German book reserves hit by insurance costs

GERMANY – German companies that finance their pension liabilities via book reserves have been hit by a sharp increase in costs to insure corporate pensions against insolvency.

According to Germany’s PSV, an association that insures the pensions, contributions from companies using book reserves – Direktzusage in German - totalled €1.2bn in 2005, up 36% from €882m in 2004.

PSV said the increase was chiefly the result of higher expenditure on its part. PSV spent €900m to safeguard pensions amid corporate insolvencies in 2005, or €500m more than in 2004.

PSV also said expenditure on corporate pensions from earlier insolvencies totalled €400m in 2005, or €50m more than in 2004.

The body insures 55,000 companies using book reserves for their pension obligations. These reserves, in turn, account for around 60% of the €366bn in German occupational pension assets.

PSV also said its members would, in the short term, see further increases in their contributions.

According to the association, this is both due to the growing number of corporate insolvencies and its planned switch to a capital-backed system for insuring corporate pensions next year. PSV has traditionally used a pay-as-you-go (PAYG) system to insure the pensions.

To boost the attractiveness of Pensionsfonds, Germany’s answer to the Anglo-Saxon pension fund, the government has endowed it with a contribution to the PSV that is significantly lower than that for book reserve-financed pensions.

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