Corporate pensions video summary

Joe Wicks, Co-Head of Pensions Solutions Commerzbank and Jonathan Tyce, Bloomberg Senior Banks Analyst, EMEA, LATAM & Asia discuss corporate pensions

How big is Europe’s pension problem?

  • The cost of social security is growing across the Eurozone
  • For some countries, percentage points of GDP are is disappearing to fill an ever growing hole
  • There is an aging population
  • We will see corporates encouraged to take a more active role in helping employees contribute to their long term savings and therefore their own long term welfare.
  • Pensions are rising to the top of the agenda as the cost of providing pensions from employers to employees is becoming more expensive due to quantitative easing, lower economic growth, subdued inflation and people are living longer

There are two aspects to be considered for corporates and pensions

The product and how the liability changes and how inflation will change what you will owe. Then there is a gap which you will have to manage and how you are going to invest the assets

How can corporates navigate these challenges?

Commerzbank recognises that there is no one size fits all approach as a pension regulations are different in each country. Therefore a country specific and holistic approach needs to be taken around pensions

Commerzbank has a particular expertise in Germany, it is our home market and we have an established track record helping corporate clients on the pension topic and this is where we believe that we can help

Pensions are not just a concern for large companies but also for smaller companies. We are also finding that pensions are an important topic for the smaller companies especially the German Mittelstand (SMEs).

We see corporates responding in three ways to the rising cost of providing pensions to their employees

1. Changing the asset allocation within their pension schemes – allocating more assets to a higher return but higher risk assets such as alternatives, for example private equity or switching from bonds into equities

2. Increasing contributions to their pension scheme in two ways from existing liquidity or for those corporates which don’t have that, this could mean raising money in the capital markets

3. Restructuring pension schemes, most commonly by changing from defined benefit schemes to defined contribution where regulation allows

How should companies plan for 2017?

We potentially have an even more protectionist world potentially. What does that mean for inflation? What does that mean for our interest rates?

We are also going to get different cycles so Europe has a format of an interest rate cycle with the UK and with the US. If you are a company that has big businesses in each of those regions, your problem has just got a lot more complicated.

It is fair to assume that rates will begin to pick up and yields have moved that way but we have created a very large asset bubble so they can’t go up too quickly

Going into 2017, our advice for clients is to hope for the best and plan for the worst.