Austria
compiled by Allianz Global Investors
Pension System Design
The Austrian pension system is predominantly based on the public pension pillar. The gross replacement rate amounts to approximately 80%, which is among the highest in Western Europe. Besides the prevailing state pension, employees can save through voluntary occupational and private pension plans.
However, with the 2004 pension reform, Austria took an important step towards the reconstruction of the very generous first pillar system, thereby giving further momentum to occupational and private pension provision. In April 2004 the Austrian parliament passed its pension reform containing the abolition of the generous early retirement system, the gradual alignment of the legal retirement age of men and women, the broadening of the calculation base and a reduction of the pension multiplier coming along with a lowering of the pension level.
The Austrian pension market did very well in the past years with increasing assets under management. The coverage of occupational pension schemes improved considerably, rising to 18% from just 10% some years ago. We therefore expect the Austrian market to post an above-average growth rate of 6.3% in the medium term. Nevertheless, even with a forecasted volume of pension assets of EUR 166 billion by 2020 the Austrian market for private pensions will remain comparatively small and dominated by individual insurance products.
Public Pensions
The Austrian state pension system is a pay-as-you go scheme, which is financed by contributions from both the employer and the employee totalling to 22.8% of the employees salary. Benefit calculation is reliant upon a formula that is based on earnings of the best 18 income years (gradually extended to the best 40 years in 2028), the length of insurance contributions and the retirement age. After having contributed for at least 45 years benefits will amount to 80% of personable salary up to a predefined cap.
The legal retirement age is 65 for men and 60 for women, which will be raised to 65 over a transition period beginning in 2024 and ending in 2033. Instead of rising the retirement age above 65 the Austrian government implemented incentives for working longer and disincentives for early retirement. They are focusing on rising the effective retirement age. Early retirement is still possible at the age of 62, but a discount is made for each year of retirement before the age of 65.
Pension benefits are indexed in line with the Consumer Price Index and subject to income tax.
Occupational Pensions
Employers who want to provide supplementary pension coverage to their employees may choose among five pension plan types. Until 1990 occupational pensions were almost financed internally through company book reserves. This changed with the introduction of Pensionskassen, the Austrian pension fund, in 1990, which now cover about 13% of the Austrian workforce.
At the end of 2005 an additional funding method for occupational pension schemes, occupational collective insurance plans (Betriebliche Kollektivversicherung) was introduced, that are offered by insurance companies. The intention was to stimulate competition between Pensionskassen and Insures, which should bring advantages for employers and employees.
The funding vehicles for voluntary occupational pension provision are the following:
- Pension funds (Pensionskassen)
- Occupational collective insurance plan (Betriebliche Kollektivversicherung)
- Internal book reserve accruals
- Support funds (Unterstützungskasse)
- Direct insurance contracts
1. Pension funds (Pensionskassen)
A pension fund is set up as a legally separate entity in order to keep pension assets separated from the sponsoring company. Due to the fact that 1,000 beneficiaries are required to set up a Pensionskasse, multi-employer pension funds have been established in order to allow smaller companies to make use of this funding vehicle as well. However, several large companies with a substantial workforce have set up their own pension fund. Early 2007, there were 7 multi-employer and 12 single-employer pension funds, covering together about 13.2% of the workforce. With the introduction of the collective insurance plans and the implementation of the IORP-Directive in national law (Directive of the European Parliament and the Council on the activities and supervision of institutions for occupational retirement provision – IORP), amendments to the law on Pensionskassen were undertaken (PKG-Novelle 2005). The main amendments are as follows:
- Opt-out option from providing a minimum return, based on the agreement of both parties (employers and employees/employee representatives)
- Previous approval of administration fee by the financial markets authority abolished
- Investment regulation relaxed – now based preponderantly on the Prudent Person Principle with some quantitative requirements (up to 70% can be invested in equity); an exemption applies for pension funds with a minimum return guarantee as they must not invest more than 50% in equity
- The relaxing of the investment regulation requires the set up of a comprehensive risk management
Tax treatment of contributions and benefits
Contributions up to 10% of salary are tax-deductible for the employer, provided that a benefit limit of 80% of current earnings is not exceeded. Contributions are not treated as taxable income to the employee.
The pension fund is not subject to tax on investment income earned on employer or employee contributions; hence, investment income is tax-exempt. Employer-financed benefits are taxed as earned income, whereas only 24% of employee-financed benefits are taxed as income.
2. Occupational collective insurance
In September 2005, collective occupational insurance plans were established as a new plan type for providing occupational pension provision. This new collective insurance vehicle is equivalent to the already existing pension funds regarding tax and labour law. For each employee a personal account must be established with separate disclosure of employer and employee contributions.
With regard to the investment regulation, the stricter investment guidelines for all life insurance products also apply to the occupational collective insurance with a maximum equity exposure of 40%.
In addition these insurance contracts must not be unit or index-linked.
In contrast to pension funds occupational collective insurance plans are not allowed to provide lump sum payments at the beginning of the payout phase unless the amount is below a certain minimum level (EUR 9,900 in 2006). They are obliged to provide life-long annuity payments.
Unlike pension funds, occupational collective insurance plans must provide a minimum return guarantee of 2.25% p.a.
3. Internal book reserves
Book reserves may be set up if the pension liability is based on a legally binding pension promise. The pension reserves are to be shown as liabilities on the balance sheet. At least 50% of a companies book reserves must be secured by government bonds. Book-reserved liabilities may be reinsured with a private insurance carrier, but the policy value has to be shown as a company asset on the balance sheet. Reinsurance is widely used for individual pension promises covering executives. The transfer to pension funds is incentivised. For a transfer of book reserve accruals to a pension fund the normal 10% limit of payroll for tax deductibility of contributions is not applicable. However, this incentive will only apply for transfers of pension promises established before January 1, 1999 and only transfers carried out before December 30, 2010 can enjoy this tax treatment.
Tax treatment of contributions and benefits
Allocations to book reserves are tax-deductible and not considered taxable income to the employee, provided a limit of 80% of current earnings is not exceeded. Insurance premiums to a reinsurer are also tax-deductible for the company. Deferred compensation arrangements are restricted to salary increases and bonus payments. Benefits are taxed as earned income.
4. Support funds
Support funds are autonomous legal entities that do not grant a legally enforceable right to the beneficiary. In addition, they may only grant very low benefits. Consequently, this funding vehicle is increasingly losing importance in Austria.
Tax treatment of contributions and benefits
No tax-deductible contributions can be made to a support fund during active employment. Benefits are taxed as earned income.
5. Direct insurance
The direct insurance is an arrangement in which an employer pays premiums to a life insurance company. In return, the benefits will be provided directly to the employee or to other beneficiaries defined in the plan. About 10% of occupational pension scheme participants are covered by direct insurances.
Direct insurance schemes existed before the introduction of the legislation in 1990 and have remained virtually unaltered. However, only annual premiums of up to EUR 300 receive any tax benefits under such schemes.
Tax treatment of contributions and benefits
Premiums are tax-deductible for the employer but are regarded as immediate taxable income to the employee if they exceed EUR 300 per person a year. Employee contributions attract tax reliefs within the limits for special expenses. Annuity benefits are taxed as earned income, while lump sum payments are not taxed.
Outlook
Austria has laid the foundations for funded pensions to play a greater role. In fact, over the past few years, Austria has reformed more elements of its pension system than almost any other country in Western Europe. For instance, it has transformed its public pillar into a notional defined contribution system, reformed the severance pay system, and introduced a new occupational vehicle as well as a new third pillar scheme. The latter has turned out to be a great success, while the new occupational vehicle has had a slow start. Austria has also experienced a shift towards defined contribution plans, which now dominate in occupational pension provision. Clearly, the shift from a very dominant first pillar to a more balanced pension system is underway.