GERMANY - Underestimating the long-term effects of the recent financial crisis on pension schemes and measures to counteract it could lead to a “catastrophe” in the second pillar, German consultancy Longial has suggested.

The pension consultancy has raised doubts about current calculations of pension assets and liabilities in listed German companies, given that funding levels for 2008 were improved considerably by actuarial interest rates, and this in turn led to falling liabilities. (See earlier IPE-story: German pensions ‘comparatively sound’ - WWH)

Companies listed on the German stock exchange saw their pension assets drop last year by €13bn to €125bn. (See earlier IPE article: DAX pensions lose €13bn in 2008)

“But while the asset loss is a real one, the gains on the liability side are only mathematical, which raises the question whether the result can be seen as an appropriate assessment of long-term pension liabilities,” noted Longial.

The consultancy has recommended companies use excess liquidity to fund pension obligations and thus improve the match of pension assets versus liabilities.

“By analysing pension liabilities with foresight and financing them, a catastrophe in the second pillar can be prevented,” said Andreas Jurk, CEO of the consultancy which until last year had been named ERGO People & Pensions.

Longial also warned about the negative effects of reducing working hours to the pension schemes.

A reduction in working hours for certain workers is often used by German companies to help the company through the financial crisis and to prevent lay-offs.

But as shorter working hours also mean less money, some people who have a fixed amount of their salary going to a pension scheme every month might struggle to pay that sum.

Furthermore, Longial noted that lower contributions not only mean reduced pension benefits but could in some cases also mean a loss of the invalidity protection which is often linked to a certain contribution level.

Consultancy Hewitt recently raised similar concerns but pointed out that these arrangements of reduced working hours often were limited to two years, a period which would not have grave consequences for long-term pension benefits.

On the other hand, negative effects on people leaving the company shortly after the end of the reduced working hour agreement could be severe, Hewitt noted.

The consultancy also explained that changes to pension benefits, their calculation and the connected administrative costs should be considered in each case before cutting working hours.

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