Railway company Deutsche Bahn sets €1.1bn aside for pension liabilities

Deutsche Bahn has added €1.1bn into a pot set for future pension provisions of its employees.

Persistently low interest rates are denting the value of pension provisions overall, driving Deutsche Bahn to increase the total amount of reserves set aside for pension liabilities to a total of €6.5bn.

Its liabilities – which have been particularly hit by low interest rates – cover its more than 200,000 employees in Germany.

A spokesperson for the company said “historically low levels of interest rates have lead to an arithmetical increase in pension provisions.”

Meanwhile, the German Institute of Pension Actuaries (IVS), an affiliate of the Association of Actuaries (DAV), has again called to reduce guarantees on pension promises.

The institute called for a redefinition of a new level of guarantees for occupational pension schemes with defined contribution (DC) options and minimum benefits (BZML) last October.

With and actuarial interest rate of 0.5%, the guarantee to pay out full contributions to employees is not viable, the IVS president Friedemann Lucius said.

The IVS has warned that in 2022 Pensionskassen and Pensionsfonds will be forced to close contracts offering minimum guarantees of pension pay outs.

Regulator BaFin will no longer approve new tariffs for regulated Pensionskassen with actuarial interest rates above 0.25%, it said.

DAV along with IVS support the introduction of a new level of minimum guarantees on pension promises.

Only by reducing guarantees, can a significant part of the contribution be invested in higher-yield assets such as equities, real estate or infrastructure, it said.

Research on inflation-returns link

High guarantees reduce the risk resulting from fluctuations in equity markets, but in turn, increase the risk resulting from inflation, according to a study jointly conducted by actuarial consulting firm IFA and Union Investment.

The study examined the effects of lower guarantees with regards to the opportunities and the risks of pension products, taking inflation into account.

It showed how low interest rates in combination with the uncertainty of future inflation could impact real opportunities and risks of long-term saving processes.

Lowering the guarantee increases the opportunities arising from the saving process in real terms, adjusted for inflation, significantly more than the risk, the study said.

Long-term returns achieved in equity markets have a positive correlation with inflation over the same period, it added.

In the current interest rate environment, a reduction of guarantees will also lead to opportunities with a relatively small increase in risk, it added.