Diversification way ahead for BVV
Like many Pensionskassen in Germany, BVV had to take action to reduce its exposure to risk following the huge losses recorded on Europe’s stock exchanges. However, it is refreshing to see a more proactive approach to risk management: diversification rather than simple avoidance.
BVV was founded in 1909 to provide pensions for bank employees, four years before the introduction of the statutory pension scheme. In 1913 it took on the additional responsibility of providing the statutory pension scheme for bank employees before reverting to being an exclusively private Pensionskasse for additional second-pillar pension provision in 1936.
In 1999 BVV established the BVV Versorgungskasse (an ‘Unterstützungskasse’) to provide a further form of pension provision covered by capital, although this form is not one of the approved Riester vehicles.
Today the BVV is Germany’s largest Pensionskasse with total assets of e15.4bn at the end of 2002, according to data from the German regulator BaFin. Total assets were nearly three times their level in 1990, making BVV nearly three times the size of its nearest rival. BVV’s membership, nearly 400,000, placed it third out of Germany’s 152 Pensionskassen.
At the end of 2002, BVV had 539 member companies, compared with 525 in the previous year and 427 in 1990. The membership consists of banks, financial service companies and their related service companies. Of the 2002 total, 496 member companies used the BVV Pensionskasse in some form: either exclusively or in addition to the Unterstützungskasse.
The minimum contribution is 3.5% of salary of which employer and employee each contribute half. In 2002 the company paid out just under e435m in pensions. This compares with e397m in 2001 and e360m in 2000, which itself was over two and a half times the figure in 1990. Meanwhile, income from contributions totalled e495m in 2002 compared with e488m in the previous year. In 2000 the figure was e476m compared with e295m 10 years earlier.
A committee within the supervisory board deals with all questions relating to investment strategy, based on recommendations made by the board of directors. The final decision is taken by the supervisory board. For the purpose of discussing strategy the board of directors meets twice a year with the investment committee. It also meets twice a year, more often if necessary, with the fund managers.
There are two members of the board of directors, while the supervisory board consists of 15 members, seven employees’ representatives and seven employers’ representatives besides the chairman of the board.
So, has BVV’s approach to investing changed recently, especially since the stock market crash? “As a result of the stock market crash, BVV’s own risk tolerance, like that of the industry as a whole, is less than it was,” explains Rainer Jakubowski, BVV board member and CFO.
He adds: “We have reduced the quota of equities; at the moment equities represent 8-9% of total investments. However, at the beginning of 2003, we started using options as a means of providing additional security.”
During 2002 the quota of equities stood at around 5-6% of total investments and at one point was as low as 1%. “The quota of equities should be between 10 and 20%,” says Jakubowski. “I am sure that in the medium term, say from 2006, it will increase significantly, although probably not above 20% because of what happened in past.”
He adds: “Suggestions by some that the industry can increase the quota of equities again to between 30 and 35% are ill-founded.”
The vast majority of BVV’s equities are held in six Spezialfonds. “Everything that needs an analyst is outsourced,” says Jakubowski. “Corporate bonds are another example of this.
“Private equity is certainly an option for the future but at the moment we are not going down that route because the quota of risk capital is fully used,” he continues.
It is interesting to note that in some areas BVV is bolder than some of its industry counterparts, the result of its ability to see an instrument in terms of its effect on the bigger picture rather than in isolation. “We are just about to start investing in hedge funds,” says Jakubowski. “When you look at hedge funds you will see that they are making losses. However, unlike private equity they contribute to a balancing of risk and create a reasonable diversification in the portfolio.”
Like other Pensionskassen, BVV has reduced its exposure to risk by increasing its investment in real estate. “For a Pensionskasse with long-term obligations, real estate is an absolute must due to the fact that this asset class offers low-volatility returns and inflation risk protection,” says Jakubowski. Indeed BVV was ahead of its time. “We took a decision to increase our investment in real estate before the stock market crash,” he adds.
BVV’s future direction is clear but cautious. “Over the last two to three years we have gradually increased the share that real estate has of total investments, although the real estate market is not very favourable at the moment,” says Jakubowski. “At the moment it accounts for around 4%. This consists in part of our own real estate, although we are reducing this portion and are moving towards real estate funds.” Currently BVV has three real estate Spezialfonds.
The volatility of the stock market and the declining returns from fixed income securities has encouraged some Pensionskassen to move from a strategic to a tactical approach in their investments. Not so BVV: “Little has changed in terms of the mix of tactics and strategy,” says Jakubowski. “It is important for us to achieve the guaranteed rates of return. We have a guaranteed rate of 4% and this has a more significant influence on our investment strategy than what’s going on in the stock market.”
It is for this reason that BVV uses absolute returns as a measure of performance. “I know exactly our minimum target,” says Jakubowski. “Therefore benchmarking plays no part in the setting of our business objectives.”
He adds: “For the majority of our customers the required rate of return is 4%. The new rate of 2.75%, which was introduced at the beginning of this year for the German life insurance industry, will only affect our new business from the beginning of 2005.” In 2002, BVV achieved a net rate of return (‘Nettoverzinsung’) of 4.1% although this was far lower than the previous year’s figure of 5.3%. The three-year average return to 2002 was 5.3%, which compared with 6.7% and 7% for the three years to 2000 and 1990 respectively.
Fixed income securities represent around 85% of total investments. “Almost the entire fixed income portfolio is managed in-house.”
In the last two to three years BVV has spread its investments in fixed income securities between a number of instruments including Pfandbriefe, Schuldscheine and Government and Länder Bonds. At the end of 2002, Schuldscheine accounted for just under 46% of total investments.
“We have done this so as to avoid the risk of having to make write-downs that are a requirement in the case of equities, real estate and corporate bonds,” says Jakubowski. He is more wary about the latter at present: “the spread of corporate bonds has narrowed recently so we are now much more cautious.”
As far as the reforms currently being discussed in parliament are concerned, BVV agrees with the consensus that the main bugbear is the complex application procedure. “The legislators need to think it through again and simplify the process,” says Jakubowski.
As one of Germany’s most important pension providers, BVV’s strategy to achieve its required returns while minimising losses will be an important example for the industry to consider. With the arrival of the hedge fund on Germany’s pensions landscape, BVV’s moderately adventurous approach could inject some badly needed excitement into the industry.