The German Association of Actuaries (DAV) has recommended keeping the maximum interest rate on life insurance and pension products unchanged at 0.25% in 2023 as the COVID-19 pandemic in Europe continues to create uncertainty.

DAV’s chair Herbert Schneidemann said the association does not currently “see signs of a noticeable recovery in interest rates in the near future”, not least in view of the economic uncertainties caused by COVID-19.

DAV believes that it is “still too early” to predict how inflation will play out in the long-term and the potential reactions of the European Central Bank.

“With the recommendation [on the maximum interest rate] we want to create planning security” for the German pension industry “in extremely uncertain times,” Schneidemann added.

The German finance ministry took the decision to reduce the maximum interest rate from 0.9% to 0.25% from 2022. The maximum interest rate was reduced to 0.9% on 1 January 2017.

The maximum interest rate relates to the accounting of obligations in annual financial statements of life insurance companies and it defines the discounting of actuarial reserves for insurance contracts.

This means that it also has an indirect influence on the guarantees that companies offer in new businesses.

In the draft ordinance with the amendments to the maximum interest rate, the finance ministry pointed at lower returns of low-risk investments, also for Pensionsfonds, to justify the cut.

The financial supervisory authority BaFin and other associations, including the DAV, have repeatedly called to cut the maximum interest rate in view of the persistently low interest rate environment.

The ministry had told IPE in a statement that the adjustment of the maximum interest rate on insurance and pension products takes into account the further decline in interest rates in order to contribute to the long-term stability of life insurers.

A low interest rate environment results in lower guarantees on insurance and pension products, it added.

The DAV is also calling on the new German government to redefine the requirements for the guarantee on state-sponsored pension products.

Schneidemann added: “The 100% guarantee [on contributions], still required, unnecessarily restricts the possibilities to invest in more profitable forms of investments.”

DAV is also suggesting a change in the concept of guarantees until now conceived as “minimum return” to a “safety net in the event of very poor capital market developments,” Schneidemann said.

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