German actuaries, Aba propose review of pension rules to boost real assets investments

The German Institute of Pension Actuaries (IVS) and the occupational pension association Aba have sent their recommendations to reform the second pillar pension system to the government, pushing to review rules for investments in real assets.

The IVS is proposing better conditions for investments in real assets for Pensionskassen and Pensionsfonds, to effectively fend off negative real interest rates in the future.

Both institutions have sent their proposals to via the ‘dialogue framework’ called “strengthening company pensions”, set up by the Ministry of Labour and Social Affairs and the Ministry of Finance, whcih will be followed by a legislative process.

The Institute is proposing that guarantees are cut to 60-80%, from the current 100%, and that rules on ESG are eased to boost funds and sustainable investments in real assets.

Only guarantees below the maximum for defined contribution (DC) plans with minimum benefit (BZML) would give room for investments in real assets, a prerequisite to lift benefits in times of persistently negative real interest rates, the IVS said in the document sent to the ministries.

Against this background, the actuaries consider the redistribution of investment risks among employers and employees necessary so that this type of pension promise can be offered by Pensionskassen, Pensionsfonds and direct insurance through external pension providers.

In its programme for the current legislative period, the government coalition of Greens, Social Democrats (SPD) and Liberals (FDP) has promised to strengthen the second pillar pension system allowing investments leading to higher returns.

IVS considered necessary to amend the Investment Ordinance to react flexibly to sudden changes in financial markets to finance company pension schemes through investments with higher returns.

The current supervisory rules requiring to cover obligations at all times means that temporarily negative capital market developments trigger shifts to low-risk forms of investment, leading to missing opportunities for returns with investments in real assets, the actuaries said in the document.

Pensionkassen need more flexibility in terms of risk-bearing capacity so that the current capital market situation does not lead to loss-making reallocations, it said, adding that relaxing rules on funding promises would also make sustainable investments significantly more attractive over the long-term.

According to the actuaries, EU rules, for example the certification of Article 8 or Article 9 products in the Sustainable Finance Disclosure Regulation (SFDR), unnecessarily restrict investments of company pension schemes, that will anyway invest according to ESG criteria without further regulations to take advantage of returns in the long run.

EU sustainable rules might overwhelm smaller pension funds administratively and financially with the certification process, resulting in reporting obligations, the IVS said.

The actuaries support opening up existing social partner models for pensions, without other social partner necessarily being involved in the implementation and control of the scheme, and opening up the model for companies also without collective bargaining agreements.

To make inflation adjustment fairer, the actuaries propose to refrain from paying out part of the inflation adjustment to current beneficiaries of direct promises and support fund (Unterstutzungskassen), while increasing the entitlements of younger employees.

Occupational pension association Aba is asking the government to create flexibility in terms of quotas for investments, for example asking an infrastructure quota without taking it into account for capital ratio risks or as part of general mixed quotas, and with the prerequisite that assets qualify as infrastructure, including infrastructure financing.

Aba is recommending a simpler structure to make it easier for pension institutions to finance start-ups, reviewing rules on diversification, particularly on the 1% limit for investments, regardless of whether it is a direct investment, a fund investment or a fund of funds investment, it said.

It is pushing for a comprehensive review of the Institutions for Occupational Retirement Provision (IORP) regulation for capital investments, funding and risk management, reforming the Investment Ordinance with the goal of higher returns for pension funds, and boosting infrastructure and digitisation of investments, it said in the document sent to the government.

Funding rules should ensure that the benefits are paid when they are due. The legislator should also ease restrictions for investments of occupational pension institutions in Spezialfonds, it added.

Aba is also requesting that guarantees for DC plans with minimum benefit (BZML) are trimmed, with the new guarantees negotiated by the parties involved or defined by the legislator, and review funding rules for Pensionskassen and Pensionsfonds.

The latest digital edition of IPE’s magazine is now available