German Pensionskassen have taken tough steps to try to fend off the consequences of a low interest rate environment and the possible impact of the current pandemic crisis.
At a recent general meeting, the occupational scheme Pensionskasse für die Deutsche Wirtschaft (PKDW) decided to lower the interest rate for future members’ contributions to 0.25% from 0.40%, starting from 1 January 2021.
The interest rate adjustment is an option that mitigates the consequences for scheme members compared with cutting benefits, PKDW said.
Under difficult circumstances, Pensionskassen are forced to opt for either reducing benefits or adjusting the interest rate for new contributions. Interest rate adjustments are considered inevitable in an on-going phase of low and negative interest rates, it added.
PKDW’s portfolio is mostly invested in long-term fixed income (79.2%), a position that poses a challenge to generate adequate returns, it said.
In its latest financial statement, the scheme acknowledged that improvements in returns under low and negative interest rate circumstances are only possible by taking on additional risk.
PKDW has, therefore, increased its share of riskier investments – in listed and private equity, and in emerging markets – by an undisclosed amount, it said.
For 2020, PKDW expects stagnation in terms of the number of sponsoring companies and new members joining the scheme, as growth figures are weak and the number of COVID-19 infections is still increasing in many countries. It foresees slow progress for contributions, it added.
BaFin has already placed 36 out of 135 Pensionskassen in Germany under intense scrutiny – it had approved requests from seven funds to cut pension benefits, including for the members of the Kölner Pensionskasse.
Kölner Pensionskasse and the Pensionskasse for the catholic aid organisation Caritas put in place restructuring plans after BaFin closed the schemes for new business citing a severe lack of funding.
The restructuring processes have paid off so far, although the full scale of the pain caused by the COVID-19 pandemic is still unknown.
Caritas has stabilised its position by building up capital resources to reinforce risk-bearing capacity. In 2019, profits amounted to €5.42m, a sum that is allocated to reserves for premium refunds. Last year’s returns were mainly the product of positive development in equity markets and income from capital investments, it said.
Kölner Pensionskasse achieved returns that exceeded expectations, it said – profits amounted to €16.85m last year, and €9.99m was allocated as reserves for premium refunds.