asset pools continue to grow and by 2030 might match or overtake the amount managed by Pensionskassen, which stood at €22.6bn at the end of 2017. 

Most of the Vorsorgekassen are part of a group that also offers a Pensionskasse. Slowly the ESG-approach of the provident funds is seeping into the Pensionskassen. 

Over the last two years, particularly the VBV and the Valida group – the two largest providers for Pensionskassen and Vorsorgekassen – have applied further ESG investment approaches to their Pensionskasse. This was partly facilitated by the Vorsorgekassen, which managed to persuade Austrian providers to tailor products to suit their ESG needs. 

It was the Vorsorgekassen that pushed for the first real estate fund to be certified with the Austrian Umweltzeichen, a national environmental and social standard which has been in use since the 1990s, but has only been applied to financial products recently.

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