Sunday, January 09, 2022
Reductions in benefits possible
Low interest rates threaten company pensions
Insurance supervision has placed Germany’s pension funds under stricter supervision. It is difficult for them to generate the necessary returns for the promised services. Employers do not always inject the necessary money.
Due to the low interest rates, further company retirees could face financial cuts in the next few years. In a number of pension funds, the sponsoring companies are ready to inject more money in order to avoid cuts in company pensions for employees, said Germany’s top insurance supervisor Frank Grund. “However, the cases where there is no corresponding commitment from the employer are problematic. It cannot therefore be ruled out that there will be further cuts in benefits in the next few years, but I do not expect larger cases.”
According to Grund, around 90 percent of the obligations of pension funds will be fully protected by the pension insurance association from the beginning of 2022. This takes over when a pension fund cuts its benefits and the employer cannot make up the difference, especially due to bankruptcy.
In the past, the Caritas pension fund and its sister company, the Cologne pension fund, had to cut benefits. Of the around 135 pension funds, around 40 are currently under closer observation. “Pension funds have a harder time than life insurers because they only offer life-long guarantees and cannot switch to other products,” said the executive director of the financial supervisory authority Bafin.
Life insurers now largely only offer products with a stripped-down guarantee in their new business. The German life insurer Grund confirmed that “in view of the challenges posed by the low interest rates, it has come through the pandemic pretty well so far.” “We are not particularly concerned about meeting our obligations to customers.”
Life insurers could lose their license
Around 20 life insurers are under intensified supervision by Bafin. In times of low interest rates, insurance companies are finding it increasingly difficult to generate the high interest promises of the past. “We assume that interest rates on the financial market will remain low for the foreseeable future,” said Grund. In order to secure the high commitments from the old contracts, the insurers have had to set aside money since 2011.
The capital buffer – called ZZR in technical jargon – will increase by around 9.5 billion euros for 2021, according to the Bafin forecast, with around 6 billion euros likely to be added this year. “In the next few years we expect the ZZR to be built up further, but the scope and timing are dependent on the specific interest rate development,” said Grund. At the same time, Germany’s top insurance supervisor warned that one or the other insurer would have to “make an effort” to fully meet the capital requirements of the European capital and supervisory rules (Solvency II) from 2032 without any relief.
“Theoretically, the following applies: insurers with a high probability that they will not meet the capital requirements in 2032, we would have to delete the transitional measures today,” explained Grund. “We don’t see any reason for this at the moment. The hurdle for this is relatively high anyway.” The company would then have the option of increasing its capital. “If that did not succeed, it would lose its license and would not be able to do any more new business. However, the claims of the insured would be met.”