Germany: The loneliness of complexity
Pension funds are not happy with the European regulator or with their government regarding IORP II
German retirement plans fear the implications of the EU’s Solvency II directive
Aba, the pensions association, has called on the regulator not to overstep its mandate
Germany’s heterogeneous pensions system is difficult to standardise
German employers are concerned the European Insurance and Regulatory Authority (EIOPA) is overreaching its remit. The German pension fund association, aba, fears the occupational pension industry will “die of reporting” under new European regulations.
At first it might sound like a knee-jerk reaction to anything coming from Brussels, or in this case, the Westhafenplatz in Frankfurt where the European pensions supervisor is based. And some might argue that the Germans have cried wolf too often in the past when new regulations for occupational pensions (Betriebliche Altersvorsorge, bAV) were considered in Brussels.
But what has to be taken into account is that Germany Firmenpension (company pension) is more than just a pension fund. It is a deeply rooted connection between companies and their employees. In some cases it dates back to well before Otto von Bismarck, Germany’s first chancellor, introduced the state pension in the 1880s.
In the case of Germany this long history has led to a system with many different vehicles and options for setting up a company pension plan (Durchführungswege). Only last year the new legislation (Betriebsrentenstärkungsgesetz) made pure defined contribution plans possible – if the unions and employers agree on the terms.
But despite this complexity, Germany still does not have a dedicated occupational pension supervisor. Each vehicle falls under different regulation and supervisory rules. Not all of them are IORPs – in fact only Pensionskassen and Pensionsfonds are. Insurers, to whom the Solvency II directive applies, are offering insurance-based pension plans (Direktversicherung). And pension promises made by companies directly (Direktzusagen) are covered by reserve buffers within the company or outsourced funding vehicles (for example, contractual trust arrangements).
In July, the German government presented its draft for implementing IORP II. In it, the authorities noted “the directive aims at a minimum harmonisation given the considerable differences in occupational pensions across the member states”.
However, aba notes the proposed implementation does not include steps towards further harmonisation. Under German law Pensionskassen will continue to be defined as life insurance companies to make use of the individual consumer protection regulations already set up for this sector. The regulation for Pensionsfonds is also based on this, with some exceptions regarding investments and guarantees.
In its statement on the legal draft, the German association of employers (BDA) criticised the government for not using the opportunity to create a common supervisory framework for all German occupational pension vehicles. It pointed out that such vehicles were still treated differently under national labour and social law.
Regarding the implementation of IORP II, the BDA sees one important contradiction with the EU’s original intentions. German authorities want to introduce different conditions for transfers of pension benefits to or from pension plans. More members would have to approve a transfer abroad than new additions to the pension plan from a non-German provider.
One of the reasons for the heterogeneous German occupational pension landscape is the sanctity of accrued pensions and acquired rights to benefits. Some companies have ended up with five different Durchführungswege because it is hard to transfer old rights to new pension vehicles or merge different pension plans from an acquisition.
In recent months, the German pension industry has worried less about new EU regulation than its implementation and interpretation by the European insurance and pensions supervisor EIOPA.
The BDA warned about this authority overreaching its mandate, especially when it comes to reporting standards. It would like the German government to ensure that any amendments to national law based on guidelines issued by EIOPA have to go through parliament rather than being waved through automatically.
Aba shares these concerns. It fears the introduction of solvency capital requirements for occupational pension vehicles via the back-door.
When the European Commission considered the concept of the Holistic Balance Sheet, later renamed the Common Framework, a few years ago, Germany was one of its fiercest opponents. Its main argument was the strong tie German employers and companies have to their pension plans – in addition to the heterogeneity and uniqueness of the German occupational pension system.
The aba has warned that new reporting standards demanded by EIOPA might cripple some German pension funds. “Some IORPS might report themselves to death,” wrote Klaus Stiefermann, aba’s managing director and board member at PensionsEurope, in a commentary.
He mentioned the transparent reporting on all fund investments, extensive data on each direct investment, information on changes to the actuarial liabilities, more data on capital investments and costs, as well as information on sponsor financials. “This is indeed strongly reminiscent of the requirements under Solvency II,” says Stiefermann.
He also points out that much of the data required by EIOPA was not available to IORPs yet and this will create new costs. “In the seven years of its existence EIOPA has very confidently, maybe even high-handedly, expanded its mandate,” he says. He called on the EU to use the pending supervisory reform to “clearly define EIOPA’s competences”.
Expect an end to high real estate returns
Real estate will remain an important asset class but selection and returns will change. “Things cannot go on like this,” says Hans Wilhelm Korfmacher, managing director of the German WPV, talking about return expectations from real estate. “In recent years, this asset class has returned over 10% for WPV. But the cycle cannot continue like this. We will have to prepare for less profitable years.”
But this does not mean that the €3.8bn Versorgungswerk for auditors and certified accountants all over Germany (except Saarland) has lost faith in these real assets. The opposite is true. In recent years, WPV has built a comprehensive core-satellite strategy which it will continue to fill with investments. This approach gained WPV two awards at this year’s IPE Real Estate Awards: the best real asset investor in the DACH region (that is Germany, Austria and Switzerland), and the best mid-size institutional real estate investor of the year globally.
The jury was impressed by the “highly diversified and sophisticated approach that has generated excellent returns”. Another juror noted the “really impressive performance” and the “good mix of internal and external management”.
This award-winning strategy is characterised by a clear separation in the investment approach for domestic and international real estate and by good risk management.
The role of domestic real estate is to generate stable returns. “Here we are positioned rather conservatively,” says Korfmacher. Via a bottom-up search, direct core investments are screened in the largest seven German cities. Additionally, a broker is seeking landmark assets for the WPV. Direct domestic investments make up about 30% of the real estate portfolio which in turn is capped at 25% of total assets.
To the rest of the world a top-down approach is applied and investments are mostly done indirectly or via joint ventures. WPV looks at growth perspectives of a country and the correlation it might have to existing investments in its portfolio. Currently, the strongest growing segment in the foreign real estate exposure is Asia.
WPV is also diversifing into real estate debt, especially in the US and UK where non-bank lenders have an established role. Korfmacher emphasises the importance of adding this asset class. “In a later phase of the real estate cycle we think debt will basically be less risky,” he says. Further, these investments are part of the alternatives quota in WPV’s portfolio and are not using up more of the real estate quota.