The share of defined contribution (DC) open pension plans offered by companies listed on Germany’s blue-chip DAX index is 86%, compared with 14% of defined benefit (DB) plans, according to a report published by Aon.
With DC pension schemes, companies can control risks from inflation and wage increases, Aon said, adding that DB pension plans are hardly ever offered any longer by DAX companies.
According to Aon, DAX companies have started to consider inflation as a “significant market risk”. The impact of rising inflation is reflected in valuation assumptions, such as an average pension trend of 1.77% in 2021 compared with 1.58% in 2020.
The pension trend reflects the expectation of future adjustments to company pensions and is generally based on the development of the consumer price index in Germany, Aon explained.
A 50bps increase in the long-term assumption on inflation would result in an increase in pension obligations of around 4%, Aon added.
Inflation levels in Germany fell from 7.6% in June to 7.5% in July this year, according to the Federal Statistical Office (Destatis).
The majority of DAX companies (55%) give employees the opportunity to choose between capital payments, instalment payments or pensions at retirement age.
Pension obligations for DAX companies rose from around €408bn in 2020, when 30 companies were listed on the index, to about €418bn in 2021 with 40 companies listed.
DAX companies valued their pension obligations with a higher discount rate last year. The average discount rate increased from 0.78% in 2020 to 1.18% in 2021, Aon said in the report.
Assets set aside for pension obligations, on the other hand, rose significantly by 14% year-on-year, from €265bn in 2020 to €302bn in 2021, because of the new composition of the DAX index with 40 companies.
The increase led to a climb in funding ratios to 72% in 2021 compared with 65% in the previous year.
The duration of pension obligations varies among DAX companies, ranging from 11 years at SAP to 21 years at Merck and Porsche.
As in the previous year, DAX companies invested mostly in bonds in 2021, followed by equities and other investments such derivatives, while investing to a lesser extent in real estate to finance pension obligations.