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Impact Investing

IPE special report May 2018

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Germany: Liberal tradition

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Versorgungswerke, the odd ones out in the German funded pension system, are a successful model of funding first pillar pensions. Barbara Ottawa reports on the critical factors

History has a strange sense of humour. When Bismarck created the first public pension system in Germany in the late nineteenth century he did not want so-called free professions, doctors, notaries, lawyers and the like, to be included. So they had to start saving for their own retirement provision. But most of the savings were eaten by the soaring inflation after World War I leading to the creation of the first so-called ‘Versorgungswerk', literally ‘provision institution' by the Bavarian doctors in 1923.

After Word War II, the Federal Republic again excluded free professions from the state retirement provision which led to the creation of many more Versorgungswerke for these professions, which are organised in chambers.

Today, there are 89 Versorgungswerke with over 700,000 members from the following professions: doctors, pharmacists, architects, notaries, lawyers, tax consultants, vets, auditors, dentists as well as self-employed engineers and psychotherapists.

They manage more than €100bn in assets, according to statistics compiled by the Arbeitsgemeinschaft berufsständischer Versorgungseinrichtungen (ABV), the funds' association. The youngest, for the lawyers and tax consultants in Sachsen-Anhalt, was established in 2007.

Just at the start of 2011, one weekly newspaper, Die Zeit, noted critically that doctors, notaries and lawyers were "allowed to opt out of the first pillar". This quote echoes a sentiment frequently brought up in political debates ever since it became clear that the first pillar was suffering from demographic imbalances.

However, after the financial crisis and general elections in Germany in 2009, ABV-chairman Ulrich Kirchhoff noted he "does not see any threat" to Versorgungswerke from the new government coalition.

Integrating this part of the retirement provision in the state's first pillar "would border on disappropriation, and it is not really feasible," notes Daniel Just, head of asset management at the €53.3bn Bayerische Versorgungskammer (BVK).

Hans-Wilhelm Korfmacher, managing director of WPV, the Düsseldorf-based scheme for accountants all over Germany - apart from Saarland - warns critics to be careful what they are wishing for as longevity among those "free professions" is well above the national average.

And this is also one of the major challenges Versorgungswerke are facing, as the ABV points out. On the other hand, the fact that they have compulsory membership and a well-defined group of members makes it easier to make longevity forecasts.

Many schemes are dealing with the problem by temporarily reducing the minimum return rate they have to achieve. Further, this minimum rate is not guaranteed as with insurers, which means that Versorgungswerke do not have to focus as much on year-on-year performance.

"We do not have to sacrifice long-term goals on the altar of short-termism as intensively as insurance companies," Dirk Lepelmeier, asset management head of the €10bn doctors' fund in Nordrhein-Westfalen, NAEV, points out.

This longer focus also meant that most Versorgungswerke reported positive returns for the crisis year 2008.

"We generate a stable 4-5% net return each year because of our conservative asset allocation," says Korfmacher. He adds that the stability of the Versorgungswerke also emanates from the hybrid funded and pay-as-you-go system most of these schemes have.

That means that while each member saves for their own retirement, there is a solidarity principle involved and the schemes can reshuffle assets according to their and their members' needs.

This solidarity principle is even further enhanced by the fact that members elect representatives to the schemes' boards and they are practically co-managing their own and their colleagues money, Just believes: "It also has the psychological effect that these board members are more cautious when it comes to risks."

Of course, especially with the large Versorgungswerke, the existence of a professional asset management team is also a critical success factor. In fact, in the last three years no IPE Award ceremony went by without at least two large Versorgungswerke scooping up prizes either for best German fund or for special investments such as fixed-income, real estate, hedge funds or innovation.

"This outside acknowledgement via awards also confirms people's image of large Versorgungswerke as sophisticated and diligent investors," says Lepelmeier. Indeed, asset management companies often aim to reel in a Versorgungswerk as a client in the hope that other institutional investors will follow their example.

But what is more important for Lepelmeier is the fact that large Versorgungswerke in particular have a very good process in place which is also acknowledged by the supervisors.

Unlike Pensionskassen, insurers or similar vehicles for retirement provision, Versorgungswerke are not supervised by BaFin but fall under the remit of the provincial finance ministries.

"In my experience these supervisors are very knowledgeable when it comes to the subject matter but also very flexible, looking more at the overall structure and giving us leeway when it comes to individual decisions," says Lepelmeier.

And Just argues along similar lines: "Because of the more intense dialogue with the supervisory body, which is only responsible for us, the individual situation of each Versorgungswerk can be assessed in detail."

But Korfmacher stresses that Versorgungswerke are by no means unregulated and that the regional finance ministries apply standards similar to those of the BaFin.

However, the fact that regulations like Solvency II are not directly applicable to Versorgungswerke means that they can, for example, run higher real estate exposures and equity allocations than most insurers. For example, the current average equity quota among larger Versorgungswerke ranges between 3% and 9%, while insurers only have 2.5%.

Smaller Versorgungswerke, some of which only manage around €100m, are having a more difficult time implementing appropriate structures and therefore some are outsourcing services to larger schemes.

For example, the BVK comprises 12 different Versorgungswerke, each of which remains a separate entity in the conglomerate.

"We are also helping out other Versorgungswerke, if they ask us to do so but we are not advertising our services," says Just.

Korfmacher's €1.6bn scheme is a different construction as it consists of all the funds for auditors from all German provinces except for Saarland. He does not see any more mergers on the horizon but like Just he sees schemes co-operating. However, Lepelmeier points out that some smaller schemes might not want to lose their independence although costs may drive them into co-operation.

In general it seems that, especially the large, Versorgungswerke are very independent and go their own way regarding structures and investments. For the smaller ones, institutions like the asset management committee at the ABV can be helpful.
 

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