It is hard to believe that only 12 months ago the first concrete steps were taken in what was to become the first of Germany’s new industry-wide pension fund. After extensive internal discussions, the employers’ – German Federation of Chemical Employers’ Associations (BAVC) – and union – Mining, Chemical and Energie Industry Union (IG BCE) – in the giant chemical industry came to the financial marketplace to talk about a possible scheme for employees.
These were initiated on an informal basis to see which of the banks and insurance companies might be interested in investing the resources and time in developing proposals for the scheme. The next stage was where the two sides acting as a committee held a beauty contest to make the appointment. This went through a number of rounds, culminating in a final of four or so contenders during the first few months of 2001.
The mandate went to the Munich-based HypoVereinsbank under the project coordination of Pension Consult, its pensions advisory arm , run by managing director Carsten Eckert.
“This whole selection process was run on a very professional basis,” he recalls.
The committee was clear about what it wanted. “The industry was looking for a pension fund, and that included the administration and investment,” he says. “Fundamentally it would be a sector-wide pension scheme, where those involved in providing services would be managed according to a definite set of objectives.”
They wanted to know how the insurance and the asset management services would be organised. On the investment side, they favoured some type of consortium or ‘open architecture’ arrangement, as they wanted to be able to control and monitor the relationships with the managers,” says Eckert. “So we had to go more into detail to express our vision and how we would implement our ideas,” he says.
Ultimately, the decision was to go for the innovative new Pensionsfonds solution. The opportunity to participate would be open to all employers in the sector, which at its core employs some 600,000 employees. But other organisations close to the industry such as ceramics, plastics, potash salt and others would be invited to join, as these were unlikely to be big enough to create their own pension scheme. This enlarged to potential membership base to more than 800,000. “In fact chemicals is the second largest industry after the metal which initially took the opportunity to create an industry wide scheme. Part of the structure, was that all chemical companies would have the right to opt out and provide their own scheme.
A formal contract was signed between IG BCE, the BAVC and HypoVereinsbank, which spelt out all the details as to how to proceed with the construction of the scheme, as to the charges and how the investment would be financed, and how the supervisory board be structured. So in putting together what the contribution levels should be, the question was a balance between creating an attractive proposition for the employees, while keeping the costs down from the employers’ viewpoint. The more options or increase of flexibility obviously brought in new costs as well, so it was a matter of deciding individually about these.
“Of course, we have to cover the existing labour agreements between the unions and the association, which sets out the attractive special support of contribution levels for pensions, with the employers give an extra subsidy towards pension investment on top of what proportion of their pay the employee decides to contribute. This existing collective agreement had to be the basis for the contribution aspects of the new scheme,” Eckert says
Because of the subsidy the industry already provided for pension contributions meant that the Riester subsidy, which is very complicated to collect, did not need to be included within the scheme. So on the question of providing disability benefits this was included as a option that the employees have of paying extra to include this.
Another key area was that of the ongoing running and monitoring of the scheme. Since neither the IG BCE nor the BAVC wanted to become involved in the commercial aspects of running the scheme as a service provider and asked the bank to do this. “We decided not to go the route of using the format of a voluntary association as the route for this,” Eckert says.
“So the bank had to look after this, including the start up and financing of the operation of the fund, through a separately set up limited company, Chemie Pensionsfonds AG.” But in order to ensure this was run in accordance with the long term aims of the sponsors, the supervisory board, included two representatives from the industry association, two from the union and two from the bank. Hans Melchiors, heading the project for the bank from the beginning, became member of the board of managing directors of the company. “This structure ensures the sponsors’ interest and longterm relationship with the fund are met and maintained.”
In a separate move, the bank also created its own public pension fund as well – this provides synergies for the bank as it can provide for the administration of both funds in one centre of competence. The bank will be promoting its open HVB Pensionsfonds to its own clients on a commercial basis completely independently to its arrangement with the chemical industry, he points out. The bank freely acknowledges that in undertaking the chemical sector scheme, it would never be on the fully viable commercial terms and involved an element of public relations, which it felt made the venture worthwhile. “So the chemical industry is obtaining its services on a very efficient basis,” he says. But he notes that the employers’ and the unions have been looking after the marketing side of promoting the scheme to the employees very well. “These costs are much lower than they would be in a commercial environment.”
The first roadshow to chemical companies was done before Christmas with the details then available. Originally, the individual employers were to decide by the end of April this year if they were participating and their employees making the decision eight weeks later, but these timings slipped with the delays in approval at the supervisory level. But employers made progress at company level assuming there would be a fully approved scheme in place by May, which is what happened, when the chemical scheme was the first of the new Pensionsfonds to roll of the stocks.
Another roadshow was held at that point. “We were able to discuss the full details of the contribution rates at that stage.” The companies have since then being making up their minds and then their employees will give their verdict. The first investments into the fund will happen late this autumn, which might be good market timing by coincidence, Eckert says.
On the asset management side, the aim is to have an open platform, with maximum flexibility. “The best investment managers today, may not be so tomorrow. We are searching for a consultant, specialised on the ALM side and organised for manager selection.” It may possibly mean two firms being used, with whoever handles the manager selection also being responsible for the ongoing performance monitoring and controlling, he adds. “This area will be a fully transparent.”
It will be up to the consultant to advise on manager structure, but Eckert says he would be surprised if there was not a range of managers. “The Chemie Pensionsfonds won’t have much to invest initially, but it will grow quickly. So more managers could be asked to the table, the more money we have.” He expects that the consultants will advise that the portfolios be by asset classes and not balanced portfolios.
Also needing a solution is how to provide the guarantee of the return of contributions, less biometric deductions, that the plan gives. This will be done on a scheme level.
The scheme will have two different ‘capital stocks’ – one to look after the guarantee, which would be very conservatively managed with high bond content in the classic insurance way. The other investment class without any guarantee will be mandated to boost up performance within reason.
The asset manager will not have to provide the guarantee, he points out. It is the pension fund which will have to do this. “It will be the net value of total contributions which you will have to deliver at age 65.”
The bank is involved on the administration side. “Two years ago, it started a large IT project with a third party capable of building a platform that is multi-lingual for future. We say it is a “Euro-Fit” project, with a straight-through-processing system as a target. But as this not available we have had to design parts of this ourselves. Hence the virtual joint venture with an international IT company. This we consider a project for the new pension funds, which could be licensed to others. The aim is to embed the administration of the asset management side with the scheme administration and the insurance aspects as well. We believe it is this combined solution that is the new dimension.”
One benefit, for members of the scheme will be the ability to view their pension account on the internet in the future. “So it is a fully transparent platform – something that was never available from the insurance sector.” Eckert adds: “We will of course give people their annual statement. The aim is to have everything in place by year end.”
“It is wonderful to have been involved with creating the first Pensionsfond in Germany. It is undoubtedly creating the benchmark. Also it is interesting to see what the competitors are doing – some go the same way and others are handling it differently.”
One of the tasks for the next few years, he reckons, is to see which is the best way from the point of view of the scheme member. “It will not be until the end of next year that we can really start to judge.”