Michael Leinwand (pictured), CIO of Germany’s VBL, talks to Luigi Serenelli about the pension fund’s growth over the past years and about its evolving responsible investment strategy


Michael Leinwand joined Versorgungsanstalt des Bundes und der Länder (VBL) as chief investment officer in January 2021, in the middle of the COVID-19 pandemic. In just over two years at the helm of the German pension fund for public sector employees, Leinwand has dealt with a global health crisis, war in Europe, and a banking crisis – events that have tested the resilience of pension institutions. To Leinwand, these crises have delivered an important lesson: people matter.   

“The COVID-19 pandemic and last year’s repricing of the market were two defining aspects of my first two years at VBL that stress the importance of having great people in the organisation,” he says.   

VBL has expanded the team significantly since the new CIO started, from six employees to about 20 in the investment management function, with a separate real estate team of 20. The investment activities are supported by risk management, monitoring, legal and back-office functions, bringing the total close to 60 staff. “We have hired experts across asset allocation, private equity or real estate to name just a few,” Leinwand says.   

The scheme reacted quickly to the COVID-19 crisis by offering flexible working hours and shifting to remote work in a matter of days, a practice that continues.  

“We have looked for talent and industry veterans in the past two years to build the team, in order to have a powerful organisation to face crises like the banking turmoil, geopolitical crises, regime changes in interest rates, double-digit inflation, which I consider to be structural breaks. In this ever-changing environment, it is essential to have a well-functioning team with strong cooperation throughout the organisation.” The team and the processes are well established, but the pension fund plans to hire more people in the next few years.    

VBL has improved its asset and liability management (ALM) model and reviewed its investment strategy, changing the definition of the asset classes in which it invests. “We have introduced a new strategic asset allocation [strategy] at the beginning of this year, based on a recalibrated ALM model, a stronger focus on our liabilities and new asset classes,” the CIO says.   

Leinwand and his team looked in more detail at the pension fund’s liabilities. “The asset allocation is risk-based relative to liabilities. That means that we first need to understand our liabilities, and then take well-understood risks on the asset side to achieve higher returns relative to our liabilities,” he says.   

In terms of asset allocation, VBL has made a shift to greater transparency by investing in clearly defined asset classes. “Until last year, we invested a high share of assets in absolute-return mandates with different underlying investment strategies. The investment strategy is now based on classic asset classes: equities, private debt, private equity, government bonds, corporate bonds, real estate, commodities and cash,” he explains.  


The liability structure of the scheme is cash flow positive and, unlike insurance companies, there is no lapse risk (the risk of policyholders cashing-in or not renewing contracts). “We have long-dated and predictable liabilities and, as such, we are well positioned to invest in alternatives. I therefore expect that the allocation to both private debt and private equity will continue to increase over the next years,” Leinwand says.   

To enable these increases, VBL will cut allocations to commodities. The current investment strategy targets a 15% allocation to private debt and 2% to private equity. It has a strong focus on private debt because it offers strong investor protections through collateralisation and covenants, but also because it is scalable.

“To have a powerful organisation to face crises like the banking turmoil, geopolitical crises, regime changes in interest rates, double-digit inflation, which I consider to be structural breaks… it is essential to have a well-functioning team with strong cooperation throughout the organisation”

“In private debt, we have defined four areas: AAA- and AA-rated collateralised loan obligations (CLOs), middle market loans, infrastructure debt and commercial real estate lending. These four [give] us exposure to corporate balance sheets in the SME space, but also to the real economy, and we are not looking to add other asset classes in this area at the moment,” Leinwand explains.   

VBL is already fully invested in CLOs and is ramping up its middle-market loan portfolio. It is beginning to invest in infrastructure debt, while in commercial real estate lending it is transitioning from a strategy based on an opportunistic approach to a more holistic and structured portfolio.   

Both the corporate private equity and the infrastructure equity allocations will grow over the next few years. In private equity, VBL has a dedicated fund-selection team that carries out intensive due diligence to build a robust portfolio, which will continue to be an important building block in the future. At the moment, VBL is investing a small amount in green-energy transition assets. “We will look at these forms of investment for our infrastructure debt and equity mandates. These sectors help the transition to a green economy and are a key component of our responsible investment strategy,” Leinwand says.  

The pension fund is working with third-party asset managers across all asset classes. The pension fund invests 17%, or roughly €9bn, in real estate. About €2.5bn worth of German residential real estate is managed by the internal team, while the rest of the real estate assets is managed by external asset managers.   

“When selecting an asset manager, there is a clear and structured process. We aim to establish strategic relationships and work with the managers in the long run. Therefore, we take time and effort to choose the managers,” Leinwand explains. Once a manager is selected, the institution continuously monitors both quantitative and qualitative aspects and, if needed, it engages directly with the manager to address potential weaknesses. “If the manager does not meet our standards, we will terminate the relationship,” adds the CIO. VBL looks for well-established and large managers that have a leading role in the market for the asset classes they manage and the ability to generate alpha returns across market cycles.   

The scheme also plans to increase the duration of its bond portfolio due to its stronger focus on ALM. These changes will benefit from the higher interest environment, which allows it to invest in corporate and government bonds with more attractive interest rates than over the past few years.   

Another important element of the new strategy is a more robust diversification within asset classes. For instance, VBL will increase its exposure to US equities, which were previously underrepresented in its equity allocation. In real estate, the pension fund is mainly invested in Germany, but it plans to gradually increase its international exposure.   

For VBL, inflation is not a major risk factor. “Our liabilities are not inflation-adjusted, which means that they are predominantly driven by interest rates and demographics,” Leinwand says. The organisation manages the resulting interest rate risks primarily using bonds, and derivatives to a limited extent. The liquidity risk arising from these derivatives is manageable, according to the CIO, which means that VBL is unlikely to encounter the issues faced by UK pension funds during last year’s LDI crisis.   

Last year, VBL’s portfolio returned -10%, with losses stemming in particular from equities and fixed income, but the fund maintained a strong level of reserves. The pension fund has made tactical adjustments to its asset allocation, actively reducing risks after the start of the war in Ukraine. In particular, it decided to underweight its equity allocation relative to the strategic asset allocation. This underweight position was then adjusted upwards, and finally closed over the course of the year. “In combination with the underweight in equities, we were positioned short duration. We held our position in cash, without investing too much. We have also maintained a stable allocation in real estate and commodities. These measures have helped in stabilising the portfolio last year,” the CIO says. 

“We are taking sustainability very seriously and have therefore established a dedicated team in charge of sustainability. It was also important to syndicate the strategy with our stakeholders”

Upon joining VBL, a key priority for Leinwand was setting a responsible-investment strategy. Rules at EU and national level were already changing and, perhaps more importantly, responsible investment is now seen as an integral part of VBL’s fiduciary duty towards its members.   

“We are taking sustainability very seriously and have therefore established a dedicated team in charge of sustainability. It was also important to syndicate the strategy with our stakeholders,” Leinwand says.   

The pension fund’s responsible investment strategy is based on four pillars: engagement, exclusions, impact and ESG integration. To achieve impact through investment, VBL focuses on asset classes where it can exercise direct influence, for example through a green and social bond mandate, in which it has €1.6bn invested.   

“The second building block will be our large real estate portfolio. We have the possibility, through energy efficiency measures, and other targeted refurbishments, to have a positive impact while also making sound financial decisions,” he says.

Infrastructure equity is also well suited as an impact investment, adds Leinwand. “In infrastructure equity, we are in the last stage of appointing a manager for the assets. We will make the decision in the second quarter of this year and expect to invest in infrastructure equity starting in Q3. This portfolio will not exclusively invest in impact investments, but we expect it to be a significant share, due to current financing needs.”  

VBL is also working on a framework to measure and assess the impact of its investments. “For us it is important that impact investments are measurable. At the moment, we receive information on the impact of investments from our asset managers, in the case of green and social bonds from Amundi. The challenge for us, but also the whole industry, is the consistency and the quality of the reporting across the different assets managers,” Leinwand says.    

In terms of environmental, social and governance (ESG) integration, open and constructive exchange with asset managers is crucial for the CIO. This means that ESG criteria are an important aspect when VBL selects a manager. “It is important to have a strong team that will work with and challenge asset managers on ESG matters. For us, as asset owner with a large and broad portfolio of investments, it is essential to ask ourselves what it means to integrate ESG aspects across asset classes and strategies. Therefore, we work with the respective asset managers, understand the asset class in depth and build a common framework for ESG integration. Having access to reliable and independent data is crucial for us,” he says.    

To support the implementation of its responsible investment strategy, VBL signed up to the Principles for Responsible Investment (PRI) in April, and has set a goal to reduce the carbon intensity of its equity and corporate bond portfolios over the next five years.   

“At this point, we are implementing concrete actions in our portfolios. However, we do not aim to join the Net Zero Asset Owner Alliance (NZAOA), as we want to keep going step by step, and committing to a specific date to bring our portfolio to net zero may be too early,” Leinwand says.  However, VBL is excluding companies from its portfolios that harm human rights, do not adhere to international labour standards, produce controversial weapons or generate more than 25% of their revenues from coal.