GERMANY – Heavy regulation and cumbersome legal structures are likely to stop Germany’s new Pensionfonds becoming “the instrument of choice” for occupational pension provision, according to a new research report by Goldman Sachs.
“Traditional trust models will remain the most attractive way for an off-balance sheet financing of occupational pension commitments,” it says. It predicts that these vehicles’ returns on assets will be higher over time than from other more heavily regulated vehicles.
The report says the slow build up of assets in the new Pensionfonds could have a knock-on effect with pressure building up for more favourable tax treatment. Because the new vehicle is designed and regulated as an insurance company it will be expensive to set up, says Goldmans and so its role may be confined to supplementing individual schemes.
It has not achieved its objective of being an attractive alternative to the current occupational options of book reserve, Pensionskassen, support funds and direct insurance.
In particular the report points to the need to be able to include both defined benefits and defined contribution approaches. In addition, contributions by employers should be unlimited rather capped at 4% as in the new law.
Less than a third of the country’s book reserve provisions could be covered within the Pensionsfonds at current levels, Goldmans reckons. Calling for the use of the ‘prudent man’ rule, it notes that the investment rules could cost up to 2.5% of the annual return on pensions assets. More flexibility in financing pensions liabilities is required.
“We believe the likely solvency, equity and actuarial requirements, as well as investment regulations will make it very costly to establish German-type Pensionsfonds and hence will prevent these funds from filling the gap,” the firm says. The contractual trust arrangements set up by a number of companies in recent will to continue to be the most attractive method of off-balance sheet financing of pensions.
With German companies facing international accounting standards by 2005 ,these financing arrangements are likely to cover 50% of book reserve pensions by 2010, compared with 30% currently.
On the basis of conservative assumptions, Goldmans suggests that private pension contributions could amount to €10bn in 2002, rising to around €52bn by 2010, with the total amount of pensions savings coming to €250bn, equivalent to 9% of GDP by the end of the first decade. Insurance groups are likely to be the main beneficiaries of this flow of contributions, because the Pensionsfonds’ insurance regulation and the need for capital guarantees on pensions savings, it adds.