The German Institute of Pension Actuaries (IVS), a branch of the Association of Actuaries (DAV), has called on social partners to finally negotiate a new pure defined contribution (DC) model to finance occupational pensions.
Social partners should not ignore the “socially relevant topic” of company pension schemes in the next collective bargaining negotiations, despite the COVID-19 crisis, the institute said. The COVID-19 pandemic has slowed down discussions between employer and employee representatives on the new DC schemes.
The IVS considers the pure DC mechanism to carry “great potential” because it waives guarantees and opens up investment opportunities.
“As a result, a significant part of contributions can be invested at a higher risk, which significantly increases the prospect of additional [pension] benefits for the younger generation”, Friedemann Lucius, the president of IVS, said.
Under the pure DC model, introduced in 2018 through the law to reinforce occupational pensions – Betriebsrentenstärkungsgesetz (BRSG) – employers are free from liabilities, but employees are entitled to an additional contribution as a safety net.
In a reply to a parliamentary inquiry, the German government admitted that collective bargaining agreements, pacts between employers and employees to design social partner models, have not been signed so far. IVS added that it is “aware” that negotiations are currently taking place between parties.
The IVS is calling for a radical change in the occupational pension system to avoid a potential generational conflict.
“Historically low interest rates are driving financial requirements for the existing old [pension] promises, with their high benefit promises, to previously unimaginable high levels,” Lucius said.
As a consequence, funds are redirected to finance old promises at the detriment of future pension benefits for the younger generation.
The condition to guarantee paid contributions leads to, in a low interest rate environment, investing assets safely, likely without the prospect of higher returns.
“The goal must be to move away from fixed guarantees and to assess the risks relating to pension requirements adequately,” Lucius explained.
“Risks of fluctuation for equities and other tangible assets are [now] dramatically overrated due to the prevailing risk aversion approach in Germany,” he added.
Over a long period of time, and with a professional management approach, risks are manageable, IVS said.