Executive VP & President of Investment Services, State Street Corporation
State-Street-Chef Jörg Ambrosius: „Pensionsloch reißt weiter auf“
Die niedrigen Kapitalmarktzinsen reißen gewaltige Löcher in die Bilanzen von Deutschlands Großkonzernen. Mehr als 300 ...
About Joerg Ambrosius
Joerg Ambrosius, Executive VP & President of Investment Services at State Street, has spoken about the growing pension obligations of German corporations. In a September 2020 interview, he stated that pension liabilities for DAX companies were around 300 billion euros at the end of 2012, with an increase of about 55 billion euros that year due to a declining discount rate. He described the low interest rate environment as creating "two negative effects" for pension funds: the low discount rate and the challenge of generating sufficient returns. Ambrosius noted a trend toward diversifying into alternative investments and infrastructure, but said the market does not currently offer enough investment opportunities in Germany. In a September 2021 interview, Ambrosius discussed racial inequality in the workplace. He described himself as "an ethnic minority ally" and said he sees it as his duty to listen to and support minority employees, adding that he is committed to helping achieve an equal workforce at State Street. Ambrosius stated that the financial industry should "start to see the eradication of racial inequality as a directly relevant issue" and that workplaces can be used "as instruments of social change." He also said that as a senior leader, he aims to "change outlooks, mindsets, and outcomes" within the industry.
Transcript (7 segments)
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Host0:08
Huge gaps are opening up in the pension obligations of German corporations, and they are growing. It's high time for action for many CFOs and investors. Our topic today is this, and we warmly welcome our studio guest, Joerg Ambrosius, Germany head of State Street. Welcome to our show. I'd like to start with a brief assessment: how large are the pension funds in German corporations currently?
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Joerg Ambrosius0:30
If we look at the year 2012 and the existing pension liabilities, we can say that for DAX companies at the end of 2012, they were around 300 billion euros. For the German Mittelstand, this figure is around 24 billion euros. What's interesting to see is how these liabilities changed over the course of 2012. We have to note that for DAX corporations, there was an increase in liabilities of around 55 billion euros. This is mainly due to the fact that the underlying discount rate for calculating pension liabilities has fallen significantly because of the currently extremely low interest rate environment. This is a dramatic development. Some corporations have already reacted, like Bayer or Deutsche Post, which have injected billions into their pension funds. Do you expect even more companies to follow suit this year?
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Host1:34
We are indeed seeing major efforts by companies to close this gap, which in most cases leads to net cash being injected from the companies into the pension funds. Therefore, we believe this trend is likely to continue. Now, the IFRS accounting rules have also changed to ensure better disclosure of what's happening in the balance sheet. What does that mean for investors?
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Joerg Ambrosius2:07
On the one hand, it concerns the discount rate we just mentioned, which is based on capital market returns—specifically, in this case, very well-rated double-A bonds. This discount rate has indeed dropped dramatically. Under HGB, the reference interest rate published by the Bundesbank applies, which was only lowered by 0.1% for the observation period 2012. This shows, I think, how dramatic the difference in perspective is between IFRS and HGB. Does this increase the pressure to remove pension obligations from the balance sheet, as was done earlier by ThyssenKrupp, for example, instead of showing them openly on the balance sheet? We continue to see the trend of taking these liabilities off corporate balance sheets, funding them outside the balance sheet with real capital. This has happened on a large scale in Germany in recent years through the establishment of so-called CTA (Contractual Trust Arrangements), which take on the corresponding liabilities and then try to represent the assets through real capital backing. Of course, the capital markets have not helped in recent years either, meaning there are actually two negative effects at play: the discount rate issue and the challenge of generating an appropriate return. Is it even possible at the moment?
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Host3:55
That depends. First, you have to look at the liability structure—whether there are guaranteed returns. In Germany, it was common to guarantee employees a minimum interest rate. We see in many cases that there are large pension liability portfolios in the market where, for example, a 4% minimum guaranteed interest rate per year was granted to employees. But this must necessarily have consequences for the investment strategy: you have to take risks. You can never achieve 4% with government bonds or good corporate bonds in the foreseeable future. We clearly see a trend toward diversification on the investment side. This concerns the risk issue you just mentioned, but also the issue of liquidity. That means pension funds are striving to find investment forms that provide a constant cash flow, because they have to pay out more to pensioners each month than they receive from current employees, especially as the age structure of retirees changes. On the other hand, we see efforts to diversify, particularly into asset classes that are either not correlated or negatively correlated with general capital market developments—keyword alternative investments, keyword infrastructure. There are intensive efforts, but at the moment the issue is more that the market does not offer enough investment objects, especially in Germany.
I'd like to go deeper into that, and with that we're already at the three final questions from Finance TV, please answer with yes or no: Are German pension funds and their investment strategies still too conservative? Have we seen the peak of pension gaps in corporate balance sheets this year? And is the explosive power of these ever-widening gaps underestimated? No. Thank you for your visit and your assessment. This topic will continue to occupy us. We'll see in the next balance sheets how it develops. Thank you very much, Mr. Ambrosius.
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Joerg Ambrosius6:22
Thank you as well. Thank you for watching. On Wednesday, it's a holiday—Labor Day—so we'll also skip work, hopefully you will too. On Friday, we'll get back to business. Tune in again and enjoy the short week. Until then, all the best and goodbye.