German companies are exploring alternative routes to pension de-risking as economic uncertainty forces them to preserve liquidity for other priorities.
Volatile markets and a prolonged period of economic stagnation are intensifying the desire to reduce pension risk, but also making traditional transactions harder to execute. As a result, many sponsors are looking at “stretched” solutions, such as buy-ins executed in tranches or hybrid structures that spread the balance sheet impact over time, Gunnar Hasselmann, pension consulting partner at PwC Deutschland, told IPE.
Companies are also seeking to ease short-term liquidity pressures by reviewing benefit adjustments, for example, by suspending pension increases linked to inflation, he added. Employers in Germany assess inflation adjustments every three years, taking into account their financial situation.
The difficult macroeconomic backdrop is complicating de-risking activity, according to Johannes Heiniz, senior director of retirement at WTW.
The strained economic situation in Germany, which is experiencing a long period of stagnation, makes pension de-risking transactions more difficult to execute, he told IPE.
“High interest rates and inflation are driving up financing costs and prompting companies to consider conserving their liquidity for their core business,” Heiniz added.
Against this backdrop, WTW and state bank Landesbank Baden-Württemberg (LBBW) are working to facilitate the funding of pension de-risking transactions. LBBW acts as house bank for WTW’s funding platform, which includes contractual trust arrangements (CTAs), Pensionsfonds and pension buyouts.
The bank supports large and medium-sized companies in raising capital for pension de-risking transactions that can have a material impact on their credit ratings.
“This is especially true when the necessary funds are not already available, or cannot be financed from operating cash flow, but must be raised, for example, through additional debt financing,” Heiniz said.
Creating plan assets via CTAs and pension fund structures, as well as outsourcing pensions to pensioner companies (Rentnergesellschaften) through buyout transactions, can tie up significant financial resources that companies may otherwise want to deploy elsewhere.
Despite these challenges, pension de-risking remains an attractive option for German sponsors seeking to reduce long-term balance sheet volatility, particularly with funding ratios at historically high levels.
“Many companies are taking advantage of this tailwind and, especially in times of transformation and uncertainty, see de-risking as a strategic opportunity to secure future sustainability,” Heiniz said.
Hasselmann expects pressure on balance sheets and cash flows to ease somewhat as the economy recovers. A more stable environment could also give companies room to prepare for the next downturn.
“I therefore expect that de-risking measures in the pension sector will continue to play a significant role even after an economic recovery,” he added.
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