Mittwoch, 10. Juni 2009

German Corporate Pensions

Many large German corporates have on-balance-sheet pension liabilities. In other words, the employees are unsecured creditors, and the companies need to pay the pensions out of core business cash-flows.

In case of bankruptcy, there is an institution called the "Pensionssicherungsverein". Basically, this is a kind of captive insurance pool: All German corporates together guarantee other companies' pensions obligations in case of default.

This works fine as long as there are no major bankruptcies. However, it can become a problem in a deep crisis:

- For Opel, the press talked about 2 - 4 bn € of pension liabilities (presumably all of them on-balance)

- Arcandor apparently has 3 bn €, of which at least 1 bn € on-balance (and the remainder in a separate fund which has claims against Arcandor assets, some of which may prove to be questionable)

So far, the biggest corporate default has been the bankruptcy of AEG in 1982, which caused a claim of 1 bn DM, or a bit less than 1 bn € in today's money (adjusted for 27 years of inflation).

In 2008, member companies paid a levy of 0.18 % of the value of pension obligations, 500 m € in total. So if Arcandor's default leads to a shortfall of 1.5 bn €, this will require a one-time fund contribution equal to 0.6 % of pension obligations.

If there are several more big-name defaults coming up, the volumes will become a major strain for all member companies.

If that happens, there are two options: Either the government voluntarily steps in and takes over the pension obligations, or the balance-sheets of Germany's corporates will take a substantial hit.

Though compared to GM's US pension liabilities, we are of course talking about "manageable" amounts...


  1. The Pensionssicherungsverein is similar to the "Institutesicherungsfonds" and "Einlagensicherungsfonds". They don't really reduce risk because they just trade volatility for skewness in the return distributions. However, though it can not make the pensions save, it can make people feel save about the pensions...

  2. If I understand the legal mechanics correctly, the banking sector's Einlagensicherungsfonds is actually not mandatory, i.e. banks cannot be forced to contribute unlimited amounts of money.

    Whereas the Pensionssicherungsverein ís apparently based on a law that requires participants to fork over the money.

    (But I'm not an expert on this, so I might be mistaken regarding the exact legal implications.)

  3. For clarification: By "not mandatory" I don't mean membership. I mean the obligation to pay more money into the fund in excess of preagreed funding ceilings.