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Mercer creates German pension fund outsourcing vehicle

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Investment consultancy Mercer has established a Pensionsfonds vehicle in Germany aimed at allowing companies to offload pension liabilities.

The Pensionfonds structure is the newest of five permissible methods or vehicles for financing occupational pensions in the country.

Mercer’s offering was authorised by the BaFin, the country’s financial services supervisory authority, last month. It is the 31st such pension institution in Germany, a spokesperson for BaFin confirmed.

Germany’s answer to the Anglo-Saxon pension fund, the Pensionsfonds vehicle was introduced in 2002 and designed to be attractive to companies financing direct promise (Direktzusage) pensions via book reserves.

This on-balance sheet funding is still the prevalent method of financing corporate pensions in Germany.

According to the latest statistics, in 2015 Direktzusage pensions accounted for 50.5% of occupational pension commitments in the country. Pensionskassen, an external pension financing vehicle that predated the Pensionsfonds, had the next largest share of the pie, with 26.5%, followed by direct insurance with 10.7%, support funds with 6.7% and only then Pensionsfonds, with 5.7%.

As per the characteristics of Pensionsfonds in general, Mercer’s new vehicle would allow corporates to outsource their pension liabilities and reduce or eliminate related accounting or tax burdens as a result.

They can also protect companies from the impact of falling discount rates as they can lock in current rates. German companies reporting locally under the German commercial code (Handelsgesetzbuch or HGB) have to value liabilities using a discount rate determined as the average of corporate bond yields over a 10-year period.

Another benefit is that Pensionsfonds pay a lower contribution to the PSV, the insurance fund, than companies have to do for book reserve-financed pensions.

Pensionsfonds face fewer investment restrictions than the other German pension financing methods and can invest more in equities.

Mercer said its Pensionsfonds differentiates itself from other such pension funds by way of its multi-manager and multi-asset approach.

This allowed it to offer flexible and tailored investment solutions and cost-efficient implementation to companies with a range of investable asset volumes, according to the consultant.

Stefan Oecking, partner at Mercer and managing director of the Mercer Pensionsfonds, said interest had grown for this route to funding pensions.

The launch of the pension fund comes amid intense discussion about changes being introduced by major occupational pension reform legislation – the Betriebsrentenstärkungsgesetz (BRSG) – which comes into effect in January.

Oecking said the consultancy was mindful of the BRSG in everything it did at the moment, but maintained that it had not set up the Pensionsfonds in this context.

“Our purpose is rather to offer clients optimal financing solutions for already existing pension commitments,” he said.

One of the main pillars of the BRSG is the introduction of defined contribution schemes in Germany for the first time, if they are agreed to and run with the involvement of the trade unions.

Mercer is not the first investment consultancy to set up an external pension fund. Willis Towers Watson did so in 2013 and Longial recently started running a pension plan within a pre-existing pension fund, the ERGO Pensionsfonds.

The Pensionsfonds is Mercer’s third external pension financing vehicle. It already ran a support fund and a contractual trust agreement. 

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