German Pensionskassen are calling for more relaxed regulatory requirements with a view to a more optimistic outlook, taking into account the current challenging environment.
According to a survey conducted by Willis Towers Watson (WTW), 62% of surveyed Pensionskassen support regulatory changes to improve future prospects.
However, only 14% of the respondents consider Pensionskasse an “interesting way” to run company pension schemes, the survey found, while 22% consider Pensionskasseen no longer an attractive option in their current form.
“The regulatory requirements have increased significantly over the past 15 years. At the same time, in the [current] low interest rate environment, safe investments prescribed for Pensionskassen can hardly lead to generate adequate returns,” said WTW’s head of retirement in Germany and Austria Heinke Conrads.
Conrads believes the goal of further disseminating company pension schemes will remain on the agenda after the general election in September.
“It is precisely for this reason that it is essential to assess which regulatory requirements contribute to reliable [forms of] company pensions and how,” Conrads added.
WTW is proposing to grant a higher degree of flexibility to Pensionskassen to relieve the schemes from strict regulatory demands.
“For example, a temporary underfunding could be allowed under precisely defined conditions so that [pension] institutions can invest [with an eye to] opportunities and better withstand volatility,” said Rafael Krönung, actuary and Pensionskassen expert at WTW.
A higher degree of freedom would also benefit the relationship between Pensionskassen and employers, Krönung said, adding that for example benefits financed by a Pensionskasse could be taken over by the employer in order to ease the burdens on pension institutions.
Sustainability, a waiting game
Pensionskassen continue to pay attention to sustainability investing in their asset allocation, but at the same time are waiting to see whether uniform market standards are set up.
For 48% of the Pensionskassen ESG standards play a role to define future allocations, while 15% checks their existing portfolio against ESG criteria, according to the survey.
It also revealed that 32% of the Pensionskassen surveyed, however, plan to wait until market standards for sustainable investment are established in order to actively consider those criteria.
ESG standards are instead not considered a priority for 5% of the pension institutions surveyed, which focus on capital investments to secure sufficient returns.
“Investments geared towards sustainability improve the risk/return ratio in the long-term,” Krönung said, adding that ESG standards contribute to overall improve the investment strategies of pension funds.
Ways to run occupational pensions in Germany
A Pensionskasse is the second most common way to operate occupational pension schemes in Germany. It is a special life insurance company operating the occupational pension for one or more employers.
The employer or the employee pay a contribution to the pension fund and at a later stage the fund provides benefits for pensioners.
Other ways to run occupational pensions in Germany include the direct promise (Direktzusage), direct insurance (Direktversicherung), support fund (Unterstützungskasse) and Pensionsfonds.
In the case of the direct promise, the employer pays the pension directly to the former employee without intermediaries or third parties. The employer builds up provisions, also called Rückstellungen in the balance sheet to then pay pension benefits.
The employer can also decide to separate the assets. It can set aside capital investments to cover pension obligations for example in a CTA (contractual trust arrangement) that serves only to cover pension obligations.
With a direct insurance an employer signs a life insurance for the employees. In the case of the support fund (Unterstützungskasse) the employer has freedom to decide how to provide contributions to the support fund. The fund can be equipped with the necessary funding, but the employer is not obliged to do so.
There are also reinsured support funds (Rückgedeckte Unterstützungskasse). In this case a life insurance company or pension fund is behind the fund.
Pensionsfonds were introduced in Germany in 2002. They are mostly operated as non-insurance-type Pensionsfonds (Nichtversicherungsförmiger Pensionsfonds), meaning that an employer transfers obligations and provides a contribution to the Pensionsfonds. The Pensionsfonds then provides benefits to the pensioner.