The Austrian pension landscape in the 21th

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1 Multiplying investment and retirement knowledge GLOBAL PENSION ATLAS LOCAL EXTRACT AUSTRIA In a bid to improve sustainability and actuarial fairness, Austria has taken an aggressive approach to pension reform. Wolfram Littich, CEO, Austria The Austrian pension landscape in the 21th century is characterized by rapid and substantive reform. Like most countries in western Europe, increasing life expectancy is a topic of concern. 1 That said, the sharp uptick in reform since 2000 is more a result of the third most-generous pension benefits in Europe and a shifting demographic that is expected to see a 7.2-year increase in male life expectancy from 2006 to 2050, the highest in western Europe. 2 Until the series reforms undertaken in , Austria had a monolithic pay-asyou-go public pension system characterized by high maximum replacement rates and low retirement ages. The reforms were largely aimed at improving the sustainability and actuarial fairness of the scheme Reforms taken in 2000 were primarily directed towards de-incentivizing early retirement. Prior to the new millennium, workers could opt to retire at age 60 (55 for women). From October 2000 onwards, this criterion was gradually increased every quarter by two months until reaching 62 years for men and 57 years for women. 4 That is, with one exception. In a reform referred to as the Hacklerregelung, workers paying into the system for at least 45 years (40 for women) could continue to take retirement at age 60 (55). 5 Though this provision continues to be extended, it is often debated The Act on Corporate Staff Provision introduced a new severance pay system (Mitarbeiterversorgungskassen) to regulate the set up and management of staff provision funds? 1 Austria, Österreich mit dritthöchsten Pensionsausgaben in Europa, Press Release, 7 November Global Investors, 2008: Funded Pensions in Western Europe 2008, International Pension Studies 3 Actuarial fairness requires that the present value of lifetime contributions equals the present value of lifetime benefits. 4 Following a ruling by the Austrian Constitutional Court based on gender equity, the early and legal retirement age for women will be gradually adjusted to mirror those of men. 5 Hackler is Austrian-German for a blue-collar worker, who typically enters the workforce at an earlier age. 1

2 FOCUS (investment limits and capital requirements). 6 The employer-paid contribution is 1.53% of employee salary and, as of 2003, is mandatory for people entering the workforce Pension reforms adopted in June 2003 made fundamental changes to the key parameters of the Austrian pension system. By 2028, the assessment period will be increased from the best 15 contribution years based on earnings, to the best 40 (it is currently 20). New tax-advantaged and state-supported financial tools (prämienbegünstigte Zukunftsvorsorge) were introduced to the third (personal savings) pillar. In the first (public) pillar, early retirement due to unemployment was eliminated completely, and incentives for early retirement were further reduced. The annual accrual rate was incrementally decreased so that, as of 2009, the 80% maximum replacement rate is only possible after paying in for 45 years (previously 40 years). Possibly as prickly a subject as the Hacklerregelung, the pensions of tenured civil servants now mirror that of the private sector The two key components of the Pension Harmonization Law of 2004 were the introduction of a uniform mandatory second (occupational) pillar with similar contribution rates and benefit entitlements across the professional spectrum, as well as the introduction of a notional defined contribution system in the PAYG scheme in the first (state) pillar for anyone born after 1 January The guiding formula according to the new system is 45/65/80. That is, after paying in for 45 years, earning average wages and taking retirement at age 65, the first pillar should yield an 80% replacement rate. DR. WOLFRAM LITTICH CEO, Austria 2012 In 1990, Austria introduced a voluntary occupational pension called the Pensionskassen. Since the financial crisis, politicians and industry representatives have been working to reform this pension fund to include, among others, guarantees on defined contribution benefits, which were exposed to severe losses. In a draft amendment to the Pensionskassengesetz (PKG) issued in November 2011, the reform commission recommended introducing Sicherheitspensionen (security pensions) with a low-risk profile and guarantees. In addition, employees would be able to opt into a life-cycle model or switch over to an insurance-based occupational group insurance (betriebliche Kollektivversicherung, BKV). 8 At the time of writing, the amendment was still under consideration. CONCLUSION Over the last twelve years, Austria has implemented more pension reforms than almost any other country in western Europe. Once a jumble of different schemes for different occupational groups, it is now on its way to a notional defined contribution system with uniform contribution rates and benefit entitlements. 6 IOPS, January 2011: Country Profile, Austria 7 Knell, Markus, Köhler-Töglhofer, Walpurga, Prammer, Doris, 2006: The Austrian Pension System How Recent Reforms Have Changed Fiscal Sustainability and Pension Benefits, Monetary Policy & the Economy Q2/06, OeNB (Austrian National Bank) 8 Austria: The long wait, IPE, 1 April

3 FOCUS AUSTRIA PENSION SUSTAINABILITY INDEX RANKING As a result of its substantial pension reforms, Austria has experienced a strong positive change in its rankings in the Global Investor s Pension Sustainability Index. In 2009, the country ranked No. 25; in 2011, it ranked No.21 (No. 18 when adjusted to compensate for additional countries included in the index), a trajectory that if sustained, could see it placed in the top third of countries analysed in the next PSI report. * This ranking is a reflection of the pension reforms themselves because in other respects, the country only performs reasonably. It sits in a band of European countries, including Poland and Germany and the differences between them are negligible in overall rankings. However, although the minimum retirement age in Austria is largely being increased to 65, this will only bring Austria up to the point where other nations used to be. Countries such as the United States, Denmark, Germany and the United Kingdom are already raising their retirement age to 67 and debates continue if the retirement age shouldn t be raised further. In terms of demography change, the country will experience a strong shift, but not quite as extreme as Japan, Germany, Portugal or Spain. Today, according to the United Nations Population Division, the old-age dependency ratio is 26 and this is expected to increase to 53.3 in dramatic increase as implemented changes begin to take effect. Overall, Austria is seriously grappling with the pension and retirement challenges arising from demographic change, but will probably still need to maintain its initiatives to stay on top of the problem. ALLIANZ GLOBAL INVESTORS 2011 PENSION SUSTAINABILITY INDEX #21 Austria FISCAL PERFORMANCE Financially, Austria is better placed than other European countries with a ratio of government debt at only 69.9%. The average ratio of the 17 eurozone countries is 85.1% with Greece topping the table at 142%, followed by Italy at 119%. Pension provision consumed 12.7% of the government s budget in 2009 and will increase by 1.3% till 2050, this is not such a Scale from 1 to 10: 1 minor need for reforms, 10 high need for reforms Source: Global Investors * Refer to the Global Pension Atlas 2011 for full details. 3

4 FOCUS EUROPE S RETIREMENT LANDSCAPE NORWAY FOCUS AUSTRIA: DEMOGRAPHICS AND MACROECONOMICS Population [m]: 8.4; 2050: 8.4; 2100: 7.8 Population 65+ [%] : 17.6; 2050: 30.0; 2100: 29.9 Old-age dependency ratio [%]: 26.0; 2050: 53.3; 2100: 55.1 GDP [US$]: billion GDP per capita [US$]: GDP growth (av. in % p.a.): 1.52 GDP growth (av. in % p.a.): 2.14 Gross National Savings [% of GDP]: Unemployment rate [%]: 4.4 Data from 2010 or latest available year SWEDEN FINLAND ESTONIA LATVIA DENMARK IRELAND UK NETHERLANDS POLAND LITHUANIA BELGIUM GERMANY CZECH REPUBLIC LUXEMBOURG AUSTRIA SLOVAKIA SWITZERLAND HUNGARY ROMANIA SLOVENIA FRANCE CROATIA BULGARIA SPAIN ITALY GREECE TURKEY PORTUGAL Less than 10% pension hardly changing Less than 10% pension changing towards DC Less than 10% pension mostly DC or substantial shift towards DC 10 to 50% pension hardly changing 10 to 50% pension changing towards DC 10 to 50% pension mostly DC or substantial shift towards DC More than 50% pension hardly changing More than 50% pension changing towards DC More than 50% pension mostly DC or substantial shift towards DC GREECE LUXEMBOURG BULGARIA CROATIA CZECH REPUBLIC ESTONIA LATVIA LITHUANIA ROMANIA 4 SLOVAKIA SLOVENIA TURKEY N/A GERMANY NORWAY AUSTRIA HUNGARY ITALY POLAND PORTUGAL SPAIN N/A BELGIUM FINLAND FRANCE NETHERLANDS 5 DENMARK IRELAND SWEDEN SWITZERLAND UNITED KINGDOM Further information on the logic of this map can be found in the Global Pensions Atlas 2011, available at

5 REGION SUMMARY WESTERN EUROPE: BREAKING FROM THE PENSION TRAP While reform activity has been evident worldwide, it has been particularly marked in western Europe, where almost every country has undergone significant changes in their pension systems since European nations have a history of state pensions stretching back more than 120 years, but the systems implemented in each country differed substantially in their aims. Some, such as that in the United Kingdom, were designed to protect citizens from absolute poverty. Others, like those in Germany and Greece, aimed to keep citizens living in retirement at a comparable standard to their active years in the workforce. However, as the later decades of the 20th century progressed, European governments realised that they faced a common and growing issue that compelled them to undertake fundamental reforms. The issue has sometimes been referred to as Bismarck s pension trap (see right) and a 2010 Green Paper released by the European Commission on pensions, explained the reasons behind the urgency. Life expectancy in Europe has risen by five years in the last half-century and a further rise of seven years could occur by Combined with low fertility rates, this greying of the population will affect almost every aspect of European society. In economic terms, its impact will be felt from growth and productivity, to demand, infrastructure, innovation and labour markets. Critically, it could also strain public finances as increasing numbers of retirees rely on the public purse for a large portion, or even all of their retirement income. Reforms undertaken in western Europe were essentially aimed to improve the sustainability of the public pension systems and relieve pressure on public finances. BISMARCK S PENSION TRAP Germany was the first modern nation to introduce an old-age social insurance (pension). William the First wrote to parliament at the request of Chancellor Otto von Bismarck, explaining Those who are disabled from work by age and invalidity have a well-grounded claim to care from the state. The system, introduced in 1889, set retirement at 70 years of age. Average life expectancy was then 35.6 years for men, 38.4 for women. In 1916, retirement age was lowered to 65, which has been a default applied in many countries since then. Today, life expectancy in Germany is 77.3 years for men and 82.5 years for women and rising. Like many countries, Germany faces the question of how to support growing numbers of retirees without bankrupting the economy. With retirement set at an arbitrary age rather than disability, an increasing number of otherwise fit and active people are withdrawing their human capital from the economy. This has been referred to as Bismarck s pension trap. The goal of the Iron Chancellor was actually to purchase social peace through a limited redistribution of income. He personally believed that as long as a person was fit enough to work, he or she should, in principle, arrange for their own protection, regardless of age. Traditionally, most western European countries were textbook examples of the dominance of public pay-as-you-go (PAYG) pension systems. In an effort to spread the load of retirement income, governments initiated the far-reaching reforms to create a multi-tiered structure for retirement 6

6 REGION SUMMARY provision. Generally speaking, these reforms have been successful and helped place national systems on a much more sustainable footing. OUTLOOK Lord Adair Turner, chair of the Financial Services Authority in the United Kingdom, believes the notions of a pension crisis in Europe are now overstated. According to Lord Turner, The argument is that Europe is facing a crisis of aging and that it is failing to deal with it. I believe more has happened in the way of reform than we sometimes think and, at least in terms of the figures, a lot of progress has been made. * Yet, while similar demographic pressures have driven European nations to undertake reforms, the pace of the demographic changes differs significantly within each country. In turn, this has affected the tempo of the reforms within each country and means the pensions landscape in Europe still remains bewilderingly diverse. This is clearly reflected in the Global Pension Atlas 2011, which shows European governments responded to the question of sustainability with a decided move from PAYG systems to funded systems in most western European and Scandinavian countries. Consequently, a substantial amount of pension assets (at least 10%, if not more than 50% of GDP) has been accumulated into funded assets and a strong move from DB to DC practices has also been recorded in the region. A QUESTION OF ADEQUACY With people living longer and in greater numbers, adequacy (the ability of individuals to maintain their living style to a reasonable level after retirement) is becoming an important question for governments, companies and citizens. In Europe, adequacy was a central theme in the European Green Paper on Pensions issued in July László Andor, European commissioner for employment, social affairs and inclusion, told PROJECT M that the question of pensions needs to be addressed, because to maintain the successful European model in face of changing demographics will mean the choice between poorer pensioners, higher pension contributions or more people working more and longer. The commission believes states must consider: increasing retirement age and linking it with life expectancy; reducing early retirement; supporting the development of complementary private savings to enhance retirement incomes; the impact of pension payments on long-term sustainability and adequacy of public finances. More than 1,700 responses to the Green Paper revealed that any interference by the commission into national pension systems is unwanted. In addition, some countries define adequacy differently, as living above the poverty line. The issue is not likely to go away, especially as the Commission only recently published its White Paper on Pensions as a response. * Quoted in Paradigm Lost PROJECT M #07, 1/2011 RELATED INFORMATION Germany Financial assets continued to rise, International Pension Issues 2011, Global Investors Defining the Direction of Defined Contribution in Europe, International Pension papers 4/2009, Global Investors Western Europe: Fiscal pressures ageing costs still on the horizon, International Pension Issues 3/2009, Global Investors Funded Pensions in Western Europe, International Pension Studies 2008, Global Investors 7

7 For further information, please visit FURTHER READING Global Pension Atlas 2011, Global Investors Pension Sustainability Index 2011, International Pension Papers, Global Investors (forthcoming) Retirement assets on the rise again, International Pension Papers 3/2010, Global Investors Demographics in Focus: Ageing, International Pension Issues 2 /2010, Global Investors Pension Trends in Emerging Markets The Rise of DC Plans and Its Consequences, International Pension Papers 2/2008, Global Investors PROJECT M Retirement saving made simple, #09, 3/2011 Paradigm Lost, #07, 1/2011 The New Age of Retirement, in edition #07, 1/2011 Secure Future, #07, 1/2011 Voting Gray, #07, 1/2011 CONTACTS Austria Mag. Manfred Rapolter, MA Elementar Versicherungs-AG Hietzinger Kai Wien tel manfred.rapolter@allianz.at Editorial Office International Pensions Seidlstrasse 24-24a Munich Germany Copyright: The contents of this brochure are protected by copyright law. All rights reserved by. Notice: The opinions expressed in this brochure do not necessarily reflect the views of the publisher or the PROJECT M editorial team. Important Information The statements contained herein may include statements of future expectations and other forward-looking statements that are based on management s current views and assumptions and involve known and unknown risks and uncertain-ties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements which are forward-looking by reason of context, the words may, will, should, expects, plans, intends, anticipates, believes, estimates, predicts, potential, or continue and similar expressions identify forward-looking statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (i) general economic conditions, including in particular economic conditions in the Groups core business and core markets, (ii) performance of financial markets, including emerging markets, and including market volatility, liquidity and credit events (iii) the frequency and severity of insured loss events, including from natural catastrophes and including the development of loss expenses, (iv) mortality and morbidity levels and trends, (v) persistency levels, (vi) the extent of credit defaults, (vii) interest rate levels, (viii) currency exchange rates including the Euro/U.S. Dollar exchange rate, (ix) changing levels of competition, (x) changes in laws and regulations, including monetary convergence and the European Monetary Union, (xi) changes in the policies of central banks and/or foreign governments, (xii) the impact of acquisitions, including related integration issues, (xiii) reorganization measures, and (xiv) general competitive factors, in each case on a local, regional, national and/ or global basis. Many of these factors may be more likely to occur, or more pronounced, as a result of terrorist activities and their consequences. The company assumes no obligation to update any forward-looking statement. No duty to update The company assumes no obligation to update any information contained herein. Photo Credits p. 4-5 Timko+Klick/Thomas Porostocky Printed: 2012