GERMANY - Regulatory and market uncertainty has deterred German investors from making major asset allocation changes despite the fact the average earnings rate on defined benefit (DB) assets has fallen to just 4.3%, according to Greenwich Associates.

For its latest German Spezialfonds report, US research and consulting firm Greenwich Associates interviewed more than 220 of the largest German institutional investors between March and May, including corporate pension funds, public pension funds, industry pension funds, corporate treasury funds, foundations, banks and insurance companies.

These had reduced their expectations on five-year average returns for various asset classes even further since the peak of the crisis.

For domestic equities, it now stands at 6.3% from 6.8% in 2008, while international equities has dropped from 7.3% to 7% and fixed-income from 4.4% to 3.7%.

Given this dampened outlook, the average actuarial earnings rate on DB plan assets was reduced to 4.3% for this year from 4.6% in 2010 and 5.1% in 2008.

Tobias Miarka, consultant at Greenwich Associates, said: "Germany's pension plan sponsors and other institutions are becoming increasingly concerned investment returns generated by current portfolio strategies and allocations will fall short of what is needed to close funding gaps and maintain sustainable funding levels."

The researchers found that the average funding level of German DB plans stands at 87%, but that it was only 79% for DB plans with more than €5bn in assets under management.

However, despite the fear of low yields, the vast majority of German institutions "do not plan to make significant changes to existing allocations", the authors of the report noted.

They put this down to a "lack of conviction" about the direction of European financial markets, as well as tight regulations.

"Regulations and risk budgets leave German institutions little leeway in altering allocations, even when it comes to defensive adjustments like reducing exposures to European government bonds in the midst of a sovereign debt crisis," said Miarka.

He added: "Institutions looking to increase allocations to risk assets in equities and alternatives will face an even greater challenge."

According to the survey, as much as 70% of interviewed investors want to stick to their current asset allocation, which, for pension funds, is roughly 60% in bonds and less than 20% in equities.

Just over 20% of investors said they were planning to reduce the share of active European government bonds in their portfolio, while another 18% said they wanted to do the same with active European equities.

"German institutions seem to have arrived at a near consensus on at least one key point - they are questioning the value of external managers," Miarka said.

According to Greenwich Associates, the excess return investors expect active managers to make has fallen from 53.9 basis points in 2010 to 22bps this year.

It also said more than 55% of institutions think external managers will deliver less than 20bps of alpha in the year ahead.

"This year, that debate has boiled down to the question, 'Is 22 basis points worth it?'" Miarka said.