Reducing risks relating to pension promises continues to represent a “key trend” for German employers, according to the Aon’s Market Report 2023.
Employers tend to reduce risks by promising a lower level of guarantees, which, the report, stated, reducing, or completely dropping guarantees can lead to an increase in benefits for employees.
Benefits can increase through offerings of capital market-oriented products or with pension commitments given directly by the employer by designing security-linked promises, Aon’s report stated.
Moreover, collective buffers and compensation mechanisms can be used to cushion individual risks and, if necessary, to make additional (temporary) benefits during the retirement phase, it added.
In order to reduce the risks linked, for example, to disability and death of the employees during the working phase, collective mechanisms are administered separately. Collective products are offered with little administrative effort and can be calculated based on one-year premiums, the report said.
Employers can reduce longevity risk, having an impact on future cash flows, considering different forms of payments such as lifelong pensions, lump sums or installment payments.
In order to provide beneficiaries with attractive pension promises, it is important to introduce modern and flexible plans, according to Aon.
Younger employees aged 18-35 in particular think it is important that an employer offers a company pension plan, according to a survey last year among 1,000 employees in Germany by Aon.
The consultancy underlined that pension promises in Germany are often associated with complexity, effort and legal challenges for employers.
Pension benefits traditionally granted via a direct pension promise require a balance sheet approach taking into account national and international accounting standards. Interest rates and the expectation of inflation, which in many cases determines pension adjustments, remain crucial.
Companies also have to look at balance sheet volatility and costs that ideally would be cut against the backdrop of uncertain capital market developments and rising inflation, it added.