Versorgungsanstalt des Bundes und der Länder (VBL), Germany’s supplementary pension provider for public sector employees, is facing demands to improve transparency on asset allocation from members, and a parliamentary inquiry for a real estate loan.

The Left (Die Linke), Germany’s democratic socialist political party, filed an inquiry with the government, asking to disclose information on a €130m “high-risk” loan by VBL to German Invest, a subsidiary of the real estate investment firm Aggregate.

It is not clear if the coupon of 15% and a term of one year on the loan has been repaid, as planned on 1 September 2022, according to the inquiry.

“If you opt actively for an investment, as VBL, an institution investing members’ money with a mandatory insurance, with a 15% coupon, that is a statement of investing with risks, and the repayment of the credit has been postponed multiple times,” Alison Schultz, financial economist at University of Mannheim, and part of the initiative SustainVBL, told IPE.

She added: “The repayment of the loan has been postponed for months, and now, as far as I know, the maturity was set on 23 May or later, while the money was initially due in September 2022.”

In a statement, VBL told IPE that is has been contacted by the German government relating to the parliamentary inquiry initiated by Die Linke, and it has given information on the investment. It has also given a statement to its supervisory authority – the finance ministry – on the matter.

The investment is a senior secured real estate loan for a construction project in Berlin, a social impact residential development project, the pension fund added in the statement. The project is going through the usual approval process and is in an advanced stage, it said.

Demand for end-of-year disclosure

SustainVBL, a group including active and former members of the pension fund, has been demanding more transparency on VBL’s asset allocation and investments for years, pushing at the same time for sustainable investments.

It has written an open letter to the scheme asking to make all investments transparent, follow a sustainable investment strategy, and exclude fossil fuel companies from its portfolio.

“We have asked VBL about the [German Invest] loan and it simply replied that it has always acted according to regulatory requirements, without giving us specific information on investments, saying that they are confidential,” Schultz said.

SustainVBL is demanding that VBL discloses all investment holdings at the end of the year, like other pension funds, for example the Norwegian Government Pension Fund Global.

“Members who are obliged to be insured with the VBL have the right to know that, for example, VBL has invested in such a loan like the one in German Invest. Disclosures on investments in securities are minimum requirements,” she said.

The Ministry of Finance, supervising VBL alongside the financial supervisory authority BaFin, declined to comment regarding VBL’s loan to German Invest, whether German Invest repaid the loan including the coupon or not.

A spokesperson for the ministry said: “The finance ministry [VBL’s supervisory authority], as well as the board of directors and thus the sponsors of VBL, are informed about the general orientation of the investments. For VBL, traditional asset classes were and remain by far the most important components of its investment strategy.”

Expanding investments to alternative asset classes reflects an industry trend, and cannot be objected from a regulatory perspective. Investment activities at VBL must meet the basic requirements of security, profitability, liquidity and quality, the spokesperson added.

“We have [also] exchanged letters with the finance ministry, asking for more transparency on investments, with a letter sent last November. The ministry’s reply did not provide clear answers, so we contacted parliamentary groups, and Die Linke have filed the parliamentary inquiry,” Schultz explained.

The finance ministry replied to the letter sent last November that from a supervisory point of view there are no indications that VBL is not complying with existing disclosure and information obligations.

In an earlier reply to a further inquiry sent by advocacy group Finanzwende and FragDenStaat, an NGO, the finance ministry said that data on direct and fund investment of VBL are not available.

“Disclosing information on the loan to German Invest is not the main goal of our initiative, but it is a matter of transparency with regard to the investments overall of VBL. German Invest is a subsidiary of Aggregate. We don’t think that it is responsible to invest members’ money in a company linked to the struggling and controversial Adler Group, of which Aggregate holds a 6% stake. Cevdet Caner, the CEO of Aggregate, has a problematic history of involvement in different firms,” Schultz added.

In email exchanges seen by IPE, however, VBL defended its position saying that CEO Caner was neither a shareholder, nor a member of the board of Aggregate at the time of the investment in German Invest, and investments in alternatives comply with all regulatory and supervisory requirements.

Aggregate announced the appointment of Caner, who had advises Aggregate’s owner and top management since its inception in 2015, as new CEO in July last year, the firm said.

Adler has faced a liquidity crisis because of the downturn in the German property market, among other reasons, with the High Court of Justice of England and Wales approving a restructuring plan in April.

Last year, BaFin found accounting shortcomings during its audit of the consolidated financial statements of Adler Real Estate for 2019, it said.

Steps towards transparency

Michael Leinwand, VBL’s chief investment officer, has given details on the pension fund’s investment strategy in an interview with IPE, mentioning the new strategic asset allocation, targets in private debt, private equity, and real estate, sustainable and impact investing.

“Alternative forms of investment allow VBL to diversify more broadly [in terms of] investment strategy, and offer an interesting risk/return ratio,” the spokesperson for the finance ministry said.

Less liquid investments offer the opportunity for additional premia, but the risks of these investments must be considered as part of the strategic asset allocation, both in advance, in the modeling phase, and in the implementation phase, as part of the risk-bearing capacity of the institution as a whole, currently taken into account by VBL, the spokesperson added.

SustainVBL is not in principle against investment in private markets if, however, VBL is supervised properly by the finance ministry and BaFin, disclosing these types of investments.

“But here we are in a situation where, for example, the finance ministry does not have an idea of what is happening with the investments. This situation is problematic, also for the members whose money is at stake. The reasons for such “alternative” investments have to be disclosed, and who is responsible for them. The finance ministry should look closely at these investments and the general investment strategy of VBL,” Schultz continued.

VBL has also reviewed its responsible investment strategy to cut CO2 emissions in its equity and corporate bond portfolios, excluding from the pool of invested companies generating more than 25% of their revenues from coal.

This is a step forward but not enough, according to SustainVBL, as oil and gas companies are still part of the investment portfolio, rules are vague and its implementation hard to verify. VBL has recently joined the UN Principles of Responsible Investments (PRI).

“This approach makes sense, but only if we can check that it is consequently implemented in reality. On sustainable investment, for us would be appropriate to inform the members once a year, at the end of the year. There can be no sustainability without transparency,” Schultz said.

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