German pension 'time-bomb' blown out of proportion
GERMANY – Recent reports that the private sector in Germany faces a pensions time-bomb because of demographics and economic declines have been blown out of proportion according to a pensions spokeswoman for Morgan Stanley in Frankfurt.
The spokeswoman says most companies are already prepared to inject capital into their book reserves in order to meet pension obligations.
“The majority of companies began to curtail their contributions and benefits from the late 80s onwards in preparation for the demographic changes that will begin to have an impact on pensions in around ten years time.
“Though they couldn’t avert a deficit, on average we are talking no more than a €12bn shortfall out of the €200bn we estimate they will need at that point. They cannot stop people retiring, after all,” she comments.
She says it is the state system and Pensionskassen that are likely to run into trouble. “The time-bomb that everyone talks about really refers to the state pay-as-you-go-system that hasn’t been adequately modified. And the traditional Pensionskassen, because of their funded elements, are suffering as a result of the declines in the equity markets.”
Nonetheless, she acknowledges that private companies would welcome further reforms, similar to the Riester reforms, that would make transferring their book reserves into pensions funds more attractive.
“On paper, transferring assets from the book reserves into the new-style pension funds is supposed to be tax-neutral when in reality, companies may find themselves penalised in the long-term,” she says.
“Moreover, the reforms are too narrow in their scope at the moment to allow companies to turn their book reserves into full scale DB plans and that’s probably why no German company has done that yet. I wouldn’t be surprised if we didn’t see more reforms soon making the transfer of asset more attractive,” she adds.