After the knife-edge parliamentary manoeverings by Chancellor Schröder, the new private pension schemes arrived earlier this year, albeit in German-style - still complicated and not too user friendly.
The market is now digesting their impact, for both the occupational related plans and the individual ‘Reister’ savings products. Critically, both have tax advantages, but with limitations on the amounts that can be contributed. Defined contribution is possible, but both the individual and group plans must guarantee return of the amount invested at retirement date.
As to what their impact will be on the market, it is still too early to say, but Morgan Stanley Dean Witter in Frankfurt predicts potential capital markets inflows from pensions related contributions of up to €50bn in 2002, rising to perhaps a high of €110bn in 2008, while rival group Goldman Sachs estimates perhaps as much as €250bn will be invested in individual private pension plans by 2010.
But for the new occupational vehicle the Pensionsfonds, which like Pensionskassen, will have tax advantaged contributions up to 8% of the income tranche subject to social insurance, there could be an exciting future. The unions may well play a significant role, with IG Metall due to launch its pension plan this autumn, as where there is a union wage agreement, they can force workers to join their scheme where no employer plan exists. Another union grouping, ver.di is believed to be planning a similar move.
Corporate and other pension plan sponsors in Germany are coming to grips with the implications of the changes and trying to decide how they should move the pieces around the board, including how to react to the new Pensionsfonds option. Here, like in the rest of the market, they are awaiting the detailed investment rules and particular how far will the authorities move towards ‘prudent man’, and what the actuarial standards and the solvency requirements will be. The long hoped-for DC option is marred by the contribution return guarantee from an employers’ view.
Altogether,when it comes to the huge individual market that will open up as a result of the Reister plans, the insurance companies are reckoned to come out as market gainers, even though asset managers’ products can be certified.
The move to ring fencing book reserved pension liabilities backed by assets segregated in constructive trust arrangements(CTAs) is likely to be of interest to German corporates, where pensions liabilities can amount in extreme cases up to 80% of the market value of the company. Only 30% of book reserves are funded, in being backed by separately invested assets. With the pressure coming from the new international accounting standards coming into force, pension liabilities will increasingly be taken off the balance sheet through CTAs, say the experts.
But pensions development has not entirely stopped pending the next year’s new regime. Volkswagen, which introduced a time share scheme last year, followed this up with a new DC style scheme this year, and is working on further plans.
The most recent figures from the Bonn-based BAV, the regulator that supervises the activities of Pensionskassen(PKs), show little growth in theirs assets. PKs account for just a fifth of the pensions assets of corporate pensions schemes, according to aba, the Heidelberg-based national association for those involved in pensions. Book reserves dominated the DM620m (€320m) of pensions assets, accounting for 59%, direct insurance for 13% and support funds for 7%.
The 141 PKs had assets of €64bn at the end of 1999, in book value terms, which at that point could have underestimated the market value by 15 to 20%, according to some observers.
Perhaps, the most worrying aspect was the decline in numbers of active members covered by PKs declined slightly from 2.41m to 2.38m. This is attributed to the unfavourable tax aspects of the PKs, something which hopefully may be reversed with the new tax regime.
The BAV recently increased the limits on equities permitted to be held by insurance companies, from 30 to 35%, and is reportedly looking at increasing this further to 40% for the new Pensionsfonds, which presumably would also apply to PKs.