Guarantees 'strangling' Germany's Pensionskassen – Towers Watson
The average discount rate applied by many Pensionskassen in Germany is still above 3.5% despite the yield from bonds having fallen in recent years, Udo Mangold, senior consultant at Towers Watson Germany, told delegates at the consultancy’s Pensionskassen Day in Frankfurt.
This means pension funds have had to issue guarantees on reaching this return level – and this is “strangling Pensionskassen” and decreasing benefits, he said.
“Too high guarantees are endangering the future survival of a Pensionskasse,” he added.
According to Mangold, lowering the discount rate to 0% or 1% would allow Pensionskassen more freedom in their investments, as well as higher returns, which over the long term would benefit members.
Earlier this year, Rainer Jakubowski, managing director at Germany’s largest Pensionskasse, the €25bn BVV, argued that limits on investment options were leading to “wrong” asset allocations.
At the Towers Watson conference, Marco Herrmann, head of strategy, law and communications at the BVV, confirmed that his fund was already in the process of lowering discount rates – including in existing contracts.
According to Mangold, the average discount rate in Pensionskassen will remain high over a long period if a new discount rate is only applied to new contracts.
“Transitions where the Rechnungszins is lowered in existing contracts have already been made, and they have been okayed by the German supervisor BaFin,” he said.
The consultant also pointed out that guarantees were based on the assumption new entrants would be paying into the Pensionskasse continuously over the next 45 years, which was not always the case.
He warned Pensionskassen against promising a life-long pension payout when the contract was signed, as opposed to offering a one-off payout of accrued assets on retirement.
“Providers can always offer a pension payout option later,” he added.
Herrmann suggested a way to increase assets in Pensionskassen would be to allow a higher percentage of the salary to be transferred.
The German government argues that many members have not even reached the 4% threshold currently allowed.
But the BVV representative pointed out this was different for members in his fund, which all are working in the financial sector.
“In fact, we would need an 8-10% threshold to ensure they can keep up their standard of living on retirement,” he said.
The BVV is now trying to encourage more people to contribute to the Pensionskasse themselves.