While German insurance companies and investment banks have been gearing themselves up for the new Riester market, the significance of the developments in German has not escaped foreign players, in particular, with an eye on the huge predicted asset flows in Europe’s largest economy.
International asset manager, Invesco, is one such firm taking clear steps to gain a foothold. Michael Duesberg, CEO of Invesco Germany, explains that the group began closely following the Riester legislation in the autumn of last year.
“We’ve been in the German market for a number of years administering accounts for pensions for German institutions, so we are not inexperienced in this area.
“Now though we are putting together our experience of the US in the 401k market with local pension fund management in Germany and the Riester legislation means we are moving strategically into the environment of corporate pension plans.”
Duesberg warns though that while politically the Riester reforms are step in the right direction, the economics may not add up – both for employees and pension providers.
“The government is taking a percentage away from people’s state pension and allowing them to invest it by themselves, but only if you have many kids and a low income. The reality is though that you cannot have many kids and be on a low income – and able to pay money for pensions. Politicians see their populations in a very theoretical light.
“The other disaster is the high complexity of the market for providers. The break-even point for providers could be something like eight years down the line, and even then the plus side could take another eight years to come through -16 years before making a profit!”
Furthermore, he notes that with many competitors on the starting line for German pension business the margins are much smaller: “You have to have to have a long-term view for this market.”
Christof Quiring, director of DC products, Germany, at Invesco, explains the company approach: “The third pillar in Germany is not being accepted by the people. They are reluctant to invest in the new Riester funds and it is turning out to be a flop even to the clients. We believe that occupational pension plans are much more interesting for the clients and for us as a provider.”
To this end, he says Invesco is concentrating its fire on using the firm’s 401k administration experience to provide multi-employer pension funds.
“This is not easy for a pure asset manager like us to do because the guarantee element means that this is an insurance oriented contract. You need an insurance wrapper and this is why we are going to co-operate with an insurance company and are close to signing a contract with a major top ten player in Germany.”
The product itself, he notes, will be a pensionfond with a fairly liberal investment regime. “One part of employee contributions will flow into a guaranteed fund. The other part, 60%, will flow into Invesco funds. We are also going to offer a managed fund concept where we have a selection of the best funds from external providers.
“Another pension plan we are working on with the insurance company is a 100% invested fund with only a small guaranteed component It will be a life cycle fund where we reduce the risk with the age of the employee. The allocation model in itself will guarantee that we meet the principle capital guarantee requirement.”
Invesco says one of its principal market targets will be foreign entities like itself:
“There have been a number of large union contracts with providers in Germany so far, but we as a foreign provider have not been included in these deals.
“On the other hand we have a natural market segment – international companies - which know our business from the UK, USA or Hong Kong and are familiar with the 401k plan concept,” says Quiring.
He adds: “We are also focusing on large and mid-sized companies that need a solution but are being ignored by the other providers. So far there are not many pure asset managers in the market and I am optimistic that we are one of the first to come up with a solution.”
Olaf John, who heads up the institutional business of US fund giant Fidelity in Frankfurt, is convinced that the reforms are a step in the right direction. “It is very difficult to change things dramatically and many moan about negative points. But people should not forget about what has been achieved. For many years, nothing had changed in occupational pensions, now we have many improvements.” He adds: “Pension vehicles are going in the right direction, but they will need changes in the future. I am very optimistic.”
Nevertheless, the interest in Riester plans at the individual level is definitely more low key that the group originally thought. John says: “We do not have a Fidelity Riester product because of the guarantees required, but our mutual funds are within unit-linked and other Riester products of different groups, so we are participating in the market.”
To provide guarantees is not something the group is set up to do, he explains. “Insurance companies have a clear advantage in developing these products, as it is major part of their approach to protect capital in this way.” The guarantee is helping insurance groups rather than the asset managers in his view. “It means we can only do limited business, so from our viewpoint it is a half step.”
The public should have had a choice as to whether or not to have a guarantee. “It is financed by a premium, which reduces the amount available to invest, so the pension could be lower. Pensioners will lose out. Just because some are not able to chose the right asset allocation, then the majority have to suffer lower returns,” says John.
In fact, a high paid investor without children may be better off committing to an equity fund longterm than going into a Riester product, he claims.
“But we very much want to handle the mandates that are coming onto the market as a result of the pensions changes, he says. “All the new Pensionskassen and Pensionsfonds will reach a stage where they will provide mandates on different asset classes. The people will be choosing asset managers, which will be the opportunity for us.”
Investment managers can take several routes into the new Riester pensions market. Martin Theisinger, managing director of Schroders Investment Management in Frankfurt, sees at least two ways in which his firm can access the new business.
“We can participate through the new Pensionfonds when they put out mandates to institutional asset managers or we can participate by offering mutual funds.”
Schroders has two mutual funds and 30 institutional mandates, a total of E2.57bn under management. It launched the funds at the beginning of the year, in cooperation with Unico. The funds, ConClusio European equities and ConClusio global equities, have two share classes for retail and institutional investors. Institutional investors – defined as investors with volumes of over E2.5m – can buy the funds through Schroders.
The funds have attracted modest interest, says Theisinger. “People are not using them as much as we had hoped but we are quite satisfied with their performance,” says Theisinger. “We need a track record to get into the retail part of the market. There will always be a portion of the market that is managed by our Spezialfonds which was our expertise when we started in 1999, purely focusing on institutional money in Germany.”
Theisinger says the way Schroders manages its funds should make them attractive to market makers. “We use a very disciplined structured process where we optimise our portfolio only once a month.”
He says that difficult market conditions in the past year have been tough on competitors, particularly the newcomers. “We saw a real clamp down on the opening up of the market in Germany, especially by foreign providers during the past year, and I expect there will be quite a few companies disappearing or merging.”
However he is confident that Schroders will not be one of them. “We are still optimistic because we were able to grow faster than the market, even during the rough and tough times of the past 18 to 24 months.
The Riester pension reforms are also likely to spur growth in the Spezialfonds market and consolidation in the KAGs, the companies that service them. Deka Asset Management now manages more Spezialfonds than any other KAG, with a 14% market share of the 5,400 funds in the marketplace. Frankfurt-based Claus Sendelbach, responsible for institutional clients at DekaBank, reckons that the move to advisory mandates will bring big changes to the Spezialfonds marketplace. Though the numbers of KAGs are increasing, he sees this trend reversing in some years’ time.
“You will need to have the budgets for investment,” he says. He points to the increased need for regular reporting on Spezialfonds, which used to be monthly and now typically is weekly. “Our Spezialfonds are now priced daily and investors can access their details via the internet”
Many KAGs are not breaking even with the volumes of business they have, he believes, but also there are trends to consolidation in the marketplace. “Multi-management is a growing trend in market. One solution is for clients to use just one KAG and to put all their Spezialfonds with this. The other is to arrange all Spezialfonds within one big Spezialfond. Here you have also consolidation of volatility of the different specialist mandates.” There are gains on administration and reporting from doing this.
Sendelbach reckons the pensions changes will be good ultimately for the Spezialfonds market, but with new funds it will be sometime before their mandate sizes are large enough to warrant creating a Spezialfond, which in Deka’s case has a minimum of E20m.

The group has just launched a range of five mutual funds aimed purely at the institutional investor. “There is limited marketing and advertising, just direct sales and it is aimed at the client with just E0.5m upwards to invest.” Each mutual fund will have much fewer investors than any retail mutual fund. “If clients’ assets grow sufficiently then they can switch into their individual Spezialfond, without significant costs.”
Deka is not the only group actively offering such funds and it hopes to extend the range offered in the future, says Sendelbach.
Other asset managers see the Spezialfonds market growing with the inflow of pension fund money. Ekkeharde Von Knebel Doeberitz, general manager of Baring Asset Management AG in Frankfurt, also “Much pension fund business is ending up in Spezialfonds, and insurance companies are setting up their own KAGs to launch Spezialfonds for themselves because they see first hand that this is an attractive business and a growing market. They expect a growth rate for the business of 15% per annum. I think this is possibly conservative.”
Barings Asset Management decided not to open a KAG when it established a German presence three and a half years ago. It estimated that it would have cost E5m to establish and run a KAG.
“KAGs require a huge amount of administration, and that means expense. There are many that are not very profitable and some that are not profitable at all,” he says.
A KAG also did not fit in with Baring’s interest in multi-management and open architecture. “We have always believed in the idea of transparency, of being able to change a manager overnight if you don’t like him any more. At the same time we favoured the idea of the multi manager or segment fund.”
Doeberitz sees a growth in ‘rent a KAG’ companies, specialist companies that will handle the administration, accounting and reporting for companies like Barings which have decided not to operate their own KAG. One recent example is Inka, part of Trinkhaus & Burkhardt, an HSBC subsidiary.
This development has been accelerated by legislation permitting outsourcing , which came into force at the beginning of the year. “We are currently about to design the first management contract where we really have an outsourced mandate, and where we do not need the feedback from the KAG,” says Doeberitz.
This will also result in an expansion of the market. “More foreigners are going to come on to the market as an advisory role allows them to be there without having a KAG, possibly without being there. The competition is going to increase. which will be good for customer.”
The Spezialfonds market faces one threat, however. International tax harmonisation could remove their tax advantages. “There is a little bit of undertone in the Spezialfonds market with regard to the tax advantages that might disappear in the wake of harmonisation,” says Doeberitz. “Under the present arrangements you can carry forward extraordinary earnings, that is, capital gains. These do not have to be taxed until they are distributed. The new IAS accounting rules would require companies to show the capital gains which would result in them being taxed.
“We do not know yet if this will happen, but that is the fear of the market and the question is whether it will have an impact on the German Spezialfonds market .
“Personally, I think the industry does not really have to worry because the Spezialfonds is not principally a tax savings instrument. It is mainly an instrument that allows you to administer the securities investment that you have.
“When you have a Spezialfond you only have to book the share price of the Spezialfond, which is treated as a security, whereas when you have a segregated account in the Anglo Saxon sense you have to book each and every security.
“This advantage of Spezialfond is not going to go away even if the tax advantage disappears.”
Banque Pictet is another investment manager that decided not to join the scramble to set up or acquire a KAG when it arrived in Germany in 1999.
Michael Montag,, head of Banque Pictet (Luxembourg) in Frankfurt and there in charge of the institutional asset management, says the main problem of setting up a new KAG was how to get into a market which was already well entrenched and effectively closed to newcomers. “We evaluated different options and one of the options was whether to set up or buy a KAG. We had our doubts about setting up our own KAG because the market tended to operate like a closed shop.”
They also ruled out buying an existing KAG. “We didn’t buy a KAG because we were quite sure that it would take too long to get any money out of it.
“Others have decided to go into KAGs, but I’m not sure that many who did are happy with the decision.” He says that consolidation in the KAG market is now inevitable. “In the next ten years you will not see many of the present 70 or 80.”
Pension reforms are not likely to produce any easy pickings, either, he says. The public has shown itself to be lukewarm about the Riester products and overall the development of the pensions market in Germany is taking longer than the market expected. “I’m not so optimistic that we will see huge amounts of money which can be managed or outsourced. It will take time, and it may take more time than we first expected,” he says.
Meanwhile, Banque Pictet is content to bide its time. “The market is not so different as other parts of the world where we operate. The primary focus is insurance, existing pension funds and corporates. About two thirds of our money is from insurance companies and pension funds.”
In an environment of markedly lower returns, the emphasis is now on controlling costs, says Montag. “In the days of high returns, nobody cared. We ourselves have to be very aware of costs. Not only our own costs but the costs we create for our clients.
“Institutional clients are now doing their homework. They are looking much more carefully into details than they were three or four years ago. They are much more aware that the management fee is not the major part of the total spend. Less than 25% of the total expenses are related to the management. The rest are costs for transactions, brokerage and custody However, the solution is not to reduce trading activity, he says. “I think it’s much better to check on transaction and brokerage costs.”
The new regulations enabling outsourcing KAG functions like portfolio management, administration, etc, have helped Banque Pictet check these costs. “Now we have much more control over the entire system process. Before, the brokerage and the trading was done by the custodians, so we had no control. Well, we do now.“
A next step, and also a major trend in the market, is the implementation of a multi manager concept and the use of a global custodian. While the multi manager approach leads to a higher degree of specialization in asset management, the global custodian provides a consolidated reporting and hence more transparency and control. In the end both should lead to a better per formance through a well structured asset allocation.
However, costs do explain differences in performance of client portfolios. “It’s difficult to explain why the performance of a portfolio that is set up in Switzerland or the UK is better than the performance of an identical portfolio set up in German Spezialfonds. There must be a reason, and the reason must be cost.”
Montag also says he expects the demand for mutual funds, especially from small and medium sized institutional investors, to increase in the future. “These investors are setting up a kind of core satellite system. The core will be done with Spezialfonds and the satellite is usually existing mutual funds. And the cost difference between mutual funds and Spezialfonds is not big.”