Germany’s baking industry and corporate companies looking to offload their pension fund liabilities could drive a new wave of pension buyout transactions tipped to reach €60bn in the coming years.
The pensions buyout market has already started seeing some activity: VEDRA Pensions has recently signed a deal to take over the pension obligations of Hauck Aufhäuser Lampe Privatbank.
“This is a significant transaction, and not just because we are involved. This was the first pension buyout transaction in Germany with a bank,” said Till Kraus, VEDRA’s co-managing director.
VEDRA takes over the pension corporation (Rentnergesellschaf), used to offload the bank’s pension liabilities, already set up by Hauck Aufhäuser Lampe, with assets held in a two-tier contractual trust arrangement (CTA).
Lampe Asset Management will be responsible for the pension obligations as an external manager in the area of liquid assets, while other asset managers will be picked to invest trust assets under the umbrella of the VEDRA Spezialfonds. The specific amount of the deal has not been disclosed.
The bank conducted a thorough due diligence exercise to pick VEDRA after the buyout firm and consultancy zeb conducted a study to identify the benefits and strategic alternatives for pension buyouts for banks and insurance companies.
Zeb specialises in services to private banks and it advised ABN AMRO on the acquisition of Hauck Aufhäuser Lampe. The first pension buyout transaction in the banking industry is a sign the German market continues to evolve, it said.
“As the market matures, standards like an appropriate level of equity contribution as risk-bearing capital by the buyout provider —typically in line with international markets at about 5% – and the use of trust agreements, cements,” Kraus said, adding that VEDRA’s pipeline of potential deals is growing with inbound requests.
Pension buyout firm Deutsche Betriebsrenten Holding (DBR), is also seeing an increasing number of transactions.
“Among industries, we observe a particular strong activity in banking. The motivations vary though, we continue to see restructuring, M&A and liquidation of legal entities as key reasons [to conduct buyout transactions] across industries,” DBR’s managing partner Thomas Bloch said.
DBR is on track to close further transactions this year in partnership with Allianz Global Investors, after taking over the pension obligations of the subsidiary of a Japanese group in Germany that was restructuring its business, he added.
Pension risk boutique Funding Solutions Deutschland is receiving enquiries for the implementation of pension corporations (Rentnergesellschaften) to transfer pension obligations in buyout transactions.
“We implemented the 8th pension corporation for a very large international corporate in January, and we are currently implementing the 9th pension corporation for another international group. We plan the closing by the end of March,” said managing director Magnus Schmagold.
Funding Solutions has also taken over further commitments to implement pension corporations over the course of the year, with a tender volume that is currently over €1bn, he added.
A €60bn market
Vedra agrees with estimates pointing at a market potential of pension buyout transactions of up to €60bn over the next five to 10 years. This estimate takes into account the role of Pensionsfonds as a de-risking vehicle.
According to occupational pension association aba, the total assets of Pensionsfonds is currently around €60bn, Kraus said, adding that “it is very likely that the pension buyout market in Germany will develop in the same way”.
German companies have pension liabilities worth around €700bn on their balance sheets.
“We see that companies from a variety of sectors are looking at this [buyout] solution. We are also seeing an increasing penetration with independent advisors that guide companies through the process and conduct due diligence on risk takers like Vedra,” Kraus added.
DBR expects the first €10bn to be transacted in the next few years. “The transformation of whole industries, a general trend towards de-risking as well as the demographic change will drive this activity,” Bloch said.
Funding Solutions’ Magnus added that corporates go to great lengths to demand appropriate safeguards, such as independent trustees, appropriate investment strategies, restrictions on risky investments such as private equity, when implementing pension corporations as a vehicle to relieve balance sheets from liabilities.
“Interest rates are also [still] high and inflation expectations are low. This means that very low-risk pension companies can be implemented at a very attractive price,” he added.
WTW also expects the pension buyout market to grow robustly in Germany in the coming years, therefore it has recently decided to set up its own Pension Buyout shop.
“We will implement this [buyout solution] by mid-2025, but we are already in talks with interested companies, and we are confident that we will be able to implement the first [buyout] transaction in 2025,” said Johannes Heiniz, senior director for retirement at WTW.
The German market is, however, still catching up with international pension markets where real pension risk transfer solutions, whether structured as buy-in or buyout solutions, have been the market standard for years, he said.
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