GERMANY - Funded pension vehicles need to take some risks to ensure added value for employees, says Peter Hadasch, head of the German federation of company pension schemes VFPK.
Hadasch puts the blame with mark-to-market valuations, accounting regulations and investment restrictions which lead to no risk appetite in the German funded pension sector.
"What good is an absolute risk-free investment for employees?" he asked in an interview with IPE. "If the funds are only investing in government bonds then employees could also invest the money themselves."
"Funded pension vehicles must guarantee a certain return as well as some insurance against biometric risks," he added.
Hadasch stressed that this did not mean they should go for highly speculative investments.
He would like to see a system in which pension funds and employers guarantee a certain level of return, perhaps measured on a market-wide best practice benchmark.
Furthermore, he urged more flexibility in accounting standards to be able to "profit from the long-term investment horizon in pensions".
"Currently companies have an investment horizon of one year for their pension assets and this will not yield a very good return," he explained.
Hadasch quoted recent discussion on the reform of IFRS standards in which it was suggested companies should use a discount rate for their pension liabilities which equals the current yield of their corporate bonds in the market.
"This is not wise as it would mean that companies which are downgraded will actually see their liabilities drop and the discount rate would be adjusted every quarter," Hadasch pointed out.
"We need to get some common sense into the debate and go for long-term horizons as employees themselves do actually have around a 30-year investment horizon and they do not balance their accounts in between."
No comments yet