The funding level of pension schemes of DAX companies reached a record high of 72% last year, up from 65% in 2020, led by positive developments in capital markets, according to the WTW study DAX Penisosnswerke 2021.

Among the healthier funding ratios, Deutsche Bank stood out with 102%, followed by BMW with 100%, Henkel 95%, Siemens 94% and HelloFresh with 93%, according to the study.

Pension assets set aside to pay benefits at the largest German companies grew year-on-year in 2021 by 12%, or €32bn, to €298bn. Five companies accounted for 43% of the total plan assets, or Planvermögen as pension assets to pay benefits are called, of the companies in the DAX last year, up from 47% the previous year.

Siemens had plan assets of €33.5bn, BMW €25bn, Mercedes-Benz €24.2bn, E.ON 23.5bn and BASF €23.1bn, the figures in the study show. On average, the share of plan assets was approximately 7% of assets in balance sheets of DAX companies in 2021, down from 9% the previous year.

Pension liabilities of DAX companies increased by only €3bn in 2021, or 0.7%, to €412bn, as the discount rate rose by 40 basis points to 1.20%.

“The discount rate impacts pension obligations much more than other factors,” said Hanne Borst, head of actuarial consulting at WTW in Germany.

If the discount rate rises by 100 basis points, pension obligations fall by around 16 percent or €66bn, WTW said.

The volatility of the discount rate increased in March after the start of the war in Ukraine, and a further increase by around 20 basis points to around 2% is expected at the end of this month as central banks hike interest rates, the consultancy added.

Hanne Borst at WTW

Hanne Borst, WTW

Volkswagen held the highest amount of pension liabilities among the DAX companies at €58.6bn, followed by Siemens with €35.5bn, Mercedes-Benz and E.ON with €28.9bn, and BASF with €28.6bn, according to the study.

The five companies accounted for approximately 44% of the defined benefit obligations of all the firms in the DAX last year, down from 48% in 2020.

On average, pension obligations accounted for around 10% of total assets in the balance sheets of the DAX companies in 2021, up from 14% in 2020.

Equities pushed returns on assets to €22.5bn, with pension investors that have also been integrating ESG criteria and alternative investments in asset allocations for years now, WTW said.

The allocation to bonds and equities in portfolios of DAX companies has been decreasing in favour of other types of investments that have grown by 15 percentage points in almost a decade. Other types of investments also include cash (3%) and alternatives (5%).

DAX companies allocate pension assets still mostly in bonds (49%), equities (21%), real estate (4%) and other types of investments (29%).

Johannes Heiniz at WTW

Johannes Heiniz, WTW

DC switch

Almost all new pension plans at German companies are now defined contribution (DC) funds, with the interest rate directly linked to the actual performance of the plan assets, Johannes Heiniz, head general consulting retirement at WTW Deutschland, told IPE.

In Germany, however, a certain level of guarantee is still common, usually measured in terms of volume of contributions, he added. Pure DC models are legally possible in Germany but have not yet been implemented.

Over the past few years, companies in Germany have consistently revised the risk positions in their pension schemes by building up large plan assets on the financing side, and on the other hand through risk-adequate plan design, he said.

“Modern pension plans link their promised interest to the development of the respective plan assets,”Heiniz said, adding that this limits the impact of fluctuations of interest rate on companies.

Companies´ pension plans increasingly include payments of the benefits in the form of capital or payments in installments. “This gives more flexibility for beneficiaries and limits interest rate and longevity risks for companies,” he said.

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