Waiting for the breakthrough
As a source of profit, Chemie Pensionsfonds, the pension fund for Germany’s chemical industry, has turned out to be a big disappointment for HVB, Germany’s second largest bank and administrator of the fund.
Naturally, HVB could not have forseen this back in early 2002, when it was awarded the mandate by the chemical employers’ association BAVC and the chemical employees’ union IG BCE. The mandate, which entailed pensions consulting and asset management, seemed lucrative enough. Projections were that Chemie would quickly attract at least e60m in contributions annually from around 60,000 of the chemical industry’s 800,000 employees.
HVB was also encouraged by comments from several German pension experts. According to them, Chemie and other new Pensionsfonds vehicles, created by government reforms of 2001, would catch fire quick owing to their defined contribution (DC) arrangements and lack of restrictions on equity investments.
These experts argued sensibly that employers would like the DC arrangement because it cut their costs, while the equity orientation would appeal to employees looking for a higher return on their retirement savings
Unfortunately for HVB, Chemie has not caught fire. Three years after its launch, the fund has won over just 14,000 employees from the chemical sector. Contributions from these employees totalled e16m last year, bringing Chemie’s total assets to a mere e40m.
Martin Großmann, chief executive of Chemie based in Munich, says that while his fund initially suffered from competitive disadvantages compared to other pension vehicles like traditional Pensionskasse, economics is the main reason why demand for Chemie’s pension has been weak.
“You would think that the promise of the Pensionsfonds - namely the ability to exploit equities to achieve high returns - is argument enough. But it’s difficult to convince the employees of that amid difficult economic conditions and markets,” says Großmann.
Großmann’s assessment is right on the mark. The Pensionsfonds were born at the height of the equity market slump and midway through Germany’s economic stagnation of 2001-2003. While equity markets have regained some of their strength, Germans by and large still lack confidence in them. Worse, the economy has not genuinely recovered and unemployment, at more than 5m, has not been this high since before the world war two.
Chemie’s track record has been disappointing, but HVB can take heart in the fact that the outlook for the fund is not bad at all. For one thing, Chemie, with its DC arrangement, has done pretty well among chemical firms. No less than 435 firms employing one-quarter of the sector’s total workforce currently offer the fund’s pension. This means there is plenty of potential for growth in its demand.
There are also signs that Chemie’s equity orientation is catching on with employees from the chemical sector. In times of strong equity markets, such an orientation can afford them a better return than what they get from traditional Pensionskassen or Direktversicherungen (direct insurance) vehicles.
Under current German law, Pensionskassen and Direktversicherungen may not invest more than 35% of their holdings in equities. The rest is invested mostly in fixed-income and some in cash.
According to Großmann, Chemie posted a 25% increase in pension sales last year, partly as a result of the respectable return that one of its two sub-funds has achieved. That fund, which invests up to 60% in European equities and as such is intended for younger employees, had a return of 9.9% in 2004.
Großmann thinks that between the higher return offered by his fund and last year’s pension reform (AEG) which slightly improved the competitiveness of Pensionsfonds, Chemie could win over 50,000 chemical employees by 2010. Annual contributions would then total e50m, putting the fund very near its original goals.
However, Chemie’s CEO qualified the prediction by saying it depended on further improvement of the German economy as well as the fund’s ability to lure pension assets from Direktzusagen (book reserves). In Germany, Direktzusagen account for nearly 60% of the e354bn in estimated pension assets.
“Since pension assets are not growing much, the only way for Pensionsfonds like ourselves to achieve our targets is to attract those from Direktzusagen. AEG has made it easier for us to do so, but problems remain,” he says, referring in particular to the Rechnungszins – a figure used in calculating how pension obligations can be met by a company.
For Pensionsfonds like Chemie, the Rechnungszins is 2.75% while for Direktzusagen it is 6%.
As part of its transposition of the EU pension funds directive, the government is considering adjusting the Rechnungszins to facilitate the transfer of assets from Direktzusagen to Pensionsfonds.
The directive should further boost Chemie’s fortunes for the simple reason that the fund will be able to operate on a European level.
Says Großmann: “We are very hopeful about the upcoming EU pension fund directive, as we are extremely well prepared to take on European business. As an example of such preparedness consider that when we launched, we took care to implement an administration system that can be adapted from domestic to European business.”
With current assets of e40m, Chemie’s asset allocation is not complicated. Beyond the equity-laden sub-fund intended for younger chemical employees, Chemie has created a sub-fund for older employees which is 65% invested in European fixed income. The rest is invested in Eurpean equities and cash. The return for this sub-fund in 2004 was 4.4%, which Großmann says is similar to that achieved by Pensionskassen and Direktversicherungen vehicles.
Since institutional investors need e25m to e50m to justify an investment in a German Spezialfonds, a tax-privilleged institutional fund, Chemie is partly invested in mutual funds from State Street Global Advisors (SSGA). For cost reasons and flexibility, Großmann says the fund also relies on exchange traded funds (ETFs) and direct investments in fixed income.
Chemie’s investment decisions are made by a special committee comprised of Großmann and representatives from the BAVC and IG BCE union. Pension Consult, a unit of HVB and Chemie’s adviser, is not represented in the committee. Instead, it liaises between the fund and chemical firms and supports the sale of the pensions. Such sales support comes in the form of training IG BCE representatives or holding informational events for chemical employees.