World Economy

Negative Rates Poisoning German Pension Funds

Negative Rates Poisoning German Pension Funds
Negative Rates Poisoning German Pension Funds

The German regulator has piled further pressure on the European Central Bank over its low interest rate policy, which experts believe is wreaking havoc on pension schemes and savers in Europe’s largest economy.

BaFin, Germany’s financial services watchdog, said last week that pension schemes in Germany might soon be forced to cut benefits for retirees as a result of the low interest rate environment, Yahoo quoted FT as saying.

Alfred Gohdes, chief actuary in the Frankfurt office of Willis Towers Watson, the world’s largest adviser to institutional investors, described Bafin’s intervention as “unusual”.

He said: “In Germany only one pension fund has cut benefits previously. This happened more than 10 years ago. Now there is a strong possibility of benefits being cut in Germany if low rates continue. It is a slow poisoning [of the pension system].”

Bafin’s comments come just two weeks after the head of France’s largest public pension fund warned many retirement funds in Europe will “implode” if the ECB’s low interest rate policy continues.

ABP, Europe’s largest retirement fund, which provides pensions for one-sixth of the Dutch population, also said last month there is a “distinct possibility” of benefits being cut in 2017 due to declining interest rates.

 ECB Unmoved

Mario Draghi, president of the ECB, defended the central bank’s decision in April to keep its benchmark interest rate at zero. The deposit rate on lenders’ reserves held at the central bank have also been kept at -0.4%.

At a press conference at the end of last month he said: “It’s pretty evident that pension funds and insurance companies are significantly affected by the low level of interest rates.

“I would urge all actors in this sector to resist the temptation to blame low interest rates as the cause of everything that went wrong and [has] been going wrong for years with this sector. As I said before, if we want to return to higher interest rates, [first] we have to return to higher growth and higher inflation.”

He highlighted the fact that US pension schemes have been coping with interest rates being set at zero for “much longer”, and added that German retirement funds have been adversely affected by regulation.

The German regulator is currently revising rules for domestic pension funds to ease restrictions on their exposure to alternative asset classes such as private equity and hedge funds, as well as real assets such as property and forestry.

But experts believe these changes are unlikely to solve the difficulties facing the country’s pension system, which have been exacerbated by the extremely low yields on German government bonds that domestic retirement funds are heavily exposed to.