Top 1000 Pension Funds: Information overload
The amendment to the law governing Austrian Pensionskassen needed to be amended before it was even implemented. Barbara Ottawa reports
When a legal paragraph leaves room for interpretation, some might draw the wrong conclusions. This happened in Austria with the amendment to the law governing pension funds (PKG-Novelle). One of the major changes it brings to the second pillar is additional choice for individual members.
Until 31 October 2013, pensioners were given a one-off choice to transfer their assets to a so-called Sicherheits-VRG, which all pension funds must now offer. A VRG (Versicherungs- und Risikogemeinschaft) is an insurance and risk pool within a Pensionskasse. Each VRG has different actuarial assumptions and risk/return parameters according to the wishes of the company signing the contract with the pension fund.
The Sicherheits-VRG is a new low-risk option offering a minimum initial pension payout guaranteed by the pension fund, and applies a very low discount rate of around 2% during the active phase.
From age 55, those in multi-employer Pensionskassen and corporate pension funds, if set down in statute, can opt for transfer to a Sicherheits-VRG or to an insurance-based BKV (Betriebliche Kollektivversicherung), an occupational pension vehicle offered by insurers.
Members of a pension fund have a limited choice between various risk portfolios following a life-cycle system – if their employer includes the option in the contract with the Pensionskasse.
These additional choices require thorough information campaigns from the Pensionskassen, for example, informing all eligible members of the possibility to join a Sicherheits-VRG, as well as the pros and cons of switching to an insurance-based BKV.
The wording of these information packages was jointly worked out by Pensionskassen and the financial markets supervisor FMA to ensure information is provided neutrally.
While the FVPK pension fund association officially welcomes the additional information for members, some of the regulations are deemed superfluous.
There is a virtual consensus among industry representatives that few will choose to join a Sicherheits-VRG because of the much lower discount rate and the low level of expected return. Interest in switching to an insurance-based BKV seems to be similarly muted.
Pension industry stakeholders agree that these additional information requirements, as well as the additional reporting, constitute a significant increase in workload.
Peter Braumüller, responsible for insurance and pension fund supervision at the FMA, says his department shares the burden. “Supervising the compliance with the new information requirements means a considerable additional workload.” But he stresses the importance of information and risk management as tools in operating a system with mostly defined contribution (DC) contracts.
When the details of the PKG-Novelle were published in 2012, Pensionskassen started to plan how to reduce the number of VRGs.
The 17 Pensionskassen at that time had more than 150 VRGs in total because, according to the law, any company with more than 1,000 employees can demand its own return-and-risk portfolio.
The number of VRGs would have increased further because of the various new permutations, so Pensionskassen were hoping to use the amendment to the pension fund law to create so-called sub-portfolios to VRGs (sub-VGs), with a different asset allocation but keeping the risk pool intact.
A larger pool of members sharing the same actuarial risks means less risk for the individual and lower administration costs for Pensionskassen.
However, in April 2013, the FMA stated that VRGs and sub-VGs would only be eligible for membership if the new portfolio included the same level of choice as the old one.
Pensionskassen rejected this interpretation, arguing that it would have made it almost impossible to join any portfolios. So they turned to the government to amend the amendment of the PKG – which it did in July – and it is now possible to transfer portfolios to other VRGs if the company agrees, regardless of the choices offered.
If the legislator had not listened to the industry’s criticism, some Pensionskassen would have had to undo the changes to their VRG structures they had started last year.
As at the end of March 2013, the FMA counted 126 different VRG in the 16 remaining Austrian Pensionskassen after Valida acquired the former Siemens corporate scheme to turn it into the Valida Industrie Pensionskasse.
Because the Austrian Pensionskassen only manage around €16bn in assets for just over 815,000 members, or 20% of the Austrian workforce, the problem of attaining economies of scale also arose with the new low-risk Sicherheits-VRG.
It can be set up as a Sicherheits-VG underneath an existing VRG but most smaller pension funds choose to set up a contract with a larger pension fund to ensure sufficient people shared the actuarial risks. Six Sicherheits-VRG were set up by the end of March 2013.
It remains to be seen whether greater member choice and contribution flexibility will help increase faith in a DC system facing pension cuts resulting from market volatility.