The German financial supervisory authority, BaFin, is warning Pensionskassen and insurance companies about the risks from investments in Spezialfonds and alternative investments, in private equity and private debt funds. 

“We have seen strong exposure in the asset classes, but private debt and private equity are clearly more complex forms of investment than government bonds and equities. Information about the goals of the companies is difficult to assess, and with private debt there is above all a credit risk,”  BaFin’s executive director Frank Grund said at the Zukuntsmarkt AltersVorsorge event in Berlin yesterday.

Grund added that relying solely on asset managers to weigh up these risks is not an option.

He added that climate change and the transition to a greener economy through decarbonisation, and digitisation also pose risks for Pensionskassen and insurance companies.

“Currently, too few companies [insurers and Pensionskassen] use climate stress tests to understand scenarios analysis and to measure these risks,” he said, adding that BaFin expects climate stress tests to be increasingly applied in the next few years.

Pensionskassen and insurance companies are now dealing with a swift increase in interest rates, a challenging geopolitical and macroeconomic environment, inflation, climate crisis and digitisation, and a banking crisis with the collapse of Silicon Valley Bank and Credit Suisse.

They have cut their exposure to banks significantly in the last few years, driven by the stringent regulatory environment set up after the financial crisis in 2008.  

BaFin considers the latest interest rate hike to be one of the main risks for the financial system, Pensionskassen and insurance companies this year.

Higher interest rates, Grund explained, hit reserves, with Pensionskassen having, at the end of 2021, net reserves of close to €30bn, which declined in 2022.

The number of Pensionskassen under intensive supervision by BaFin has decreased from 30 to 20, although even a moderately low interest rate environment can still have a negative impact on pension funds, he added.

For some Pensionskassen contributions have gone up, Grund said, adding that the business models of the schemes are showing signs of solidity for the future. 

However, the regulator continued to look at how occupational pension schemes and insurance companies conduct business operations.

“This also includes occupational pension schemes and insurance companies being able to fulfil obligations against the members in the long-term [meaning] ‘lifetime guaranteed payments’ as an add-on to the statutory pension scheme,” Grund said.

BaFin has looked closely in the last year at the ability of Pensionskassen and insurance companies that suffered in the past decade’s low interest rate environment to fulfil lifetime obligations, observing that insurers have had a “robust development”, with the hike in interest rates having a positive impact on returns on new investments, and Solvency II strengthening risk capacity, he added.

“In part this applies also to Pensionskassen, but [the situation] doesn’t look quite as good. There are [some that are] well positioned and future-proof, but over half of the Pensionskassen are closed for new members, and contributions have stagnated for years,” he said, adding that from his point of view the Pensionskassen industry will face consolidation.

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