The professional way to do it
The German auditors came later to professional pension provision than other liberal professions, such as doctors and dentists, but luckily they made their move well before the engineers’ ill-fated bid to follow the same course.
With just 15,000 members of the profession in Germany, auditors are by no means as prevalent as in the UK, nor indeed as tax accountants are in the federal republic, but in the last decade they have organised their pension provision in the way open to the professions, which enables them to opt out of social security pension provision.
As Hans-Wilhelm Korfmacher, who runs the Versorgungswerk der Wirtschaftspruefer (WPV) scheme from the accountancy body’s Düsseldorf offices, explains: “We started in 1993 under the laws of North Rhine Westphalia, just looking after the interests of our members in this state. But our intention was always to spread the arrangement to other states in the republic.”
The omens looked good, so much so, that in 1994, Korfmacher, who had been given the task of building up the WPV scheme, believed that all the different states would join in the next few years. But the engineers decided to make their move to establish their own professional scheme, which would involve several hundred thousand opting out of the social security system.
The outcome of a subsequent legal decision was that the existing ‘liberal professions’ could have their Versorgungswerk pension arrangements, but that no other new professional schemes could be established. “The auditors had just made it, and that meant we could go ahead to try to persuade those in other states to join.”
This decision was quite ironic, as in 1957 when the German social security system was revised, all the professions wanted to join as it looked very attractive, but they were not allowed as the politicians at the time claimed the professions did not need it, the view being that they were well able to take care of their own needs. “Since then, they built up over the next 20 years their successful pension provision and now do not want to get involved with the social security system.” There are now 79 such professional plans across Germany, he says, with all of them investing their members’ contributions.
So once the legal situation was clear, the WPV was able to reach agreement to cover all 14 states, except for the Saarland, which has its own arrangement covering both auditors and tax accountants. Korfmacher says. “It was just earlier this year, that the last state, Rheinland Pfalz joined.” The total number covered by the plan come to 7,000 members. Not all of the profession because of age or their current arrangements wanted to join the new arrangements, but in future all new members will need to.
“The scheme membership will grow, for the simple reason that all auditors have to join, since the scheme is part of Germany’s first pillar pension structure,” he explains. The contributions are invested by the Versorungswerk under the same rules as for insurance companies. For example, the limit on equity investment is currently 35%.
“But though investment conditions are bad currently, we have our inflow of compulsory contributions, which we can invest now for the long term as we do not need the money invested to make any significant payouts for the next 15 or 20 years.” The scheme does not have to meet the 3.25% guaranteed return that insurance companies are required to. “But we do have an assumed rate of annual return we use of 4%, which we want to achieve as minimum, but it is not a problem if we do not reach this in any particular years.”
He adds: “We believe our system combines the advantages of the compulsory system with the freedom to invest.” But he finds that it is very difficult to compare the benefits of different systems. There is no guarantee that the pension benefit will be better than the social security, nor are all the benefits provided by the state system available from the professional pension arrangements. “We only pay pensions and there is no lump sums, as capitalisation is not allowed. But we have flexibility as to when they are taken, we also provide widow pensions, and we pay invalidity benefit at a generous level,” Korfmacher points out.
“But our costs are very low compared with insurance companies’ 10% or more of premiums, our total costs are 1.2% of contributions per annum. Other professional schemes have less and others more. As there are no shareholders, everything is invested to the benefit of members. So we expect our returns to be higher than from an insurance company.”
The contribution level is the same as for the social security system at 19.1% currently, which is due to increase next year, up to an earnings limit of E54,000 pa. “It is possible to pay more in, which many do.”
In addition, to the auditors themselves, those working with them can join, provided they are board members of the firm. “But there are only a few hundred such people throughout the profession who are eligible to be members for this reason,” says Korfmacher.
Some of the professional schemes go back a long way, as the oldest dates to 1923, he points out. “They are very strong financially in living up to their commitments. One long established fund paid 85% the benefits the members would have got when retiring in the 1950s, whereas many insurance companies were not able to keep their promises, due to the war and inflation. I do not see any risk that people will not get their promised pension.”
In fact, by law, the managing director of a Versorgungswerk has to have the same professional knowledge as someone responsible for running an insurance company.
“The board members, who are ultimately responsible for the decision-making are from members of the auditing profession. They, for example, will decide the asset allocation, or to pay invalidity benefit.”
The scheme, which has some E300m in assets, undertook its first asset liability study in 2001, partly because of the growth the fund was experiencing, but also as the stock market outlook was not so certain as it had been. “This confirmed our ability to take a very long term view,” says Korfmacher. “This enabled us to continue with our asset allocation strategy and go on investing in equities.”
This is reviewed every year. “Currently we are 25% invested in equities, about 10% in real estate, with the balance in fixed income.” Korfmacher handles the government fixed income investment, which accounts for the greater part of the bond portfolio and includes Pfandebriefe, structured bonds and loans of supranationals. There is a corporate bond portfolio, which is handled externally. “No adviser or investment specialist has ever convinced me that they could make more out of bonds after costs than I can in-house.”
The equities are managed by three asset managers appointed by the fund earlier this year, when a new structure was introduced following the ALM study, replacing two existing KAGs. “It is too early to comment how the new managers are doing,” says Korfmacher. “We only have a euro-related exposure and will later build up US and Far East exposures gradually.”
BNP Paribas acts as the global custodian, while Deutsche Asset Management is the master KAG, which looks after the Spezialfond vehicle that the fund uses, with the managers acting as sub-advisers to the KAG.
He expects the fund to undergo rapid expansion and reckons that before10 years are out that assets will have grown to E1bn. A firm of consultants are used for on-going control purposes.
Korfmacher believes very strongly in the approach of the professional funds. “We think our funds are very good in relation to the social security system. I believe that what has been built up is something of a model that could be copied elsewhere, as it has the advantages of both systems. Those who pay now are paying for the existing pensioners, but on the other hand the money is invested and the returns help pay the pensions.” As he sums it up: “We are in the same system, but we are different.”