Germany: More paperwork
Low equity exposure, strict regulations regarding guarantees and a rise in actuarial interest rates have left the German pension system relatively unscathed, according to Barbara Ottawa
German occupational pension schemes underwent an additional stress test during the worst of the financial crisis, and some additional reporting requirements changed.
"We only had to file special reports twice during the crisis," notes Dirk Lepelmeier, managing director of the NAEV, the pension plan for doctors in North Rhine-Westphalia. "Those were aimed at checking the exposure to toxic assets in portfolios."
Klaus Stiefermann, managing director of the pension fund association aba, is aware of a few schemes that had to deliver key figures to the supervisory authorities monthly during the worst months of the crisis, with some pension fund managers having to be available on the phone around the clock. "That was a bit exaggerated but only temporarily and, in general, there was no hysteria from the supervisors as regulations are already strict."
Different occupational pension vehicles in Germany are subordinate to different supervisory authorities.
BAFin, which supervises most Pensionskassen and Pensionsfonds, asked pension funds last year to take two scenario-based assessments instead of the usual one a year.
For the tests BAFin generates certain scenarios against which institutions test their portfolios
Those few Pensionskassen that failed the last published test at year-end 2007 reported only a slight underfunding in the worst-case scenario and adapted their risk buffers.
"There are no new legal requirements and we are on the same regulatory level that we were on two years ago," says Lepelmeier, whose fund reports to the regional finance ministry for the province. And regional supervisors often follow what the BAFin is doing.
According to BAFin, no new regulations specifically affecting Pensionskassen and Pensionsfonds have arisen or are set to arise from the crisis.
Market participants, politicians and experts have stressed frequently over the past few months that the German pension system has weathered the crisis well and most Pensionskassen achieved their minimum guaranteed return of around 4% - sometimes with the help of buffers.
Monika Queisser, a pension expert at the OECD, noted: "The German retirement system has proven comparatively robust in the financial crisis" with only a major increase in unemployment potentially threatening its sustainability.
The average funding ratio of most schemes dropped by only 0.5 percentage points to 65% over the past year, including both funded and unfunded pension schemes, according to calculations by consultancy Watson Wyatt Heissmann.
Working in favour of the schemes was a rise in the actuarial interest rate by 0.5 percentage points, which helped lower liabilities. Of course, the traditionally low equity exposure, often as low as 10% and legally capped at 35%, helped as well.
However, other regulatory changes are causing more concern. A proposed amendment to the supervision of insurance companies included professionalisation of the supervisory board. This would have affected Pensionskassen.
In the original draft the government wanted to see people on the boards with leadership experience in insurance companies of similar size. Stiefermann's concern is that this would have meant employee as well as employer representatives on the board.
After aba's intervention, the law that was passed at the end of July with immediate effect now makes allowances for the special situation in pension vehicles. The amendment states that members of the boards of insurance companies (including Pensionskassen) and Pensionsfonds have to be reliable and have the "necessary competences to assess and supervise the business".
The legal text then goes on to state specifically that in judging whether or not a person has the necessary competences "the supervisory authority is taking into account the breadth and complexity of the operations dealt with by insurance companies and Pensionsfonds as well as the special situation regarding occupational pension vehicles and the board membership of employees and employers".
The aba is also concerned about long discussed plans to change the investment regulations for pension vehicles which aim to reduce the credit risk in portfolios by demanding more diversification of debtors in certain asset classes.
"The problematic thing about all changes to the investment regulations is that it would also affect existing assets and we demand an exemption of already existing investments from these new regulations," the German pension fund assocation says. Discussions are continuing.
Issue number one on the aba agenda, and on the minds of many members of the German pension industry, remains Solvency II.
German funds still fear that new solvency requirements set by the European Commission for insurance companies will include Pensionskassen and Pensionsfonds, dropping a huge financial burden on them.
"Any new solvency regulations have to be specifically adapted for the second pillar," Stiefermann stresses.
One thing that might throw a bad light on German pensions in the wake of the financial crisis is the pension protection fund PSV, which is facing its largest financial burden yet as more and more companies file for bankruptcy. Experts are expecting a four- to eight-fold increase in the PSV levy, which will be hard to bear for many companies and will only hit those with retirement schemes already in place as they have a compulsory PSV membership.