BaFin warns over German Pensionskassen’s heightened private markets exposure

Germany’s Pensionskassen are significantly more exposed to private markets than other pension vehicles, with the financial regulator BaFin raising concerns over potential risks in the current environment.

Speaking at the annual aba occupational pensions conference last week, Andreas Seiltz, head of group supervision for institutions for occupational retirement provision at BaFin, said Pensionskassen held 29% of their €211bn in total assets in private market investments at the end of 2023 — 10 percentage points more than other domestic pension institutions.

The exposure spans commercial real estate, private equity, private debt and mezzanine financing. Like the Versorgungswerke (pension funds for professionals), Pensionskassen have increased allocations to alternatives in response to prolonged low interest rates, seeking higher returns.

However, Seiltz has warned that this strategic shift has amplified vulnerabilities in today’s more volatile market conditions.

Alternative investments are one of the main focal points of BaFin’s supervisory activities, he said, adding that risks of asset depreciation could pose problems for individual schemes.

BaFin conducted a thematic review last year of alternative and commercial real estate investments across the sector, identifying around 50 of the 124 Pensionskassen under its supervision as particularly exposed to private assets or combining them with other riskier asset classes.

This year, the regulator is planning a targeted investigation into the risk management frameworks for alternative investments at Pensionskassen. “We want to ensure that risk management is designed to deal with such investments adequately,” Seiltz said.

BaFin has already adjusted its stress test for Pensionskassen to include provisions for external funds and private debt exposures. Further changes are expected following reforms to investment regulations that expand the quota for infrastructure allocations by Pensionskassen and Versorgungswerke.

According to Jürgen Rings, head of aba’s Pensionskassen expert group, the industry has requested a less severe stress test for infrastructure investments — proposing a 10% drawdown in negative scenarios, compared with 40% for equities.

Reserves and solvency improving

Despite concerns around portfolio risk, BaFin noted an improving financial picture for Pensionskassen, supported by higher interest rates. Gross reserves reached €15bn by the end of 2024, and the sector’s solvency ratio rose to 152.1%, up from 147.5% the previous year.

The number of Pensionskassen subject to intensified supervision has also declined to fewer than 20. However, BaFin continues to observe ongoing consolidation, with half of the Pensionskassen it oversees now in run-off and closed to new business.

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