Mercer has helped overhaul pension plans and strategic asset allocations of corporates in Germany, using targeted measures aimed at de-risking balance sheets and, in some cases, enabling future buyouts.
The consultancy worked with a Japanese multinational pharmaceutical company to review its pension arrangements amid a tight labour market.
The company had accumulated different pension obligations in Germany over the years, but had not set aside plan assets to cover liabilities, resulting in volatile service costs.
Its aim was to avoid further pension commitments without building up plan assets, achieve a transparent cost structure, and gradually increase a funding ratio that was previously zero, said Sebastian Sparakowski, senior principal at Mercer, during a recent webinar organised by the consultancy.
The company closed the pension plan to new members, introduced a new market and fund-based pension promise, and began funding existing promises over several years via a Contractual Trust Arrangement (CTA).
A buy-in or buyout could follow if the strategy proves successful in the coming years, Sparakowski said.
In another case, a large German company overhauled its asset allocation to design a more capital market-oriented pension plan.
The shift was driven by dissatisfaction with historical performance, investment strategy, and existing managers that had “the same targets and restrictions” regarding asset allocation, said David Sehn, senior investment consultant, during the webinar.
As a result, the company appointed new managers while redesigning its strategic asset allocation to reflect higher return expectations, alongside a revised governance structure.
The company now focuses on strategic decision-making and risk management, while Mercer handles operational processes, according to Sehn’s presentation.
A third company, also active in the pharmaceutical sector, offered defined contribution-style arrangements (Beitragsorientierte Leistungszusage, BoLZ) and moved to introduce a reinsured direct promise.
The firm is now considering offloading pension promises through a buyout, said senior principal Klaus Bednarz.
Meanwhile, according to Mercer’s head of pension Carsten Strube, German companies are increasingly outsourcing pension schemes to providers that pay contributions to insurers, which then manage investment, administration and benefit payments.
Some companies have brought in external partners to cover specific risks, while also considering pension buy-in or buyout as de-risking tools.
“Many companies have set up a so-called pension board that regularly comes together, oversees and controls things, [and] formulates [its pension] strategy,” Strube added during the webinar.
He said companies should take advantage of the record-high 87% funding ratio, as older large corporate pension schemes among DAX-listed firms gradually disappear while new forms of pension obligations gain traction.
