In a normal world, bankers would be wrestling each other to get hold of customers like Alfred Weber.
He manages €7 billion, or $7.9 billion, on behalf of Allgemeine Ortskrankenkasse, or AOK, the largest of Germany’s statutory health insurance funds which covers some 24 million people, almost a third of the population.
Until recently, banks lined up to woo him for his money and he would hand it to the bank that offered the best terms. But the European Central Bank’s policy of extremely low interest rates has turned his world upside down.
“These days the focus is on finding partners who’ll even take our money,” said Mr. Weber. He’s hard-pressed to find a bank that doesn’t charge him punitive interest rates for taking his cash.
It’s the same story with other health insurers and the pension insurance system, and the Federal Employment Agency, which pays out unemployment benefits.
Germany’s social insurance system had reserves totaling over €75 billion at the end of 2014 — and didn’t know where to put the money.
Germany’s social insurance system had reserves totalling over €75 billion at the end of 2014 — and didn’t know where to put the money.
The ECB has set a negative interest rate for bank deposits it holds and those held by national central banks in the euro zone. At present, it amounts to minus 0.2 percent.
The aim is to stimulate growth by punishing banks that hoard cash at the central bank instead of lending to businesses.
Since the ECB provides a benchmark for borrowing costs, negative rates spread through the system.
If the entire reserves of the insurance system were parked at the Bundesbank, the German central bank, on a long-term basis, it would theoretically cost more than €140 million in negative interest in 2015.
The pension insurance fund, the health insurers and the labor office are doing everything they can to avoid these penalties, and have hired bankers to help them. These cash management experts clear out the accounts with the Bundesbank as quickly as possible and distribute the money among private commercial banks. But many of those banks too are now imposing punitive rates, at least for large sums.
Twice a month, AOK Plus, a health insurer in the AOK group, gets €800 million transferred from the system’s central allocation authority. Then the AOK’s financial managers get to work to protect it.
“Because there’s a danger that our bank will demand deposit fees for it in the future, we make sure that the money is distributed to term deposit accounts at other banks,” said Stefan Knupfer, a management board member at AOK Plus.
The individual sums must be spread widely and in quite small amounts because most banks have introduced limits on deposits. For every euro paid above such limits, negative rates apply. “The banks used to lick their lips for an investment sum of €50 million,” said Mr. Knupfer. “But it’s already happened, albeit in isolated cases, that a bank rejected it.”
The funds have stopped even thinking about investing for profit.
Their priority is now to avoid their reserves being eroded by interest payments.
Negative interest rates aren’t the only problem.
Social insurance fund managers are required by law to invest only in safe assets such as government bonds. But since the ECB embarked on its program of public sector bond purchases in March to pump more than €1 trillion into the euro-zone economy, the price of many bonds has risen so far that they offer next to no yield.
Each month, the ECB purchases government bonds worth €60 billion in the euro zone to avert what it sees as the threat of deflation.
Around a quarter of this is invested in German bonds, of which some €10 billion to €11 billion go into federal government bonds.
Germany’s public budgets are balanced right now, so the federal government hasn’t been issuing fresh paper for some time.
It only issues new debt to refinance maturing bonds.
That means the supply of bonds is drying up, which drives up their price and pushes down their yields even more.
A few weeks ago, financial markets were speculating when the yield on 10-year German government bonds would slip below zero percent. At present, these bonds yield half a percentage point — in line with the current very low interest rate.
The funds have stopped even thinking about investing for profit. Their priority is now to avoid their reserves being eroded by interest payments.
The German Federal Social Insurance Office, which monitors health insurance assets, has alerted the government to the problem, financial sources told Handelsblatt.
The social insurance funds want permission to start investing money in higher-risk assets that offer greater returns.
Insurance regulators from the central and state governments plan to discuss this at a meeting at the end of May.
Mr. Weber of the AOK said the government must allow funds to invest in other assets including in stocks -- which are taboo.
Melanie Kümmel, a financial expert at another health insurance fund, Techniker Krankenkasse, said permission should be given to invest outside Europe, for example in states belonging to the Organisation for Economic Cooperation and Development.
It would amount to an escape from the ECB — but also an escape into higher risk.
So far, there’s been no response from the government.
Labor Minister Andrea Nahles, who is in charge of the labor and pension insurance system, isn’t saying anything.
Suggestions that some of the surpluses should be repaid to the taxpayers who’ve been making the mandatory social insurance contributions appear to be falling on deaf ears. In Germany, taxpayers are required to pay into state-run insurance funds that provide national health care, social security, unemployment and home health care, mostly for the elderly.
In general, these contributions combined tend to amount to 20 percent to 25 percent of a taxpayer's gross salary. In return, German taxpayers receive health care, home health care, unemployment compensation and social security support at little or no extra cost.
The employment agency would have scope to reduce the level of its mandatory contributions for unemployment compensation.
After all, the job market is booming. Ever more Germans are in employment and paying these mandatory social contributions, and ever fewer are out of work and in need of benefits from the fund — meaning the agency's reserves are steadily expanding.
But in Germany, a social democracy that strives to use government funds to insulate its citizens from the vagaries of life, government agencies that in themselves are large employers are strong and influential, and are opposed to limiting their resources and clout.
The German chancellor, Angela Merkel, rules in coalition with the Social Democrats, a party that traditionally draws its support from labor interests and defends the government's role in social welfare programs.
“We hope that the competition among banks will delay negative interest rates,” said Mr. Knupfer of AOK Plus. But he added: “If the ECB keeps on exerting pressure on the market with its bond-buying program and the banks agree among each other, the negative interest rates may soon become normality.”
Axel Schrinner writes about tax and finance policy for Handelsblatt. Peter Thelen writes about social security systems, the job market and labor topics. To contact the authors: schr[email protected]; [email protected]