German multi-employer pension fund Babcock Pensionskasse is shifting to a defensive strategy in a bid to meet solvency capital requirements.
The current investment strategy is focused on euro-denominated fixed income securities with an average rating of A, the pension fund told IPE in a statement.
Investments in euro-denominated fixed income are managed through a specialised manager in a ‘Masterfonds’ structure, using a buy-and-maintain approach.
Key performance indicators for the allocations are diversification, maturity management and high tradability to ensure liquidity flows, according to Babcock.
At the same time, the pension fund is gradually reducing existing positions in real estate and private markets, having already fully divested its equity holdings.
Despite the cutback, a significant share of the portfolio remains invested in alternatives, particularly real estate and fund-of-funds allocating to private markets.
The pension fund has established a risk management system backed by an internal watchlist to monitor and control high-risk investments and respond in a timely manner to changes in the portfolio’s risk profile.
De-risking
Babcock said it is pursuing “a clearly defensive strategy focused on stability and risk minimisation”. The pension fund continues to restructure its investment portfolio in coordination with financial supervisor BaFin.
Last year, BaFin revoked the pension fund’s licence to conduct business after it failed to meet minimum capital requirements and did not present a realistic financing plan to emerge from underfunding.
The largest sponsoring companies refused to provide loans to restore minimum equity requirements.
Disruptions in the real estate market resulting from the COVID-19 pandemic and the war in Ukraine significantly contributed to the pension fund’s financial situation.
Investments in real estate had been made to rebuild legally required solvency reserves following an initial restructuring in 2007.
The strategy worked well for many years until market conditions deteriorated significantly in the 2020s. As a result, investment returns were no longer sufficient to generate the target interest rate on pension promises.
Net return on investments stood at -8.48% in the 2024/25 financial year, down from 2.57% in the previous fiscal year, according to the pension fund’s latest financial statement published in April.
Babcock cut the interest rate on pensions to 2.7%, acknowledging “no realistic possibility” of achieving a net return above that level, according to the statement.
