Capturing the Life Cycle opportunity in Germany

Dorothee Franzen, Jun 1, 2021 2:07:17 PM

Abstract:

We at Avida see significant opportunity within the German market for Institutional Pensions. 

Corporates have started restructuring what was previously DB pension plans towards DC-style pension plans.  

We think that the corporate world will completely turn DC by 2050. 

We expect life cycle strategies to become the dominant investment strategy for corporate pension plans.  

Therefore, there are significant opportunities within the German market, especially for asset managers with experience in life cycle strategies.

Read more below:

Avida International expects life cycle strategies to become the dominant investment strategy for corporate pension plans by 2050 

The German market for Institutional Pensions is one which is underestimated by many. The market itself is mid-sized in Europe and ranks the fourth highest after the UK, the Netherlands and Switzerland. It has total Assets Under Management (AUM) of around €700bn. Around half of the pension liabilities (roughly €1tr*)[1] are owned by corporates, and roughly the other half are sponsored by associations of the liberal professions, churches and local governments.  

Germany, only DB?

It is often claimed that Germany is one the few countries which still use Defined Benefit (DB) pension plans, in a growing sea of Defined Contribution (DC) countries. However, we at Avida believe that this is not the case and is one of the many myths being told about the German market. Although the employees of local governments, churches and the members of the liberal profession still enjoy relatively generous pension benefits that mostly fulfil the strict DB definition, this is a journey for the employees of the large corporate plan sponsors. Twenty years ago, German actuaries started to develop and introduce new pension plans that are fundamentally DC. It also needs to be said that Defined Contribution plans are not prohibited in Germany, it is merely that they are not recognised from a tax and accounting perspective. Yet, like many of their international competitors, German corporates are still faced with the same constant pressure on costs due to globalisation and rising life expectancy. Therefore, German corporates share the same goals of making pension risk manageable, and also to minimise pension costs.

NEW DC-style pension plans

These new DC-style pension plans are characterised by a fixed contribution rate. This rate is paid by the employer and the employee into the employee’s individual account and gets invested into a range of investment products. At retirement, the employee receives their pension benefit which is calculated with the sum of the paid-in contributions and also the investment returns. This is very similar to an US-style 401(k) plan; however, the important difference is that there is a guarantee which is legally requested from the employer in Germany. This guarantee is the difference for accountants. Therefore, the German DC-style pension plans are still usually DB in accounting terms, (i.e. the pension plan’s liability and assets are recognised on the balance sheet of the plan sponsor.)

opportunities within life cycle solutions

In line with international best practice, life cycle solutions are the investment strategy of choice for these new DC pension plans in Germany. We at Avida International think that this is an interesting opportunity for asset managers. However, since there are no official statistics to support this argument, we have conducted our own survey of actuaries and pension consultants in order to determine the current size and – even more importantly – the most likely trends which will follow in both the DC pension segment and life cycle solutions in Germany.  

Our report shows that the German DC market is currently a small market, but we expect the corporate world to completely turn DC by 2050. We also expect life cycle strategies to become the dominant investment strategy for corporate pension plans. But unless the German Government introduces formal DC pension plans, there will still remain significant differences compared to other countries with individual DC plans, such as the US or France.

Overall, there are significant opportunities for the German market, especially for asset managers with experience in life cycle strategies. However, for these opportunities to become successful, products and strategies need to be closely aligned with local client needs.  

Please click here for the highlights of our in-depth study into the German life  cycle opportunity.

[1] *) There is no funding requirement for corporate pension plans in the form of the direct pension promise (‘Direktzusage’). 

 

 

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