While Austrian-born California governor Arnold Schwarzenegger has been grappling with the California Public Employees’ Retirement System (CalPERS), in the land of his birth the Austrian government was having considerably more success trying to bring its own public service pensions arrangements into line with those of the rest of society.
“It was one of the major political issues in the reform of the first pillar,” says Christian Böhm, chairman of the Association of Austrian Occupational Pensionfunds. “It was one of the questions that was most addressed by the political parties. And we expect that a new system negotiated with the civil servants’ trade union will be passed into law so that from 2006, in addition to their first pillar pension, civil servants will join an occupational pension fund for state officials.”
“The public sector arrangements were very generous and step-by-step they will be brought into line with the normal state scheme,” says Josef Woss of the Arbeiterkammer, which represents the interests of trade unions. “To make that acceptable to the civil servants the government agreed to accept some form of funded ‘company’ scheme on top of the new scheme.”
This, says Böhn, will be a positive development that at a stroke will double the size of the funded element in Austria’s pension system. “Currently there are about 450,000 people in funded systems, growing by about 10% a year,” he says. “And if this law is passed it will add an additional 400,000 persons. So funded systems will then cover a third or so of the working population.”
That in turn will have a trickle-down effect on the rest of society, he adds. “It will provide motivation,” says Bohm. “People will be aware that the system has changed for government officials.”
More recently the paper sector has agreed to establish an industry-wide occupational pension scheme governed by a collective agreement.
So, at first glance it would appear that Austria’s second pillar pensions system is in rude health. However, such an appearance would be deceptive.
“Pensionskasse began in the 1990s when the main focus was to transform the defined benefit schemes, to suck the risk out of the balance sheet and transfer it to the pension fund,” says Kurt Bednar of Mercer in Vienna. “But there was a risk with this too, and in 2002 when everything was under water many former employees sued the companies on the grounds that when they waived their claims they had not realised that the impact would be so great. Less than 20% of employees have a company pension, which is very low by European standards, and altogether they have about €10bn and again it’s a small amount.”
“Some years ago large employers had plant agreements with works councils for individual pension schemes paid by the firm,” says Manfred Engelmann of the Federal Economic Chamber, an employers’ grouping. “But most Austrian industry is small and medium sized, with only 15% employing 500 or more people. So many firms abolished these plant agreements and only outstanding companies have retained them. Collective bargaining at a branch level is limited to wages, flexible working time, periods of notice and sometimes training questions but not pensions. The paper industry’s collective agreement is exceptional and is facilitated by the nature of the sector which consists of a lot of uniform firms working closely together, so they can manage it.”
The government’s move to bring the public sector into line with the rest of the workforce was part of a parametric reform undertaken by a coalition government consisting of the Christian democratic Austrian People’s Party (ÖVP) and the controversial right-wing Freedom Party (FPÖ) that broke the pattern of post-World War II Austrian politics.
Coalition governments have been the norm, often with the social democrats (SPÖ) as the leading party. Indeed, the SPÖ headed a coalition with the FPÖ, then seen as a liberal party, in the mid 1980s. But its image changed and the coalition collapsed when Jörg Haider took over the FPÖ leadership. Haider’s contentious views, notably his stated admiration for some of the policies of Adolf Hitler, put his party beyond the political pale for mainstream players and for years it languished as a repository for nationalists and protest voters.
However, this changed following the 1999 general election. ÖVP leader Wolfgang Schüssel clearly found his party’s 13 years as the SPÖ’s junior coalition party stifling. Opinion polls showed that the electorate was tiring of government by grand coalition and that support for the FPÖ was increasing at the ÖVP’s expense. And when the votes were counted Haider’s FPÖ had beaten the ÖVP into third place by a whisker. Throughout months of negotiations during which an embittered Schüssel refused to reconstruct an SPÖ/ÖVP administration he was evidently thinking what had until then been considered the unthinkable. Within days of talks with the SPÖ breaking down, the policies and personalities of an ÖVP/FPÖ coalition had been finalised.

Although the larger party, the FPÖ surrendered the chancellorship to Schüssel and Haider stayed out of the government. Nevertheless, the inclusion of his party created an international scandal and led to a brief boycott of Austria by its EU partners.
Schüssel ignored the protests and indeed they provoked a nationalistic reaction in Austria which bolstered support for the government.
And this assisted Schüssel to kick start his agenda. The years of SPÖ/ÖVP rule had seen sectors of the economy shared out between coalition partners. This gave rise to a feeling of ownership, with major enterprises being identified as ‘red’, SPÖ, or ‘black’, ÖVP, that in turn led to a degree opacity. Schüssel set about undermining the SPÖ’s control of its fiefdoms.
“The main idea of this government was to weaken the social democratic party throughout the Austrian system – in the state-owned companies, the social security sector, the major infrastructural enterprises like the post and railway,” says Johann Moser, SPÖ parliamentary spokesman for economic affairs.
“In 2000 there was not only a change in government but also a cultural change,” says Woss. “The Haider party tried to transform policymaking, saying that dialogue with the social partners takes too much time. A lot of people from universities were brought in as advisers and while their intentions may not have been bad, they handled the issues dreadfully. Even the employers were dissatisfied because they did not want to have problems with the unions.”
But the new administration felt liberated from SPÖ-imposed restraints. “We began considering pension reforms in 1997 when the ÖVP was the junior party in a coalition with the SPÖ,” recalls Josef Kandlhofer, special adviser on pensions, social security and health issues to the ÖVP, who worked on pension reform proposals. “The problem to be tackled was that many people took early retirement and that the age at which they did so was creeping down, to 59 from 62 in the 1970s, in part because political parties had courted the electorate with promises of early retirement. We proposed tough measures, but they were blocked by the socialists, who want to maintain the existing situation as every reform in effect means lowering the pension. We tried again in 1999 and again nothing happened.”
But the ÖVP-led government pressed ahead with reform. “We recognised that the PAYG system could not continue as it was because people were living longer, retiring younger and the ratio between retirees and the working population was worsening,” says Kandlhofer. “We calculated that in 40 years each employee would be required to finance a retiree. And we wanted to reduce the fiscal costs of pensions.
“The first step to make the pension system financially sustainable came in 2003. Previously, PAYG pensions were calculated on the basis of the best 15 years of a working life and the replacement rate was very high, some 80% of a last net salary to a ceiling on insurable values of €3,630, so €2,340 a month. Consequently, it was very difficult to encourage people to pay into pension funds. Our 2003 reform required people to work for 40 years to qualify for a pension and in 2005 we moved to basing the calculation on a whole working life.”
“The 2003 reform was made in a very strange way,” says Woss. “When we made calculations based on the outline, the government denied that we had the correct text. The legislation proposed very high reductions in the public scheme and when they provoked widespread popular concern the government announced a 10% loss limit. But the legislation implied cuts of 20%, 30% maybe 40%. A further change was announced in 2004, declaring that in the first two years the maximum loss would be 5%, rising gradually to 10%. But while accepting to roll back the loss limits, the government did not change the legislation. As a result we have mixed messages, making it impossible to calculate the outlook for the public pension system.”
“There is a considerable distance between a realisation and action upon it,” notes Bednar. “In 2003 we had strikes. But what was portrayed as a real reform was weakened in the end to allow the strikers to go home. Nevertheless, the retirement age was raised and the basis for calculation of retirement benefits was changed.”
In addition to a parametric reform they introduced a tax-subsidised private pillar. “That was important because it had not been done before,” says Bednar. “For many years the private element was kept to a minimum because the social democrats always said that they were the defenders of the social security system whereas the People’s Party said that they wanted to assist a private pillar.”
“We realised that we have to get people into private pension schemes and to understand what would be the consequences of not investing in private funds,” says Kandlhofer. “So under the 2003 reforms we created private pension funds which are offered by banks or insurers, into which people can pay up to €150 per month.”
But rather than give a tax concession to the contributions, the government opted to subsidise the return to the investors directly from the budget. “The government provides a bonus to ensure an interest rate of between 8% to 9.5% of the annual contributions,” says Kandlhofer. The actual level of return is decided by the finance minister and is announced with the budget. This year it was 8.5%, so a contribution of €100 per month gets a return of 8.5% on €1,200.
“We will not necessarily pay this top-up forever. However, it is important to get people to begin investing for their own future. We thought about giving a tax concession but decided against it because it would have been attacked by the socialists as a measure solely for higher-earners.”
But the socialists are scathing about the measure anyway. “We are not convinced that subsidising the third pillar, by up to 9%, is the best way to operate,” says Moser. “It’s crazy. The subsidy is expensive and it’s made for the wrong target group, these people don’t need a subsidy.”
But the government has also taken steps to promote the second pillar. The first was the transformation of Austria’s severance pay scheme, the Abfertigung – where employees accrued money, which was the equivalent of two months’ salary after three years rising to an annual salary after 25 years – into payments into a Pensionskasse.
The old system acted as a block to labour mobility as people wanting to change job after three or more years had to ask their employer to fire them or they lost the money.
“We changed the system so that people can change their job openly and still get an Abfertigung Neu, the new severance pay scheme in the form of 1.53% of a wage paid to a pensionskasse,” says Kandlhofer. “Now some 1m people are in the Abfertigung Neu schemes out of a working population of 3.8m. And it will grow because everybody who starts a new job will be included in the system.”
“Our member companies with 20-plus employees could never handle a special pension scheme at a plant level and so we are in favour of the new arrangements with the Pensionskassen,” says Engelmann.
The Pensionskasse gained in popularity as equities boomed in the late 1990s, and the subsequent market collapse shook confidence in funded pensions and reawakened old insecurities. Austria had a difficult 20th century. The defeat and collapse of the Austro-Hungarian Empire in World War I left the new Austrian republic politically and economically vulnerable, with an overweight capital city that had evolved to service the needs of surrounding territories from which it was separated by the new borders carved out in the 1919 peace treaties. Austria’s union with Nazi Germany in 1938 wiped out the pension system established after 1919 and the defeat of the Third Reich resulted in another collapse.
“Austrians are aware that their grandparents lost their pension money, so there is a certain amount of suspicion about the financial services sector,” says Moser.
The government did little to assuage such doubts. “From their beginning in 1990 pension funds were required to guarantee a 1.5% interest rate over the previous five years,” says Woss. “In 2002 the pension funds said that they could not pay the guarantee. Before a compromise could be reached the government indicated that it had no interest in an accommodation with the social partners and announced that it would change the legislation. So while that solved the problem for the funds the workers were left with even bigger cuts than otherwise.
“You cannot establish confidence with such measures. For that you need to bring the employers, the employees and the funds together.”
“In 2000 the guarantee worked fine, but when it was needed the owners of the pension funds did not want to pay it, and the government ruled that it only required action from the providers of the funds if at the moment of an individual’s retirement money from his or her account was missing,” says Bednar. “So last February saw the latest reform, with an opt out clause under which those who want to retain the guarantee accept that some of the contributions will go to build up a reserve while those who don’t like the guarantee can opt out with the agreement of the employees.”
Since then there have been further developments, Bednar notes. “Initially the trade unions were reluctant to agree to an opting out. Then they were convinced that it as a good idea to abandon it because it did not really work. But the latest phase follows a legal action against the government in the Constitutional Court by a social democrat parliamentarian who argues that the dropping of the guarantee amounted to robbery, so again the trade unions are reluctant to encourage their members to accept the opt out. A ruling is expected shortly.”

So where does that leave the Pensionskassen? “Our population is very sensitive where pensions are concerned, and politicians are aware of this,” says Engelmann. “If the next step is the Pensionskassen, with contributions covered by capital, should the state reduce the official pension contribution and give additional incentives to make compulsory payments to the pensionskassen? And if employers have to pay both sets of contributions we will have additional labour costs to the disadvantage of Austrian competitiveness and attraction as an investment target? Our chamber is very close to one of the governing parties, the ÖVP, so we are one of the factors in this debate.”
The Arbeiterkammer is another. “The issue of non-wage labour costs is not only about pension contributions,” says Woss.” A lot of things are financed through contributions and if we find other methods to finance things or to reduce expenditure where we can accept the social consequences we will discuss it.
“And we have to consider whether higher saving rates would be good for the economy, and what would be the social and political consequences of reducing the currently paid pensions too much.”
With a general election due by the end of this year no further reforms are on the agenda. And the possibility is that the next steps will be taken by the SPÖ. The ÖVP is unlikely to be able to reform its right-of-centre coalition as in April Haider resolved an internal FPÖ dispute by defecting from the party to form the Alliance for Austria’s Future in which he was joined by the FPÖ cabinet ministers. But his national support has plummeted and it appears that he could no longer deliver a post-election majority.
But currently the SPÖ appears to have no clear-cut pensions policy.
“In our party we are discussing how can we guarantee that people will get their contributions back when they are old,” says Moser. “We are not convinced that a funded system is more efficient than the old PAYG arrangement, the costs of the administration are sometimes greater than in the public pensions system. But our experts have advised us that we can’t guarantee to deliver 80% of a final salary. So our policy is to raise the retirement age to 65 and to require people pay into the system for 45 years to qualify for 80% of their average working life income. Then for those who want a bigger pension there is the capital market – but without subsidies. We feel that if the market works tax incentives should not be necessary.
“But we recently included a chapter with a capital markets strategy in our programme, which was a new departure for us. We have to convince our people that the capital market is an important part of financing investment. There is not a big tradition of this in our party because normally most investment was financed by credits not the capital market. So while trust in the capital market has been dented because the pension funds lost a lot of money in 2001 and 2002, we know it is necessary to build up a second pillar. Pension funds are facing competition from insurance companies and both have subsidies. We appreciate this competition, because it offers more alternatives for people to choose. Also it guarantees more efficiency for both systems.”

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