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VFS takes the direct approach

In Germany, asset managers tend to focus on attracting assets from Pensionkassen, the traditional pension fund vehicle. In doing so, however, they may be overlooking one of the hidden giants of the German occupational pensions market: Volksfürsorge (VFS), a life insurer based in Hamburg.
Pensionskassen are certainly attractive clients. They make up 20% of the e354bn in German occupational pension assets and since they are often tied to multinational companies, are generally open-minded.
But while Pensionskassen mostly cater to big companies, insurers like VFS serve wide swathes of the small- to medium-sized enterprises (SME) sector, which employs 70% of Germany’s workforce.
The insurer has its fingers in the entire corporate pensions pie. Beyond insurance-related pension schemes, called the Direktversicherung (direct insurance) and Unterstützungskasse (support funds), it offers a Pensionskasse, Direktzusagen (book reserves) and the new equity-oriented Pensionsfonds vehicle. According to VFS, it has sold around 250,000 corporate pensions to date.
While VFS declines to disclose how much of its e23bn in total investment assets is corporate pension money, the last four years give some idea of where it stands in the market. Between 2000 and 2004, VFS took in almost e4.5bn in contributions from its occupational pension schemes.
VFS’s formidable position is basically down to two factors. Firstly, Germans have always been very receptive to insurance of any type and of course fully appreciate the need to save for retirement amid the shrinking government pension. Secondly, VFS - like rival Allianz but unlike many Pensionskassen - has an army of sales people in Germany to fall back on. All told, 60,000 VFS agents and another 6,000 independent ones sell the insurer’s corporate pension, whose current return is 4.2%.
Government pension reforms have also helped. In 2002, for example, VFS launched a Pensionskasse and a Pensionsfonds to take advantage of the new defined contribution (DC) business created by the historic Riester reforms.
At least for its Pensionskasse, the move has paid off. Of the e1.4bn in occupational pension contributions VFS took in last year, no less than 70.4% went to the scheme. VFS’ Pensionsfonds, on the other hand, had virtually no contributions, though much of this is related to the general unpopularity of the three-year-old scheme.
Hans Melchiors, VFS board member in charge of occupational
pensions, remarks that while the insurer is strong in the SME pensions sector, “we have not fully realised our growth potential among German multinationals and the public sector”.
Regarding the former, Melchiors points out that new international accounting rules are pressuring them to remove pension liabilities from their balance sheet and place them in a cash-backed fund. Regarding the latter, he says public institutions like hospitals and clinics are, amid demographic changes, shifting from pay-as-you-go schemes to external funds.
To meet these clients’ needs, in January VFS rolled out an IT product, which, according to Melchiors, is a cheaper and simpler alternative to the contractual trust agreements (CTAs) currently very much in demand in Germany.
Another ideal solution is for these clients to transfer their pension assets to the insurer’s Pensionsfonds vehicle, he says. In the same breath, however, he admits that all Pensionsfonds will remain unattractive vis à vis CTAs, unless the government adjusts the so-called Rechnungszins.
“For the past year, we in the industry have been urging the government to adjust the the Rechnungszins, as this is central to the viability of Pensionsfonds. Although the social affairs ministry supports our view, we still haven’t convinced the finance ministry, which has final say on this matter,” says Melchiors.
The government is expected to make a decision on the Rechnungszins as part of its transposition of the EU pension funds directive in late September. Until then Melchiors, who is the spokesman for Pensionsfonds at the German occupational pensions association (aba), says he will continue to lobby to ensure the vehicle’s competitiveness.
Regarding the EU directive in particular, its impact on VFS is seen as minimal. This is because the insurer is already active in other European markets by virtue of being a subsidiary of AMB, which - since 1993 - is part of Italian insurance giant Generali. These markets include Italy, Austria and in the future, central and eastern Europe.
Melchiors also stresses that to ensure the continued development of German occupational pensions, it is essential that the government preserve the tax exemption for employee savings in DC schemes. That exemption is due to expire in 2008.
Regardless of what happens, VFS seems poised for further robust growth, so asset managers not doing business with the insurer may wish to take note. However, they should also know that VFS is captive to its parent AMB Generali Asset Managers, meaning that, for example, nearly all of its investing is done in-house.
“Our situation is similar to the one at Allianz or Münchener Rück. Both rely on their in-house investment arms to manage their insurance assets,” says Melchiors, though he adds that AMB Generali does outsource to other asset managers.
VFS’s asset allocation is typical for all German insurers currently – that is largely in fixed-income. More than 80% of its assets are invested in bonds, most of which are investment-grade European government debt. Another 8% are invested in equities, primarily from Europe, though this figure includes larger direct shareholdings in companies.
With respect to other asset classes, VFS says it has 2% of its assets in real estate, including both funds and direct property holdings. Private equity accounts for under 2%, while hedge funds are not present in the insurer’s portfolio.
Melchiors says that because VFS is committed to providing a “steady, solid return” on pension savings, it has no current plans to increase its exposure to equities or invest in alternative investments, like hedge funds and real estate investment trusts (REITs). REITs are to make their debut in Germany in 2006.
“Our return of 4.2% may not be all that exciting, but it has been sustainable. We don’t want to try to maximise our return in the short term only to suffer in the long term,” he says.
VFS also does not rely on investment consultants, since, according to Melchiors, AMB Generali has qualified staff that performs relevant tasks like asset-liability-matching. AMB Generali does use several global custodians, but VFS declines to disclose who they are.

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