Liam Kennedy spoke with Dr Boy-Jürgen Andresen, a grandee of German pensions who is shortly to retire as chairman of the board of Watson Wyatt Heissmann
Q: How do you assess the pension reforms of 2001-09. What could have been done better and what further measures are necessary?
A: The reforms have increased the coverage of occupational pensions in Germany considerably. Today, two out of every three employees have a workplace pension entitlement. At the beginning of the decade it was every second worker. Apart from that, there is hardly any economic sector that does not have some sort of occupational pension arrangement. We have achieved a lot in terms of coverage, which has also shown us that although the Riester incentives [lump sum top-ups] are more suited to the third pillar than the second, this has still led to sustainable growth of pension capital. But the level of pension that can be expected leaves a lot to be desired and the tax exempted framework for salary sacrifice should be raised to 8% as soon as possible.
The reforms of the last few years have strengthened external funding vehicles in particular, while internally funded direct promises, with dependable insolvency insurance through the PSVaG, took more of a backseat role amid the attacks of the capital market industry, analysts, rating agencies and so on. But these players have failed across the board, as the current crisis shows. I expect, as a result, that internal financing of pensions, with its liquidity effect for the employer, will be viewed more soberly and objectively in future.
Of course, there are many things that the government could do - or avoid doing - in the area of pensions. I’m thinking of areas like equal pension on divorce provisions and the BilMoG domestic accounting reform. .
Q: Political priorities are changing thanks to the economic crisis. Will occupational pensions still be a priority, and what can the sector do?
A: Because of the reconstruction of the state pension system that is currently taking place, the role of occupational pensions will increase in future, in effect, by law. Thanks to the crisis, the reliability of our systems, in particular that of the contribution-oriented DB systems with a minimum guarantee, have proved themselves against pure DC models.
The German systems are better shock-proofed than others in the world, because of their multiple security systems. We have strict supervision, employers have a residuary liability, and the systems are insured against insolvency, either for their own part, or through the insolvency insurance of the employer. Above all, greed was never a central impetus. Guarantees, risk sharing and investment security are central.
That still means we must do everything to maintain trust in occupational pensions, in particular in externally funded vehicles, which are also considerably less affected by the financial crisis in comparison to those in the UK, US or the Netherlands because of their more conservative investment policy.
Q: Is the German pension system optimally conceived? In comparison with neighbouring countries like the Netherlands and Switzerland it seems somewhat complex.
A: Those countries are no example for us. They have massive problems thanks to the financial market crisis and I don’t envy them for that. Our situation is less serious, not least because many companies have not adopted the capital funding system wholesale - rather they have opted for mixed financing.
A German employer has the choice between five vehicles of occupational pension provision. Choice is valued and in demand in all areas of life - I have never understood why anything else should apply to the world of pensions. Also, occupational pensions are less complex than some of the financial instruments of the capital markets and manageable in terms of risk.
Choice presents opportunities for companies in the formation of their plans - do I want to remove the liabilities completely from the balance sheet, or do I prefer the liquidity effect? What level of guarantee do I want to give? To what extent do I want to uprate the benefits? And so on.
If you look around in Europe you have to admit that the simpler systems aren’t actually in a better situation than the German one - in fact it’s more the other way around. Simplicity often leads to to a reduction in complex safety nets.
As well as that, you also have to take into account that occupational pensions are something that employees have to be able to rely on. Changes only apply to future accruals and existing entitlements are protected. So this also means that the old rules apply right up until the last beneficiary dies. If I create a new set of extra rules then the complexity automatically increases, and much of the complexity within the system is due to legal security and protection of benefits. Of course the system could be simpler, but it would lose in terms of plan design options.
Complexity also presents the option to select the best solution. Just as with the design of high grade technical systems, pension schemes also need to be easy to understand and use - for the employer and the employee. So perhaps we should work on developing that ‘Apple’ feeling in terms of pension scheme design.
Q: What is the future for pensions in Germany? Is compulsion eventually going to be unavoidable?
A: Interest in occupational pensions will continue to grow because the financial crisis will not affect the general demographic system and a company pension will more than ever form part of an attractive pay package due to the growing shortage of specialist and management talent.
I do not see anyone politically in favour of compulsion in pensions - neither in politics nor in the unions. What I do see is further action for sector-wide solutions, and the number of Riester contracts - currently 12 million - will increase. We have to take that factor into account when looking at the total level of pension provision.
Q: Capital funding of book reserve pension promises largely happened because of IAS and fair value accounting. Was this the right strategy for Deutschland AG and how do you evaluate the mark-to-market principle?
A: The financial market crisis has tested the appropriateness of all valuation mechanisms to breaking point. Fair value, according to the assessment of many specialists, has rather acted to fan the flames. Of course, you have volatility on the asset valuation side as well as on the liability valuation side because of the variable discount rate, which can balance liabilities, as at the moment, as well as magnify them. What is important to me is that these are snapshot assessments that relativise themselves over the perspective of many years.
What is also important from my point of view is the perspective of my colleague Alfred Gohdes, who says that the pension plans of the DAX30 companies are comparatively solidly funded and we are dealing with dents rather than holes.
Q: Will BilMOG correspondingly only have a negative effect on German companies?
A: We still don’t know what the rules of BilMOG will look like. HGB accounting is supposed to remain an option because it is better calibrated for the valuation of long-term liabilities.
The total effect of BilMOG will vary. With regard to occupational pensions, a more realistic valuation and accounting on pension obligations is intellectually correct. On the one hand, the liabilities from direct promises will increase - a negative effect against book reserves - but ring-fencing liabilities from the balance sheet does have its advantages. Direct promises through book reserves but with partially ring-fenced funding offers a defined balance between external and internal financing on a company specific basis from the point of view of risk, return and liquidity.
Q: You are retiring from Watson Wyatt Heissmann. What are your plans, and will you remain active in company pensions alongside your role as chairman of the aba?
A: I am stepping down from the board of our company as of the end of April but I will retain a strong connection both with Watson Wyatt Heissmann and the aba - the role of aba chairman requires it. Of course, I hope to profit from being the master of my own time and thereby to occupy myself more with the central political problems of occupational pensions. Real retirement will have to wait a while.
DR BOY-JÜRGEN ANDRESEN
• Joined what was then Dr Dr Heissmann in 1996. Andresen has also been a member of the Watson Wyatt European management group since the German firm’s acquisition in 2007. On retiring from the managing board at the end of April 2009, Andresen joins the advisory board of Watson Wyatt Heissmann.
• Previously senior vice-president for human resources at Daimler Benz, with national and international responsibilities.
• Chairman of the board of aba, the German Association for Occupational Retirement Provision until 2011. He also serves as an honorary member of the jury of the Social Court of Germany.
* Completed post-graduate and Ph.D. studies at the University of Tuebingen, Germany and participated in the International Senior Management Programme at the Harvard Business School.