On the face of it Germany's Pensionskassen (PKs) seemed to have had a satisfactory year in 1996. Ac-cording to the official figures, the 139 funds had an increase in assets of nearly 5%.
For the investment returns, two figures are shown and for all PKs these averaged out at at 6.9% on the current yield basis and 7.6% on the net yield basis. Though certainly not exciting, these would appear as acceptable figures.
The only negative note was the slight fall in PK 'contributions', or gross premiums as the supervisory authorities in Berlin refer to them in their recent annual report on 1996 from which our figures are taken. PKs are constituted as insurance companies and regulated on this basis.
To an outsider, only one of the above set of figures has meaning outside the realm of insurance accounting procedures, since the investment figures are on a book value basis, with assets valued at the price at which they were bought or the current asset value if this is less.
As Patrick Roeder of the $4.27bn Hoechst PK points out: You can only see this book price and the market value of assets can be very different from fund to fund."
When it comes to the yield figures, hopes at arriving at something useful are also quickly dashed. For the current yield figure only income flows received are included, such as dividends, interest and rents - capital gains and losses are ignored for this figure.
In the case of the net yield figure, the effects of capital transactions are taken into account, but only to a certain ex-tent. As Jürgen Bader of the $4.98bn Bayer PK points out: "These yield figures are only the good side of the coin. If you can benefit from capital gains this is included in the figure, but if you have write-offs due to a sale below book value, the amount of the depreciation is not included in the calculation."
As Roeder says: "You cannot compare German pension funds by this figure because they are driven by ac-counting rules. It is possible to smooth the performance of the fund each year due to the hidden reserve policy." If the actuary tells the fund that it has to earn 6.5% year by year, then the fund can show this under the rules. "So if a fund is showing a return of 8%, it could be misleading to say that this fund's performance was good, as it could mean that the actuary requires an 8% yield, because the fund has some high liabilities. But if the fund showed 5%, this could be a sign of strength of the fund as they are very much overfunded and have a funding ratio such that the fund only needs to show a return of 5%."
It is not possible to make comparisons between funds on an 'Anglo- Saxon' basis, Roeder warns. Bader adds:"The yield will depend on your strategy. If your fund has tended to avoid realisation of capital gains, the figures would be very similar or identical to the published figures." But if the fund needed additional returns, it could generate capital gains by selling assets.
In its comments on the figures, the insurance supervisory authority in Berlin uses a standardised formula used by life insurers to calculate a current yield figure, which it says provides a yield figure for 1996 of 6.3%. This lies "roughly" between the net and current yield figures.
The total figure for investment in-come received in 1996 by the 139 PKs covered came to $8.41bn, which was an increase of 13.7% on the previous year, but without a market value asset base to compare it against, it becomes virtually meaningless.
But help may be on the way to take some of the wraps off the hidden re-serves. In their reporting of figures for 1997, funds are going to have provide market value figures in their annual report as one overall figure. So what are the sort of increases over the current book values for assets likely to be? Roeder comments: "I would say ten to15% above, depending on the fund." At the huge BBV fund in Berlin covering the bank workers, Christoph von Langsdorff believes that overall figure could could be up to 10%.
However, Bader takes a different view, regarding such estimates as too high. Because of PKs' limited equity exposures, he does not think there will be much be way of hidden assets coming through. "I do not see any hidden reserves regarding the real estate because of the state of the market in Germany."
When it comes to reporting year-end figures to Berlin, funds will have to indicate the market value of their investments for specific areas. Here Bader sees problems with the Sculdschein fixed interest loans, which do not have quoted market values.
But as far as outside observers of the PK scene are concerned these disclosures do not look like being made public in this year's report. The supervisory office has told IPE: "At this stage it is not planned to publish these values in the annual report for 1997." Why ever not? Bader says: "I feel there is much sense in revealing the hidden reserve figures."
The breakdown of PK investment assets of $58bn on book value basis is given in the report, and on a book value basis are as follows: property/ real estate 6.1% (commercial, property 4.6% and residential 1.5%), equity 1.7%, investment funds 23.2%, bearer bonds and fixed interest 25.7%, registered debentures 19.3%, bonded debts and loans 13.2%, and cash deposits with credit institutions 1.1%.
The poor showing in equities at 1.7% is offset to some extent by the holdings in investment funds. Here the total proportions of assets in-vested in companies based in the European Economic Area (EEA) comes to 10.4%, which is less than half of the 23.5% of assets held in investment funds. The stake in companies outside the EEA is a mere 3%. The balance held through funds comes to 8.3% in bonds and 4.3% labelled as 'other investments'. Of the PK investment fund holdings, 98% is in special funds, with the balance in public funds.
One area where reality of the PKs' situation is captured in the official figures is in the decline of contributions to $2.1bn. Its significance is not in the amount, but that it is reflecting what is happening in the real economy.
As Roeder says: "If companies cut their workforce, the salary levels and contributions will be lower. There are also early retirements." The financial sector has not been immune as BBV points out in its report for 1996 when scheme member numbers declined for the first time after a steady increase. However, its contributions showed a marginal rise. Fennell Betson"