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Discount rates boost German pension funding levels

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An increase in the discount rate over the first half of 2017 has improved funding ratios in German listed companies’ pension plans, according to Willis Towers Watson’s German Pension Finance Watch, covering the first six months of the year.

The discount rate applied to pension liabilities for DAX companies – the Rechnungszins – increased by 24 basis points since the beginning of the year. With it, liabilities fell, pushing the average funding ratio to 65.9%, from 63% at the end of 2016.

Over the same period, aggregate assets in DAX pension plans increased slightly by 0.3% to €251bn.

It comes as German employers prepare for new rules requiring them to pay more into certain pension plans. From 2019, a new legal framework – the Betriebsrentenstärkungsgesetz (BRSG) – will oblige companies operating deferred compensation (Entgeltumwandlung) pension schemes to pay 15% of deferred contributions into them.

This aspect of the BRSG was introduced to prevent employers from saving on social contributions and incidental wage costs.

For new plans, the rules come into effect from 2019, while existing plans have until 2022 to adapt for the change.

The BRSG was passed by the German parliament earlier this year and will come into effect from 2018.

From then on pension plans can be set up without guarantees for the first time in Germany under certain conditions. They must be negotiated and set up by employers and employee unions (Tarifparteien) through collective bargaining agreements.

“Given the current low interest rate this new option creates advantages,” said Thomas Jasper, head of occupational pensions at Willis Towers Watson for Western Europe. “But it also limits the leeway for companies. They have to coordinate closely with the ‘Tarifparteien’.”

The law will also introduce subsidies for integrating lower-income workers into pension plans and for setting up plans at SMEs.

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