As part of a study for HDI, the Institute of Finance and Actuarial Science (ifa) from Ulm has analyzed the correlation between guaranteed contributions and returns. The result: With a premium guarantee of around 80 percent and a correspondingly higher share in equity investments, the chance to earn can be significantly increased compared to products with a full premium guarantee.
Especially when inflation is taken into account, lowering the guarantee hardly increases the risks – in some cases they even decrease. According to its own calculations, HDI even found that a maturity benefit in 82 percent of the cases was higher than for a product with a full premium guarantee.
A permanently high rate of price increase in Germany is rapidly and massively undermining the value of contribution guarantees for old-age pension models. The higher the guarantee, the lower the proportion of promising capital investments that can compensate for inflation. Analyzes from ifa have shown that, especially when there is great uncertainty about future inflation, lower guaranteed payments, for example in company pension schemes, also make sense for security-oriented investors. This allows for a higher proportion of equity investments, which can provide better returns and better protection against inflation in general.
The underestimated risk
For a long time, the risk of inflation in Germany was underestimated because the inflation rate since around the year 2000 has fluctuated moderately around two percent. Since March 2022, however, it has been constantly above seven percent.
The so-called “Rule of 72” (a rule of thumb from interest calculations that shows how an interest-bearing capital investment doubles in nominal value) can be used to calculate how quickly the high price increases devalue the capital: At seven percent annual inflation, it halves after ten years the purchasing power of a principal amount (72 divided by 7) such as a nominal premium guarantee in direct insurance. Fabian von Löbbecke emphasizes that guarantees in old-age provision must therefore be reassessed and designed so that they meet the needs.
Because with pension models, high guarantees, especially when inflation rates are high, do not equal a high degree of security in the preservation of the capital: “The risk that the real value of the old-age benefit can no longer keep up with inflation increases significantly,” says Fabian von Löbbecke Rather, reduced contribution guarantees make sense if it means that higher equity investments give an overall better chance of a return.
As part of the HDI bAV expert forum in July 2022, this connection was discussed together with Dr. Sandra Blome from the Department of Finance and Actuarial Science in Ulm. The result of the analyzes from ifa: If the contribution guarantee is lowered from 100 to 80 percent, the probability of a significantly higher maturity benefit increases, and taking inflation into account, the risk of worse (inflation-adjusted) maturity benefits may reduce.
“According to HDI calculations, the maturity benefit is in 82 percent of cases even higher than for a product with a full premium guarantee,” adds Fabian von Löbbecke, member of the board of HDI Lebensversicherung AG and responsible for the area of products and new life business.
Stocks can compensate for inflation
With persistently high inflation rates, investment forms to build a pension should be able to mitigate inflation on the one hand and, on the other hand, reflect legislative certainty and minimum guarantees to protect the insured. “Investments in productive capital and intrinsic values such as shares are particularly suitable for this. Because it has been scientifically proven that if inflation is high over a longer period, there is a high probability that the stock markets will develop positively,’ says Dr. Sandra Bloom.
Fund policies with a high proportion of shares as the silver bullet
A unit-link subsidized direct insurance provides the optimal prerequisites for the development of an adequate old-age provision which can also withstand the currently high inflation from a guarantee and return point of view. Guarantees are important and also necessary from an employment law point of view in company pension schemes, but they must be adjusted as necessary to increase the return potential and the chance of inflation compensation.
“Classic contribution obligations with 100 percent minimum benefit have had their everyday life in times of volatile capital markets and high inflation rates. They offer employees no security, but rather increase the risk of a real loss of purchasing power. The right balance must now be found, especially in company pension schemes, because on on the one hand to make it possible for employees of all age groups to have a profitable financial provision and to reliably meet the labor law framework conditions and requirements in a defined contribution scheme. on the other. That is why it is important for us to provide the right answer with tailor-made products ,« sums up von Löbbecke.