The German Actuarial Association (DAV) and the Institute of Actuarial Experts for Retirement Provision (IVS) have welcomed the Pension Commission’s recommendations but warned that their implementation was linked to several actuarial, financial, and regulatory issues.

The commission has recommended the introduction of a cross-pillar pension target in the form of a net replacement rate of 70 per cent, the strengthening of funded elements, and linking retirement ages to life expectancy.

The DAV and IVS said the proposals were an important step towards the sustainable development of retirement provision in Germany.

However, the introduction of the proposals would have to overcome numerous actuarial, financial, and regulatory issues, the organisations said, particularly the realistic modelling of capital market and life expectancy developments; the design of the statutory pension, especially during the retirement phase; the assessment and hedging of risks; and the appropriate interaction of the three pillars.

“The goal should be to design the upcoming reform steps in collaboration with policymakers, administrators, and other stakeholders in such a way that they are financially sustainable, transparent, risk-appropriate, and actuarially sound in the long term,” they stated.

“Expert guidance is essential for this. The DAV and IVS therefore offer to contribute their actuarial expertise to the further development and implementation process.”

The Pension Commission also recommended supplementing the pay-as-you-go statutory pension insurance with a funded pension component.

The DAV and IVS welcomed the increased use of funded pensions, as they believed this would broaden the long-term financing base of the statutory pension insurance system and therefore mitigate the effects of demographic change on the pay-as-you-go component.

“The long-term performance of such a system depends in particular on the investment strategy and the associated opportunities and risks,” the organisations said.

“For a realistic assessment of expected performance, the assumptions used regarding the long-term development of the capital markets must be critically examined and validated using sensitivities.

“The specific design of the savings and pension phases are mutually influential and place common demands on investment and risk management.

“The DAV and IVS therefore consider it necessary to design the savings and pension phases not separately, but within a comprehensive concept.”

---