Secure pensions in uncertain times

Market forces drive interest rates and prices, but rarely pensions. Once pension benefits from the second pillar have been granted, they are guaranteed. To strengthen systemic security, the regulator has introduced a two-tier system. In the first instance, it is the pension fund’s obligation to honour its pension commitments. If a pension fund gets into financial difficulties, pension payments may only be reduced to the extent that they were previously topped up by pension increases (inflation adjustments). In the worst case, the guarantee fund comes into play, which secures the benefits of the members in the 2nd pillar in the event a pension fund or members’ collective (affiliation of an employer to a collective or joint foundation) becomes insolvent. However, it is primarily the pension fund’s responsibility to take all necessary steps to ensure that this body does not have to intervene. For this purpose, the pension fund has various instruments at its disposal.

The technical interest rate

As a purely mathematical figure, the technical interest rate impacts the conversion rate and the pensioners’ retirement capital. It should reflect the expected return and should be at a reasonable level. If the technical interest rate that is too high, there may be insufficient funds to pay for current pensions, which can lead to losses for the employee benefits institutions.

A safeguard against market risks

To ensure that they can meet their obligations, pension funds must choose an appropriate investment strategy. There are several factors to consider in this choice. Firstly, the pension fund’s risk capacity and its cash flows must be factored in. The chosen investment strategy must be tailored to ensure that the pension fund achieves its required return and avoids any underfunding. In many cases, investment strategies for pensioner portfolios are therefore more on the defensive side.

Another measure to avoid underfunding is the creation of value fluctuation reserves (VFR). In difficult times, these reserves can prevent the pension fund from running into financial difficulties. VFRs ensure that fluctuations on the financial markets do not result in underfunding. They act as a safeguard against volatility on the stock markets and thereby protect the pensions.

Greater risk capacity increases the scope for action

A higher VFR increases the risk capacity and allows for a less defensive investment strategy. As mentioned before, the risk capacity of a pensioner portfolio is closely linked to the required return. Secure and stable investment income is the be-all and end-all in the pension fund business. It guarantees that the promised pensions can actually be paid.