German Pensionskassen are looking to pool assets to access specialised investment strategies, as consolidation accelerates under cost pressures and rising regulatory demands, according to industry observers.
“Many pension funds are increasingly relying on asset pooling and joint mandates to reduce costs and gain access to specialised investment strategies,” Dennis Lehnhoff, senior principal at Mercer, told IPE.
Operational activities such as administration and reporting are also being outsourced to external providers through third-party administration or fiduciary management, he added.
Cost pressures are driving progressive consolidation, with smaller Pensionskassen transferring assets to larger institutions or merging. Regulatory complexity and the need to build more robust structures are also key drivers.
“This trend will intensify in the future as collaborations with insurers and asset managers are further expanded to meet upcoming challenges,” Lehnhoff said.
Germany’s financial supervisory authority, BaFin, is encouraging smaller pension funds in particular to transfer holdings to larger pension schemes.
Lehnhoff said supervisors should continue to support consolidation while ensuring regulatory flexibility does not compromise member security. “Only in this way can pension funds ensure their long-term performance and stability,” he added.
The number of supervised Pensionskassen fell from 135 in 2019 to 124 in 2024, according to BaFin. Consolidation continued last year, with two schemes exiting the market through a portfolio transfer and a liquidation.
Babcock Pensionskasse was placed into wind-down after years of investment losses and failure to restore its solvency position.
No lack of options
Looking ahead, pension funds are expected to pursue a variety of strategies, including outsourcing operational functions, expanding collaborations, transferring assets and, where necessary, liquidation with distribution of remaining assets. The choices will depend on resources, strategy and implementation, rather than financial position alone, according to Henning Tewes, principal at Mercer.
Structural factors such as a lack of trained professionals, particularly in investment and risk management, pressure to improve efficiency, ESG integration, rising operational risks and new requirements such as the Digital Operational Resilience Act (DORA) are also pushing pension funds towards consolidation.
From this year, a reform of the second pillar allows for benefits compensation in the event of liquidation, offering smaller schemes with a high proportion of pensioners an additional wind-up option, Tewes said.
Where portfolio transfer or orderly liquidation are not viable, Pensionskassen may merge to form larger entities and achieve economies of scale.
“Strategically, Pensionskassen should increasingly focus on collaborations and mergers to leverage economies of scale and diversify risks. Professionalising investment management is just as important as investing in digitalisation and IT security,” Lehnhoff said.
Improved financials
The financial position of Pensionskassen has improved as higher interest rates create new return opportunities and positively affect liabilities.
“Fixed-income securities continue to dominate asset allocation, supplemented by real estate and increasingly by alternative investments to improve return opportunities and diversify risk,” said Lehnhoff.
BaFin has warned that Pensionskassen are more exposed to private markets than other pension vehicles.
Overall, pension funds are increasingly focusing on diversification, while smaller institutions are pursuing partial or full outsourcing (OCIO) to strengthen governance and manage growing complexity, according to Lehnhoff.
“These strategies improve efficiency, enable economies of scale, and strengthen the long-term performance of pension funds,” he said.
The second pillar reform also allows for temporary underfunding to support investment in growth assets.
Adjustments to the maximum guaranteed interest rate, regulatory incentives for sustainable investments and measures to streamline pensioner portfolio transfers are expected to have a positive impact on asset allocation.
“These reforms aim to strengthen the ability to adapt of pension funds and promote stable, high-yield investments in the long term,” Lehnhoff said.
