Tobias Bockholt, senior investment consultant at Willis Towers Watson (WTW), believes the trend towards alternative forms of investment for German pension investors is expected to continue based on expected returns for traditional bonds and equities, he told IPE. Pension investors “have no other choice,” he added.
Commenting on the firm’s German Pension Finance Watch study, Bockholt said that “liquid standard asset classes cannot generate the returns required for the actuarial interest rate.”
According to the study, the development of pension assets for companies listed on DAX and MDAX indices stabilized in the course of the third quarter of this year.
The 30 largest German companies are listed on the DAX index, while the MDAX lists the 60 largest firms below the DAX stock in terms of market capitalization and trading volume.
Pension assets declined significantly for both DAX and MDAX companies at the end of Q1 2020 to €280.4bn from €302.5bn at the end of 2019. Asset volumes recovered in the second and third quarters even though market uncertainties remain.
“The uncertainty in the market will remain high and will go hand in hand with the development of the crisis. The excess of money from central banks has decoupled the equity market from the real economy, which is dangerous,” Heinke Conrads, head of retirement Germany and Austria at WTW, told IPE.
Pension assets of DAX companies improved from €270.2bn in Q2 2020 to €272.7bn in Q3. Pension assets of firms listed on the MDAX index remained stable quarter-on-quarter at €49.6bn.
WTW noted in the study that individual asset classes performed very differently, but alternative forms of investment were increasingly important.
Year to date, European equities recorded -12.2%, global equities -1.5%. real estate -19.7%, while bonds performed positively so far with a 2.8% return. Overall, the portfolio of DAX firms saw a positive 12.5% growth.
Equity markets gradually recovered in the course of the first half of the year from the downturn caused by the COVID-19 pandemic, and stabilized at the beginning of the third quarter. Global equities in particular, and yields on European bonds, continued to recover.
“Institutional pension investors such as DAX and MDAX companies are primarily positioned with a strategic allocation and are unlikely to have actively reduced their share of allocations during the pandemic,” Bockholt said.
In particular, Bockholt added, investors without value preservation strategies, also often referred to as risk overlay, were able to take the “very fast countermovement in full” because their portfolios did not have a neutral position with regard to the [equity] market through security mechanisms”.
“The same also applies to bond markets, where a clear widening of spreads could be seen and these show a tendency to go back to almost pre-crisis levels,” he said.
The actuarial interest rate has stagnated in the current low interest rate environment. This has led to unchanged pension obligations, while the funding level of company pensions rose by almost 1% according to the model used for calculation, the study noted.
The specific funding level of company pensions, or Ausfinanzierungsgrad, for DAX companies remained substantially flat at 64.9% in Q3 2020, while for firms listed on the MDAX increased from 56.3% in Q2 to 57% in the third quarter of this year.
“In times of crisis, pension promises are important compared to other benefits,” Conrads said, adding that especially now it is worth pursuing consistent de-risking in pension plans and at the same time transparent communication for the employees.