German Pensionskassen are increasingly looking at how to consolidate their operations to mitigate succession planning and ramp up professional management in the face of a wave of regulatory requirements, according to local consultants.
Pensionskassen, an occupational pensions vehicle under insurance supervision, account for around €210bn in assets, or just under 30% of total pension assets, according to the latest figures supplied by the German pensions association (aba).
Options for the 122 Pensionskassen currently overseen by the BaFin financial services regulator include mergers, transfer of pension portfolios, shared platforms for administration and outsourcing administrative functions to larger market players, Gunnar Hasselmann, a partner at PwC, told IPE.
“We are aware, in particular, of plans by small and medium-sized pension funds to examine the transfer of [pension] portfolios to larger institutions, consolidate or outsource their administration, enter into strategic partnerships [or] use shared platforms for investment management, governance or IT,” he said.
Smaller Pensionskassen, in particular, struggle to provide for succession planning for employees or board members, added Rafael Krönung, CEO of human capital at Aon in Germany.
In addition, regulatory requirements, governance and increasing professionalisation in areas such as IT, information security, reporting and risk management put pension funds, which can sometimes struggle to find skilled workers, under pressure.
“For smaller institutions with limited staff, it is becoming almost impossible to meet these requirements appropriately,” Krönung said.
Pension obligations are managed “more efficiently and with an adequate level of resources” if pooled in larger institutions through mergers or portfolio transfers, he added.
“For other [pension] institutions, the key issue is finding a sustainable environment for administering the pension liabilities over many years or even decades,” Krönung added.
‘Growth rather than consolidation’
The situation differs for Germany’s 34 Pensionsfonds – another vehicle for German company pensions – as well as contractual trust arrangements (CTAs) and first-pillar pension funds for professionals.
PwC is currently seeing “fewer traditional mergers” in the €60bn Pensionfonds market, which is still relatively young and concentrated, Hasselmann said.
“Similarly, in the area of funding vehicles for direct pension promises – such as CTAs – we have observed growth rather than consolidation in recent years,” he added.
PwC expects only limited consolidation activity among pension funds for professionals, largely based on the fact that regulatory frameworks and regional structures discourage incentives for institutional mergers.
Faros Consulting currently views Pensionsfonds and CTAs as “unlikely candidates” for consolidation, given that sponsoring companies possess their own governance structures and sufficient, in-house treasury expertise, said the firm’s managing director Andreas Weigl.
“For pension funds for professionals, we [also] expect significantly less consolidation, primarily due to their strong tradition of self-administration,” he added.
In the case of Pensionskassen, Faros said the pressure to consolidate was likely continue to grow.
Acceleration in sight
PwC also expects consolidation to accelerate further in the coming years.
Regulatory requirements such as the IORP II Directive, the Digital Operational Resilience Act (DORA), increasing ESG and reporting obligations will intensify the pressure on pension funds, Hasselmann said.
Significant investments in digitalisation, shortages of skilled professionals, specifically actuaries, risk managers and administration specialists as well as economies of scale in asset management and administration are further drivers of consolidation going forward, he added.
“In the case of Pensionsfonds we expect growth driven by the takeover of outsourced liabilities rather than significant consolidation among the funds themselves,” Hasselmann said.
Increasing complexity in investment and risk management, a lack of the minimum scale needed for efficient management, and – in some cases – unsatisfactory investment returns – for example in real estate – are intensifying the pressure on smaller pension institutions to reposition themselves strategically, potentially even through mergers, Faros’s Weigl noted.
The pressure to further professionalise the management of pension institutions, in particular Pensionskassen and Pensionsfonds, will continue and could even increase, Krönung at Aon warned.
However, the requirements of supervisory authorities could hinder the consolidation processes, he added.
Supervisory authorities require that, after a merger or portfolio transfer, the old and new portfolios, including assets and solvency capital, must be kept separate for years to protect both portfolios after the transaction, he said, adding that these sorts of hurdles could offset the benefits of a portfolio transfer or a merger.
