By SPIEGEL Staff
There is nothing new about the fact that statutory pensions are often insufficient to guarantee that retirees can maintain their standard of living. What is new, however, is that the pension system that politicians have encouraged Germans to embrace has reached a crisis point. Roughly a decade ago, when Germany's pension reformers reduced the benefits of the statutory system, they hoped that workers would fill the resulting gaps in their pensions by investing in private retirement funds.
But things often don't work out that way, as Werner Brochhausen, 68, and his wife Doris, 63, have found out. Brochhausen is a friendly pensioner with a warm and somewhat brittle voice. He used to be an engineer for Deutsche Telekom, the German telecommunications giant. His wife worked at the call center of Deutsche Bank, Germany's largest bank.
In 1997, the couple took out a life insurance policy with the Herold insurance company, which belonged to Deutsche Bank at the time, and is now a member of the Zurich Group. The product was called a "dynamic vario" policy, and it provided for funds to be disbursed if one of the policy holders died. The couple was told that they would receive some 210,000 deutsche marks if they paid their premiums for 15 years.
Over the course of the years, though, this amount continuously dwindled in the annual reports that they received from the company. In 2007, the couple could look forward to receiving just 85,016.59. Today, shortly before the policy will be paid out, it has dropped to 80,603.51. "That's less than what we paid in over all those years," Brochhausen says. "Now we know where the insurance companies get the money to build their palaces."
Chasing after Diminishing or Nonexistent Returns
Should the financial crisis continue, many small savers could find themselves in a similar situation. Indeed, the recent turbulence on the markets has been like an endless stress test for private-sector providers of old-age pension plans.
Nevertheless, the business relies on a simple enough principle: Customers pay their premiums, and the insurance companies invest the money in stocks and bonds.
But the yields obtained this way have been falling for years. The blame for this lies mainly with the central banks of the US and Europe, which have flooded the economy with cheap money over the past few years: In the euro zone, the key base lending rate has reached a record low of 0.75 percent.
That's good for German businesses, which receive loans at more favorable rates, but bad for savers. What they manage to put aside generates virtually no returns.
As a result, Torsten Utecht sometimes has great difficulties finding lucrative investments for his customers' money. Utecht, 43, hails from the western German town of Düren and, as the CFO of Generali Deutschland, he decides what is done with 106 billion of investment capital. According to industry regulations, fund managers like him have to invest this money according to stringent standards to help avoid losses for policy holders -- but that's no easy task.
It's not just the low interest rates that are making life difficult for Utecht and fellow players in the insurance business. Stock-market, real-estate and financial-market crises in recent decades have shaken the industry at its core. Which investments can actually still be viewed as "safe"?
After the 2003 collapse of Neue Markt, Germany's stock index for technology shares launched in 1997, many insurance companies hardly invested in stocks anymore. Instead, they purchased large quantities of bonds from banks and countries. Many of these securities were seen as the safest investments on the market, but the euro crisis rapidly put an end to that perception. Generali, for instance, had to write off hundreds of millions of euros in Greek sovereign bonds.
Bonds from debt-ridden countries, such as Italy and Spain, are now strictly off-limits for Utecht, but he is currently not purchasing any more German government bonds either, although they are still reputed to be completely reliable. The problem is that so many investors from around the globe are jostling to purchase them as a safe haven that the yields are no longer appealing.
Desperate for Returns
The Generali executive currently has some 5 billion in cash in the company's accounts. "That's 5 percent of our capital investments," he says. "Normally, it's 1 to 2 percent." Since this situation is untenable over the long-term, Utecht is looking for new investment opportunities. He's now buying more covered and corporate bonds, and looking into the possibility of expanding the company's lending operations.
Many of his colleagues are increasingly investing in real estate and solar panels. Allianz, the German insurance giant, has invested in parking meters in Chicago. Some insurance companies have even recently started buying asset-backed securities (ABS) from the banks, although these highly complex investments are only allowed to make up a tiny proportion of their portfolios. "If interest rates remain at their current level over the long term, bankruptcies cannot be ruled out," warns Lars Heermann from the Assekurata rating agency, which specializes in insurance companies.
In 2011, lawmakers even forced insurers to create a financial buffer to ensure that they can meet their indemnity commitments. These reserves will presumably have to be boosted once again by some 5 billion in 2012.
Investors will have to foot the bill for this. Indeed, the money for these guarantees will have to be deducted from the surpluses that make life insurance policies profitable in the first place. Although only some 4 percent of the savings accrued by an insurance policy are deposited in these emergency funds, the trend is toward greater amounts. This makes it less and less rewarding for many holders of life insurance policies and participants in Germany's "Riester" scheme, a voluntary, state-subsidized private pension program. With a Riester pension, says Axel Kleinlein, head of the German Insurance Holders Association (BdV), "you really have to have a large family to be sure that you can keep pace with inflation."
Kleinlein has calculated the impact of the new market situation on life insurance yields. The actuary's results are sobering: A 30-year-old man who signed a standard contract in 1992 for 35 years, and has since then been paying into it 150 a month, was led to expect nearly 199,000 in payout when the contract reached maturity (see graphic). In the meantime, however, the dividends paid by insurance companies have plummeted. Should they remain at their current level, the insurance policy holder, today age 50, can only count on receiving some 103,000 when the policy matures. If, after adjusting for inflation, the real interest rate drops to 3 percent, it would only be roughly 95,000. And if he is only paid the guaranteed amount, he will only receive 87,500. A 30-year-old who signs the same contract today can only count on receiving just under 70,000.
No Way Out
Terminating the contract is rarely a viable solution. For Claudia Klemm, 48, this radical decision only made her situation worse.
Klemm is divorced, has two children and owns a modestly successful bookstore in the heart of Berlin. The money is just enough to live on: Her average gross monthly income is 2,500. When she retires, she will -- at least according to the current calculations -- only receive 200 a month from the statutory pension fund. This would make her a candidate for supplements from basic social security. "Actually, I can only hope that I never get that old," says Klemm.
Nevertheless, for years now, the bookseller has been investing between 40 and 70 a month to boost her meager pension entitlements. At first, the money flowed into a life insurance policy, but since the annual reports revealed increasingly smaller yields, Klemm's investment consultant managed to convince her to cancel the contract. That cost her 4,000. The supposed financial expert assured Klemm that a stock fund would make up for the losses. His persuasive buzzwords included "global investments," "better opportunities" and "larger yields."
It was a disastrous decision. Klemm now realizes that "the funds are going down the drain." Her consultant now even admits that the situation can't be remedied. The most recent stock market turbulence has cost her yet another 4,500, and she's likely to suffer additional losses. "I'd almost be better off hiding the money at home," she angrily says.
Klemm is just one of the many people who lost substantial amounts of money after investing in securities and index funds over the past decade. Experts promised high yields and rising market prices but, in reality, investors could be happy if they didn't lose any money.
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