German companies are increasingly considering pooling defined benefit (DB) and defined contribution (DC) pension assets to gain access to private markets that may otherwise be difficult for DC plans to enter.
Discussions about combining DB and DC assets for private market investments are gaining momentum, according to Christoph Schaumlöffel, senior director of investments at WTW.
The debate is particularly active among larger companies managing a growing DC plan alongside an existing DB plan, he added.
“The arguments are clear: greater economies of scale, more efficient governance, and offsetting cash-flow profiles as DB plans shrink and DC plans grow,” Schaumlöffel said.
Marsh, formerly Mercer, considers pooling DB and DC assets one of the latest developments in Germany, offering a cost-effective route to an investment universe that would otherwise be inaccessible to some investors.
Combining DB and DC assets within Spezialfonds, for example, can create synergies for private market investments.
Speaking during a webinar organised by Marsh on 29 September, Daniel Stolberg, senior managing consultant for investments at the firm, explained how assets held in different Spezialfonds could be combined to fund growth investments.
DB plans investing in liability-driven investment (LDI) Spezialfonds, holding long-duration bonds and swaps, and DC plans investing in defensive Spezialfonds, holding short-duration bonds, cash and absolute return strategies, can contribute to a growth fund (Wachstumsfonds) investing in equities, high-yield bonds and private markets, he explained.
“Especially when the DB plan is significantly larger than the DC plan, something we frequently see, the DC plan can invest in the same funds, and this gives employees benefit from exposure to private markets,” he said.
Companies can also negotiate lower fees with asset managers by combining DB and DC plans, Stolberg added.
Cost savings are therefore often cited as a key argument for pooling DB and DC assets for private market investments. In practice, however, the benefits may be more limited.
According to WTW’s Schaumlöffel, actual savings often fall short of expectations because DB and DC plans have “fundamentally different objectives”.
“DC plans require investments geared toward long-term growth and a gradual de-risking process prior to retirement. DB plans, by contrast, focus on liability matching, predictable cash flows, and – increasingly – preparing for potential buy-out transactions,” he said.
“The benefits of consolidation are often overestimated”
Christoph Schaumlöffel, WTW
Regulatory differences, valuation issues and potential conflicts of interest add to the challenges, he continued, adding: “Our conclusion is therefore clear: the benefits of consolidation are often overestimated.”
While economies of scale can be achieved through shared platforms and fund structures, investment strategies for DB and DC plans should generally remain separate, as their differing objectives outweigh the potential cost advantages, he said.
Pooling remains uncommon
Pooling DB and DC assets remains the exception rather than the rule.
Among large corporates, Lufthansa, for example, keeps DB and DC assets separate for private market investments.
Only DB assets are invested in private markets, specifically private equity and infrastructure equity, to diversify the investment portfolio and capture additional long-term return opportunities, the group told IPE.
Alternative investments often account for 20-30% of investment portfolios, Schaumlöffel noted.
“Currently, the interest is primarily on infrastructure and private debt offering relatively stable cash flows, attractive risk premiums, and, in some cases, inflation protection,” he said.
Investments are mainly made through Spezialfonds and pooled structures, often using Luxembourg-based fund vehicles. Semi-liquid solutions such as evergreen funds and European long-term investment funds (ELTIFs) are gaining traction, particularly in the DC sector, he added.
Bosch Pensionsfonds invests in private equity, infrastructure equity and private debt primarily to boost returns, improve portfolio diversification and reduce volatility.
It uses funds of funds, single funds and separately managed accounts, all bundled within a Luxembourg-based Spezialfonds that enables efficient allocation and management of its alternative investments, a spokesperson said.
.jpg)
