In his opening address, Ralf Lochmüller, CEO and Managing Partner of Lupus alpha, turned his attention to an issue that will become increasingly explosive as low interest rates persist. Under the current regulatory regime, it will be impossible for the more than 400 pension schemes in Germany to generate a long-term average return of 4% in the long run. As this is vital, however, additional pension assets should be accumulated in addition to simply preserving value. “The way the pension system was designed 30 years ago no longer works,” Lochmüller observed.
He called for opportunistic asset allocation, which deliberately allows for greater risk, to be the new credo for pension capital investments. “We do not need any new state pension funds in Germany for this,” said Lochmüller. “The bold transformation of our existing social security systems is perfectly adequate to make them fit for the future and help tackle poverty in old age.”
To illustrate what this transformation should look like, Lochmüller formulated a five-point plan for reforming company pension schemes:
1. The Investment Ordinance must be modified
...as its investment limits prevent promising asset allocation that produces long-term success. We need a significantly higher risk capital ratio of 60% or more.
2. A long-term risk methodology is needed
Pension investors may have to adjust their risk models to a 20-year investment horizon. In accounting, the strict principle of valuing at the lower of cost of market must be avoided.
3. Pension guarantees should be abolished
Guarantees cannot be realised in a low interest rate environment. Future pensioners will still have the opportunity to achieve the necessary 4% even though it is no longer “guaranteed”.
4. Regulation requires care and sound judgement
Company pension schemes do not require insurance-like regulations similar to Solvency. This would restrict room for manoeuvre even further.
5. Pension funds must recruit substantially more staff
Pension funds need to embark on a qualification campaign to expand their workforce as a prerequisite for professional, diversified investment.
Lochmüller concluded: “While risks must be managed, they may also need to be taken. That is the winning formula for attractive returns, even in difficult times.”
You can find the complete five-point plan, “Pension systems need a rethink” here.