A knot of regulations, pension liabilities and balance sheet issues, paired with the need for clearer communication on the topic remain the main stumbling blocks for pension buyout deals between insurers and companies in Germany, despite the benefits such transitions can bring.
“The topic of pension buyouts is currently one of the most discussed options for optimising the structure and financing of pension claims. The final release from liabilities, which is only possible through this type of outsourcing, clearly speaks in favour of a buyout [solution] for many companies,” Gunnar Hasselmann, partner pension consulting at PwC in Germany, told IPE.
However, companies are still reluctant to implement pension buyout projects, especially when it comes to large volumes of obligations, with legal and accounting issues still hanging over deals, he added.
“The sale of pension obligations in Germany is subject to extensive regulations, which may be associated with restrictions regarding the financial resources of pension corporations (Rentnergesellschaften),” which are companies established for the transfer of pension obligations, Gunnar explained.
For many insurers, the management of pension payments is close to their actual ‘core business’, said Tilo Kraus, managing director of pension buyout firm Vedra Pensions, explaining why buyouts are not widespread in the industry.
Insurers often have insurance-based implementation channels within the group or an affinity for insurance-based solutions for their pension obligations, alternative solutions to a pension buy-out, he added.
German insurers also have solvency ratios often hardly being a bottleneck factor, Kraus said.
Vedra published a study – Pension buy-outs as a strategic option for banks and insurers – in partnership with consultancy zeb, after regular exchanges held with over 20 chief financial officers in the insurance industry in Germany, coming to the conclusion that pension obligations (especially their outsourcing) are a “little discussed topic” at least at top management level.
An increasing number of companies tend to acknowledge market volatility, inflation adjustments, and longevity risks associated with pension liabilities, and some have conducted risk transfers in other countries.
“Most [companies], however, carry pension liabilities directly on their balance sheets or they have essentially underwritten the performance of a funding vehicle such as a pension fund or a CTA (Contractual Trust Arrangement). There is a need for greater explanation and communication on this topic,” Dirk Holländer, partner at zeb, added.
Rising interest rates, heathy funding ratios and the decline of valuations of pension liabilities on balance sheets are a boon for buyout deals, as higher levels of inflation seen in the past few years have increased pension payouts.
“The tipping point will occur when companies fully recognise the looming risks of pension liabilities and the advantages of addressing them – not just for their balance sheets, but for all stakeholders involved,” Kraus said.
At the start of a new cycle?
A sound investment strategy protecting the interests of those entitled to pensions, and the reputation of the former employer, communicated to the transferring companies in a comprehensible and reliable manner, means pension corporations will be used even more regularly in Germany in the future, Gunnar said.
There is an inclination in Germany to establish pension companies (Rentnergesellschaften).
“We observe a constant increase in transaction processes – both auction processes run by pension advisors and bilateral processes as a result of our own origination efforts. As we experience lead times of 12 to 18 months, this increase in activity does not immediately translate in closed transactions,” said Thomas Bloch, managing partner of pension buyout firm Deutsche Betriebsrenten Holding (DBR).
DBR, which signed a strategic partnership with Allianz Global Investors on pension buyouts, expects the number of closed transactions to increase in 2025 and following years based on activity seen in 2024.
DBR has just closed a pension risk transfer deal, taking over the pension obligations of the subsidiary of a Japanese group in Germany that was restructuring its business.
“Given the progress made by many international corporate groups on their respective de-risking journeys, we see that German pension plans increasingly come into focus. Furthermore we see corporates aiming to lock in current interest and inflation levels amidst uncertainty around future economic developments,” Block said.
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