Higher Pension Savings Interest Rates on the Horizon
After a prolonged lull, savers of private pensions can anticipate higher interest rates on life insurance policies across the board in 2024. "The trajectory is pointing upwards. Many providers are making this move," remarks Lars Heermann, an analyst from Assekurata, a rating agency. Major providers like industry leader Allianz Leben have already upped the current interest rate for the coming year. "The interest rate is back. All offers are benefiting from this," adds Volker Priebe, a board member. However, consumer advocates are left wanting more.
Insurance expert Heermann predicts an increase in the current interest rate from the guaranteed interest rate and profit participation to around 2.45% for traditional private pension insurance policies – a jump from 2.2% this year. For products with limited guarantees, the current interest rate may reach 2.5%.
Despite the optimistic outlook, Lars Gatschke of the Federal Association of Consumer Organizations says "there's potential for improvement." He argues that short-term deposits pay more than profit participation. The primary reason for slower progress, he suggests, is the buffer capital. Life insurers built up this buffer during the prolonged interest rate slump to guarantee higher promises of up to 4% for old contracts. Unfortunately, this money could not be distributed to customers. Gatschke believes that releasing more of the buffer sooner could benefit customers in terms of profit participation.
Sluggish Process
Heermann sees the increase in interest rates as a gradual process. "Insurers cannot turn their long-term investments around overnight." A significant portion of insurance companies' funds is invested in relatively low-interest bonds with good ratings and long maturities from recent years. Their market value has decreased in the face of the sharp rise in interest rates.
This development has resulted in "hidden liabilities" on balance sheets. If insurers needed to sell these securities before maturity, they would incur losses. It's highly unlikely that insurers will resort to large-scale losses sales, according to Heermann. However, the hidden burdens force them to be cautious.
Interest rates are made up of profit participation, the amount of which insurers determine based on the economic situation and the success of their investment strategy, and the maximum actuarial interest rate set by the Federal Ministry of Finance – also known as the guaranteed interest rate. The current interest rate pertains only to the savings portion after deducting acquisition and distribution expenses among others. The final surplus is added at the end of the contract term.
Recommendation to Increase Maximum Actuarial Interest Rate
The German Actuarial Association is advocating for an increase in the maximum actuarial interest rate from the present 0.25% to 1% for new life insurance policies, starting from 2025 – a change not seen for decades. Only new policies will be affected by this adjustment; those with old contracts still yielding 4% will remain unchanged.
Consumer Centers and Advisors
Consumer centers and financial advisors can provide valuable advice and assistance to individuals navigating the changing interest rate landscape, helping savers make informed decisions about their pension plans. The current interest rate environment, along with ongoing economic data and the interest rate policy of the Federal Ministry of Finance, must all be considered when optimizing pension provision.
Enrichment Insights
- Economic Impact: Rising interest rates in 2024 are likely driven by a combination of broader economic factors and monetary policy decisions. Notably, the risk-free rate has surpassed 4.1% in the United States, impacting pensions and investments.
- Monetary Policy: The rise in interest rates is largely due to aggressive hikes by the Federal Reserve aiming to combat inflation. The impact on pension values can be significant, as the latest adjustments will make it more expensive to generate the same amount of income.
- Consumer Advocacy: Given these challenges, consumer advocates might push for improvements in pension policies, including better inflation adjustments, improved risk management, and more conservative investment strategies to secure stable returns.
