Some occupational pensions and their regulatory systems were designed for another era. Increasingly, fixed-rate annual accrual or guarantee systems, like German and Swiss Pensionskassen, look like relics.
It may be tempting to consider the counterfactual, as Germany’s political elite appear to be doing when they draw attention to the plight of savers in the current interest rate regime. Clearly, had government bond yields not been compressed as they have been since 2009, the wider economy would have come under unbearable pressure. This would have been a worse outcome for savers and retirement scheme members.
Solvency II has prompted continental European insurers to move away from guaranteed, fixed-rate life insurance contracts towards unit-linked products. Scandinavian pension insurers have also followed this path.
The Solvency II framework, if not perfect, is seen in the European Commission as ‘state of the art’ regulation, and has brought about a shift in risk and asset allocation among insurers and pension funds in countries like Denmark. Some regulators, like the Dutch DNB, have created a parallel framework for pension funds to which occupational pension funds have had to adapt.
In Germany, the BAFin regulator has taken far too long to adapt to the reality of low and negative yields, despite its move in August 2014 to prevent new Pensionskassen contracts with interest rates of more than 1.25%.
Yet German Pensionskassen are stuck in a dystopian world with fixed annual guarantees, amounting to 3.28% on average, with little flexibility to adapt to the current capital markets situation as their Danish counterparts have by embracing unit-linked savings.
Neither is there a media discussion of occupational pensions in Germany, unlike in Switzerland where the problems receive a regular airing. Unlike insurers under Solvency II, German Pensionskassen are ineligible to apply an own-model for risk management.
At the BAFin annual press conference in early May, the regulator’s chief executive director of insurance supervision, Frank Grund, said Pensionskassen were suffering more than life insurers from the current interest rate environment; some may be unable to pay their benefits in full: “In the interest of the beneficiaries, we are supporting [Pensionskassen] in encouraging sponsors…to provide funds.” Shareholders would be the ones to contribute where Pensionskasen are constituted as a joint stock company.
This means difficult conversations between Pensionskassen and employers, and weaker Pensionkassen may have to turn to Protektor, the guarantee fund for the insurance sector.
Yet the failure of one or more Pensionskassen to meet guarantees in full might at least illustrate the problem.
In Germany, it will take an (reluctant) acceptance that guarantees and security are not fit for purpose. There needs to be greater understanding among politicians that risk assets can and should be part of the equation. Pensionskassen should also be able to increase their risk profile; at the end of 2014, BVV Pensionskasse, Germany’s largest, had an equity allocation of just 5%. German pension funds have fewer palatable options than embracing higher risk tolerance if pension saving is to remain affordable.
As Germany looks to reform its funded retirement system, there should be a holistic assessment of both funded and unfunded elements. Making pension regulation fit for purpose requires understanding what the system is trying to achieve. Germany has adapted to changing circumstances in the past and there is every chance it will adapt in the future.