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IPE special report May 2018

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Germany’s BPK scheme planning new mandates

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GERMANY – Barmer Pensionskasse, a €1.27bn pension fund for health care employees, plans to award new mandates for convertible bonds and options on equities in an attempt to generate more return on a portfolio that is almost entirely invested in fixed income.

Andreas Poestges, board member responsible for portfolio management, said the fund would be investing in these asset classes as they best fit its current “risk-return profile”.

Regarding straight equities, Poestges said Barmer PK had not been exposed to this asset class since late 2003, when it sold all of its shares.

“In late 2003, a decision was made to end our exposure to equities. Although it’s true that equity markets continued to perform very well since then, our risk budget did not permit us to return to the asset class,” Poestges told IPE on the sidelines of a pensions conference sponsored by Handelsblatt.

He acknowledged that at the time of the equity fire sale, Barmer PK’s risk budget had been used up by losses on equities during the poor markets of 2000 to early 2003.

“In the meantime, our risk budget has been much improved, which means that we are in a position to invest in asset classes which can yield a higher return and help us better meet our liabilities,” he said.

Barmer PK, which insures nearly 12,000 employees, finished 2005 with a gross return of 6.25%, up from 6.14% in 2004.

In late 2005, Barmer PK sold all of its direct holdings in German real estate, which formerly made up 15% of total assets. It netted a gain of €172m in the process. It is now almost entirely invested in fixed income, the lion’s share of which are investment grade bonds with a double ‘AA’ rating.

Poestges said the complete sale of the fund’s German property holdings was motivated by the need to “get out of such an inflexible asset class.”

“This does not mean that we are ruling out investing in real estate. But if we did so again, we would want a more flexible mechanism like funds.”

Poestges joined Barmer PK in April 2004 from the pension fund of German chemical firm Degussa. At Degussa, he oversaw the management of €2.4bn in assets. Prior to joining Barmer PK, he said that restructuring the pension fund’s investment strategy was his key priority.

A year ago, Barmer PK commissioned an asset-liability study from a pensions consulting arm of the German insurer Ergo and WGZ, a co-operative bank. Poestges said that another study would be done in 2006, adding that the fund had not yet decided who would compile it.

Some German Pensionskassen blame excessive regulation by BaFin for why, despite a good year for equities, their returns for 2005 are below those of their Austrian and Swiss peers.

Poestges, however, dismissed this criticism, saying the BaFin provided German Pensionskassen with plenty of freedom in their investing. “For me, it’s more a question of whether or not the Pensionskasse had the appropriate risk budget to raise exposure to equities,” Poestges said.

“The BaFin is, for example, very liberal when it comes to the use of derivatives by Pensionskassen to get a better handle on long-term investment risk. I don’t think you can call this excessive regulation.”

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