Ulrich Jürgens is among the revisionists pioneering new thinking in Germany's highly regulated and stagnant Pensionskasse sector.
Fennell Betson reports
Beneath the regulation-encrusted surface of the German pensions landscape there are stirrings of new life. Not only within the book reserve system are the revisionists at work, but in other traditional areas rethinking is breaking up the old ground.
Ulrich Jurgens is an actuary who is determined to bring a new business perspective to what has long been considered the moribund Pensionskassen sector - the victim of Germany's unwillingness to carry out significant reforms to its supplementary pension provision.
Fresh, if that is the term to be used, from a stint at the European Commission's pensions desk in Brussels, Jürgens came in 1993 to the Hamburger Pensionskasse von 1905 (HPK), a long established multi-employer scheme, with DM3.2bn ($1.8bn ) in assets. This covers some 40,000 active members and 26,000 pensioners for 160 employers, mainly in the food retailing and distribution sector across Germany.
In 1994, he started to make his moves. In that year, we created the Hamburger Pensionsverwaltung (HPV), an administration company organised as a co-operative," he says. The thinking behind this was that "the HPK was only one brick in employers' pensions arrangements, and they often had additional supplementary schemes, financed through support funds". These funds, set up as separate legal entities, often had their origins in the tax and contribution limits on Pensionskassen, and employers needed them to be sure of being able to meet their pension promise of typically 70% of final salary. "In the early days, when these were set up, there was not much to be financed out of them, as the social security benefit was high enough. But with shorter professional careers and reductions in social security, real liabilities have built up in these support funds." In fact, many employers closed these to new entrants in the early 1980s, but they still have to administer them, Jürgens points out." Our view was that because we already administered 66,000 Pensionskassen promises, we could do more of this and this is how we came into this business."
But because the legislation was unclear about how far this could be run under the auspices of the existing Pensionskasse structure, HPV was set up. "We moved all of our personnel from the pension fund to the new administration company and made a real business out of it." This company administers 17 closed and open support funds, which are often on a pay-as-you-go basis entailing no more than paying the appropriate pension to the retired employee and collecting the sum from the employer.
HPV also sees the Pensionskasse market as a target. Earlier this year, it took on the administration of the Pensionskasse von 1925 for the Phoenix group. "They asked us to do all the management for them, because of the supervisory legislation, they were finding the bureaucratic requirements too onerous." Since, Pensionskassen are from a regulatory point of view mini-captive insurance companies authorised only for pensions purposes, they are under much the same supervisory and reporting regime as insurers. "There are many smaller Pensionskassen for whom these requirements are too heavy," says Jürgens.
But the real driver of business growth could be another development in support funds. Their use has been increasing outside their traditional role, as employers sought ways around the shortcomings of Pensionskasse particularly because of the taxation of employers' contributions - now at a not negligible 23% rate on the first DM3,408 of contribution each year per individual - as well as the well-known investment restrictions. This new approach to support funds is referred to by some as reinsured funds, a name rejected by Jürgens in favour of the ungainly but more accurate "back-covered support funds". These funds are not insurance companies and therefore cannot strictly "reinsure" themselves, he points out sensibly. What these funds can do is to buy insurance for their pension and other liabilities from an insurance company or, indeed, a Pensionskasse. The attraction to employees is that the amount paid is not subject to tax and there is no limit on it practically, which contrasts with the small sums payable to traditional support funds. In addition, the contribution is treated as a business expense and the employer effectively gets tax relief on it. As Jürgens sees it: "Thus it is possible to achieve actuarially complete funding through a back-covered support fund as is the case with a Pensionskasse, but without creating tax problems for the employee."
But, to exploit the opportunity, Jürgens says another company, the Hamburger Pensionsruckdeckungskasse (HPR), had to be formed. "This was because our original Pensionkasse von 1905 is a tax-free fund and if we took 'reinsurance premiums' into it, then it would have become a taxed vehicle."The new venture was established in 1995 and Jürgens is very pleased with the reception it has met with. "In the two years, we have now about DM370m, which we regard as a success." Included in the client base, which numbers about 20 with 26,000 insured employees, are the support fund of the employees of the German unions, the SMST fund, a joint company of IBM and Philips, the fund of Lockheed Martin and for sections of the giant ZF Friedriechhafen group.
Perhaps the most exciting part of the structure is its potential for new arrangements. "There are still new schemes being set up in Germany," says Jürgens. "But when they are set up, they usually use this insurance approach in some way." What this achieves is what he refers to as "a virtual Pensionskasse". "This allows a company to organise its own individual Pensionskasse within the framework of a larger entity on a truly co-operative basis." Essentially, a separate Pensionskasse can be run without bearing the otherwise disproportionate overhead costs.The approach has introduced greater flexibilityinto an otherwise highly rigid system. He says schemes can be set up with just employees contributing to them and the employer limited to providing the legal structure for an efficient scheme. "Another area is to renovate pensions schemes that are in trouble. We offer some partial funding products, perhaps the introduction of a Pensionskasse at a lower level to take away some of the liabilities held in a support fund without sufficient funding. With all the different financing vehicles, it is a challenge to find the most appropriate solutions for the client."
A key element of this structure is the freedom it gives employers, within the overall legal framework, to decide their own pension plan benefits, their profit-sharing system and their own investment strategy. The employer could use its own pensions consultant to monitor this side, he says. Jürgens reckons a scheme needs a minimum of around DM50m to be able to run its own assets individually, which is something more and more employers want to do. "If they do not have assets of DM50m, they would come into the general fund of the HPR."
While Jürgens is looking at ways of giving employers in the Pensionskasse of 1905 more control over their scheme and assets, it is now run as a common fund for its DM3.2bn of assets. This is invested largely in domestic bonds (15% in non-domestic) managed in-house. Around 8% of the portfolio is in property and only 8.5% is in equities. Jürgens is definite that this will increase. "We have come from 0% in 1993." The strategy is to go international in preparation for monetary union, he says. All equity investment is done externally through five Spezialfonds, with a range of investment companies, among them JP Morgan, Metzler and Barclays Global Investors."We have given these managers well-defined mandates, as a result of asset liability modelling and defined optimal asset allocation." Having decided on the the asset class and style for the portfolio, a number of Kags were sent questionnaires, and on the responses received candidates were short-listed and a final selection made. "It is quite a complex matter to find the right Spezialfond and to keep it under control - it is not like buying a mutual fund and we would like to obtain some professional assistance, but unfortunately this market in not well developed in Germany." The fund has changed managers from time to time - their performance is measured and reported by The WM Company.
Jürgens is very optimistic about how the future could develop for its operations as more support funds and Pensionskassen re-engineer their futures and more new schemes are set up using its structures. "Companies will move to external funding, but will want their investments to cover their own liabilities. They will require a say in the investment and we are offering these possibilities. There is definitely a trend away from standardised products, people want individual solutions." Hazarding a guess on what their DM370m in assets in this part of the business might have grown to in five years, Jürgens says: "The whole thing should then be a DM5bn operation.""