The introduction of legislative and regulatory changes means the pensions sector is going through a period of flux. This has given rise to some uncertainty. “But what we know is that the trend towards the strengthening of old-age financial provision is continuing” in the wake of the 2002 Riester reforms, says Herbert Fronert, chief financial officer of Volksfürsorge Pensionsfonds.
By the end of 2004, 60% of all employees in private and public employment were covered by additional pension provision, he says.
Currently, the government is putting forward an additional bill to change the Insurance Supervision Law to comply with the EU’s pensions directive. The bill will apply to pension funds - Pensionskassen - and pension investment funds - Pensionsfonds - but not to direct insurance.
But with a general election looming, Klaus Stiefermann, general manager of the Association for Company Pension schemes (ABA), says the hot question is what will be the approaches of the different political parties towards retirement provision.
For example, contributions are exempt from social insurance contributions until 2008. “Employees want to know what will happen after that, but it has not yet been decided,” says Stiefermann.
Future uncertainty aside, Fronert is satisfied with investment returns over the last year. “The conditions were quite positive”, he says. But he notes that a major challenges is how to find other investments as an alternative to bonds as interest rates are simply so low. “One could go further into equities, or one could use other instruments such as hedge funds and asset-backed securities, or property,” says Fronert.
The fund’s investment mix has not changed recently, he says: “The strategy is a somewhat long-term one.” Volksfürsorge’s portfolio is over 50% in bonds, around 10% in stocks, 10% in mortgage loans and 3% in property. The fund’s asset management is conducted in bulk conjunction with the rest of the group, he says.
Germany’s biggest pension provider, the Bayerische Versorgungskammer (BVK), also had a good last year, with the fund able to add to its reserves. Chief investment officer Daniel Just says the overall average return was 6.7%, but the fund is only showing 4.8% because the rest is going into hidden reserves.
Low interest rates are also causing concern at BVK. “The biggest problem we have is the low interest rate and the apparent formation of a bubble in the bond market,” says Just.
The fund has taken advantage of certain opportunities, including investments in high-yield and emerging market debt. It has also invested €150m in hedge funds of funds.
Currently, BVK is reviewing its strategic asset allocation – an exercise it carries out every two years. Many different asset classes are under consideration, such as private equity, commodities, currency, REITs, and inflation-linkers, Just says. It could be worth locking into current low rates of inflation, he adds.
Looking further ahead, Just says that the BVK’s investment strategy is relatively stable. “As a long-term investor, you need a long-term horizon,” he says. “Going backwards and forwards is not very useful.”
The BVK is the umbrella for several pension schemes, each having its own precise asset allocation. But overall, around 80% of assets are held in Schuldscheindarlehen and domestic real estate. The remaining 20% is termed the ‘surplus’ portfolio, which typically holds a mix of fixed income, equities, alternatives and international real estate funds.
Investment is partly outsourced, and to a greater extent than it was in the past.