Plans to reform Germany’s pension regulatory and policy system that are expected to boost the country’s pension buyout market have sparked the interest of foreign investors, say industry experts.
In June, Alterssicherungskommission – Germany’s Pension Security Commission – published a government-backed report in which it urged social partners to fully support the defined contribution model as well as consider the introduction of mandatory occupational pensions.
The latter also gained the support of the country’s largest umbrella trade union organisation, the Trade Union Confederation, as well as from policymakers, experts and industry stakeholders.
In light of these moves, occupational pensions are increasingly becoming “a boardroom priority” as companies and chief financial officers are pushed to rethink their pension strategies, pension buy-out firm Vedra Pensions told IPE.
The shift in policy has created a strategic opportunity for companies to take action on legacy closed pension promises which are funded through provisions set aside on their balance sheets rather than leaving them unaddressed – at the same time as focusing on optimising new pension plans and trying to meet new requirements, Vedra said in a statement,
Pension promises currently account for €336.1bn – or 46.2% – of the assets set aside by companies to cover their liabilities, according to the latest figures published by aba, the occupational pension association.
Investors are now eagerly eyeing the €730bn pension liabilities market.
In June, London-based private market specialist One Investment Management took a stake in Vedra that will help the buyout firm further tap into the accelerating demand for pension buy-out solutions.
Two dominating buy-out models
In a June webinar, Jeffrey Dissmann, head of investment consulting at Mercer Deutschland, said his company had observed two dominant models for buyout transactions across the German market.
Under the first, the pension buyout firm deploys its own capital to fund the pension corporation that is used for buyout transactions in Germany. The provider is then compensated through the distribution of dividends.
The second is based on a fee paid to the provider, with the employer providing full funding.
According to Mercer, the first capital model is becoming established, and used by the majority of providers, because it is the only one delivering on the promise of a “final and complete transfer of risk”.
“We view this [model] primarily as an alignment of interests, as it imposes a discipline on the buyer to manage operations prudently,” Mercer said.
Some pension buyout providers position themselves through administration and structuring solutions, or platforms, offering what Mercer calls “off-balance-sheet solutions”.
These are models based on both a base and a performance fee, with the crucial difference that providers don’t have skin in the game as they do not deploy their own capital, the firm said.
“Consequently, one might expect less discipline regarding capitalisation and pricing from such providers, whereas the experience shows that providers who commit their own capital tend to price more carefully and pay closer attention to capitalisation,” Mercer said.
