Modern forms of security-linked pension promises make it possible to “largely immunise” retirement provisions against fluctuations in interest rates and inflation, said Thomas Hagemann, chief actuary at Mercer Germany, commenting on pension assets and liabilities of the DAX 40 companies.

Securities-linked pension promises are a type of direct promise (Direktzusage) regulated in the German Commercial Code Handelsgesetzbuch (HGB).

The amount of the pension promise results from the value of an investment and is therefore a pure form of defined contribution, Michael Hoppstädter, the managing director of consultancy Longial, explained in a post last year.

For Hagemann it is difficult to predict how actuarial interest rates and inflation will develop.

“Further inflationary shocks in particular are a challenge [and] investors must prepare their portfolios […] we recommend a broad mix of various inflation-sensitive investment instruments”, said Jeffrey Dissmann, Mercer’s head of investment consulting in Germany.

For the companies it was important last year to take risks to invest capital and investors “were able to noticeably increase their coverage through high allocations in equities,” Dissmann added.

Pension assets in the DAX 40 increased by around €6bn year-on-year last year to around €286bn as a result of partially opposing effects.

The companies recorded net outflow of funds worth €1.5bn and a loss in assets of almost €6bn after Vitesco, a spin-off of Continental, and Daimler Truck left the index, while returns stood at €13bn.

Pension obligations of the 40 largest companies listed on the DAX index went down year-on-year in 2021 by around €35bn to €400bn, from €434.6bn in 2020, mainly as a consequence of the increase in the discount rate and actuarial gains of €26bn.

Obligations decreased last year by €9bn also because Vitesco and Daimler Truck left the DAX.

Mercer is assuming that the DAX 40 companies have increased their discount rate by an average of 0.4 percentage points.

Moreover, companies have also likely adjusted their inflation expectations last year with a dampening effect as a result, it added. The expectation on long-term inflation is an important factor to assess pension obligations, as they are not directly affected by the currently high inflation rates.

But inflation’s assumptions may not be as important for pension adjustments if promises increase and an increase in guaranteed pensions is introduced, replacing a mechanism of inflation compensation, it added.

“Interest rates have been very volatile this year compared with the extremely low interest rate at the end of 2020, the interest rate has recovered significantly,” said Hagemann.

The funding ratio of the DAX 40 companies has improved, standing close to 72% last year from 64% the prior year, thanks to lower interest rates and capital markets growth.

Read the digital edition of IPE’s latest magazine.