German Pensionskassen continue to ponder their future role as underlying trends of low interest rates, demographic changes and the need to achieve returns continue to shake their core offering.
“In view of low interest rates and demographic development, the tariffs and surplus concepts offered by Pensionskassen will have to change in the future to facilitate attractive benefits despite lower guarantee levels,” Rafael Krönung, Pensionskassen expert at Willis Towers Watson, told IPE.
In a recent unprecedented move, the Pensionskasse for insurer Allianz has decided to stop taking on new business from 2022, and shift the focus to direct insurance (Direktversicherung) and Pensionsfonds products since they are considered “more attractive” than Pensionskassen.
Other occupational pensions providers are finding alternative investing routes.
Manfred Hoffmann, chief executive officer of Versorgungswerk der Presse, the provider of pension provisions for employees in the German communications and media industry, told IPE the institution is turning to asset classes with attractive risk-return profiles such as infrastructure or other alternatives.
Occupational pensions schemes, including Pensionskassen, are urged to redefine the level of guarantees for beneficiaries.
“We are convinced that there should also be the possibility in the future for state-sponsored company pensions, such as defined contribution with minimum benefit, to not guarantee the full contribution, but significantly less, somewhere between 50-100%,” Friedemann Lucius, the president of the Institute of Pension Actuaries (IVS), told IPE.
This, according to Lucius, would open up room for capital investments and, at the same time, increase the chance of higher pension benefits for employees.
Krönung concurred that long-term guarantee promises on one hand, and low interest rates on the other, have pushed some pension funds into difficult positions.
More flexibility is needed
Returns required to cover guarantees can no longer be achieved in the long term with “safe investments”, and risk investments with higher expected returns are generally not permitted under supervisory law, also because they can cause higher volatility for investments, which would result in a (temporary) underfunding of pension schemes, Krönung explained.
“A more flexible framework is required, with the possibility for example of temporary underfunding of the very long-term obligations of a Pensionskasse,” he said.
Extensive regulatory requirements, combined with low interest rates and demographic changes, make it necessary for institutions to become increasingly professional, according to Krönung.
Pensionskassen should be equipped with the necessary human resources and “deep, very specific expertise” in a variety of topics to navigate capital investments in the current market environment and manage complex operations, he continued, adding that Pensionskassen will increasingly be dependent on buying external expertise.
At the same time, Krönung argued, the demand for a consolidation will remain high, with smaller Pensionskassen finding it “very difficult” to operate efficiently.
However, Pensionskassen in Germany will continue to play a role to provide occupational pensions through administrative efforts and professional capital investment still seen as a relief for employers and a value for employees.