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German funds show no risk of being underfunded

GERMANY- Germany’s corporate pensionskassen and direct insurance pension schemes carry literally no risk of being underfunded and have little or no exposure to equity markets according to new research from Commerzbank Securities.

The research, which cover companies in the DAX30, shows that the companies’ directly assigned fund assets, as a percentage of total liabilities, are an average 39%. The same companies have, on a five year average, a return on capital employed (ROCE) of 10.3%, easily sufficient to cover the technical interest rate of 6% at which unfunded pension liabilities are valued.

German companies using Pensionskassen or direct insurance are obliged to keep less than 45% of the fund in equities and liabilities must be 80% matched by European-denominated assets. But Commerzbank’s research shows that few are taking advantage of the recently raised equity ceiling of 45% and asset allocation remains conservative with only 20% invested in equities. This compares with UK and US funds that invest a respective 75% and 60% in equities.

Many of Germany’s largest companies still tie their final salary pension commitments via either the book reserve approach or support funds. “As both routes predominantly tie the liability to the company’s own assets and, in the case of the latter, predominantly to the company’s own loans, the pension commitment is hardly, if at all, exposed to equity market downturns,” says the report.

For Pensionskassen and direct insurance approaches, both typically hybrids of DC and DB, the research suggests that the risk of underfunding borne by the employer is quite low and non-existent in the case on direct insurance.

“Because the pre-funded routes do not offer a pure form of final salary pension in the first place and, moreover, are largely exposed to an insurance type contract that often implies only an indirect exposure to capital market conditions for the employer, the plans are not that generous,” says the report.

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