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European pension funds unfazed by negative 10-year Bund yields

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Ten-year Bund yields moved into negative territory on 14 June for the first time ever in Germany, yet the development has come as little surprise to many European pension funds, with some even hoping to profit from it.

The continued decline in interest rates in recent months – including those of German Bunds – has actually been of boon to some pension funds, including Austria’s Allianz Pensionskasse.

Andreas Csurda, chief executive at the €616m multi-employer pension fund, told IPE: “Interest rates falling even further have increased returns for our existing bond portfolio. The real tragedy is the policy itself.” 

Csurda pointed out that seven-year Bunds had been negative for some time and said the drop in the 10-year Bund yield from 0.2 to -0.1% was merely a “calculatory cosmetic”.

“The real problem over the long term is that the low-interest-rate environment is not helping funded pensions,” he said.

He said the European Central Bank’s (ECB) current interest-rate policy had had no visible effect and that it was “currently unclear how it can actually help”.

He added that his Pensionskassen had actually been “rather blessed” in the current environment because it had no guarantees to meet.

“This is quite different for the provident funds (Vorsorgekassen), which have to guarantee the level of contributions, as well as for life insurance companies, of course” he said.

Csurda argued that the ECB’s interest-rate policy was “slowly destroying” much had been achieved to strengthen funded pensions in Europe in recent years.

Günther Schiendl, CIO at VBV, Austria’s largest pension fund, said the negative 10-year Bund yields were “to be expected” and would remain at a “similar level” for some time.

At Publica, Switzerland’s largest public pension fund, CIO and chief economist Stefan Beiner said interest rates continued to fall worldwide, due largely to global deflationary pressures and “political uncertainties such as the Brexit vote”.

Duration management, he said, had become “more important than ever”.

Tom Mergaerts, chief executive at Amonis, a €1.8bn Belgian pension fund for the healthcare sector, said yield changes such as the one seen in the 10-year Bund were “not a big deal”, as the scheme had already been “largely immunised”.

“But it is an important issue for investing future contributions,” he added. 

The pension fund has a 12.3% allocation to German government bonds in its liability-driven investment (LDI) portfolio, used for the asset-liability interest rate risk hedge.

The LDI portfolio accounts for 60% of total assets under management, with the remainder invested in a growth portfolio.

For its growth portfolio, Amonis tries to avoid buying negative-yielding assets, according to Mergaerts, and may consider selling some “over-priced” bonds.

In a statement, Deutsche Asset Management CIO Stefan Kreuzkamp said the 10-year Bund rate was “the measure of all things” in the German financial sector.

“The meltdown of this benchmark is distorting all asset classes,” he said.

The slipping of the Bund yield into negative territory increases the importance of the German government’s decision earlier this year to extend the calculation basis for the discount rate used for pension liabilities, under local accounting standard HGB.

It extended the calculation basis to include the previous 10 years of interest-rate levels, rather than just seven, which would have already excluded any pre-crisis levels. 

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