German Pensionskassen have started submitting proposals to supervisory authority BaFin to implement asset-backed underfunding arrangements under new rules designed to create greater scope for higher-risk investments.
Two pension funds have so far submitted implementation proposals, including relevant statutes and draft contracts, to BaFin, according to Thomas Obenberger, expert on Pensionskassen at WTW.
BaFin is currently reviewing the submissions, and it is likely to take some time before the first asset-backed underfunding plans are approved, Obenberger told IPE.
A BaFin spokesperson said the regulator is in discussions “with some pension funds” on the relevant provisions of schemes’ statutes and their plans for asset-backed funding of pension liabilities.
The new funding framework, introduced under the Betriebsrentenstärkungsgesetz II (Second Occupational Pensions Strengthening Act), allows temporary underfunding of up to 10% of actuarial liabilities calculated at book value, provided a recovery clause is included in a Pensionskasse’s statutes.
Under a recovery plan approved by BaFin, pension funds must eliminate the underfunding within a maximum of 10 years while continuing to meet solvency and minimum capital requirements at all times.
Sponsoring employers must make a legally binding commitment to provide the financial resources necessary to implement the recovery plan, Obenberger said.
As a result, use of the new framework is likely to be limited to pension funds whose sponsoring employers are willing to provide such support, depending on the supervisory authority’s requirements for approving recovery plans, he added.
Nevertheless, the new framework represents a “paradigm shift” from the previous regulatory regime, which required pension funds to cover their obligations, meet solvency requirements at all times and continuously comply with stress tests, Obenberger said.
He added that allowing a degree of underfunding increases the available risk budget, enabling pension funds to invest more in higher-return assets.
“In our view, it is primarily corporate pension funds, backed by a sponsoring company willing to step in if necessary, that will benefit from and use this new regulation,” Obenberger said.
BaFin’s spokesperson agreed that the new rules create additional scope for higher-return investments, offering beneficiaries the prospect of higher pension benefits.
The greater investment flexibility comes as the funding and solvency positions of many pension funds have improved following higher interest rates.
According to a survey by WTW, 37% of Pensionskassen view the new funding framework as a major opportunity, provided BaFin supports implementation constructively.
However, BaFin stressed that, despite the potential for higher investment returns, members’ interests must continue to be adequately protected in cases of underfunding, while capital requirements must be met consistently.
