New incentives for pension funds

Private "pension funds" are growing rapidly in Austria, although from a tiny base. In March 1999, the government proposed the introduction of a small subsidy for employee contributions to such funds, but the pensions industry has expressed disappointment.

There are 17 private pension funds in operation in Austria. In 1998 their assets rose by 55% to ATS 68.5 billion. About 870 firms introduced company pension schemes in 1998, part of a total of 1,369 that signed first-time contracts with private pension funds. At the end of 1998, there were 4,820 companies which had a contract with a pension fund. The number of employees covered increased over the year by 29% to slightly more than 200,000, and pension recipients by 53% to 24,500. The value of pensions paid out during the year increased by 36% to ATS 1.9 billion. Among the 17 pension funds, there are seven that are not tied to a particular enterprise. Their assets grew to ATS 47 billion in 1998 and the annual contributions to ATS 2.6 billion.

Existing incentives

The taxation authorities in Austria treat pension fund contributions by enterprises as part of their normal expenditure if the pension contribution is considered to be paid in addition to the wage - ie, is not part of the normal wages governed by collective agreement, but is paid on top of these wages. However, when pension fund contributions are viewed as a wage component - ie, they form part of the collectively agreed wage - they are fully taxed. This distinction is made in a government directive issued in April 1998, but is seen by some as unconstitutional. The directive reflects the fear expressed by the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) that if employers, with the agreement of the employees, had the option of converting a proportion of the wage to pension fund contributions (over which the enterprise would retain control), then they would exert pressure on employees to agree to such conversions.

Pension fund contributions by employees, which amounted to ATS 400 million in 1998, are only partially tax-deductible. All employees earning up to ATS 500,000 a year may claim up to ATS 40,000 as "special expenditures", with one quarter of this amount being tax deductible (ie, up to ATS 10,000 per year). Pension fund contributions fall within the category of "special expenditures", but so do housing investments, which tend to use up this allowance. Furthermore, the allowance is gradually reduced to zero for taxable annual incomes of between ATS 500,000 and ATS 700,000.

A further tax incentive for pension funds is that until the end of 1999, enterprises may convert any existing pension reserves into pension funds tax free. Afterwards they will have to pay 10% income tax plus 4% insurance tax on the amount converted.

New incentive

In the tax reform of March 1999 (AT9903137N) an incentive was created for participation in pension funds. From 2000, the government will spend a forecast ATS 500 million annually on subsidies to pension fund contributions. The subsidies will amount to 4.5% of the contributions but will be paid only for contributions up to EUR 1,000 per year. The maximum subsidy is thus limited to EUR 45 per year per person. As with the existing scheme, the benefit accrues only to schemes that pay a pension of unlimited duration. Unlike the existing tax incentive for employee contributions, the subsidy is not dependent on income. It will not be possible, though, to draw on the existing tax incentive and the new subsidy at the same time. Employees will have to decide which of the two they choose in any given year.

The Association of Pension Funds in the Austrian Chamber of the Economy (Wirtschaftskammer Österreich, WKÖ), together with insurers, is strongly critical of the scope and structure of the new incentive, since it runs counter to its wishes. In the run-up to the tax reform, these organisations had argued that employee contributions should be fully tax exempt or that there should be an arrangement of roughly equal worth. In other words, they wanted neither contributions nor capital gains to be taxed. They maintained instead that tax should be levied on pension pay-outs.

The system now in place is almost the exact opposite. Contributions are taxed for the most part, and pensions paid out by funds are tax free. The reason is that the government needs the tax income now, and hopes to need it less later when the budget is more balanced. Companies also opposed the bureaucracy involved with the choice that has to be made between the two incentives.

Severance payments

The social partners are in negotiations over converting companies' compulsory severance pay reserves (AT9811109F) into something akin to pension funds. The payments are expected to amount to 2.5% of gross wages. The annual contributions are expected to amount to about ATS 22 billion. The existing pension funds were hoping to benefit from this.

Lately there have been warnings, however, that the social partners may want to manage these funds themselves. They have an example and possible vehicle at hand, the Construction Workers' Vacations and Severance Pay Fund (Bauarbeiter-Urlaubs- und Abfertigungskasse, BUAG). Founded in 1972 by an act of parliament, it is run jointly by the construction industry social partners. The drive to shift severance pay provision from the private sector to BUAG results from an effort by the trade unions to increase the number of employees with severance pay entitlements. Currently, of about 1.1 million terminations of employment relationships per year, 840,000 occur without severance pay. The reason is that either the employee resigns, or has been employed for less than three years with the firm, or is a civil servant.

The Hotel, Restaurant and Personal Services Trade Union (Gewerkschaft Hotel, Gastgewerbe, Persönlicher Dienst, HGPD), in particular, doubts that its members will ever receive severance pay in their working life. The union's demand for a solution similar to BUAG has been long standing and is frequently renewed (AT9705111F). It is apparently the union's insistence and the support it receives from sections of the government that has put on the agenda a widening of the BUAG scheme to cover all workers or at least a very substantial proportion.

Commentary

The reasons both for the government's current move to introduce pension fund contribution subsidies and its paltry significance are easy to see. The federal budget is contributing about one third of the total pension pay-out. The tendency has been for this share to rise. While these developments may not imperil the system, the government has little inclination, in reality, to see pension fund contributions eat into its efforts gradually to balance the budget. In fact, however, much of the federal budget's increasing share is due to civil service pensions and pensions in government-owned companies (such as the railways) which leaves the government scope to contain the burden on its own without having to intervene in the private sector.

Negotiations on the details of the subsidy for pension contributions are continuing, involving the social partners, the government and the pensions industry. By the time parliament comes to vote on the proposals, probably in May 1999, some amendments will have been made but nothing fundamental. Eventually, however, it is expected there will be an EU Directive that may bring major changes.

As for the severance pay issue, given the approaching general elections and the strain under which the partnership between the WKÖ and the ÖGB has been placed recently, it is somewhat unlikely that it will actually be resolved in 1999. (August Gächter, IHS)