GERMANY – Pension funds tied to German insurers are likely to reduce their guaranteed return on contributions to 2.25% in 2007 from 2.75% now.
The move is linked to yesterday’s recommendation from the German Association of Actuaries, which called for financial regulator BaFin to permit life insurers to reduce the rate amid persistently low long-term interest rates.
Though they have to formally sanction the reduction, BaFin and the German finance ministry usually follow the DAV’s recommendations.
A BaFin spokesman confirmed that assuming such approval, Direktversicherungen (direct insurance contracts) and Pensionskassen (traditional pension funds) offered by insurers would be affected.
Since 2002, a year of historic pension reforms, leading German life insurers have launched Pensionskassen in the hopes of profiting from a boom in corporate pensions.
Lowering the rate in question would ease the pressure on these insurers. The low interest rates are making it increasingly very difficult to earn the kinds or returns on bond markets they need to maintain the guaranteed rate.
Generally speaking, Pensionskassen invest between 70-90% of their holdings in bonds, typically investment grade, though they theoretically could invest up to 35% in equities.
However, most German Pensionskassen are not tied to the insurers but instead serve specific companies or sectors. Moreover, not all of these vehicles offer a guaranteed rate of return.
One such scheme is Hamburger Pensionskasse, a €2.7bn scheme for several German employers. Hamburger argues that any guaranteed return would restrict its ability to achieve higher returns and potentially harm the companies backing it.
Elaborating on the latter point, the scheme notes that if it simply guarantees the contributions, this rules out the possibility of a necessary cash injection from the employers.
All told, Pensionskassen and Direktversicherungen make up a respective 21% and 12% of the €366bn in German pension assets.