The funding ratios of the pension plans of Germany’s largest companies listed on the DAX have reached an all-time-high at 81% last year, compared to 80% in 2022, according to consultancy Mercer.
Last year’s positive returns on investments led to an year-on-year increase in the amount of pension assets of DAX 40 companies by approximately €22bn to around €267bn, although below the peak of €300bn reached at the end of 2021, Mercer said.
The consultancy has calculated that returns on pension assets of DAX companies reached 10%, or €25bn, last year.
However, the high funding ratios recorded last year were not only the result of the ratio between assets and liabilities, but also of the trend towards using Pensionsfonds and other vehicles as pension schemes as de-risking strategies for pension obligations.
“In recent years, many companies have transferred pension obligations to Pensionsfonds to manage risks appropriately,” said André Geilenkothen, head of pension funding consulting at Mercer Germany.
He added: “Companies in Germany have continually provided mid-single-digit billions for this purpose over the last few years.”
The replacement in the DAX 40 index of Linde by Commerzbank, and of Fresenius Medical by Rheinmetall led to an increase in the amount of pension assets of just €2bn, it added.
Mercer expects pension payouts from plan assets will once again be higher than contributions as inflation continues to remain high. This could result in an outflow of funds of around €5bn, it said, adding that pension assets would fall as a result by €3bn.
“Pension investors have to continue to take capital market risks in order to cover adjustments due to inflation, and this has certainly paid off on the stock market, especially at the end of the year,” said Jeffrey Dissmann, head of investments at Mercer Germany.
With interest rates that remain high, pension investors must grapple with how to adequately reduce balance sheet volatility without compromising return opportunities, Dismann said, adding that investors should opt for smart strategies to close funding gaps.
The discount rate instead fell significantly, especially in November and December last year, causing an uptick in terms of the value of pension obligations on the books of DAX companies by around €23bn to close to €330bn, it added.
“We assume that the actuarial interest rate in the DAX 40 was around half a percentage point below the previous year’s value, as of 31 December 2023. This explains most of the increase in terms of values of obligations,” added Thomas Hagemann, chief actuary at Mercer Germany.
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