How the banks avoid pension pitfalls
So how were other German banks able to externalise their book reserves without the accompanying furore?
At Deutsche Bank, for example, the change to the structure of the bank’s staff pension arrangements is considered to have been a great success compared with the Commerzbank debacle.
“The main point is that the change in the structure of the corporate pension did not reduce the pension rights of our staff,” says Patrik Fischer of Deutsche Bank’s communications department. “In fact, the new scheme allows for more reflection of remuneration changes and variable pay such as bonuses.” Which is fine if you can afford it, of course.
At the end of 2002, in the name of improved transparency and balance sheet comparability, Deutsche Bank externalised its E4bn book reserve by means of special securities investments using a ‘contractual trust arrangement’ (CTA).
Deutsche Bank subsidiary Deutsche Asset Management (DeAM), was commissioned to manage the fund, comprising 80% fixed-interest securities (government and corporate bonds) and 20% equities and other risk assets.
The assets retained to finance the pension provisions were transferred to an independent trustee.
The bank claimed that the change gave its employees and pensioners an additional safeguard for their pension entitlements by means of a “separate and widely diversified capital cover” which went “beyond Deutsche Bank’s direct guarantee and the guarantees of the German Pension Protection Association”.
Last year, Deutsche Bank also converted the existing capital backed final salary scheme, managed by bank pension provider BVV (see page 23), into a defined contribution plan. Roughly 94% of the 23,000 staff of the bank’s German organisation accepted the offer to convert. “We thus made our company pensions more transparent and the resulting burden more calculable for Deutsche Bank,” says Fischer.
Regarding the other key issue of communication, Fischer is keen to stress Deutsche bank’s approach: “Our corporate culture is based on consensus. We included all parties in the decision process.”
At the same time, Munich-based Hypovereinsbank (HVB) decided to externalise all of its pension obligations.
While all HVB employees were covered by a direct contribution scheme that had been drawn up with the BVV Unterstützungskasse, senior employees in particular received an additional promise via the bank's book reserve. This additional benefit was scrapped for new employees with effect from March 2003. HVB’s capital-backed pension arrangement with BVV had already been converted to defined contribution back in 1995, when it was the first bank in Germany to make this change. So that was one thing less to worry about.
At the end of 2003 the book reserve of some E1.6bn was transferred to a dedicated trustee. The bank still has the same obligations in respect of the promises that it has issued. It continues to pay the pensions directly; the payments are reimbursed by the trustee. “We expect that the trustee will always have the means to do this,” says Walter Torka, managing director of compensation and services at HVB.
The bank lays down for the trustee how the fund should be invested, with the underlying principle being to generate income at minimum risk. “In these early days of its existence, the trustee is nothing but a vehicle to implement the investment principles set out by the bank,” says Torka.
The bank is now working on a long-term asset management concept that will be in place by June. “It will be a conservative system with no more than 30% in equities,” Torka adds. “For the meantime the whole fund is in fixed income.”
As with Deutsche, HVB was careful to preserve the goodwill of its staff. “We avoided touching existing pension promises,” says Torka. “We knew it would be easier to limit the changes to new pension promises.”