At the start of 2024, volatility in equity markets and a turning point in German fiscal policy sent ripples through bond markets. The spectre of a resurgence of inflation further underlined the value of sound asset management for German corporate pension schemes – particularly those able to diversify investment strategies while remaining focused on long-term liabilities.
WTW anticipates a rapidly shifting macroeconomic backdrop in 2025, with political decisions affecting discount rates, DAX company liabilities, and capital markets. This, the consultancy argues, calls for robust pension governance and adaptive investment processes.
“In our outlook, we consider two scenarios,” said Hanne Borst, head of retirement, Germany, at WTW. “One foresees a US recession, which could lead to lower inflation. The other anticipates upward inflationary pressure driven by the risk of trade wars, tariffs, and stricter migration policies.”
WTW estimates that DAX companies faced a combined cost of €250m in 2024 to adjust pensions for inflation, on top of an estimated €900m in cumulative costs from the prior inflation surge.
The ongoing debate around Germany’s debt brake, and government proposals to increase defence spending and create a €500bn special infrastructure fund (Sondervermögen), have already had an effect on long-dated bond yields. According to WTW, the resulting increase in discount rates has had a favourable impact on pension liabilities.
Diversification remains a core principle for DAX companies’ pension schemes. In 2024, according to WTW, fixed income allocations fell by one percentage point to 44%, while equity allocations rose by the same margin to 19%. Real estate and alternatives allocations remained stable year-on-year at 5% and 32%, respectively.
Higher yields on German government bonds, stemming from the shift in fiscal policy, could prompt further strategic reallocation.
“Interest rate movements can reshape portfolio structures,” said Johannes Heiniz, senior director, retirement, at WTW. “With higher yields, bonds become attractive again versus equities or alternatives.”
Jeffrey Dissmann, partner and head of investments at Mercer Germany, told IPE that recent market volatility underscores the vulnerability of pension scheme funding levels.
“While US equities have performed strongly in recent years, European equities have outperformed in 2025,” he said. “Companies mitigate this volatility by closely aligning investments with liabilities and increasing diversification in risk assets. Many also make additional contributions to close funding gaps.”
Strong funding in 2024
The funding ratio of DAX company pension schemes rose to 82% in 2024, up from 79% in 2023, and reaching its highest level in a decade, according to WTW.
The discount rate rose by 11bps over the year, primarily in the first half, contributing to a 1.8% decrease in pension obligations to €320bn. Positive capital market performance supported a 1.6% increase in plan assets, reaching €262bn. The schemes delivered returns of 6.4%, equivalent to currency-adjusted gains of €16.3bn.
Mercer’s estimates show similar figures: pension assets rose by €5bn in 2024 to €263bn, while pension obligations declined from €324bn to €319bn. The funding ratio surpassed the 80% mark seen in 2022 to reach more than 82% last year.
André Geilenkoten, head of pension funding consulting at Mercer Germany, noted that the improvement in funding levels, which were as low as 60-70% only a few years ago, can no longer be attributed solely to market movements.
“We are seeing a sustained shift towards higher funding. It’s a diverse picture – some companies are fully funded, while others remain below 50%. The current regulatory framework gives companies significant flexibility to steer funding strategies,” he said.
SME focus and cash balance growth
Defined contribution (DC) remains the dominant model among German companies, with 98% of firms now operating at least one open DC plan, according to a survey by consultancy Lurse, covering 61 large and medium-sized firms.
The survey found that 93% offer employer-funded plans, and all respondents offer matching contributions. However, DC plans with minimum guarantees (BZML) are in sharp decline – down from 34% in 2018 to just 10% in 2024.
Cash balance plans (Kapitalkontenpläne), based on employer contributions or deferred compensation, have gained traction. These plans invest assets in bond and equity funds and allow contributions to grow with market performance, with retirement benefits paid out in instalments or as annuities.
“Unlike traditional DB plans, contributions in cash balance plans are not immediately converted into guaranteed benefits,” said Miroslaw Staniek, managing partner at Lurse. “Expected returns have risen significantly, from 3.4% to 4.0%, due to improved performance in fixed income markets.”
Asset managers are increasingly targeting the SME market through partnerships with service providers that can offer bundled solutions.
“We’re seeing large asset managers work with service providers that can handle pension plan administration, set up contractual trust arrangements (CTAs), and support SMEs that may not have internal resources,” Staniek said.
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