The volatility of the banking sector, geopolitical conflicts and uncertainties over monetary policies of central banks mean that the discount rate to calculate pension obligations for companies listed on the DAX index in Germany remains highly volatile in 2023.

“The significant decline [of the discount rate] in January was compensated by an increase in February. A moderate decline, compared with the end of the previous year, can currently be expected at the end of the first quarter,” Hanne Borst, head of retirement Germany at WTW, told IPE commenting on the results of its annual study “DAX Pensionswerke 2022” published today.

Borst added that the volatility of the discount rate, which has the biggest impact on the amount of pension obligations, is likely to remain high this year, affected among other things by market participants’ expectations of the European Central Bank’s interest rate decisions.

Last year, the discount rate rose to 3.74%, one of the strongest increases ever recorded, according to the study, compared with 1.20% in 2021. The increase was pushed by a significant rise in interest rates by central banks, resulting in pension obligations of DAX companies decreasing by €105bn to €308bn.

Volkswagen recorded the highest amount of pension obligations in 2022 at €42.2bn, followed by Siemens at €27.9bn, BASF with €21.7bn, and Allianz with €21.3bn.

On average, pension obligations accounted for around 7% of total assets at DAX companies in 2022, down from 10% in 2021, with the top five companies making up about 43% of the defined benefit obligations of all the companies listed in the DAX.

Borst said that inflation is another factor that has an impact on obligations as well as on the trends relating to adjustments made to the level of pension and salaries, adding that inflation rates falling less quickly than expected in the first quarter of this year mean significant adjustments in 2023 to pensions, which change every three years in line with consumer price index.

She added: “Our study shows that the pension schemes of DAX companies are well positioned to cope with challenging framework conditions. Many companies pay attention to risk-optimised plan designs and build assets based on diversified investment strategies that are used specifically to meet pension obligations.”

Pension assets of DAX companies fell last year by €53bn, or 17.8% year-on-year, hit by a high level of inflation and the consequences of Russia’s war on Ukraine, standing now at €245bn, the study said. Adjusted for currency effects, pension assets suffered losses of €56bn, and a negative performance on investments of -18.4% in 2022.

Siemens accounted for the largest share of pension assets among the DAX firms with €26.5bn, followed by Mercedes-Benz with €20.5bn, BASF with €20.1bn and BMW with €18.4bn.

Market volatility has led to a shift in DAX pension schemes’ asset allocations from  bonds and equities to other types of investments and real estate. Investment strategies now increasingly focus on ESG criteria, the study said.

DAX companies now invest 19% of their pension assets in equities, 42% in bonds, 6% in real estate, and 33% in other types of investments including infrastructure and private equity, it added.

“The equity and bond markets in particular were under pressure [last year]. Other investments and real estate proved to be more robust,” Johannes Heinz, head of general consulting at WTW, told IPE, adding that strategic asset allocations did not undergo significant changes.

DAX companies contributed €6.7bn to pension plans last year, down from €9bn in 2021. Funding ratios rose to an all-time high of 80%.

Deutsche Bank topped the list of DAX companies with the highest funding ratio at 107%, followed by BMW with 104% and HeidelbergCement with 99%, according to the study.

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