 The pressure on German corporates to fund their pension
liabilities, coupled with the UK’s inability to close its funding gap
, means that the two systems are starting to look remarkably similar.
German actuaries and pension professionals are often quick to defend their pension funding system from Anglo-Saxon attack.
The last few years have seen predictions of the gradual decline of the
traditional German book reserve system of pension funding, whereby
pensions are paid from earnings and the obligation sits on the company
balance sheet, with insurance provided by the PSV discontinuance fund.
The system emerged in the 1920s when hyperinflation put paid not only
to many individuals’ and families’ personal wealth, but also to the
assets of the capital-funded pension and assistance funds then in
existence.
It was easier to criticise this funding method at the end of the 1990s
when the expected equity risk premium was a good deal higher than it is
today. Risk is, after all, concentrated in the sponsor, and the
‘assets’ of the ‘pension fund’ are effectively invested in the plant,
real estate, equipment and machinery of the company.
In the face of pressure from international accounting standards,
international analysts and the SEC when seeking a US listing, many
large German corporates set up so-called contractual trust
arrangements, quasi pension funds that operate without investment
restrictions.
Lufthansa was a recent follower.
Germany’s Pensionsfonds vehicle was established in the early days of
the current coalition governments as an alternative to this form of
funding.
Several years on, it is harder to gain from the market the real returns
that a healthy company can generate on its own equity. Some form of
partial funding, or hybrid between book reserve and full funding, looks
to be a sensible halfway house for many German companies.
It is ironic that the UK – with its massive pension deficit reckoned by
Mercer to amount to just over E100bn – may now be moving towards
something close to the hybrid funding system favoured by some German
companies. Particularly ironic given the manner in which the British
funding system was trumpeted as such a success story by some
politicians and observers before the current malaise.
Now that some UK commentators are advising trustees to take charge of
assets, such as real estate, in cases of underfunding, the parallels
are strikingly similar. German corporates have been ‘funding’ their
schemes in a similar way for a while.
The UK’s pension deficit is too much of a burden for British industry
to clear overnight, and such hybrid solutions are likely to be around
for some years to come.
20 June 2005
Obtained from European Pensions & Investment News
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