ECB to blame for declining funding in German schemes, says Towers Watson

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Low interest rates have pushed Germany’s corporate pension plans to historic funding lows, despite returns remaining stable year-on-year.

The funding levels of schemes operated by listed German companies have fallen to similarly low levels as during the last trough in 2012 because of ever shrinking discount rates.

Over the last year, the Rechnungszins – the discount rate applied to pension obligations – has dropped by 155 basis points to 2.1%, while three years ago it still stood close to 5%.

Companies listed in the German DAX index, many of which still have DB plans in place, saw their liabilities soar by 29.1% from €303bn to almost €392bn, Towers Watson noted as it released the result of its latest German Pension Finance Watch report.

Thomas Jasper, head of retirement solutions at Towers Watson Germany, placed the blame for the increase the with the European Central Bank (ECB)..

“The reason for the existing pressure on pension liabilities can be put into two words: Mario Draghi,” he said.

The retirement expert stressed the ECB’s “ultra-loose monetary policy” indirectly led to higher costs for occupational pensions which in turn was “directly and considerably straining the company’s equity”.

Funding levels at the DAX companies deteriorated by 108 basis points last year, reaching 54.5% at year-end 2014.

But Jasper stressed while the low interest rate policy placed a burden on companies, it was not ”endangering occupational pensions” as payouts from these plans were often not due for years or even several decades.

Further, returns from assets in these pension plans amounted to 10.2% for the full year which together with additional contributions from employers meant a 7.7% increase in plan assets for DAX-listed companies to €213.5bn.

According to Towers Watson it was to be expected that companies made “further unscheduled payments” to their pension plans which would mean assets actually exceed the figure projected by the consultancy based on earlier statistics.

Jasper explained that over the medium to long-term increasing interest rates could be expected and added there were “additional safety mechanisms” in place at the pension plans to safeguard pension payouts.

There are no pure DC plans in the German second pillar as all companies have to guarantee at least a minimum pension.