The German finance ministry has decided to increase the maximum interest rate – Höchstrechnungszins – applied by Pensionskassen, Pensionsfonds and insurance companies to calculate the amount of reserve funds for pension payouts to 1%, from the current 0.25%, from 2025 – the first increase in the last 30 years.

The finance ministry had lowered the maximum interest rate to 0.25%, the lowest level ever recorded, to react to a prolonged phase of low interest rates.

Its latest decision follows the recommendation of the German Association of Actuaries (DAV) pointing at higher interest rates, current economic forecasts, and the trajectory of inflation levels.

Against this background, a higher maximum interest rate for new contracts provides the basis for “flexibility in the range of products”, and at the same time a stable basis for the development of the rate in the medium-term, DAV said in a statement.

“The inflationary pressure in particular has permanently changed the interest rate level. It can currently be assumed that the yields on long-term government bonds will also remain above the [European Central Bank] inflation target of 2.0%. A maximum technical interest rate of 1.0%, still calculated with a safety margin, therefore makes sense,” said Maximilian Happacher, DAV’s chair.

The German insurance association (GDV) has also welcomed the finance ministry’s decision.

“The increase in the maximum technical interest rate is an appropriate reaction to the sharp rise in interest rates since 2021,” said GDV’s chief executive officer Jörg Asmussen.

He added: “This will have a positive impact on the design of life insurance products, from which consumer will benefit.”

This means that pension schemes and insurers can offer members higher guarantees, with the guaranteed pension benefits can also increase, GDV added. Rising interest rates also have a positive effect on premiums for occupational disability insurance.

“Regardless of this, the minimum guarantee in subsidised retirement provision should be lowered so that more money can be invested in investments promising higher returns”, Asmussen said.

The ministry is also starting a consultation to reform the ordinance to calculate reserve - Deckungsrückstellungsverordnung.

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