Investment shift

The German Pensions Gamble

Companies such as chemicals giant BASF are suffering under the weight of their pensions burden.
  • Why it matters

    Why it matters

    Big firms are increasingly turning to high-risk investments in a bid to secure sufficient returns to meet their pension obligations.

  • Facts


    • Pension assets of Germany’s 30 biggest public firms rose 12 percent to €228 billion, or $247 billion in past year.
    • But the firms still have a shortfall in equity capital of €45 billion.
    • Nearly €55 billion of DAX companies’ pension assets is now in alternative investments.
  • Audio


  • Pdf

At first sight the news seems good – pension assets for the top 30 companies on the German DAX stock exchange hit a record high last year. Assets increased by at least 12 percent to €228 billion, or $247 billion, according to reviews of annual reports.

But a closer look shows the increase is not enough to meet the firms’ soaring pension obligations.

Companies such as engineering firm Siemens and chemicals giant BASF are suffering because of historically low interest rates caused by the European Central Bank’s liquidity glut. Pension funds can’t earn enough in low-risk investments and the gap in employee pension plans has widened.

That represents a burden on equity capital for DAX blue-chip companies totaling €45 billion – as much as 7 percent of equity.

“The importance of alternative investments will continue to increase.”

Carl-Heinrich Kehr, Mercer consultants

With no end in sight to low-interest rates, companies have to change tack. Pension managers are looking for capital investments with higher returns to secure long-term financing of pensions.

“The importance of alternative investments will continue to increase,” said Carl-Heinrich Kehr, an investment expert at Mercer consultants in Frankfurt.

Last year, pension fund investments in infrastructure, private companies, hedge funds and liquidity increased from 16 percent to 19 percent, according to Thomas Jasper, an expert on pensions at Towers Watson consultants in Stuttgart.

That is nearly double the share of alternative investments being managed externally by trust companies and pension funds. An additional 5 percent is invested in real estate. Overall, nearly €55 billion of DAX companies’ pension assets is now in alternative investments.

It is usually more difficult to offload alternative investments quickly. But that is compensated by higher single-digit or even low double-digit returns, like for example with private equity.

The current return on ten-year government bonds is only 0.23 percent – not enough to finance pensions of DAX company employees in the future. Last year, thanks to sharp increases in bond prices, they accounted for a large part of returns on pension assets. But those days are gone.

Mr. Kehr does not expect bonds with a good credit rating to produce more than a one percent return in the next few years. But pension fund managers need an average of about 4 percent to meet their obligations.

In the last four years, the share of classic bonds making up pension assets has already decreased from 60 percent to 55 percent. Still, bonds will remain the dominant form of investment, said Winfried Becker, an analyst at BHF-Bank in Düsseldorf. Managers, for example, are now looking at interest-bearing securities in emerging countries.

Managers also cannot ignore the stock market if they want good returns. Since October, for instance, the DAX index has risen by 43 percent.

In 2014, the overall pension burden of DAX companies increased by a quarter to €372 billion – considerably higher than overall pension assets.

But professionals refrain from buying up stocks because they fear big price swings. The stock market’s share in pension portfolios is about one-fifth, a decrease following bad experiences in the most recent financial crisis.

That’s true not only of Germans, who are notoriously skeptical of stocks. International pension funds have also sold off shares. They held as much as three-quarters of assets in the stock market back in 2000 – the zenith of this form of investment – but now it’s only about a half.

Companies are trying to approach this dilemma from a new angle. According to Mr. Jasper, they are now far better at coordinating investments and maturities of extremely long-term pension obligations.

Instead of promising fixed returns, companies now link their predictions more closely to the return on contributions paid. For employees, this means both opportunity and risk. Only well-managed pension assets can produce higher company pensions.

In 2014, the overall pension burden of DAX companies increased by a quarter to €372 billion – considerably higher than overall pension assets. Only 61 percent of pension obligations are now covered by corresponding assets, compared with 65 percent a year earlier, according to Towers Watson consultants.

While that’s a burden for the companies, it does not necessarily endanger company pensions, said Mr. Jasper. The only thing that changes is the book value of the pension obligations – higher benefit payments do not ensue as a result, and a big part of the obligations is not due for decades.

Funding levels differ widely among DAX companies, however. At Deutsche Bank, funding for pension obligations is 98 percent. Deutsche Telekom has the lowest level of DAX companies, with only 23 percent funded.

Volkswagen and Siemens have the highest total pension obligations, with €38.9 billion and €35.6 billion respectively.


Anke Rezmer covers investment funds for Handelsblatt. To contact the author:

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!