no returns

Negative interest rates eat into Germany’s social security funds

Seniorenwonheim in Hamburg
A grim outlook for pension funds. Source: DPA

The European Central Bank’s ultra-low interest rate policy has squeezed Germany’s savers hard. But it’s hitting the country’s massive social security funds even harder.

It’s a curious time for Germany’s pension, health insurance and social security funds. The country’s booming economy means taxpayers are paying more in social welfare contributions than ever before. This drove the state pension fund, for example, to record levels last month: It now has a war chest of €34.3 billion ($40 billion), €3.6 billion more than the same time last year.

But as the social funds’ capital grows, negative interest rates instituted by the European Central Bank mean their returns are diminishing, or worse. For the first time, the state pension fund last year actually lost money – €49 million to be exact – as below-zero interest rates ate away at its capital, Handelsblatt has learned from an internal document.

Billions that earn nothing at all

This poor performance contrasts with the extraordinary growth of sovereign wealth funds like Norway’s, which is now worth close to €900 billion, and enjoyed annual growth close to 20 percent last year.

The big difference? Norway allows its public capital funds to invest in the stock market, whereas Germany’s have very tight restrictions, forcing them into a more conservative investment policy. German public funds are in a similar situation to the Social Security Trust Fund in the US, which can only issue non-tradeable bonds. Last year, it saw returns of around 3 percent.

Three and a half years have passed since the ECB introduced negative interest rates for deposits with the Eurozone’s central banks. The bank says it has no plans to raise rates until next summer at the earliest. In the meantime, capital funds are suffering.

30 p07 Federal bond-01

The situation is worst for funds with tight investment rules. By law, the state pension fund must invest most of its money in short-term deposits, precisely the vehicles which are currently giving abysmal returns. The €22.5 billion fund held by the Federal Labor Office is in a similar bind: It can only invest in the overnight money market. Last year, the return on its billions amounted to just 0.01 percent.

Germany’s 110 non-profit health funds, the backbone of the country’s health system, find themselves in a similar situation. Every year around 70 million Germans pay over €220 billion into the public health insurers’ funds, through a levy on income.

Before being paid out to medical service providers of all kinds, that money has to be kept somewhere. The trouble is that most of the health funds are comparatively small, so they have to keep the money with commercial banks.

In the early days of the negative interest rates policy, the banks tried to avoid passing on the charges – then “only” minus 0.2 percent – to large customers. But those days are long gone. Banks now frequently offer an even worse rate than the ECB’s headline figure, currently minus 0.4 percent.

For this reason, at the beginning of this year, the Techniker Krankenkasse, one of the country’s largest health funds, opened its own account with the central bank in an attempt to minimize losses from negative rates.

Juggling to break even

The AOK, an alliance of 11 regional health funds representing over 25 million individuals, lost €6 million last year to negative rates, €1.5 million more than in 2016, says Andreas Grein, its head of financial management. He says older bank deposit terms are now lapsing for many funds, leaving them more exposed than ever to the ECB policy.

“We realized that a proportion of the money that we send to regional health funds every day is not needed in the short term,” Mr. Grein notes. “So we’re investing this money for a longer term in order to hedge against the lower rates.”

So some maneuvering has proved possible. Additionally different rules for funds for old-age care mean that AOK can invest 10 percent of these in the stock market, and 20 percent from 2019.

Very similar stories are playing out across Germany’s complex landscape of publicly-held capital funds. Finance managers do what they can, shifting money between negative interest-bearing investments and ultra-low interest ones. At best, these gigantic funds manage to break even.

Even some of the country’s newest funds are suffering. In 2015, the government implemented a new levy, forcing taxpayers to pay 0.1 percent of their income into a new fund, set up to cover the extra costs of old-age care for a rapidly aging population.

The measure has since raised €3.8 billion, but the fund has earned no interest on this. Instead it was forced to pay €40,000 to the central bank. The fund is allowed to invest 20 percent of its money on the stock market, raising its overall return to 1.38 percent. But this falls far below the average 3.4 percent return earned by the country’s private health insurance companies, which can invest as they choose.

Frank Specht is based at Handelsblatt’s Berlin bureau, where he focuses on the German labor market and trade unions. Peter Thelen writes about social security systems, the job market and labor topics. Astrid Dörner is an editor for Handelsblatt. Helmut Steuer is Handelsblatt’s correspondent for northern Europe. To contact the authors:,,,


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