AUSTRIA - The Austrian supervisory authority FMA has cut the interest rate used by Pensionskassen to 3%.

Known as the Rechnungszins, the rate had been capped at 3.5% for DC schemes and 5% for DB schemes since 2003.

The new cut was taken to bring interest rates in line with capital market conditions, as well as ensure profitability "at the highest level of security for beneficiaries", the FMA noted in a press release.

Andreas Zakostelsky, head of the association of Austrian Pensionskassen, told IPE: "We welcome this step as a precautionary measure."

He pointed out the new interest rate was a more realistic figure to calculate pensions with and that it would lead to more pension increases, as the performance was more likely to exceed the lower threshold.

There was speculation that the June deadline for the new interest rate would be used as an opportunity by companies with defined benefit (DB) liabilities on their books to make a "cheaper" transfer to a Pensionskasse.

But Zakostelsky also pointed out that the new lower DB minimum rate might actually facilitate new DB contracts in future, which had not played much of a role over the last years.

The new interest rate, also used as a discount rate to calculate DB transfers from company book reserves, will only be applied to new contracts signed from the first of July.

New employees in companies that already have a contract with the Pensionskasse will receive the old interest rate, as a change to existing contracts would require a change to the Pensionskassen law, an FMA-spokesperson confirmed to IPE.

Such an amendment has been discussed for the past two years, in light of the fact that a few very old pension contracts are still granting interest rates of 6%, with some even as high as 8%.

Even the stable return of 6.61%, which Austrian Pensionskassen posted on average for last year, only led to a pension increase, is legally capped at 2%, for around 45% of all retired members.

Previous excessive interest rate assumptions have led to massive pension cuts of up to three quarters over the last years for some of the retired members in Pensionskassen and a loss in faith among some in the funded second pillar.