One of the main Pensionskassen in Germany is Berlin-based VERKA which was founded in 1924 by the Evangelical Church and today provides pensions for all of the country’s church employees.
According to figures published by the German regulator BAFin, VERKA’s asset total of just over E1.5bn at the end of 2002 placed it tenth out of Germany’s 152 Pensionskassen, and it was eleventh in terms of membership, with just under 80,000 active members.
Just as we thought that German Pensionskassen couldn’t get any more prudent, VERKA’s own prudence has reached new heights over the last few years. Like its German counterparts, VERKA has an obligation to achieve a minimum rate of return, which was reduced to 2.75% with effect from the beginning of this year.
However, as Bernd Kühlein, board member at VERKA explains, “the change in the guaranteed rate to 2.75% will not have an immediate effect on strategy because it only concerns new customers. We have some customers where we have to achieve a return of 3.5% and some at 3.25%.”
He adds: “The required average rate of return has a great deal of influence; we can’t afford to see large values suddenly wiped out.
“It has become more difficult to achieve these rates in the last few years,” confesses Kühlein. “Ten years ago it was easy to achieve rates of return of 7% or more. Another problem has been low interest rates. However, each year we have been above the guaranteed rate. In the last two years the return was over 4%.”
The increasing prudence of VERKA’s management bears testament to these developments. In 2001 equities accounted for 27% of VERKA’s total investments. Because of the fall in the market and the increased level of risk associated with equities the quota was reduced to 18% in the following year and last year the figure stood at 13%. The equities are kept in Spezialfonds for ease of handling and control.
But surely now the gradual resurrection of the equity market offers potential for significant gains? “Given the upturn in the stock market we could moderately increase the proportion accounted for by equities,” says Kühlein. “But we will not go back to the level of 2001. In a year or two the proportion may be between 10 and 15%.” The equities are mainly from the Euro-zone so as to eliminate the currency risk.
However, the move away from equities has not been driven by divine prudence alone. A small part of the move from stocks was used to increase the investment in real estate. The proportion accounted for by this asset class increased from 5.7% in 2001 to 6.6% last year. The rest is invested in fixed income stocks.
A new ruling allows Pensionskassen to invest up to 5% of their capital in hedge funds. “In general hedge funds are an efficient extension of asset allocation,” says Kühlein. “Important for the decision as to whether they are suitable for the prudent business of pension building is to consider the risk structure of the funds. The same is true for private equity.”
Schuldscheine account for the largest part of total investments – some 36.5% at the end of 2002. “Schuldscheine offer both a good rate of interest and a high level of security,” says Kühlein. They are tailor-made and write-downs are not necessary.”
VERKA does not use benchmarking. “The company uses absolute returns on account of its need and principal aim to produce a basic minimum rate of return,” says Kühlein. German accounting legislation dictates that investments are recorded at book value.
The volatility of the stock market clearly questions the wisdom of a long-term approach to the investment portfolio. “We have to consider what will happen to your pension if the stock market suddenly falls by 35%,” says Olav Rieck, head of investment management at VERKA. “So tactical investing certainly becomes more and more important.” He adds: “Our risk capital quota – especially our hedging strategies – requires daily monitoring to minimise any losses.”
A more hands-on approach is central to VERKA’s thinking. “Control of investment decisions must be significantly strengthened,” says Rieck. “In the last few years we have taken the decision to make the investment decision more of a team process.” Short-term investment decisions that are taken in-house are made in consultation with the board of directors.
An investment committee including board members, head of finance, company actuary, accompanied by members of the financial commercial and controlling departments takes decisions on long-term strategy including asset allocation, explains Kühlein. “The supervisory board deals with more fundamental issues such as liabilility management.”
Currently the Master KAG structure is not used, although discussions are now underway regarding the possible future use of the structure. VERKA considers transparent and consistent reporting and flexibility in the choice of fund managers and advisers to be the main advantages of the structure.
Kühlein views the future with optimism and welcomes the recent reforms which are aimed at greater self-provision. “We will probably move in this direction more quickly than many politicians had originally envisaged,” he says. “But the legislation is far too complicated and volatile and the tax framework has not been properly thought through.” So feelings are mixed. The politicians still have some work to do, it seems.

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