The investment of pension assets of German firms listed on the DAX 30 index yielded returns of €9.9bn in 2020, above the expected €3.4bn, according to a study conducted by Willis Towers Watson (WTW).
Returns were down last year from €30.2bn in 2019. The largest German firms allocated 49% of their pension assets to bonds, 19% to equities, 3% to real estate and 29% to other investments, including 5% to alternatives.
The companies still adopt a predominantly conservative investment strategy, WTW said. However, they have started to rebalance their allocation to bonds and equities in favour of other forms of investments, whose allocation has increased by 17 percentage points since 2011.
Moreover, the integration of sustainability standards and risks into their investment process is playing an increasingly important role.
“On the one hand, considering [sustainability standards] promise a sustainable return on pension assets, and on the other hand many DAX companies have explicitly included the expansion of sustainable financing and ESG investments in their goals,” Heinke Conrads, head of retirement Germany and Austria at WTW, told IPE.
An active asset management strategy that integrates sustainability is important, she added. Pension assets tied up in IORPs are more and more subject to regulatory requirements.
“For example since 10 March, as part of a “comply or explain” approach, they have to publish whether they include sustainability risks and negative impacts of investments on the environment and society in their investment decision-making processes,” Conrads said.
Pension liabilities and pension assets of DAX firms decreased last year by 1.8% and 3.9% to €409bn and €266bn, respectively, according to the study.
This is mainly because companies with a higher amount of pension liabilities and assets have left the DAX, replaced by companies with lower obligations and assets.
Carmaker Volkswagen recorded the highest amount of pension obligations with €58.3bn, followed by Daimler with €40.9bn, Siemens with €35.8bn, BASF with €29.8bn and Bayer with 27.3bn. The top five companies accounted for 47% of the defined benefit obligations in 2020, compared with 45% in 2019.
Siemens topped the ranking for pension assets with €20.0bn, ahead of Daimler with €28.9bn, BMW with €22.9bn, BASF with €21.4bn and Deutsche Bank with €20.5bn. The top five companies made up 47% of the pension assets of the DAX firms in 2020, compared with 44% the prior year.
Deutsche Börse will expand the DAX index from September from the current 30 to 40 companies, including Airbus, Zalando and Siemens Healthineers.
“With the expansion of the DAX, the volume companies’ pension obligations and pension assets should also increase overall,” Conrads noted.
Companies have however taken de-risking measures for their pension schemes while continuing to run existing assets professionally. “Therefore, they are well positioned for turbulent times,” she said.
The discount rate fell by 31 basis points last year, leading to an increase on pension liabilities.The ratio between pension assets and pension obligations fell by only 1 percentage point compared to the previous year. This means that DAX 30 companies have succeeded in managing pension schemes in a challenging year.
WTW said.DAX companies added €7.8bn to pension assets last year, compared with €7.6bn in 2019.
Conrads explained that the reasons for additional allocations to pension assets can vary. Plans for ancillary funds to invest new contributions directly in capital markets, governance guidelines to achieve companies’ funding goals, active cash flow management or the desire to improve insolvency protection for fund beneficiaries will continue to play a role in the future.
“Further allocations to pension assets can be expected,” she said.