The pension funds for professionals (Versorgungswerke) in the German state of North Rhine-Westphalen will start to apply a stress test to their asset allocations through a new model intended as a more granular risk management tool for capital requirements.

The Stresstest 2.0, as it is called, was designed by Germany’s finance ministry together with the 15 pension funds for professionals in North Rhine-Westphalen.

It aims to give a more granular idea of the risks that a pension fund can incur when allocating assets, with a strong correlation to current market events, according to a paper on the stress test methodology.

The stress test is conducted for the first time this year, with results that have to be submitted to the finance ministry, which is the supervisory authority of the pension funds for professionals in North Rhine-Westphalen, by 30 April 2025.

The asset allocations of these particular pension funds in this German region have changed in recent years.

“Since there is no risk-free interest rate, more [solvency] capital is required than in the past,” said Ulf Steenken, head of department for insurance supervision of the state of North Rhine-Westphalia at the Ministry of Finance, explaining why the ministry and the schemes have reworked the stress test.

With the 2.0 test, asset classes are stressed simultaneously based on the ‘Maximum Drawdown’ (MDD) concept, and on historical data. The MDD model applies to asset classes such as equities, bonds, private equity and private debt, according to the ministry. General values are sometimes used, for example to stress investments in real estate, infrastructure or mortgages.

Pension funds will pass the test if they have sufficient risk capital to cover stressed assets, and if the funding ratio is at least 100%, while underfunded schemes are required to draft a recovery plan, according to the finance ministry.

In order to take into account risks beyond asset allocation, 2.5% of the actuarial reserve must be deducted from the overall risk-bearing capacity as a buffer for non-investment risks, for example IT risks, it added.

“The supervisory authority in the Ministry of Finance [of North Rhine-Westphalen] expects a more realistic assessment of the capital required [by pension funds] in the event of stress, tailored to the pension funds’ investments,” said Steenken.

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Luigi is IPE's Berlin-based DACH correspondent. His coverage includes regulation and the latest pensions and investments trends, and, being a native Italian, he also covers Italy’s pensions market. He has reported from Italy and Germany on international politics and business for European and US publications including USA Today, Bloomberg BNA and for the investigative magazine L’Espresso. He was previously Germany correspondent for Mergermarket covering M&A.View full Profile

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