The Austrian Federal Economic Chamber's pension scheme looks to be the biggest loser from the collapse of three funds of a real estate manager accused of misleading investors.

The chamber, which represents the Austrian business community, reportedly had €20 million invested in the insolvent funds and have been accused by the Austrian press of blindly following the advice of investment advisors who shared the same parent group.

According to national daily Kurier, R-Quadrat's property funds were said to be invested in Eastern European real estate but official reports on the insolvency of three funds this month revealed that 80% of the portfolios were invested in shares of companies owned by R-Quadrat's German parent group Magnat Real Estate. As an example, the R-Quadrat capital gamma fund held 480,000 shares in the Magnat Real Estate group that were worth €28 each in 2007 and now trade at just €1.50.

Wolfgang Gartner, a solicitor investigating the insolvencies, says that "an existing diverse investment portfolio was ripped up and redeployed in R-Quadrat bonds". IMB investment advisors, the R-Quadrat sister company who are alleged to have routinely suggested their services to pension funds, are accused by Gartner of making "a massive mis-selling because IMB were buying the R-Quadrat group into lots of investors' portfolios even when it was clear that they were not worth anything anymore."

The Austrian Federal Economic Chamber have said they were unaware of the relationship between IMB and R-Quadrat. Kurier suggested, however, that "a glance at the company's books should have been enough" to deter pension funds from investing with R-Quadrat and reported on the scandal-ridden past of several key R-Quadrat figures.

The chief executive of the insolvent fund management group has told press that they "had a series of investments in different countries and sectors" and blamed the financial crisis for the fact that projects in countries like the Ukraine could not be completed.

The chamber's losses have led commentators to suggest there may be fundamental flaws in the investment strategies of Austrian pension funds. Josef Schmidinger, head of building society s-Bausparkasse has said that rates of return needed to meet the planned benefits as set out by the Pensionskassen are too high, forcing funds into risky investments in order to meet them in an era of unspectacular stock market growth.

For instance, if the Federal Economic Chamber's fund continues to perform so poorly for the next 15 years as it has in the past decade, only 10% of planned pension benefits would be met, claims lawyer Roland Gerlach. Without any payments from the sponsor, that could theoretically be all that future pensioners can draw as Austria's funds are in effect defined contribution plans with defined benefit-like targets.

Thomas Url, a pensions expert at the Austrian Institute of Economic Research (WIFO) recently told Pension Funds Insider that "trust into funded pensions has taken a knock after the financial crises of 2008 and 2001. Pension funds are especially affected as their accounts are presented at mark-to-market values and each loss in defined contribution systems is fully and immediately reflected in benefit reductions or capital losses."

28/06/2011

dbillingham@wilmington.co.uk