German pharmaceutical and biotechnology company Bayer is almost fully hedging foreign currency exposure across its pension portfolios to avoid taking additional risks from unhedged assets.
Stefan Nellshen, head of asset management and pensions at Bayer, told IPE that the DAX-listed company hedges investments held by its German pension plans “wherever possible and reasonable”.
Assets held by overseas pension plans are generally hedged into the domestic currency in which their liabilities are denominated.
“We use this approach because otherwise we would take an additional active currency risk,” Nellshen said.
Bayer’s German pension funds, including Bayer Pensionskasse and Rheinische Pensionskasse, invest primarily in euro-denominated fixed income assets, Nellshen added, noting that the market for high-quality euro-denominated bonds is sufficiently broad and liquid.
As a result, the schemes have limited currency exposure within fixed income, their largest asset class, apart from small allocations to high-yield bonds and emerging market sovereign debt.
In equities, Bayer typically uses passive or enhanced passive strategies, based on the view that active managers cannot consistently outperform deep and liquid markets.
“This holds, for example, for the S&P 500. We partially invest synthetically into the S&P 500, which means we maintain cash positions in euros, and we hold corresponding long positions in S&P index futures,” Nellshen explained.
This structure largely eliminates currency exposure against the euro, apart from gains and losses generated by the index itself.
For other equity mandates, external managers hedge foreign currency exposure back into euros, or into the relevant domestic currency for overseas pension plans, against already-hedged benchmarks.
Bayer does not generally hedge private equity investments, however.
“We think [instead] that we cannot effectively FX-hedge investments in private equity at all, which make up roughly 4% of our portfolio globally, because the timings of the respective cash flows are too difficult to forecast,” Nellshen said.
Selective hedging
Kevin Richter, head of implementation at Mercer, said DAX-listed companies typically do not fully hedge alternative investments, which are often denominated in foreign currencies.
Foreign equities, particularly US stocks, overseas government and corporate bonds, and foreign-currency exposures within multi-asset portfolios are also frequently left partially unhedged.
“Hedging mechanisms for alternative investments are often limited or costly, and are therefore less frequently implemented in full,” he added.
According to Richter, currency exposure may have contributed to the relatively modest 2% returns generated by DAX pension investors in 2025 despite strong equity markets and solid bond performance.
He said risks associated with alternative investments were reflected on pension balance sheets and weighed on overall portfolio returns.
Christoph Schaumlöffel, senior director investments and head of Western European portfolio management at WTW, said German pension investors are increasingly managing foreign exchange exposure according to the role assets play within the portfolio.
This has led to high hedging ratios for liability-matching assets, while pension funds remain more selective in hedging currency exposure within equity portfolios.
WTW has also observed an increase in hedging activity for US dollar exposures across fixed income, credit and private market investments.
“Key drivers include dollar weakness and the increased integration of these assets into Liabilities Driven and Cashflow Driven-oriented de-risking strategies,” Schaumlöffel said.
