The pension schemes of German companies in the DAX 40 reached a record coverage ratio of 80 per cent of pension obligations in 2022, analysis from Mercer Germany has shown.

This represents an 8 percentage point increase on the previous record high the year prior, which was a 72 per cent coverage ratio recorded in 2021.

The primary driver for the improved ratio was a decrease in liabilities, which fell from €412bn in 2021 to €290bn in 2022.

Mercer primarily attributed the decline in pension liabilities to a significant increase in the discount rate, which caused the balance sheet value of pension obligations to fall.

This fall in liabilities was partially offset by a decline in asset values, which fell from €299bn to €240bn during the same period.

Price losses in almost every asset class was the main reason for the fall in asset values.

The decline in assets was mitigated by five companies being replaced on the DAX 40 throughout the year, resulting in an increase in pension assets of around €6bn.

Meanwhile, due to the changed composition of the DAX 40, the pension obligations initially increased by €8bn.

In addition, due to the sharp rise in inflation, companies had to significantly increase the assumption for pension dynamics, which accounted for actuarial losses of around €10bn.

“For investors in 2022, it was particularly important to set up the portfolio with less risk and to keep the loss as low as possible,” commented Mercer Germany head of investment consulting, Jeffrey Dissmann.

“Due to the highly interest rate-sensitive obligations, pension investors were able to noticeably increase their coverage despite falling assets.

“Due to the rise in interest rates and the associated high level of coverage, it is now a sensible time to invest in interest-bearing asset classes again.

“With a liability-driven investment (LDI) approach, the high interest rate sensitivity of the obligations is safeguarded and balance sheet volatility is reduced.”

Mercer Germany chief actuary, Thomas Hagemann added: “Due primarily to the conflict in Ukraine, the interest rate level was volatile in 2022, but generally went up.

“At the end of the year, we reached the highest month-end figure in over 10 years.

“On the one hand, the duration of a portfolio decreases when the actuarial interest rate rises, and on the other hand there are various interest calculation methods.

“Overall, however, we expect that the companies in the DAX 40 have raised the discount rate by an average of 2.5 percentage points."

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