Possible cut in benefits: Low interest rates threaten company pension

Sunday, January 09, 2022

profit reduction possible
Low interest rates threaten the pension of the company

Insurance supervision has placed Germany’s pension fund under strict surveillance. It is difficult for them to generate the required returns for the services promised. Employers don’t always inject the necessary funds.

Due to lower interest rates, more retirees of the company may face financial cuts in the next few years. Germany’s top insurance supervisor Frank Grund said that in the case of many pension funds, sponsor companies are willing to put in more money to avoid cutting company pensions for employees. “However, cases where there is no commitment on the part of the employer are problematic. So it cannot be ruled out that there will be further cuts in benefits in the next few years, but I do not expect major cases.”

According to Grund, by the beginning of 2022 about 90 percent of the pension fund’s obligations will be fully protected by the Pension Insurance Association. This applies when a pension fund deducts its benefits and the employer cannot differentiate, especially due to bankruptcy.

In the past, Caritas Pension Fund and its subsidiary Cologne Pension Fund had to cut benefits. Of the around 135 pension funds, around 40 are being monitored at present. “Pension funds have a harder time than life insurers because they only offer lifetime guarantees and cannot switch to other products,” said the executive director of financial supervisory authority BaFin.

When it comes to new business, life insurers now largely only offer products with a strip-down guarantee. German life insurer Grund confirmed that “given the challenges posed by low interest rates, it has come through the pandemic very well so far.” “We are not particularly concerned about meeting our obligations to customers.”

Life insurers can lose their license

Around 20 life insurers are under close watch of BaFin. In times of low interest rates, it is becoming increasingly difficult for insurance companies to fulfill the high interest promises of the past. “We are assuming that interest rates on the financial markets will remain low for the foreseeable future,” Grund said. In order to secure higher commitments from old contracts, insurance companies have had to refund money since 2011.

The capital buffer – called ZZR in technical jargon – will increase by about 9.5 billion euros for 2021, with BaFin forecasting, with around 6 billion euros likely to be added this year. “We expect further development of ZZR over the next few years, the scope and timing, however, depend on specific interest rate developments,” said Grund. At the same time, Germany’s top insurance observer warned that one or the other insurer would have to “make an effort” to fully meet the capital requirements of the European Capital and Supervisory Regulations (Solvency II) from 2032 without respite.

“Theoretically, the following applies: high probability insurers that will not meet capital requirements in 2032 will have to remove transitional measures today,” Grund explained. “We see no reason for this at this time. The odds for it are relatively high anyway.” The company will then have the option to increase its capital. “If it is not successful, it will lose its license and should not be able to do any more new business. However, the insured’s claims will be met.”