Limiting Risks Through Guarantees and Regulation in Germany by

Transkript

1 Limiting Risks Through Guarantees and Regulation in Germany by Prof. Dr. Heinz-Dietrich Steinmeyer

2 Introduction In general: How to make sure that people get sufficient benefits in old age? What are the risks? Loosing entitlements because of job change Risk of insolvency of the employer Investment risk Longevity risk Risk of inflation Folie 2

3 Introduction Basic philosophy of systems: Risk is generally with the employer vs. Risk is generally with the employee Germany: System based on labor law employee should be protected Folie 3

4 German philosophy on risk and insolvency No investment risk should be borne by the worker No insolvency risk should be borne by the worker Longevity risk should not be with the worker Folie 4

5 German Occupational Pensions Act (Betriebsrentengesetz) originally based on DB plans only promise to provide benefits in old age, invalidity and death The typical plan therefore used to be Salary related or Fixed monthly benefits Salary related could also mean guaranteeing a certain percentage of salary by deducting public pension benefits (expensive solution for employer in case of decreasing level of public pensions) Folie 5

6 Reform of the act allowing certain forms of plans closer to DC plans plans under which the employer promises to convert a certain contribution into a (defined) (beitragsorientierte Leistungszusage) Guarantee DC plans with a guaranteed return (Beitragszusage mit Mindestleistung) - what has been paid in has to be paid out Guarantee conversion of earnings (Entgeltumwandlung) benefit Folie 6

7 In case of Riester pension special form of private provision sponsored by state guaranteed return (certification only if this is proved) to be paid as annuity for lifetime General philosophy of security and protection Folie 7

8 View that the investment risk should not be borne by the worker But: leads to conservative investments since in pensions the employer has to guarantee - his risk might in the financial crisis? - obviously not conservative approach - in consequence reluctancy to make new promises Folie 8

9 What happens if a fund has a bad investment performance? Generally the employer promising an occupational pension has to guarantee the full amount So the investment risk is with the employer Folie 9

10 Investment rules in Germany following the Caution Principle (Vorsichtsprinzip) Tendency towards conservative investments According to the law Greatest possible security Greatest possible profitability Solvency at any time Adequate diversification of assets Adequate spread of risks Folie 10

11 Special protection risk of insolvency Introduced in the 70s by German Occupational Pensions Act (Betriebsrentengesetz) of 1974 Executed by Pensionssicherungsverein (Mutual Pension-Assurance-Association ) private institution with public functions Folie 11

12 System covering occupational pensions based on direct committment (Direktzusage) support / relief funds (Unterstützungskasse) pension funds (Pensionsfonds) System does not cover direct insurance (Direktversicherung) specialized life insurance company offering pension insurance under occupational pension schemes (Pensionskasse) Folie 12

13 the system covers Example Germany insolvency of employer not insolvency of insurance company Basic argument: no need for special protection due to system of supervision of insurance companies Regulation as an approach to prevent insolvency risks Certain loss of persuasive power due to less strict system of insurance supervision Folie 13

14 Some facts about Pensionssicherungsverein - Mutual Pension-Assurance-Association Members are employers providing schemes covered members Until Dec. 31, 2005 financed PAYG Since then funded yearly contribution of 1.8 or 1.9 per thousand of book reserves for pensions Jumped to 14.2 per thousand in 2009 due to insolvency of a department store chain one-time contribution to convert to funded system of 8.6 per thousand to be paid over a period of 15 years Folie 14

15 Direct benefit claim against PSV for benefit recipients persons with vested rights Benefit amount of the plan will be paid but no indexing - certain but high - limit on benefit amount PSV may claim recourse if company recovers Folie 15

16 Germany survived the financial crisis in better shape than other countries But cost of insolvency protection really jumped in 2009 Are insurance companies economically secure? Are the existing measures sufficient? Folie 16

17 Different approach due to different philosophy May provide higher protection for workers in a period of financial crisis The real stress test ahead? Folie 17