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Stress tests thwarting German schemes' equity investments, experts warn

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Solvency “stress tests” required by law are preventing German pension funds from increasing their equity investments, industry figures have warned.

According to legal investment limits, Germany’s largest Pensionskasse – the BVV, for banks and the financial services industry – is allowed to invest up to 35% of its assets in equities.

Yet BVV managing director Rainer Jakubowski, speaking at the Handelsblatt annual conference in Berlin, pointed out that the scheme was not even allowed to maintain a 27% equity allocation, due to additional regulations.

According to German risk-management rules, Pensionskassen have to demonstrate their solvency using a stress test, which caps the amount of risk the institution can take in equities.

“This stress test, which was put in place in 2004, forces us into a relatively low equity allocation, which I think is [fundamentally] wrong,” Jakubowski said.

He said that, if he had more freedom in terms of asset allocation, he would “do some things differently”.

Hans Dieter Ohlrogge, chairman of the board at the IBM Pensionsfonds and Pensionskasse, agreed that the stress test was “a problem” because “it prevents a sensible real asset allocation in most cases”.

At IBM, he “has more freedom than others”, he said, both in the Pensionsfonds, as this is less regulated, and in the Pensionskasse because the plan sponsor has an obligation for top-ups.

“We have a higher real asset allocation than the average Pensionskasse, and we can cope with the volatility,” he added.

Ohlrogge argued that regulations should provide more freedom on the liability side – by allowing temporary underfunding, for example.

“But current regulation goes exactly the opposite way,” he said. “Pension funds are being driven into higher volatility and higher-risk investments because of the low interest rates, but institutions are not handed any instruments to handle the higher volatility.”

Together with a shrinking discount rate in many cases, the capacity to bear risk is also lowered, which, in turn, drives institutions into non-returning asset classes – “a vicious cycle”, he said.

“Eventually,” he added, “contributions have to be increased, which makes retirement provision unattractive. In fact, we are in an environment in which occupational pensions are being strangled.”

Jakubowski said institutions were now being driven by continuous mark-to-market assessments, often resulting in poor asset allocation decisions.

“We need the political understanding that the artificially created low interest rate einvironment is making retirement provision more difficult and that counter measures are needed,” he said.

He added that, should the low interest rate continue for much longer, German pension funds would have problems achieving their minimum guarantees, as institutions are “punished by the supervisory body” for investing in most asset classes returning 3-4%, which is roughly the guarantee level.  

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