Sections

Looking at alternatives and regulation

Related Categories

Heribert Karch, managing director of the MetallRente pension fund

nvestment issues have taken a backseat at MetallRente for the moment. According to managing director Heribert Karch, the main issue on the minds of those running the €780m industry-wide scheme is the looming change in the way pension contributions are treated.

As things stand now, workers in Germany are exempt from paying social contributions on the part of their salary that they put into retirement provision, up to a maximum of the 4% ceiling for social contributions.

But then social minister Walter Riester created this exemption as a supportive measure in the wake of the 2001 pensions reform on the understanding that it would expire after seven years.

However, there is still a question mark over whether the government will actually go ahead with its plans to abolish the social tax exemption in the face of mounting opposition from the trade unions, the pensions industry, insurers and employers' organisations.

"In Germany right now, occupational pensions provision is built on tax relief
on the one side and the exemption of social insurance contributions on the other,"
says Karch. If one side of the equation disappears, the effects could be huge, he says. "In particular average-income savers will
be the victims of that measure, because they do not have a tax relief in the way those
on high salaries do. So the normal
worker needs the relief of social security c
ontributions."

Employees with earnings above the
ceiling of social contributions are not affected at all so if the plan is put into practice, high-income earners will be the only the winners of the German pension reform, he says.

"There are many people in Germany who are working to stop this happening, including the insurance industry, pensions providers and employers' associations," he says. These parties are working as one force to try to get the government to change its plans.

"The government says it can't allow any gaps to emerge in public finances, but we say you can't provide health insurance at the expense of retirement provision."

If the social contributions exemption were to disappear, occupational pension schemes would then end up with less money to pay out to members in benefits, he points out. The knock-on effect of this weakening of benefit values would be the dwindling of employers' contributions as well. Companies would simply have less incentive to pitch in, he says.

"Then they would not support the process of occupational pensions," he warns.

Hans Rübel, director of the Bosch Pensionsfonds scheme

eighing up a move into alterative investments will top the agenda this year for the investment team at the Bosch Pensionsfonds. Broadening the investment spread in this way could cut risk and boost stability, says Hans Rübel, director of the scheme, though such a step would need thorough consideration first.

The Pensionsfonds of leading German industrial firm Robert Bosch was established five years ago, initially just for employee contributions, but since the beginning of 2006 for employer contributions as well. The plan is a defined contribution scheme with contributions guaranteed.

It invests contributions according to a life-cycle model, says Rübel, with members of the pension scheme who are 55 or younger having around half of their assets invested in equities, while the equity allocation for those above that age drops to about 20% to preserve capital.

But in the overall scheme, the asset mix may soon include new classes of investment. "Right now, we are invested in the traditional asset classes," he says.

Without disclosing the precise asset allocation of the overall scheme, he says assets are split between equities and bonds. On the equities side, the fund hold shares in both developing and emerging markets, while the bonds side consists mostly of euro-denominated bonds, but also included are high-yield and emerging markets debt.

"So far, we have not invested in alternatives, but this is a topic we will be involved with this year," he says. "We are checking to see whether it is worth adding alternative asset classes in the future.

"We see advantages in adding alternatives, in that it could reduce risk and act as a stabiliser, so that is why we think it's worthwhile to investigate the possibility."

During 2007, the scheme will assess how it might make the move into alternatives - looking at which investment vehicles would be the most suitable and which of the possible asset classes it should choose. Classes under scrutiny will include private equity, hedge funds, currency and commodities, says Rübel.

"It makes sense to start with various alternatives at the same time, so that the risk is limited," he says. But, there are obstacles from a regulatory point of view. In Germany there are certain limits on how much a pension fund can invest in alternative asset classes, he says. "We will have to work out how we can stay in line with the regulations."

Walter Schmidt-Cording, head of liquidity and risk management at Deutsche Lufthansa

nvestment strategy at the Lufthansa pension fund is set for a shake-up, with the results of its asset-liability study coming in less than two months.

And this latest assessment could be a good opportunity to add more alternative asset classes to the mix, says Walter Schmidt-Cording, head of liquidity and risk management at Deutsche Lufthansa AG.

Lufthansa is still in the process of moving its pension obligations off the balance sheet, a move which it began three years ago. At the end of last year, there were €3.81bn of retirement benefit obligations on the balance sheet.

An external contractual trust arrange-ment has now been set up for the pension fund assets, which is fed annually by cash flow resources. The outsourcing should be complete by 2020 at the latest.

"The biggest challenges this year will emerge in connection with the results of the ALM study," says Schmidt-Cording.

"We expect this to lead to a change or expansion of the strategic asset allocation of the fund," he says. "Very probably, we will integrate new asset classes into the fund; that will mean that new mandates will have to be defined, along with corresponding benchmarks,"
he says.

The Lufthansa pension fund will be helped along with the whole manager-selection process by its multi-manager, HSBC, says Schmidt-Cording.

"We're assuming we will have awarded all the new mandates necessary by the end of this year," he adds.

At the moment, the Lufthansa fund has a 30/70 equity/bond split. "The equity portfolio mostly contains European blue-chips," he says. "Alongside those, we also have US shares and Asian shares."

The bond portfolio is mostly made up of European government bonds or Pfandbriefe - tradeable debt secured against mortgage or public sector loans.

There are some corporate bonds and a relatively small proportion of emerging markets bonds. "We achieve duration matching by including some 30-year government bonds in a separate sub-fund," he says.

ALM studies happen once every two to three years at the fund.

"When we do this, we make sure we analyse new investment opportunities as well as current developments on the liabilities side," says Schmidt-Cording.

In general, the investment outlook is good this year. "On the whole, we feel still positive about the capital markets," he says.

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2444

    Asset class: Trade Finance.
    Asset region: Global.
    Size: USD 10m.
    Closing date: 2018-06-25.

Begin Your Search Here