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Participants unconvinced by 'German-style' DC schemes

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  • Participants unconvinced by 'German-style' DC schemes

GERMANY - The trend towards "German-style" defined contribution (DC) pension schemes has failed to allay the fears of plan members, according to a report by Towers Watson.

The consultancy recently surveyed 5,000 German employees on a range of topics including inflation protection and the relative importance of safety versus return.

Speaking at the Towers Watson risk management conference in Mainz, Thomas Jasper, head of retirement solutions, offered a "sneak preview" of the consultancy's Retirement Attitude Survey, which will be published this spring.

He said the survey had shown that the trend from defined benefit to "German-style" DC hybrid schemes had failed to address the fears of most German workers, who believe hybrid schemes shift too much risk from the employer to the employee.

He said more efficient means of risk-sharing should be considered in the DC space - making use of capital-market instruments, for example, or outsourcing certain elements through reinsurance.

Jaspers told delegates about a large German company that, prior to the 2008 crisis, had come quite far in making inflation-linked pensions calculable by using capital-market instruments but then had to abandon the scheme.

The retirement expert said he was convinced that such plans could now be implemented, as the capital markets could absorb such risks - "even if it does not always look like it".

Meanwhile, Nigel Cresswell, head of investment consulting at Towers Watson Germany, told delegates that 40% of pension funds worldwide currently had enough resources to account for the complexity of their investments, while roughly half of plans were a "ticking bombs" where complexity exceeded resources.

Looking at German plans, Cresswell told IPE that most still fell into the category of "few resources and little complexity", which "is fine but not very exciting".

He stressed that all investors should re-think diversification according to underlying risks rather than asset classes to avoid a "false sense of diversification".

Further, pension funds should hedge out unrewarded risks like longevity, interest rates and inflation by using swaps where possible within their regulatory framework.

According to Cresswell, "good governance is key" and can add 1-2 percentage points to returns.

For Holger Schalk, senior consultant at Towers Watson Germany, the debate around Solvency II has had a beneficial side effect on institutional investors' risk approach.

He pointed out that many investors were now looking at their risk management in greater detail, and that actuaries, the financial department and management were sitting together at one table - sometimes for the first time.

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