Moody's: German regional governments' pension reserves keep costs at sustainable level

German regional governments' pension credit risk is moderate due to their ability and demonstrated willingness to ensure sustainability, Moody's Public Sector Europe (MPSE) said in a report published today. Furthermore, the decision to build reserves to mitigate the expected rise in pension costs will keep annual payments at a sustainable level.

The report, "German Regional Governments -- Small Pots, Big Impact - Pension Reserve Funds To Alleviate Budgetary Pressure", is available on www.moodys.com. Moody's subscribers can access the report using the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

All German Laender have started accruing earmarked reserve funds to mitigate expected rising pension-related costs. At the end of 2015, their total earmarked reserves stood at €35 billion.

As well as building reserves, Laender have raised the pension retirement age and reduced benefits to stem their rising pension costs. We expect that, if under pressure, the Laender have both the willingness and ability to take similar measures to ensure their costs are sustainable.

"German regional governments' pension funds are relatively small, compared to estimated liabilities," said Harald Sperlein, a Moody's Vice President -- Senior Analyst and co-author of the report. "The pension reserves purpose is however, not to fund the pension liabilities, but rather to keep annual pension payments at a sustainable level by drawing down funds during peak years. There is some variation among regions."

Over the past five years, annual pension payments have risen by an average of 5.3% per year, outpacing regions' tax revenue growth which averaged at around 3% per annum. For German Laender, Moody's expects pension payments to continue to rise, albeit at a slower pace, before stabilising in the 2030s.

While the demographic effects of an ageing population have put financial pressure on German regions, the rising pension payments are also driven by the uneven demographic profiles of civil servants of German Laender. This means that a relatively large number of active special status civil servants is retiring in certain years.

Pension-related budgetary pressure differs widely across the Laender. West German Laender are faced with legacy issues from decades ago, when they hired large numbers of special status employees. In particular in the 1970s and 1980s, some Laender, had hiring peaks of special status employees which results in high pension payments today. Their East German peers, currently have very low absolute numbers of retirees and, consequently, low pension payments. This is because East German Laender only exist since German reunification in 1990 and since then started employing special-status employees.

In addition to building reserves, Laender have raised the pension retirement age and reduced benefits to stem the rise in pension costs. As German Laender have full flexibility on their pension systems, Moody's anticipates that Laender would take similar measures if necessary.