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  • German Pensionskassen may need further regulatory relief

    first_imgGerman Pensionskassen are under heavier than usual pressure due to a mix of low interest rates and market uncertainty caused by the COVID-19 crisis, and for this they could benefit from further regulatory relief, as the outlook, according to some, does not look promising.In a reply to a parliamentary inquiry of the far-right party Alternative for Germany, AfD, the German government revealed that 36 Pensionskassen were currently under the intensive supervision of the Federal Financial Supervisory Authority (BaFin).According to the government, BaFin has already approved applications to cut pension benefits filed by seven Pensionskassen (see box below). Four additional Pensionskassen have submitted applications, which are now being reviewed by the authority, the government replied without giving further details.Rafael Krönung, actuary and company pension schemes expert at Willis Towers Watson (WTW), told IPE that many Pensionskassen and Pensionsfonds “have enough financial buffers at their disposal to absorb the effects of the COVID-19 crisis on their assets; others will go through difficult times”. If a Pensionskassen entity cannot meet funding requirements, it must provide BaFin with a recovery plan that would restore its required solvency within a certain time frame, Krönung explained, adding that the schemes could also approach their employers for additional contributions.He said that if an employer could not provide additional financial support and capital investments were not sufficient to cover liabilities, most Pensionskassen would have a restructuring clause.The reduction of obligations is a last resort. “It is what the BaFin, the employer and the Pensionskasse usually want to avoid with all their power,” Krönung said, adding that of the around 135 Pensionskassen in Germany, only a few had to cut obligations in the past, although it is possible that others would follow because of the current crisis.BaFin has already decided to provide relief for employers to restore the coverage of guaranteed assets for Pensionsfonds, by allowing them to submit a plan to restore coverage of up to 10% until 1 October at the latest.For Krönung, similar or even further measures are necessary for Pensionskassen to reduce the risk of cutting benefits. “This could permanently harm beneficiaries or employers, even though the financial situation of the Pensionskasse might recover in the near future,” he added.Even if underfunded, a Pensionskasse usually has sufficient assets to make benefit payments for at least 30 or 40 more years, therefore, BaFin and the legislator should provide adequate time to overcome the current market volatility, he said.Detlef Coßmann, actuary at Aon Hewitt, believes that BaFin has reacted quickly to relax the rules for Pensionsfonds. “This creates considerably more flexibility and cash relief for employers or sponsoring undertakings.”He said similar action could be put in place for regulated Pensionskassen, “for example an extension of a financing period to strengthen calculation bases, or even a delay of an additional payment scheduled for 2020-21”.BaFin already allows for regulated Pensionskassen to hold a temporary excess of real estate investments as other assets devalue: “It would be very helpful if, in general, supervisory responses would reflect the extraordinary circumstances by reacting to the needs for Pensionskassen, Pensionsfonds and employers,” Coßmann added.VolatilityBaFin’s strict supervision, however, may not couple well with current capital market volatility.For Coßmann, losses may not only be reflected in the stock market in the medium term, but also in other markets such as real estate and alternative investments. “However, given market volatility, it is difficult to estimate an actual loss in the value of assets,” he said.Pensionskassen and Pensionsfonds had already experienced the negative effects of price developments in 2018, which led to discussions on the sustainability of losses, followed by a recovery in 2019.“In this respect, one should not overreact and deal moderately with the impact of the COVID-19 crisis on asset allocation and actual holdings, especially since it is not yet possible to conclusively assess whether and when a partial recovery could emerge,” Coßmann said.The funding requirements of a Pensionskasse or a Pensionsfonds could further stress the liquidity situation of an employer, WTW’s Krönung added. In the case of a Pensionsfonds, the employer would have to pay additional contributions if the Pensionsfonds is underfunded and, similarly, this can happen for sponsoring companies of a Pensionskasse.“In the current situation, Pensionskassen, Pensionsfonds and employers need in particular one thing, and that is time,” Krönung said, adding that the crisis causes extreme volatility on capital markets.He highlighted the importance for Pensionskassen and Pensionsfonds to take prudent long-term decisions.Normally, Pensionskassen investing in equities would rely on a risk buffer that shows it can sustain volatility. For this reason, in current times a fund would be forced to end its investment in equities and make safer capital investments instead, he noted.He said a pension fund would realise losses in equities and when prices pick up again, the fund would not be able to participate in the rebound. Instead, “Pensionskassen should be allowed to wait until the equity market picks up again and should not be pushed to realise the current losses due to regulatory reasons” as this would harm the Pensionskassen and their beneficiaries in the long term, Krönung said.Pensionskasse that have received approval from BaFIn to cut pension benefitsDeutsche Steuerberater-VersicherungHannoversche Alterskasse VVaGHannoversche Pensionskasse VVaGKölner Pensionskasse VVaGPensionskasse der Genossenschaftsorganisation VVaGPensionskasse der Hamburger Hochbahn Aktiengesellschaft -VVaGPensionskasse Deutscher Eisenbahnen und Straßenbahnen VVaGlast_img read more

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