GERMANY - The current regulation of Pensionskassen is suppressing returns and making diversification difficult, according to Rainer Jakubowski, chief executive of €18bn Pensionskasse BVV.

Pensionskassen are insurance-type pension funds that guarantee at least a 2.25% annual return on paid-in savings. BVV's return in recent years has been around 5%, or one percentage point above its guarantee.

The guaranteed return is achieved through a mix of conservative investing and close supervision on part of financial services watchdog, the BaFin. As part of its supervision, the BaFin stress tests the equity, bond and real estate investments of the Pensionskassen once a year.
Addressing the Handelsblatt pensions conference in Berlin, Jakubowski said regulation of Pensionskassen was why their returns were far lower than those of institutions outside Germany, for example the Yale and Harvard foundations, and the Dutch pension fund PGGM.

"The regulatory environment means that, generally speaking, Pensionskassen have 80% in fixed income and as little as 15% in equities," Jakubowski told the conference. "Investments in alternatives like private equity and hedge funds also make up less than 5%."

He added: "So Pensionskassen are not able to achieve the kinds of returns you see internationally."

Jakubowski also criticised the BaFin's stress tests, saying they were too frequent and too stringent in terms of market decline assumptions. Moreover, "by the time German regulation has fully adapted to new asset classes, it's often too late for Pensionskassen," he said.

"All this means that current regulation does not fully honour diversification, which is critical in optimising any portfolio," Jakubowski added.

Not all German pension vehicles are closely regulated by the BaFin. Pensionsfonds, which were launched in 2002 as Germany's answer to the Anglo-Saxon pension fund, are legally obliged to follow the prudent man rule to investing.

Asked by IPE whether he favoured prudent man for German Pensionskassen, Jakubowski said: "I'm not taking a position on that. All I would like to call for is less stringent regulatory environment (for Pensionskassen)."

For its part, the BaFin said it could not understand the criticism of its stress tests.

"Our stress tests correspond to international standards," a BaFin official said. "It's simply an early-warning system to ensure that those Pensionskassen which fail the test take measures to increase their risk tolerance."

"The Pensionskassen's insured have a right to expect that their schemes are well-prepared to deal with any possible market-related risks," he added. "The goal of our supervision is to insure that the guarantees given by the schemes in their contracts are always upheld."