Consultancy WTW is in discussions with companies in Germany to transfer pension liabilities in the range of €50m to €500m, after finalising a structure for buyout transactions in Germany.
Small and medium-sized enterprises (SMEs) involved in mergers and acquisitions (M&A) are considering buyouts as they come under pressure from US tariffs, Hanne Borst, head of retirement at WTW, told IPE.
Current disruptions in industries are prompting companies to rethink their structures, with offloading pension liabilities as part of the process.
Larger SMEs, or Mittelstände, are also looking at buyout deals as a de-risking tool, particularly as employees who have been managing pension obligations retire, Borst said.
Borst said that the focus at the moment is on €50-500m liabilities. “Large companies listed on the DAX exchange talk about [buyout transactions], but they are not mentally ready on the topic of the impact on reputation,” she added.
Foreign companies with direct promises (Direktzusage) on their balance sheets are also exploring buyout solutions, according to Borst.
WTW officially entered the German buyout market on 1 July, building a structure that includes a foundation (Stiftung), a pension holding company, and a pension corporation (Rentnergesellschaft) – the vehicle used to transfer liabilities – supported by a pension trust, a Pensionsfonds and a contractual trust agreement (CTA).
The foundation, independent from both the holding and the pension corporation, was established to pay benefits over time, while the pension holding integrates the pension corporation through share deals.
Companies with strong funding ratios – particularly banks, but also DAX-listed firms – are well positioned to transfer liabilities, Borst noted. The Basel III framework incentivises banks to build pension assets, meaning many have the funding ratios required for buyout transactions.
“We are in talks with companies in Germany and abroad. We see that the market develops and will continue to develop, we expect three to four transactions next year,” Borst said.
Asset allocation
WTW structures assets for buyouts through existing fund platforms, drawing on actuarial, administration and payroll services, as well as global investment operations.
The portfolio focus is on private markets and illiquid assets to deliver long-term premium, liquidity and returns in volatile markets, said Johannes Heiniz, head of consulting and retirement Germany at WTW.
WTW acts as an outsourced chief investment officer (OCIO) for the pension corporation within the fund-based buyout solution, with portfolios implemented through sub-fund structures. Existing platforms in the US and UK are also used for German deals via Spezialfonds, Heiniz said.
The consultancy partners with Munich Re to hedge risks associated with pension promises in buyout deals. The reinsurance solution offers guarantees on pension products not bound by Germany’s maximum interest rate (Höchstrechnungszins), which has risen from 0.25% to 1% this year.
With Munich Re’s reinsurance solution complementing the fund-based structure, guaranteed benefits are calculated on the basis of market interest rates.
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