Aon Hewitt Retirement & Investment. Global Pension Risk Survey German Survey Findings. Risk. Reinsurance. Human Resources.

Aon Hewitt Retirement & Investment Global Pension Risk Survey 2017 German Survey Findings Risk. Reinsurance. Human Resources.

Contents 2017 Survey Findings Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 2

Executive summary For a number of years, Aon Hewitt has conducted the Global Pension Risk Survey at two-yearly intervals. The aim of this year s Survey is to give businesses an opportunity to compare their approach to risks against the market and to identify current developments in both local and global risk management in company retirement plans. This report also provides a snapshot of opinions among participating businesses regarding current developments in German company retirement plans. The recent trend away from benefit-based to contribution-based pension plans has led to the majority of current pension plans being contribution-based. Current considerations for modifying plans are generally aimed not so much at reducing costs but more at reducing risk. Participants are divided when it comes to external funding of pension obligations as a means of controlling risk, either through financing via a pension fund or funding in a Contractual Trust Arrangement (CTA). While some of the companies surveyed see this as a reasonable tool, others are more concerned about the associated drain on liquidity. Other risk-reducing measures, such as paying settlements to pension recipients, are seen positively or have already been carried out. The Survey shows that the majority of businesses pursue long-term strategic planning when it comes to hedging against the risks from pension plans. They pay attention to a variety of risks, including hedging against interest rate and inflation risks. Hedging is a subject most businesses engage in. However, very few companies currently implement it as part of a defined strategy. With regard to the target investment strategy, looking back over a period of 12 months the majority of companies surveyed have made very few changes here. Further, many companies have not yet committed themselves to any changes in the coming 12 months. Turning to transferring or outsourcing decisions, the Survey findings show growing demand among businesses for solutions that transfer functions to external service providers within a coordinated control framework. Current developments resulting from the 2018 German Company Pension Reform the so-called Betriebsrentenstärkungsgesetz, which has now been adopted, are viewed as a step in the right direction by the majority of participating businesses. The possibility of pure contribution commitments without guarantees, increasing the taxfree endowment limit, and the introduction of a legally secure opt-out model are seen as positive factors for the propagation of company retirement plans. However, the responses show that some questions remain regarding the practical implementation of the measures and participants would still like to see additional legislative measures. Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 3

1 of 1 Survey participants Our 2017 Global Pension Risk Survey sought responses from DAX30 companies, as well as small and medium-sized businesses that are largely focused on pension obligations and are therefore especially concerned with their approach to the associated risks. Aon clients and prospective clients with an international orientation were invited to participate in the study. A total of 39 companies participated in the Survey in Germany. The questionnaires were completed online by participants during the period from March to May 2017. Almost all the companies (93%) are bound by collective agreements. Existing benefit plans with the largest obligations in Germany tend to be career-average plans (41% of respondents operate these) and Defined Contribution with minimum guarantee (Beitragszusage mit Mindestleistung; 25%). Pure final-salary plans (19%) now play only a minor role. Bound by collective agreement Type of benefit plan 93+7+C Not bound by collective agreements 7 % 93 % Bound by collective agreements 19+41+15+25C Defined Contribution (Beitragszusage mit Mindestleistung) Cash Balance 1 2 19 % 41 % Final-salary plan Career-Average-Plan (Bausteinplan) Function of respondent Number of plan participants Pension manager 30+30+26+14C Pension board or committee 26 % 14 % 30 % 30 % HR or Benefits Finance More than 10,000 13+17+17+13+4+36C 5,001 to 10,000 36 % 4 % 13 % 2,001 to 5,000 13 % Less than 500 17 % 17 % 500 to 1,000 1,001 to 2,000 Aon Hewitt Global Pension Risk Survey German Survey Findings 4

1 of 2 Long-term objectives For some years, we have seen a trend towards paying special attention to risk control in pension plans with respect to long-term strategy. This trend continues in the 2017 Survey. For many schemes, the level of risk currently achieved is already considered to be sufficiently low in some cases, but further hedges (for instance against the interest rate and inflation or other risks) are desired. Almost half of respondents have set themselves very short timeframes, of five years or less, to achieve their long-term targets. For 40%, the time frame is six to 10 years. Only 7% and 6% of study participants, respectively, have longer-term horizons of 11 to 15 years or more than 20 years. Description of long-term strategy Ensuring that all risks are ruled out 23+23+23+23+8C No long-term goals (yet) 23 % 23 % 8 % 23 % 23 % No change over current risk level Reduction of other risks Hedging against interest rate and inflation risks Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 5

2 of 2 Long-term objectives Planning to achieve long-term objective The importance attached to 47+20+27+6C No planning implementing long-term goals is also made clear by the fact that almost half 6 % of respondents already have robust Planning aspirations Robust planning implementation plans. Just over one-third (eg, statement of (eg, documented of those surveyed currently has planning intent, planning not plans, implementation under way) aspirations only, or has no plan at all. yet begun) 27 % % 20 % Basic planning (eg, statement of intent, plans being finalised) Factors influencing achievement of targets The factors influencing the achievement of targets are very diverse from the businesses point of view. They include internal circumstances, such as risk tolerance and the availability of liquidity, and outside influences, such as prevailing interest rates. Amount of risk that can/should be carried 27 % Long-term interest rates 20 % Employer s ability to pay contributions/provide funding 20 % Fixed timetable 13 % Legal restrictions (eg, employment and/or supervisory law) 13% Resources to implement planning 7 % 0 10 % 20 % 30 % Aon Hewitt Global Pension Risk Survey German Survey Findings 6

1 of 4 Managing benefits and liabilities Plan design for future service and new entrants The clear majority of respondents (69%) have already closed benefit-based plans for new entrants or are very likely to do so. This is often the first step to transitioning benefit schemes from defined benefit plans to defined contribution plans. Within this context, defined contribution refers to plans that may still carry a theoretical risk for the employer but where on the basis of the plan design, that risk is almost nonexistent within the bounds of legal regulations. This trend, which has been growing for some years, is also reflected in the responses given by participants in this Survey. More than a quarter of participants have already completed this transition. By contrast, the reduction in benefits under defined benefit plans, the limitation of creditable income, and the financing of benefits through additional employee contributions are not currently suitable measures for controlling benefitbased plans for the majority of respondents. As an alternative to closing defined benefit-oriented plans and introducing a new pension plan, risks might also be reduced by modifying elements of the plan. Just under half of businesses surveyed (44%) plan to reduce the risk by modifying plan elements, such as converting from pension to lump sum benefit, or have already implemented this. The participants responses lead to the conclusion that organisations are reducing risk mainly by converting to contribution-based systems and by modifying plan elements. The companies focus has shifted such that cost reductions, which in many cases were the main driver for changes in pension plans in the past, are now no longer the primary objective. Plan design measures in the next 12 to 24 months Close plan for new entrants 5 14 % 18 % 8 % Keep DB but reduce future benefits 10 % 10 % 29 % 10 % 36 % Switch to defined-contribution plan 27 % 9 % 23 % 36 % Limit on creditable income 10 % 10 % 4 2 Modification of plan elements (eg, transition from pension to lump sum) 10 % 24 % 10 % 24 % 32 % Additional employee contributions 20 % 1 3 2 0 20 % 40 % 60 % 80 % 100 % Already implemented Very likely to be implemented Unlikely to be implemented Not legally possible Rather likely to be implemented Not applicable Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 7

2 of 4 Managing benefits and liabilities Measures for risk management and financing in existing pension plans With regard to risk management for past service, partial or complete reinsurance of obligations, hedging of longevity risks, and transferring obligations to another benefit carrier such as a pension fund have so far not been taken up by the clear majority of Survey respondents. 42% have not yet dealt with the issue of hedging of longevity risk. More than a quarter of respondents would like to eliminate this risk, but assume that they will not find an affordable solution on the market. The reluctance to pursue reinsurance through insurance products is likely to be based on the high costs caused by the calculation of insurance rates and on the perceived administrative effort. It is more difficult to be specific about the reasons behind a lack of appetite to transfer to a pension fund. In particular, we must distinguish between insurance-oriented and non-insurance-oriented designs. While the insurance-oriented design results in high costs (much like reinsurance through insurance products), contributions for a non-insurance-oriented solution are typically close to the liability value under IFRS. Since a pension fund is a collective solution and typically performs the administrative functions, it is unlikely that administrative reasons are pertinent here. This is therefore a subject that needs to be investigated in greater detail in order to understand companies lack of action. By contrast, settlement of pensions in payment (where permitted by law) has already been implemented by 38% of respondents, while just under 20% consider implementation to be likely. Opinions are divided when it comes to external funding of benefit payments through a Contractual Trust Arrangement (CTA). While half of the companies have already implemented a CTA solution, 45% of them consider it a non-issue. This two-tier view is often seen when it comes to this issue. While one side argues that companies regularly show a higher return on equity than can be earned as income on the capital market, the other side points out the mitigation of liquidity risks in addition to the improvement in key balance sheet figures. In an external funding scenario, the strain on liquidity caused by benefit payments is not moved to the future but paid out immediately to the funding vehicle. It has been observed in recent years, however, that German companies are more willing to bind financial resources in order to cover direct pension obligations when capital is more readily available. Aon Hewitt Global Pension Risk Survey German Survey Findings 8

3 of 4 Managing benefits and liabilities Measures for risk management in existing plans in the next 12 to 24 months Reinsurance of obligations 20 % 4 2 Hedge of longevity risk 10 % 5 2 Transfer to other benefit carriers (eg, Pensionsfonds) 6 2 Settlement of pensions in payment 38 % 14 % 19 % 24 % Implementation of CTA solution 50 % 2 1 0 20 % 40 % 60 % 80 % 100 % Already implementetd Implementation unlikely Implementation very likely Not legally possible Implementation rather unlikely Not applicable Contribution payments Many businesses are concerned about an increase but also about the volatility of contribution payments to the plans. If, when viewing the pure contribution payments into an external vehicle, we consider that a portion of the benefit commitments is not externally financed, in other words no contribution payments that could be a cause for concern are incurred for those plans, the result is clearer than the statement of percentages initially implies. However, the businesses are clearly concerned about the increase and the volatility of the effects of service and interest costs on the profit and loss account, as can be seen from the corresponding question below. The findings also show that it is more important to the respondents that the contributions can be planned than that they should be stable. Increase in contribution payments to the plan 20 % 10 % 2 40 % Volatility of contribution payments to the plan 10 % 30 % 1 30 % 1 0 20 % 40 % 60 % 80 % 100 % 1 (highest level of concern) 2 3 4 5 6 (lowest level of concern) Aon Hewitt Global Pension Risk Survey German Survey Findings 9

4 of 4 Managing benefits and liabilities Effects on the corporate balance sheet The picture is more nuanced where the effect of the pension obligations on the balance sheet is concerned. Balance sheet ratios definitely play an important role for some of the businesses. This also correlates with the result of the question concerning external funding through a CTA, where improving balance sheet ratios together with liquidity planning plays an important role. For other businesses, a possible weakening of the balance sheet through transfers to pension reserves plays a rather less important role. Of course, this might have to do with the level of pension reserves relative to the total balance sheet. However, another possible explanation might be that risk management measures that have already been carried out have allowed those businesses to reduce the volatility of their balance sheets. Weakening of company s balance sheet due to pension obligations 26 % 21 % 11 % 10 % Volatility of the company s balance sheet due to pension obligations 10 % 10 % 30 % 3 10 % 0 20 % 40 % 60 % 80 % 10 0% 1 (highest level of concern) 2 3 4 5 6 (lowest level of concern) Effects on the profit and loss account An increase in expenditures for pension commitments on the profit and loss account is accessed similarly to an increase in balance sheet items. Concerns regarding the profit and loss account are somewhat greater when it comes to volatility. Fluctuations in the pensions often have a stronger effect than on the balance sheet, based on the relative amount in the profit and loss account. Also, we frequently see that volatility that can be explained externally (for instance, due to changes in the actuarial interest rate) are considered less critical. This tends to apply more to balance sheet items than to the profit and loss account. Increase in pension expenditures in the profit and loss account 20 % 20 % 1 1 2 Volatility of pension expenditures in the profit and loss account 11 % 21 % 20 % 0 20 % 40 % 60 % 80 % 100 % 1 (highest level of concern) 2 3 4 5 6 (lowest level of concern) Aon Hewitt Global Pension Risk Survey German Survey Findings 10

1 of 5 Investment strategy considerations Changes in the investment strategy The Survey findings show that investors still carry a great deal of uncertainty in the current environment. For this reason, the vast majority of respondents have made no change regarding their target investment strategy in the last 12 months. 21% have increased their holdings in global stocks and 16% have done so with local stocks. We are also seeing a shift (due, among other factors, to the ongoing low-interest environment) away from traditional investments (fixed-interest paper as well as government and corporate bonds) towards real assets and alternative and illiquid assets. In the last 12 months, 16% of respondents have increased their holdings in real estate and alternative as well as illiquid assets, at the same time reducing their share of corporate and government bonds. The reduced appeal of traditional investments is due to the fact that they are barely profitable any more in terms of yields. 21% respectively 26% of the companies had delegated decision-making regarding adjustments for their target investment strategy. Looking back: Changes made with regard to the target investment strategy Proportion of local stocks 32 % 21 % 26 % Proportion of global stocks 21 % 26 % 21 % 27 % Proportion of government bonds 11 % 26 % 21 % 26 % Proportion of inflation-indexed government bonds 11 % 37 % 21 % 26 % Proportion of corporate bonds 11 % 26 % 21 % 26 % Proportion of real estate 32 % 21 % 31 % Proportion of alternative assets 32 % 21 % 31 % Proportion of illiquid assets 32 % 21 % 31 % Use of guaranteed or structured products 42 % 26 % 32 % Derivatives 37 % 26 % 32 % 13% Active asset portfolio strategy 11% 37 % 21 % 31 % 0 20 % 40 % 60 % 80 % 100 % Increased No change Reduced Decision was delegated Don t know Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 11

2 of 5 Investment strategy considerations The majority of organisations have not yet decided on changes in their target investment strategy for the coming 12 months. Around a third has not yet formed an opinion on the matter or is having difficulty making a decision. 11% of respondents will reduce their share of corporate bonds in the coming 12 months. A smaller group (5%) expects the share of local and global stocks and government bonds to be reduced. Increases are expected in the proportions of illiquid assets (16% of participants), alternative assets and real estate (11% each), as well as corporate bonds, guaranteed or structured products, and active asset portfolio strategy (5% each). These findings evidence some companies desire to use alternative investment opportunities for better diversification among their income-oriented investments, particularly given the current low-interest environment. Looking ahead: Changes expected in regard to the target investment strategy Proportion of local stocks 42 % 37 % Proportion of global stocks 42 % 16% % 37 % Proportion of government bonds 42 % 37 % Proportion of inflation-indexed government bonds 47 % 37 % Proportion of corporate bonds 32 % 11 % 37 % Proportion of real estate 11 % 37 % 36 % Proportion of alternative assets 11% 32 % 41 % Proportion of illiquid assets 26 % 42 % Use of guaranteed or structured products 37 % 42 % Derivatives 42 % 42 % Active asset portfolio strategy 37 % 42 % 0 20 % 40 % 60 % 80 % 100 % Increased No change Reduced Decision was delegated Don t know Aon Hewitt Global Pension Risk Survey German Survey Findings 12

3 of 5 Investment strategy considerations Outsourcing of pension scheme functions As soon as a target investment strategy is defined, the question arises as to how and by whom it will be implemented. We asked participants which investment activities and other functions they have outsourced to external service providers within an agreed control framework, and how likely they are to perform such outsourcing in the future. The Survey results show that function outsourcing has so far occurred only to a very limited degree. Depending on the function, only 5% to 11% of respondents have already outsourced them. However, it is clear that the trend towards outsourcing is only just starting to gain traction. Although implementation of the complete investment guidelines (not creation of the guidelines) has not yet been transferred to an external service provider by any of the companies surveyed, 42% of the companies are very likely to do so in the future. This shows that the demand for sophisticated trustee concepts (outsourcing all investment management functions) is strong. In addition, 26% to 37% of the companies are very likely to partially outsource investment activities, for instance, to outsource the selection and monitoring of asset managers. This comes as no surprise given that the respondents are international companies with a variety of pension plans. Due to the increasing complexity (especially after acquisitions and mergers), CFOs and finance departments struggle to keep on top of all their investment responsibilities. Their willingness to outsource functions to external service providers is growing in order to provide focused solutions. About one-third of respondents have not yet explored the outsourcing of any investment activities or functions. Functions outsourced to external service providers Monitoring of asset managers 11 % 37 % 21 % 26 % Selection of asset managers 11 % 26% 16% 21 % 26 % Tactical asset allocation 32 % 21 % 31 % Hedging the interest rate or inflation risk through a liabililty-driven investment strategy with use of derivatives 32 % 21 % 31 % Introduction of a special asset class (not decision for the asset class) 32 % 21 % 31 % Implementation of entire investment guidelines (not creation of the guidelines) 42 % 26 % 32 % Pensioner payroll 37 % 26 % 32 % Pension administration (aspirants and pensioners) 11 % 37 % 21 % 31 % 0 20 % 40 % 60 % 80 % 100 % Outsourced Outsourcing Outsourcing very likely rather likely Outsourcing unlikely Not yet examined Aon Hewitt Global Pension Risk Survey German Survey Findings 13

4 of 5 Investment strategy considerations Attitudes toward hedging for pension risks As well as using additional investment classes and the associated improved diversification within the portfolio to hedge, it is also possible to use liability-driven investment (LDI) to better hedge against certain pension risks. Hedging makes sense from the companies point of view but also brings some expense. There is no surprise, therefore, in the Survey s finding that only a few companies have already implemented a defined hedging strategy with fixed triggers. The results also show that none of the companies plan to hedge against certain risks at any price. It is also interesting to note the number of companies that either do not wish to hedge against those risks or state that they are not exposed to those risks. Between 32% and 37% of the companies have not defined any clear guidelines to date for hedging against the interest rate and inflation risk. If hedging were possible at a fair price, then hedging for the currency and interest rate risk would be the top priority for respondents, followed by credit margins and by inflation. Attitudes towards hedging Currency 26 % 11 % 42% 21 % 10 % Credit margin 11 % 11 % 216% % 32 % 9 % Interest rate 21 % 11 % 37 % Inflation 21 % 16% 32 % 21 % 0 20 % 40 % 60 % 80 % 100 % Hedging at any price Hedging at a fair price Predefined strategy with fixed triggers No risk hedging No guidelines on hedging Don t know Not exposed to these risks Aon Hewitt Global Pension Risk Survey German Survey Findings 14

5 of 5 Investment strategy considerations Hedging the inflation and interest rate risk relative to the scope of obligations In summary, the Survey results show a very mixed picture with regard to the range of obligations which are hedged by the companies against the interest rate and inflation risks. At one extreme, just 5% of the companies hedge 81% or more of their scope of obligations against the interest rate risk. On the other hand, 32% of the companies hedge 20% or less of their scope of obligations against the inflation risk. 21% of the companies surveyed do so with respect to the interest rate risk. The vast majority of respondents could provide no information regarding the precise amount of the scope of obligations that is hedged against the inflation or interest rate risk. 21+16+11+5+47L 32+5+11+52E 47 % 52 % Inflation 11 % 21 % 32 % 11 % Interest rate 20 % or less 21 % - 40 % 41 % - 60 % 61 % - 80 % 81 % or more Don t know Aon Hewitt Global Pension Risk Survey German Survey Findings 15

1 of 1 Monitoring and mitigating pension risk When asking about the frequency with which costs, risks, and opportunities are reviewed, we see that the assetside risks (assets and investment performance) tend to be monitored most frequently. More than half of respondents have a weekly, monthly, or at least quarterly review. The current need for financial resources is also reviewed at comparable intervals by about half of respondents. Cost and balance sheet risks tend to be examined less frequently, as is the long-term desired level of coverage. The picture presented here shows that those factors that respond to short-term control are more frequently subject to a monitoring process. This includes capital investment in particular. By contrast, the obligation side offers only slight or generally long-term intervention opportunities as a basis for reviewing various other pension risks, particularly due to the general conditions that apply in Germany. Frequency of review Asset values and investment performance 37 % 11 % 1 Current financing needs 11 % 26 % 16% 26 % Projected year-end balance sheet for central accounting gap 26 % 32 % 11 % 1 Projected costs in profit and loss account for subsequent year for central accounting group 42 % 37 % Costs for a possible insured ongoing pension payment (eg, Pensionsfonds) 26 % 42 % Desired long-term coverage level (if different from above) 42 % 21 % Insolvency protection for pension entitlements not legally hedged 58 % 11 % 21 % Value at risk, medium-term cost projection, sensitivity analysis, or other measurement of cost fluctuation 26 % 26 % 22 % 0 20 % 40 % 60 % 80 % 100 % One or more times weekly Monthly Quarterly Annually or less often Never Don t know Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 16

1 of 6 Hot topics Insurance solutions in company retirement plans Market interest rates in recent years have remained at a very low level, with yields on high-quality corporate bonds in the range of about 1.0% to 2.5%. Increasingly, this is also affecting the insurance industry. Responses show an appropriate amount of scepticism regarding insurance solutions in company retirement plans. Insurers have apparently not yet managed to successfully communicate the transition from established guarantee models that have been used for decades to the world of the new guarantees. It is true that there have been sound alternatives to the classic insurance tariffs for some time, but when more than 40% of those surveyed are not aware of them and 31% believe that life insurance as part of pension plans is obsolete, those are not good results for life insurers. This is also strongly reinforced by the fact that a very large portion of those surveyed doubt the long-term fulfillment capability due to the low-interest phase. The strengths of life insurers, particularly hedging of risk and longevity, are not appreciated by the Survey respondents. This might be a specific characteristic of the target group. Other surveys show that large companies and even some companies with traditional internal financing do not use insurances, preferring an internal risk management approach. Insurance solutions There are currently no appealing alternative models from life insurers to the classic life insurance known to date 44% Insurance solutions in company retirement plans are obsolete 31% Certain risks (death, disability, longevity) can only be adequately hedged without financial risk through insurance 25% Pension schemes with an insurance element can still be adequately hedged and implemented by life insurance companies 19% % Due to the rules, life insurance companies have adequate financial stability to fulfill their obligations over the long term despite low interest rates 13% New contracts with reduced guarantees provide more attractive yields 13% 0 10 % 20 % 30 % 40 % 50 % Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 17

2 of 6 Hot topics Risks of company retirement plans The financing and longevity risk (which directly affects the financing risk) are the main risks of company pension plans from the participants point of view (76% and 57% say most important and very important, respectively). To counter these risks, recent years have seen an increasing trend towards converting from benefit-based to contributionbased pension plans. Settlements of pensions in payment (where permitted by law) and implementation of CTA solutions are also on the increase. It remains to be seen how much the possibility of introducing pure defined contribution plans without guarantees through the 2018 German Company Pension Reform will change those risks. Risks of company retirement plans Longevity 38 % 1916% % 31 % 12 % Financing risks 38 % 38 % 6 % 18 % Legal risks 19 % 2 31 % 19 % 6 % Commitment risks 6 % 19 % 31 % 44 % 0 20 % 40 % 60 % 80 % 100 % Most important Very important Important Rather unimportant Least important Aon Hewitt Global Pension Risk Survey German Survey Findings 18

3 of 6 Hot topics 2018 German Company Pension Reform The Bundesrat approved the 2018 German Company Pension Reform the so-called Betriebsrentenstärkungsgesetz (BRSG) on July 7, 2017. The new rules take effect on January 1, 2018. After the Federal Government introduced its draft legislation in late December 2016, there was intense debate about the new rules at all levels and in many committees and interest groups. In the end, a law was created that makes company retirement plans significantly more appealing but will certainly also introduce more complexity. It remains to be seen whether the law can live up to the promise of its name in the long term and provide the desired stabilisation for company pension plans. The changes that were included in the now-approved legislation as compared to the government s draft have no effect on the questions posed by us in the course of this Survey. Respondents see the greatest opportunity for propagating company retirement plans in the introduction of a legally secure model for automatic conversion of salary (75%). This opt-out model was also frequently debated in the past. The attendant legal questions regarding the design of this model s liability certainty previously stood in the way of its implementation, however. Solutions for legal uncertainties have now been found in the BRSG. The increase in the tax-free endowment limit from the previous 4% (+EUR 1,800) to 8% of the Social Security Contribution Ceiling is also considered a positive factor for propagation (63%). This change brings not only an increase in the amount of the possible tax-free contribution but also an increase through an improved automatic adjustment mechanism in the future. Respondents attach the same importance to the introduction of a pension allowance for lowincome earners (63%). However, the applicable income limit and the amount of the allowance do not automatically adjust. 56% of respondents see potential for propagating company pension plans in the introduction of a pure defined contribution plan without guarantees. This is consistent with past experience, since employers have often cited employer liability as a factor in the decision not to introduce or to redesign benefit schemes. Yet the fact that pure defined contribution plans are limited to collective bargaining agreements somewhat moderates the respondents optimism, with 31% seeing this as a risk for propagation. It remains to be seen if the possibility of implementing a pure defined contribution plan in the company without collective-agreement obligations by reference to pertinent collective-bargaining rules, can negate this risk. The enhanced employer contibutions that should be agreed through collective bargaining for a pure defined contribution plan in order to reduce the volatility is considered by respondents to be the greatest risk in propagation of company retirement plans (50%). Aon Hewitt Global Pension Risk Survey German Survey Findings 19

4 of 6 Hot topics Basic points of the 2018 German Company Pension Reform Introduction of a pure defined contribution plan (no employer liability beyond payment of contribution) 56 % 31 % 13 % Restriction of pure contribution commitments to collective-bargaining rules (company use not possible) Implementation of pure defined contribution plan exclusively through an insurance-oriented funding vehicle and only through a joint institution of the collective-bargaining sides Enhanced employer contributions in order to reduce the volatility of defined contribution plans 2 44 % 31 % 2 56 % 19 % 19 % 31 % 50 % Introduction of a legally secure model for automatic salary conversion ( option or opt-out models) 7 2 Removal of vesting periods for pure defined contribution plans even for purely employer-financed new commitments 38 % 31 % 31 % Increasing the endowment limit to 8% of the Social Security Contribution Ceiling 63 % 37 % Introduction of a pension allowance for low-income earners 63 % 37 % Introduction of an exempt amount as part of basic security 50 % 50 % 0 20 % 40 % 60 % 80 % 100 % Suitable for propagation of company retirement plans Will have no effect on propagation More likely to represent a risk for propagation Aon Hewitt Global Pension Risk Survey German Survey Findings 20

5 of 6 Hot topics Expectations for further legislative measures The BRSG aims to strengthen company pension plans in Germany and has put in place various measures to achieve that end. From the participants point of view, however, there are still other essential elements that should be regulated by law for propagation of company pension plans. Double payment of social security contributions (ie, both on the contributions to and on the benefits paid from company pension plans) were eliminated by the BRSG only for Riester retirement agreements. The majority of Survey respondents believe that his should also be extended to company pension plans in general (69% of participants). The consideration of plan assets regarding the determination of the contribution base for the mandatory insolvency protection via the German Pension Insurance Association (PSVaG), thereby reducing the contribution to be paid to the PSVaG by the employer, would be a step towards strengthening company retirement plans for 63% of participants. With the same percentage participants evaluate the reduction of the actuarial interest rate under Section 6 (a) of the EStG (German income tax law) for calculating accruals for pensions in the tax balance sheet. This was demanded repeatedly in the course of the legislative procedure for the BRSG by various bodies in the field of company pension plans, but it was not included. Other solutions for strengthening company retirement plans Elimination of double payment of social security contributions (both on the contributions to and on the benefits paid from company pension plans) 69 % Consideration of plan assets regarding the determination of the contribution base for the PSVaG 63 % Reduction of the actuarial interest rate for calculating accruals for pensions in the tax balance sheet 63 % Other, eg, health insurance exemption accompanying 8% tax exemption 19 % 0 10 % 20 % 30 % 40 % 50 % 60 % 70 % Aon Hewitt Global Pension Risk Survey German Survey Findings 21

6 of 6 Hot topics Introduction of a pure defined contribution plan (DC plan) Introduction of a pure defined contribution plan where possible under collective agreement For years there have been calls in Germany for introduction of a pure defined contribution plan based on international examples, primarily to reduce companies liability risks. Introduction of the BRSG now opens up this possibility. The only downside is, that implementation is possible only on the basis of collective-bargaining agreements and institutions. This form of introducing pure defined contribution plans has so far not met with a great deal of interest from large, internationally-operating companies. After all, the German defined contribution plan is not an option for half of participants. Only a quarter of participants are already planning to use this or will at least examine whether it might be of interest. Not an option for us 25+25+50C 50 % 2 2 Plan to use Could be considered Transfer of an existing promise to a pure defined contribution plan for future service There is a similar reaction to the question of whether companies could imagine to transfer an existing promise to a defined contribution plan for future services, ie, the benefit entitlements that can still be earned in the future. For 43% of participants this is not an option, but 44% of participants indicate they would like to use this option. Not an option for us 13+44+43C 43 % 13 % Plan to use 44 % Could be considered Use of a company-owned institution with involvement of trade unions (instead of an institution organised above company level), where possible under collective agreement Even if it were possible on the basis of a collective agreement to use a company-owned institution with the involvement of trade unions instead of an institution organized above the company level, this is not an option for almost 70% of participants. Not an option for us 6+25+69C 69 % 6 % Plan to use 2 Could be considered Aon Hewitt Global Pension Risk Survey German Survey Findings 22

Contact Angelika Brandl +49 89 52305 4785 angelika.brandl@aonhewitt.com Florian Burg +49 89 52305 4903 florian.burg@aonhewitt.com Dr. Torsten Köpke +49 611 17208 6780 torsten.koepke@aonhewitt.com About Aon Hewitt Human Resources and Aon Hewitt a natural combination. We are one of the leading consulting firms worldwide. In Germany we develop practical and innovative solutions in the areas of company retirement plans, compensation, and talent management. It is our goal to permanently add to our clients success. We reduce complexity and come up with the best possible individual solution for them. Our clients value us as a strategic and capable partner with extraordinary expertise. Aon Hewitt operates worldwide with almost 15,000 employees in 50 countries. About 450 of them work at our German offices in Hamburg, Mülheim an der Ruhr, Munich, Stuttgart, and Wiesbaden. For more information on Aon Hewitt, go to www.aonhewitt.de. Aon Hewitt 2017 Aon Business Hewitt Unit Global Pension Risk Survey 2017 Name German of study Survey or publication Findings 23

About Aon Aon plc (NYSE:AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions. Our 50,000 colleagues in 120 countries thereof about 1,700 colleagues at eight locations in Germany empower results for clients by using proprietary data and analytics to deliver insights that reduce volatility and improve performance. Aon Hewitt GmbH 2017. All rights reserved This document is based upon information available to us at the date of this document and takes no account of subsequent developments. In preparing this document we may have relied upon data supplied to us by third parties and therefore no warranty or guarantee of accuracy or completeness is provided. We cannot be held accountable for any error, omission or misrepresentation of any data provided to us by any third party. This document is not intended by us to form a basis of any decision by any third party to do or omit to do anything. www.aonhewitt.de www.aon.com Risk. Reinsurance. Human Resources.