German pension funds call for end of discount-rate disparity

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  • German pension funds call for end of discount-rate disparity

GERMANY – Lawmakers must address the disparity between regulatory and accounting discount rates if they wish pension provision to prosper, the chairman of Germany's pension association has said.

Heribert Karch said supervisory and tax regulation needed to be modified, given that the current low-yield environment.

This environment, he said, resulted in the German Rechnungszins – the discount rate applied to pension obligations – declining, while the accounting yield against which expected returns were discounted remained at around 6%.

"If we want large companies that currently accrue pension reserves to continue to engage and make payments, we need to make it easier for said companies," he told IPE the day before the aba annual conference in Berlin.

"This means the accounting discount yield needs to come down from the current 6% and lower itself to a rate adequate for the pension obligation [under Heubeck]."

He stressed that while companies were able to absorb the disparity, change was needed to reduce the increasing burden on companies stemming from pension obligations.

However, Karch was critical of the current low-yield environment, and said country's treasuries were enriching themselves at the cost of companies.

"The states are refinancing themselves fairly cheaply on the bond markets due to the low-yield policies – this means the states enjoy a fiscal gain, so to speak, and companies see the low yields result in lower profits or even losses," he said, adding that the disparity was not "sustainable".

Karch, also head of industry-wide scheme MetallRente, did not see the low yields as a hurdle to further expansion of Germany's occupational pension system (bAV).

But he said the introduction of auto-enrolment with opt-out provisos would not be the only way to increase coverage.

He noted that some companies employed auto-enrolment without opt out, by mandating that, as part of the terms of employment, a worker contributes towards the company pension fund.

"My suggestion would be, rather than introducing the new approach of opting out for all – which would be better for some, but worse for others – we argue there should be a regulatory framework that allows for every model to be introduced in every company," he said.

"This could mean that quasi-mandatory, opting out and a completely voluntary system could exist alongside each other."

Karch noted, however, that the continued existence of a voluntary system would not help address the current coverage levels.

He added that there was a need for the government and social partners to engage on ways to increase second-pillar participation, and argued that "creeping and erroneous" measures introduced in the past needed to be stopped.

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