Speaker: Reiner Dietz
This presentation (45 minutes) is intended to provide insights into the challenges of managing pure defined contribution (DC) assets according to the new German regulations.
Before 2018, the framework of occupational pensions in Germany did not include pure DC schemes. The regulations only allowed for defined benefit (DB) schemes. For this reason, asset allocation and asset management processes related to pension assets commonly included minimum requirements for risk, effectively limiting return opportunities, too.
In 2018, a new DC framework becomes effective, providing managers of pension assets with new options and hazards. Avoiding solvency II requirements for asset management and minimizing capital resources costs, it aims at providing better return opportunities instead of focusing on guarantees which in reality are likely to result in losses on a real basis (i.e. after inflation is taken into account). In doing so, the risk of poor asset returns has fully been imposed on plan participants, a move that runs absolutely contrary to German custom and practice. To compensate for this at least partially, a requirement to keep volatility of stipulated life annuities low was as well included as a collective responsibility of social partners (unions and employers associations).
The new framework includes a comprehensive set of rules for asset and risk management, which will apply to both individual and collective saving models. In our view, the main point of interest lies in the stipulation of buffers as a replacement of solvency capital.
The presentation includes suggestions on how to create and apply buffers, how to deduce return and risk parameters and how to optimize key factors determining risk and return. It will also elaborate on preferable legal structures of funds in respect of German investment law. Lastly, volume and maturity effects will be mentioned.