On 1 January, Germany’s new financial supervisory authority began operations. The Bundesanstalt für Finanzdienstleistungsaufsicht – handily abbreviated to BAFin – brought together the three pillars of German financial regulation by amalgamating the former insurance body, the BAV, the former banking supervisor, the BAKred and the previous securities regulator, the BAWe.
The move was in part prompted by the advent of the Riester pensions legislation, which placed the new Pensionsfonds vehicle under insurance auspices.
Volker Greve, a director at the BAFin, explains that the supervisory authority now has two seats – the insurance and banking supervisory body in Bonn and the securities regulator in Frankfurt – and describes the regulator’s role as similar to that of the FSA in the UK.
“The new Pensionsfonds are under the supervision of the insurance pillar and under the Riester law they have to fulfil, especially for investments, our regulations, even though the investment regulations for pension funds are very liberal.”
The merging of the regulators, he believes, has its practicalities because the Riester pension business is very similar to that of insurance products: “The funds can include mortality risk etc and this is the same as if you pay into a life insurance contract.” Jurgen Tietze at BAFin adds: “The new pension funds are not insurance companies because they have this investment freedom, but in practical terms there is little difference.”
Greve continues: “Theoretically under the new law Pensionsfonds can have a 100% investment allocation to shares worldwide, as long as they are listed in the EWR. The reason for this is that the pension fund (employer) has to have an insolvency insurance through the Cologne-based Pensions-Sicherungs-Verein (PSV), which acts a bit like a reinsurer and guarantees the contributions.”
The law governing Pensionsfond investment, he explains, is based on the prudent investment principle. “If an employer guarantees a pension he can make the investments necessary to cover his own provision. If the returns are good then for a DB plan the surplus can remain with the employer, hence the freedom in investment.”
The BAFin covers the approval of both Pensionsfonds and Pensionskassen, although it is not responsible for the approval of third-pillar insurance products, as Tietze notes: “The third pillar funds don’t concern us from a supervisory point of view because these are just life insurance products and need no specific approval. We just need notification when they are launched. They do need certification under tax laws and BAFin employs the people who certify these funds, but they are not really regulators. It was just easier to have them within the supervisor.”
Regarding the new Pensionsfond vehicle, Tietze says the regulator has to date given approval for 10 to be set up, with about 15 more in the pipeline. While he comments that Pensionsfond approval is easier than for a Pensionskasse and a little easier than for a full-blown insurance company, he notes that there is still a good deal for sponsors to do before they get the green light.
Regarding the regulator itself, he notes that the move from insurance regulator to Pensionsfond supervisor has not been plain sailing for the BAFin. “With the move to look after the Riester law, as you say in English ‘the devil is in the detail’– some of the new rules were very difficult when we wanted to put them into practice, even without considering the tax side of things.”
And Greve notes that permission for fund licences depends very much on the quality of the papers submitted to BAFin, adding that some are badly prepared. “My colleagues tell me that a lot of pension funds that have been established and backed by insurance companies have had more success, because they know what we are looking for,” he says.
“In the beginning it was quite difficult for us as a supervisor to define the rules because we had to look at issues of solvency and the influence of the pension plan – it was all new for us. I would say that last year it was very hard work, but not so much since the new pension funds became legal on 1 January and the legislation was published.”