Pensionskassen facing challenges
The number of insurance-based pension funds on the supervisor’s watchlist is falling. But some providers are in serious trouble
- Pensionskassen have reacted to BaFin warning about their solvency levels and adjusted their liabilities accordingly
- Two Pensionskassen shut down by regulator in ongoing talks
- No further Pensionskassen disposals have been scheduled
Pensionskassen are the largest external pension-plan providers in the German second pillar. According to recent data, these insurance-based pension funds managed €167bn at the end of 2017. Only Direktzusage (direct promises) had more assets at almost €300bn.
Two years ago there were 137 Pensionskassen in Germany but since then two have been sold off while two others were forced to close down. Some of the other Pensionskassen are also closed to new members, but so far this has only happened in the case of companies that do not want to keep on making top-up payments to fulfil guarantees.
In 2018, the German Financial Supervisory Authority (BaFin) issued a notice to the €546m Caritas Pensionskasse and its sister organisation the €329m Kölner Pensionskasse to no longer take on new business. It was the first time in recent years that such a decree had been issued against a Pensionskasse.
“Both Pensionskassen were below the solvency threshold, which means they were unable to fulfil the capital requirements,” says Norbert Pieper, BaFin spokesman for the insurance sector. “We had to forbid them to take on new business as they did not have the necessary risk-bearing capacity.”
Under the law governing insurance-based businesses the companies have to provide recovery plans. However, the one presented by Caritas was rejected by BaFin and the pension fund decided to accept the rejection rather than fight it in court.
At the time of writing, Caritas and Kölner were in talks with BaFin on further measures. Both Pensionskassen announced that they will have to cut some guarantees and pensions. According to industry sources it is unlikely that these Pensionskassen will be opening for business again soon.
What happens in the case of insolvency of a Pensionskasse depends on the legal structure of the entity. Generally speaking, company Pensionskassen are less at risk as they are set up as a limited company, and virtually all of them are members of the Protektor AG insolvency protection scheme.
As for the other Pensionskassen, including Caritas and Kölner, they are organised as mutual insurance companies in the form of an association, Versicherungsverein auf Gegenseitigkeit (VVaG). In their statutes they include recovery measures including cuts to pension payouts. Every member of a Pensionskasse has agreed to these terms. However, according to the German occupational pension law (BetrAVG) employers are liable when pensions are cut. They have to pay for the underfunding unless they are insolvent or the company has ceased to exist.
In May 2018, BaFin warned that about one third of all Pensionskassen on the market might experience financial trouble because of the continued low interest rates. The main problem for these providers is the guarantees they promised – mostly during periods of significantly higher interest rates.
But Pieper says the number of Pensionskassen closely watched by the BaFin has come down from 45 to 31 over the past year. He says some companies have made top-up payments and many Pensionskassen have adjusted their guarantee levels or contributions. “In the current interest-rate environment, a 3.5% guarantee is just not feasible,” Pieper says. “Our warnings have been heard and many Pensionskassen have taken action – but that does not mean that there might not still be problems at some providers.”
One Pensionskasse that is in talks with BaFin about its recovery plan is the €992m Steuerberater Pensionskasse VVaG for tax advisers.
But as one source points out to IPE: “All this is completely uncharted territory for the industry and the regulator.” On and off the record representatives of Pensionskassen are blaming not only the low-interest-rate environment for their troubles but also the regulatory framework.
In its 2016 annual report the Kölner Pensionskasse blamed “nonsensical measures” in the regulations for starting its solvency problems. Some rules forced the fund to sell assets at the wrong time, it claimed. Also, money had to be put into an interest-rate buffer – the controversial Zinszusatzreserve – rather than using it to top up the capital buffers, according to the board.
Pieper says the “regulatory density has increased” for Pensionskassen. “But it is important to see that there are understandable reasons for this as the environment in which Pensionskassen are operating has become more complex.” He adds that with smaller providers “proportionality” is important as “nobody has any interest in weakening the second pillar in Germany”.
The regulatory burden had also been blamed in the two cases of Pensionskassen being sold to the run-off platform Frankfurt Leben early in 2018. AXA sold its probAV and the clothing retailer C&A its Prudentia Pensionskasse. But despite analysts at the time predicting a wave of further sell-offs, there are “currently no further requests for selling Pensionskassen or transferring members”, he says.
Despite the current market environment, Pieper is convinced that Pensionskassen and their guarantees “still make a lot of sense” as vehicles for setting up occupational pension plans. But he adds the caveat “only if the reserve buffers are adequate and the liabilities are adjusted to fit the market environment”.