The media and others often compare the interest rates on retirement assets at pension funds.
What makes a good interest rate?
We are often asked about the interest rate situation at PUBLICA. At the end of each year, the pension plans’ parity commissions set the interest rates on retirement benefits for the current year, and on vested termination benefits for the year ahead. Any comparison of PUBLICA’s interest rates with those of other pension providers requires a holistic view of the pension relationship.
“That’s not surprising, because one day, interest rates will be key to the level of termination benefits, retirement assets and pensions.” Melih Cirit, Head of Actuarial Service
The supreme governing body bears overall responsibility for ensuring that the pension fund is financially stable – in other words, that benefits are secure for the long term. The executive bodies have a number of ways to achieve that, which can also influence the interest on retirement assets. So comparing the interest rates of various pension funds over a single year is not a meaningful approach.
Why not? If we look back, we can see that a dominant feature of the last 20 years has been low interest rates. In some cases, pension funds have had to reduce their conversion rates. Some have done that in a single step, cushioning the impact with expensive measures for which they had built up financial reserves. But that meant those reserves were no longer available to fund higher interest rates. Instead, they were released and credited to the beneficiaries’ pension assets when the conversion rate was lowered. Other pension funds cut their conversion rate in stages, without cushioning and without crediting anything to pension assets. Which active members are better off? That doesn’t just depend on the interest rate for one year: there are other factors, such as changes in benefit levels, any accompanying measures, and the interest rates over a number of years to take into account.