Stakeholders propose flexible funding rules for German Pensionskassen

Stakeholder discussions with regard to strengthening Germany’s occupational pensions have led to proposals for flexible funding rules for Pensionskassen, to possibly tolerate underfunding, freeing up capital for investments.

One proposal, according to Stefan Nellshen, deputy head of the committee of experts on investments and regulations of the occupational pension association Aba, would allow Pensionskassen to experience underfunding – at book value – under certain conditions and for a defined period of time.

The prerequisite to undergo temporary underfunding is a so-called “standby agreement” between the Pensionskasse and one or more sponsoring companies.

The agreement would require the sponsoring company to close any existing shortfalls beyond the period of tolerance for underfunding, if capital market developments won’t help to automatically close those gaps.

Nellshen said: “The current regulatory requirements are not in line with the business model of Pensionskasse, which pay lifelong pensions to pensioners and therefore have extremely long-term obligations.”

The purpose of funding rules is to guarantee that benefits are fully funded when they are due to be paid, he added.

Aba is therefore calling to reform what it considers strict rules forcing pension funds to meet the full amount of obligations at all times, particularly at book values, and to meet solvency requirements at all times.

“These requirements limit our options for investing,” said Jürgen Rings, head of the Pensionskasse committee of specialists at aba.

The government had promised in its programme for the current legislative period to strengthen company pension schemes, among other things, by allowing investment options with higher returns.

It is also considering to reform the second pillar social partner model (Sozialpartnermodell), to open up pure defined contribution (DC) arrangements also to companies that have not signed collective bargaining agreements.

More flexibility in terms of funding requirements is necessary to meet the promise of the government to support further investments of company pension schemes with higher returns, Rings said.

Rings also believes that it is necessary to review the stress test for Pensionskassen conducted by the financial regulator BaFin, that at least partially unnecessarily limits investment options.

Discussions taking place between the government, social partners and associations in the context of strengthening occupational pensions, which officially ended in May, could result in a bill to reform the second pillar pension system.

Aba is calling for a second law to strengthen company pensions (Betriebsrentenstärkungsgesetz), after the one entered into force in 2018, changing regulatory framework, tax and labour rules, it said.

It is also in favour of increasing support for law earners in the second pillar, and opening up the social partner model to companies that are not bound by collective bargaining agreements, meaning many small and medium-sized firms, it added.

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