GERMANY - Spezialfonds in which only retirement-provision institutes are invested will no longer be subject to withholding tax on dividend payments from their US equities holdings.

Under the new agreement, Spezialfonds in which only retirement vehicles such as Pensionskassen, Pensionsfonds and CTAs are invested will themselves be considered Pensionsfonds and therefore exempt from the tax.

A similar exception had already been in place for direct investments by German pension funds.

The BVI, the German association for investment and asset management, has calculated that around €20bn in pension fund assets will be affected by the new regulations.

Thomas Richter, managing director, said: "This further increases the attractiveness of the German Spezialfonds."

In an interview with IPE, Michael Schmidt, head of equity fund management at Union Investment, pointed out that dividends were becoming increasingly attractive for German institutional investors.

"I would not go so far as to say 'dividends are the new coupon yields', but they can offer steady income," he said.

He noted that Union had launched a globally invested volatility-reduced dividend fund in September 2010, which managed an 8.3% net return after fees during the market ups and downs of 2011 without derivatives or foreign currency hedging, with a volatility between 11% and 13%.

"Dividend investments could become a substitute for parts of institutional investors' bond portfolios," Schmidt said, "but first there would have to be a change of investors' mind-sets."

First, he said, there is the problem of institutional investors thinking in very strictly separated equity and bond categories, and secondly there are the regulators making that same distinction.

But Schmidt also sees a change in the companies themselves, with many - until now - seeing dividends as an admission of no further growth perspective.

"Companies are starting to realise dividends are a very good means of making their shares more attractive, and investors are more frequently demanding a dividend, which is becoming an important part of their view on equity returns," he said.

However, Schmidt stressed that not all companies should pay out dividends and that investors had to "check carefully" whether these payments were sustainable, making active management of dividend strategies "indispensable".  

He added that retirement funds that could be affected by new Solvency II regulations would probably hold off on increasing equity exposure, as the capital requirements for allegedly riskier assets were still unknown.