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Occupational Pension Schemes Are Time Bomb for German Firms

Demographic and economic developments mean that some of Germany's major companies are about to run into trouble as a result of their existing occupational pension schemes, a new Morgan Stanley study finds.


Time's running out for German firms as their employees grow older

The Morgan Stanley study names engineering groups MG Technologies and Thyssen Krupp, cement producer Dyckerhoff, retail giant Metro and constructor Hochtief as German companies who are about to run into difficulties as they struggle to afford their existing pension schemes.

During the 1960s and 1970s, periods of strong economic growth in Germany, companies hired a large number of employees to meet the growing production demands. Now these same workers have reached retirement age, and they have a right to the extremely favorable occupational pensions that were secured for them at the time of hiring. On top of that, as the economic downturn leads companies to downsize, many have stepped up their early retirement programs.

The upshot is that a number of firms will, in the medium term, face a real strain on their liquidity, according to Morgan Stanley's Sabine Mahnert, an expert on retirement provision. She said a number of companies from the so-called "old economy" face a tidal wave which they'll find very hard to avoid.

One thing's sure, according to analyst Frank Rothauge at Sal. Oppenheim: German industry will have to start raising employee contributions to occupational pension schemes. "The companies will find that there's no way around this," Rothauge said.

Companies are coming under pressure on two fronts. First, their earnings position is worsening, so that they are finding it increasingly difficult to finance occupational pension payouts from current income. Second, companies invested part of the funds from their pension schemes in the equity markets, and the recent market downturn has wiped away much of the value from these investments.

Pension Insurance Union

The problem is reflected in the figures of PSV, Germany's pensions insurance union. PSV becomes involved when a company faced with insolvency is unable to meet its pension obligations to retired workers. The aim is to ensure that individual pensioners don't suffer as a result of their former employers' difficulties.

This year, PSV is heading for record figures. In the first six months alone, it has received notification of claims totaling 1.3 billion euro ($1.27 billion), more than twice the figure for the whole of 2001.

"This gives cause for real concern," said Professor Wolfgang Förster of Dr Heissmann GmbH, which advises companies on issues relating to pension provision. As a result of the high claims figure, PSV plans a dramatic increase in its premium rates.

MG Technologies is one of the top companies singled out in the Morgan Stanley study as facing real difficulties in meeting its pension commitments. But the company's chief finance officer, Karlheinz Hornung, doesn't believe that its situation is as perilous as it's portrayed.

Hornung conceded that MG has "a large number of pensioners" right now. But this, he said, was because of the existence-threatening crisis that the company underwent in the years 1993 and 1994, when it was known as Metallgesellschaft and its main business was in metals trading. As a result of the crisis, it had to make large job cuts, he said. But once it had come through the crisis, it modified the pension commitments it made to its workers.

"The current situation includes a kind of historic burden, which will naturally start to reduce by around 2009," he said.