The German Finance Ministry has yet to make a decision on a possible adjustment to the maximum interest rate on pension and life insurance products from 2021, a spokesperson for the ministry told IPE.
Asked whether the department believes pension funds should review the interest rate in light of the current situation caused by the COVID-19 pandemic, the spokesperson added that insurers have to “constantly” deal with this question, but the financial impact of the current crisis on pension funds and life insurers has so far been “minor”.
The recent equity market downturn, which has added to the structural problem of low interest rates, has renewed calls for Pensionskassen in Germany to rethink the interest rate offered on products.
“It is possible that the ministry will decide on a maximum interest rate in 2021,” Reiner Will, managing director of insurance rating company Assekurata, told IPE.
He said: “The question is why it is it taking so long to make a decision, probably because of the corona[virus] crisis”, adding that providers can already calculate a lower interest rate.
Assekurata calculated in a recent research study that 24 companies have an interest rate of 0.9% and nine companies between 0-0.5%, showing that one third of providers already have a rate of below the maximum limit, Will said.
But the German Association of Actuaries (DAV) has continued to demand a lower maximum level of interest rate for new contracts from 1 January 2021, from the current 0.9% to 0.5%.
In a recent statement, Herbert Schneidemann, the association’s president-elect, appealed to the Federal Ministry of Finance to make a decision on the issue by the end of May at the latest.
Schneidemann also urged for adjustment requirements for subsidised products such as the Riester-Rente in order to avoid narrowing the scope for investment opportunities with full premium guarantees in the current equity market environment.
“In order to have a realistic chance to adjust the inflation to investments in the future, a reduction of the guarantees is actuarially required,” he said.
For Will, the question is whether 100% guarantees, or less, can be provided on such products. “The providers need contributions for products such as the Riester-Rente, and if the interest rate will be lowered, these products cannot be offered anymore,” he said.
“This puts the state, which has to support these products, in a difficult situation,” he added.
The actuarial interest rate has already been lowered several times in the past. On average, the nominal guaranteed interest rate in the portfolios of German life insurers at the end of 2019 was 2.73%.
However, companies reserve more than the nominal discount rate since 2011 against the risks of falling capital market interest rates.
This so-called additional interest reserve amounted to around €75bn at the end of 2019, which accounts to approximately 9% of the total actuarial reserve. The additional reserve has reduced the nominal reserve interest from 2.73% to 1.77% at the end of 2019.
The contracts have a maximum interest rate of 0.9%, while in portfolios the contracts still currently have an average interest rate of 1.77%.
Extended period of low rates
With the COVID-19 crisis, and the consequent launch of a new bonds purchasing programme – the Pandemic Emergency Purchase Programme – by the European Central Bank, investors may face a low interest rate environment for a longer period of time.
“Life insurers have to grant an interest rate above the 0.9% on old contracts, meaning that insurers have an investment problem and have to generate guarantees in stocks,” Will said.
Returns can cover the costs of these types of contracts, but a 0.9% interest rate over a long period of time means only a compensation of the costs without a positive return for providers, he added.
BaFin, Germany’s financial regulatory authority, believes the risks increase if it is difficult to generate the interest rate in capital markets, therefore, it allows a calculation with a rate below 0.9%, Will said.
This is also an issue particularly for Pensionskassen because they have higher returns in stocks, he continued, adding that with higher interest rates customers pay lower contributions but have riskier investments.
In a recent article Frank Grund, executive director for supervision of insurers and Pensionsfonds at BaFin, warned Pensionskassen to avoid using high interest rates as a basis for calculating contributions and benefits without taking into account the current situation on equity markets.
Providers have to deal intensively with the question of an affordable guaranteed interest rate based on the ability to bear the risk, and profitability, he said.