Life companies are not currently leading players in pensions provision in Germany. Their share of about 13% of total pensions assets exceeds the 8% share of the support funds (Unterstützungskassen), but falls far short of the Pensionskassen’s share of 22% and the massive 56% share of pensions funded by employers via book reserves (Pensionstruckstellung). But life companies are also custodians of large ‘unofficial’ pension assets, and many Germans have traditionally made long-term retirement savings via life assurance-based plans.
But all this looks like changing once reforms designed to lift Germany out of its looming pensions crisis come into being, relieving pressure on a scheme that dates back to the days of Bismarck. The state currently plays a significant role in pensions provision, with upwards of 80% of small firms’ employees having no occupational pension entitlement.
The new arrangements involve
personal retirement pension plans
in the spirit of the US’s 401(k) scheme and the ‘stakeholder’ pension scheme to be launched in the UK next year.
But if this is the concept, the execution has still to take place. A loose framework, rather than a tightly defined product, is envisaged, giving customers plenty of scope for plan design and provider choice. Government-provided financial incentives to encourage consumers to take out the new plans are more or less agreed, but there is still negotiation between interested parties on the detail of the plans, with banks, building societies, life companies and fund managers angling for features that favour their own capabilities and expertise.
There are also concerns that there will be overly rigid rules on permissible vesting dates and how the accumulated funds can be taken – will it be compulsory to buy an annuity, for example? If so, life companies stand to benefit.
A swing towards personal pensions would erode the market for classic life assurance-based savings plans and also put group arrangements under
the spotlight. The Pensionskassen
looks like meeting the new requirements, but some other occupational schemes may come under pressure to deliver a value for money similar to the new plans. There could, therefore, be some switches to group personal
Broadly, life companies welcome the pensions reforms and the market leaders are very positive. The industry has been calling for change for some time, and the official line is that the new pensions era will boost the market, introduce healthy competition and be a spur for innovation. Certainly the major players will be in good shape to tackle the new market. Some already set up separate asset-management subsidiaries, most of which look after the investments of all associated companies.
Asset management units mean a wider product range and freedom from the 30% limit on equity
investments that potentially puts a brake on the life operation’s investment performance.
Although the feeling is that the new framework will favour life companies, they will not have the new market all to themselves. Fund managers in particular look as though they will present strong competition. They already offer old-age retirement funds (Altervorsorge Sondervermögen or AS funds) which, after two years’ availability, currently represent around 1% of pension assets. These effectively bundle together existing funded products and are aimed at individual retirement savers, placing the emphasis on investment in equities and property.
The fund managers could offer some very healthy returns if stock markets continue to perform well, although it seems they are a little uneasy about the proposed money-back guarantee. This should not be an unsolvable problem, but life companies have been used to giving a minimum return of 3.25% per annum for years.
Germans are also traditionally risk-averse, which favours life companies, although the bull markets of recent times have shown what equities are capable of and have encouraged more adventurous investment.
Life companies’ regular face-to-face distribution channels should work well for the new pension plans. The new arrangements will not be so simple as to remove the need for advice, and remote channels are undeveloped, except for motor cover and, to a lesser extent, term assurance. But given that, according to a recent survey, Germany is the European leader in the effective application of internet technology, it surely will not be long before the net begins to play a significant role in pensions distribution.
The pensions reforms promise to accelerate the pace of change within the German life industry. Since deregulation in 1994, the life market has been undergoing continuous transformation. While the market is crowded with brand names, most of which have only small market shares, Allianz, the Generali group and the Ergo group hold a third of the market between them. With a population of 80m, Germany is an attractive market and, in addition to Generali, foreign investment is evident in the shape of Axa, Aegon, ING and Winterthur.
Deregulation is freeing the market of the shackles of conservatism and ratcheting up competition, with real benefits for consumers in the shape of improved returns, more product transparency, innovation and improved service. But, at the same time, the newly competitive climate means squeezed margins, demands new levels of efficiency and
effectiveness and forces companies to streamline their operations. International groups have begun to leverage scale by centralising functions.
Furthermore, the Euro-zone makes international operations within Europe a more viable and attractive proposition.
It does create a double-edged sword, however – while domestic companies can look beyond Germany’s borders, new foreign entrants may be tempted in.
Some of these new realities have been hard to swallow for companies used to predictable progress in an ordered, regulated environment, where success was measured in market share rather than product performance, and where shareholders did not constantly press for better returns delivered more quickly. Even the strongest balance sheets have come under pressure, and there has been slow but steady merger and acquisition activity in the quest for scale economies. Given the abundance of tiny market shares, there looks plenty of room for more consolidation.
The pensions reforms pose life companies a fresh set of challenges on top of those they already face. Much depends on the detail of the legislation. The life industry might be placed in a strong competitive position against the banks, building societies and fund managers who want to grab their share of the new pensions cake. But experience in the US and Australia has shown mutual funds doing well on the new market battlegrounds by offering competitive, value-for-money products – to the detriment of some of the established life companies who have not been skilful enough in their product development and marketing.
The UK life market is undergoing upheaval as a result of stakeholder pensions. It might be premature to talk of cataclysm in Germany, but the possible long-term impact of pension reform, changing consumer behaviour and even new technology should not be underestimated. If the German life market has been an exciting place these last six years or so, it could well become still more so. There’ll be big opportunities, but not all companies will be fit or skilful enough to take them.