German finance ministry plans interest rate cuts to pension products

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The German finance ministry is set to reduce the maximum interest rate on life insurance and pension products from the current 0.9% to 0.25% in 2022, the ministry told IPE in a statement.

The ministry intends to follow the proposals of the financial supervisory authority BaFin and other associations, including the German Association of Actuaries (DAV), that have repeatedly called for cuts to the maximum interest rate in view of the persistently low interest rate environment, it said.

The maximum interest rate refers to a guarantee promised on savings for old-age provisions. It affects the accounting of obligations in annual financial statements of life insurance companies and limits the discounting of actuarial reserves for contracts, it explained.

This means that it also has an indirect impact on the guarantees that companies offer with new business, it added.

The ministry is convinced that the adjustment of the maximum interest rate would contribute to the long-term stability of life insurers in the interests of the insured.

It will publish a draft regulation in the next few days to give life insurers enough time to make the necessary changes by the turn of the year, it said.

Low interest rates mean in turn lower guarantees, the ministry said, adding that pension and life insurance products should exploit potential new ways for returns to compensate for a lower level of guarantees.

DAV welcomed the decision by the finance ministry to lower the maximum interest rate from next year. The reform of the Riester-Rente, however, is also necessary to design a “comprehensive concept” to reinforce capital-funded pensions, the DAV added.

Public interest

Finance minister Olaf Scholz’s plan to rewrite the rules on the maximum interest rate was communicated to parliamentary groups the Union (CDU/CSU) and the SPD in a letter by the Parliamentary State Secretary in the ministry of finance, Sarah Ryglewski (SPD), the Rheinische Post reported.

“The public perceives the maximum interest rate as a ‘guaranteed interest rate’, which is why an adjustment [of the rate] wakes widespread interest,” Ryglewski wrote in the letter.

The draft of the regulation includes a reduction of “the maximum interest rate for life insurers from 0.9% to 0.25% because of the lower returns on low-risk investments. This applies also to Pensionsfonds,” it added.