Under legislation adopted in June 2002, a new severance pay scheme will apply to all private sector employment contracts concluded in Austria from 1 January 2003. Under the new system, special funds will administer and invest employers' contributions to employees' severance pay. However, the new legal framework does not provide detailed regulations on some points, and the recently established funds are thus not able to offer serious calculations on administrative expenditure and the net rates of interest that can be achieved on invested severance pay contributions. Thus, in late 2002, only a few weeks before the new legislation comes into force, most companies have not yet decided which fund to use.
On 1 July 2002, a new severance pay (Abfertigung) system replaced the old scheme, which excluded the majority of employees from entitlement to severance pay for reasons which were regarded as questionable. Employees with less than three years' continuous service with the same employer were excluded from any eligibility for severance pay, as were those whose employment relationship was terminated through voluntary resignation or justified summary dismissal by their employer (AT0106220N).
The new scheme, which was jointly developed by the social partners in early 2002 (AT0112231F) and proposed to parliament by government in June 2002, stipulates that all private sector employees are entitled to severance pay from the second month of employment onwards. This entitlement cannot be lost even where employment is terminated for reasons relating to a fault on the part of the employee (AT0207201N). Thus, employees' entitlement to severance pay resulting from employment relationships concluded from 1 January 2003 onwards will in future be transferred to, and maintained in, a new employment relationship. Employers must obligatorily contribute 1.5377% of the gross monthly pay of each employee to a special severance pay and pensions fund (Mitarbeitervorsorgekasse, MVK). If the employee leaves the company, the accumulated employers' severance pay contributions may be either: paid directly to the employee (if they have at least three years’ service); or transferred to the MVK with which the worker's new employer has a contract. These MVKs are obliged by law to administer companies’ severance pay contributions and to invest them in the private capital market in order to build up the employees' severance pay entitlement towards a future supplementary occupational pension.
Severance pay and occupational pensions
When introducing the new severance pay scheme, the coalition government of the conservative People’s Party (Österreichische Volkspartei, ÖVP) and the populist Freedom Party (Freiheitliche Partei Österreichs, FPÖ) wanted to use it to help establish a system of occupational pensions in addition to the statutory pension scheme. Under the 2002 Employees’ Severance Pay and Pensions Fund Act (Mitarbeitervorsorgegesetz, MVG), companies will be obliged to pay severance pay contributions to the MVK funds in respect of all new employment contracts concluded from 1 January 2003 onwards. Originally, the government did not wish to provide for the possibility of paying severance pay directly to employees on the termination of their employment relationship, but favoured a model whereby severance pay entitlement went purely to fund occupational pensions. However, the Austrian Trade Union Federation (Österreichischer Gewerkschaftsbund, ÖGB) insisted on choice for employees in the use of their severance pay entitlement, arguing that a compulsory occupational pension scheme (based on investments in the private capital market) would be a first step towards undermining the more secure statutory pension system (based on an 'inter-generational balance' system of regular taxation of incomes in order to grant social benefits to retired people). In the end, the social partners and the government agreed on a compromise whereby severance pay paid directly to employees on termination of their employment will be taxed at a flat rate of 6%, whereas severance payments saved towards a private pension will be tax-free.
The role of the MVKs
The MVG legislation provides that MVKs have to be established, which must invest the employers’ severance pay contributions in the private capital market in order to increase revenues for the employees. However, although the minister of financial affairs, Karl-Heinz Grasser, expects an average annual net yield of 6% from the investment of severance payments, only the nominal contribution per employee paid by the employer is guaranteed by law. Moreover, the MVKs themselves, eight of which have been established and licensed by the public authorities up to now, do not promise an investment yield higher than between 3% and 4%, even though, in order to compete, they would be expected to promote their investment capacities.
According to the MVG, MVKs are entitled to retain an administrative fee of up to 3.5% of annual severance pay contributions. In transferring entitlements from the old severance pay scheme to one of the new funds (which is also possible by way of individually concluded contracts between companies and funds), the relevant MVK may impose charges up to 3% of the transferred amount. Aside from this, additional special fees and charges, eg for management, can be imposed upon employers or directly deducted from employees' severance pay contributions. Since some matters have remained unspecified by law, and implementing decrees (covering matters such as the transfer of employees’ personal data from companies to the relevant funds) are still lacking, the MVKs - which claim that half of the 60 paragraphs of the MVG law require amendments - are not yet able seriously to calculate costs and profit margins. This lack of transparency and legal certainty is the main obstacle to companies concluding contracts with one of the eight MVKs. Therefore, only very few enterprises – mainly small-sized craft companies – have successfully finalised negotiations on severance pay conditions with one of the MVKs by November 2002.
Commentary
The government’s aim of establishing an occupational pension scheme via a thoroughgoing reform of Austria’s severance pay system is proving to be more difficult to achieve than expected. On the one hand, the legislator did not spell out a clear and detailed legal framework enabling the MVKs to submit a well-calculated offer to the companies. On the other hand, there is a conflict between the employees’ interest in having their severance pay contributions invested securely and the funds’ interest in attracting business by means of (risky) investments in the private (venture) capital market. To minimise such risks, the legislator forces the MVKs to build up a certain amount of reserves and also stipulates that no more than 40% of total capital may be invested in the stock market. This favours a rather conservative - less risky, but less promising - investment policy. However, as experts emphasise, this conflict raises the essential question of whether a pension scheme should be tied to the risks and fluctuations of the private (venture) capital market. (Georg Adam, University of Vienna)