The Berlin-based Bewag Pensionskasse feels that its policy of extreme prudence over the past three years has paid off. Risk is almost a dirty word, as management – and doubtless the members too – content themselves with the chosen ‘safety first policy.
The fund, Bewag Pensionskasse, which was Germany’s twelfth-largest at the end of 2002 with total assets of E1.25bn looks after nearly 12,000 members in electricity generating and heating oil supply, invests through Spezialfonds. “The advantage of Spezialfonds is that we are the only owners,” says board member Michael Papendorf. “We have more control and flexibility – we decide on the strategic direction and also on short-term decisions.”
Founded in 1937, Bewag Pensionskasse has three mixed funds (equities and fixed income) and three real estate funds which together account for 17% of total investments. These are made up of 7% in equities and 2% in real estate, the remainder consists of fixed income amounting to 6% as well as 2% in cash to make new purchases.
Over the past few years investment policy has been cautious. At the end of 2000 equities accounted for only 12% of total investments, although further resources were being made available to increase this figure. However, this was reversed in January 2001 as the stockmarket crashed. The proportion of equities then fell steadily, to 10% in 2001 and 6% in 2002. Last year, as the market began to recover, the figure was increased to 7% which will remain in place this year, with an increase to 8% or 9% possible in 2005.
“For the short term we have told our investment funds that they can increase the proportion of equities to 60% in the mixed funds if they see good opportunities,” says Papendorf.
The risk-aversion of the Bewag management is clear to see. Take hedge funds, for example. “‘The stuff of the devil’. We have not wasted time with that,” adds Papendorf.
What about private equity? “We steer clear of private equity; we stick to things which we understand and can use to generate returns,” he continues.
In December 2002 Bewag Pensionskasse added to its own real estate assets a number of real estate funds. Its directly held property accounts for around 5% of total investments and is recorded at purchase price, while the l2% in the three real estate funds is recorded at market value. “These figures are unlikely to change for the foreseeable future,” says Papendorf.
The balance of the assets not in Spezialfonds is in the fixed income portfolio which is managed in-house. This is recorded at the lower of book value and market value. The greatest proportion of the fixed income is split between Pfandbriefe and Schuldscheine, with a small allocation to corporate bonds.
“Even though Pfandbriefe yield low rates of interest we buy them because they represent a secure form of
investment,” says Papendorf. He adds: “On account of the low rates of interest prevailing at the moment we’re not buying now. We will wait until rates have recovered significantly.
“The interest paid on public bonds at the moment is so low that there is no point buying them,” argues Papendorf. “However, we still have older bonds paying better interest.” He adds: “We use the ‘buy-and-hold’ principle for fixed income investments. We purchase 10-year bonds and do not sell them mid-term.”
With such a high proportion of long-term fixed-interest bonds, strategic thinking appears to be holding sway. “Pensionskassen must be risk-averse, so we are very limited as to how much of a risk we can tolerate,” he says.
Corporate bonds represent around 5% of total assets. The law requires that those purchased for Pensionskassen must be investment grade.
The tactical element seems rudimentary by comparison. “We have no particular instrument to control the volatility of the stockmarket – that’s the job of the fund manager,” says Papendorf. “However, a decision to change the percentage in the fund can be taken at immediate notice.”
Achieving the guaranteed rate of return has not been an issue for Bewag Pensionskasse. “We have always achieved the guaranteed rates of return and in previous years have generated returns of more than 5%.”
Bewag Pensionskasse does not use benchmarking. “What is important is that we achieve our minimum rate of return,” says Papendorf. “If we have achieved our 4-5% it doesn’t matter if the market achieves 6%. What should we then do, buy Argentinian bonds?”
Decisions on long-term investment strategy are the subject of a yearly meeting between the board and the head of investment management. “This year we have placed additional emphasis on the long term by commissioning an asset liability study to determine asset strategy for the next few years,” says Papendorf.
Meetings can also be convened at short notice if necessary. The board of directors has to approve the investment decisions of its in-house investment team. “It can – indeed it must – make an immediate decision.”
For the purposes of fund management, Papendorf does not consider the Master KAG to be an appropriate tool at present: “We do not use this form of fund management and do not plan to do so given the small number of Spezialfonds that we hold currently,” he says. “The Master-KAG can be useful if the number of funds held increases, although one should consider the additional costs that they entail.”
So what of the pension reforms? The main problem is the complicated application procedure, as many of the 11,700 members are finding to their cost. “Even the procedure for applying for a Riester pension requires considerable administration,” says Papendorf. “We hope that the big institutions have the same problem and put pressure on the politicians to simplify the system.”

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