Bert Rürup, a long-term adviser to the German government on pensions, has said that hybrid models offer “a good chance” to react to demographic changes and that “hybrid means full funding is never required”.
Rürup, who is also president of the Handelsblatt Research Institute, was speaking at the 100th anniversary of the municipal civil servant pension fund – part of the Bayerische Versorgungskammer (BVK) and set up as a hybrid scheme, with pay-as-you-go (PAYG) elements and liabilities that require funding.
Rürup said full funding requirements would “massively expose” pension funds to the risk of interest-rate changes.
For him, hybrid pension plans offer “more advantages than disadvantages” compared with pure PAYG or pure funded pension plans, given their collective accounting setup.
He said the contribution equivalence promised in most funded pension plans allowed for an “inter-temporal shift of assets but no inter-generational redistribution”.
Rürup also argued that German chancellor Otto von Bismarck’s original plan 120 years ago had been to establish a funded state pension system, but that the debt crisis after World War II prevented this.
He told IPE he would not introduce a funded element to the current first pillar, as the German pension system is facing “not a construction problem but an adjustment problem in existing vehicles”.
One of the problems, he said, was the “low interest but not low-yield environment”, something he attributed to interest-rate policies.
He cited domestic equities as a possible source of yield for German institutions.
“At the moment, more than 55% of the equities in the German DAX are owned by foreign investors, and especially US pension funds are very keen to invest in German companies,” he said.
Rürup also proposed making it easier for domestic institutions to invest in foreign equities.
In a recent research note, he warned that most calculations and predictions on the future of the German pension system were calibrated to the year 2030.
“But the fact we are close to another ageing shift is left out,” he said.
“We have another 25 years of increasing dependency ratios ahead of us, and the policies have not yet been adjusted to that.”