As countries around the world grapple with how to fund their aging societies and evolve their pensions systems, Germany’s answer is the Pension Level Stabilisation and General Capitalisation Act[1].
Germany’s first pillar statutory pension insurance remains the most important component of its old-age security system.[2] The draft legislation, introduced in March this year, aims to maintain the statutory pension benefit level (the Rentenniveau) at 48% of the nation’s average wage.[3] To keep that level stable, the draft bill proposes the creation of a “generational capital” fund that would pursue a globally diversified investment strategy.
Attention is also turning to the second (occupational pensions financed by employers and/or employees) and third (supplementary individual provision) pillars, with pension funds under pressure to strengthen returns in order to maintain individuals’ standards of living in retirement.
Another key lever to lift returns – employed widely by pension funds in Northern Europe, Australia, Canada and the United States – is to boost allocations to private capital markets.
Pension funds pursuing returns in private markets
With the potential for risk-adjusted return and diversification, private capital asset classes have become increasingly attractive for institutional investors in Germany. Expanding allocations to private capital assets offers multiple benefits. Public markets around the world continue to shrink, narrowing the range of investment options they offer. Private markets are expanding in parallel, creating more diversification opportunities and a long-term investment horizon in line with the liabilities of the pension funds.
Spezialfonds are the core constituent in the portfolios of retirement benefit schemes, which have overtaken insurance companies as the biggest investors in these vehicles.[4] Spezialfonds are classified as Alternative Investment Funds (AIFs), helping make Germany the largest AIF domicile in Europe, with 29% of the overall market.
Despite allowing a flexible universe of investments, including in closed-end funds, Spezialfonds tend to invest conservatively to meet payout obligations, with a high allocation to bonds and minimal exposure to illiquid asset classes such as private equity and infrastructure. However, over the past two years the present values of liquid bond portfolios have also deteriorated. Selling the bonds would result in realising undisclosed provisions.
However, private market investing brings operational considerations for pension funds. Holding private capital investments poses regulatory issues for investors due to complex balance sheet and tax considerations. Extracting relevant data from quarterly reports and capital account statements is difficult. In addition, investors need to track the number of commitments that have been called and those still available for future calls to meet their allocation targets.
Liquidity issues present a further test. Many German insurance companies have faced liquidity issues after making too many commitments during the low interest rate years based on internal forecasts, which they no longer have the liquidity to meet. Controlling liquidity, and comparing liquid asset performance against illiquid asset classes, is both complex and essential.
German pension funds look to private markets for sustainability objectives
Private capital investments in sustainable asset classes and projects such as infrastructure and renewable energy are particularly attractive for pension schemes, with their promise of long-term, fixed cash flows providing resilient, sustainable income. The attractions are reflected in a McKinsey survey[5], which found Limited Partners remain bullish on their deployment to infrastructure, adding that at least a dozen vehicles targeting more than $10 billion were actively fundraising as of the end of 2023.
Regulation and reputational risks play a growing role in pension schemes’ engagement too. According to BNP Paribas’s latest ESG Global Survey, more than half of the asset owners and managers surveyed say their organisation is primarily assessing the financial materiality of regulatory risks (60% of respondents) and reputational risks (58%).[6]
In Germany, as elsewhere, broad societal shifts towards responsible finance are gathering strength as consciousness around sustainability issues grows. Many scheme members want their pensions to contribute to the transition and are pushing schemes to adopt impact investing (which is set to become the most important sustainability objective and method of sustainable investing, according to BNP Paribas’s ESG Global Survey 2023). Meanwhile, the Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants and advisers to disclose information on sustainability risks, impacts and objectives to end-investors, which applies to Spezialfonds equally.
How we support pension funds’ private capital investments in Germany
To support pensions’ private capital investments, we have partnered with the fintech AssetMetrix. AssetMetrix’s web-based platform offers pension funds full transparency regarding their private capital portfolios, ensuring state-of-the-art performance evaluation and reporting.
Users can filter key metrics from various data/reporting sources and use a broad range of forecasting capabilities to allow more effective and realistic planning. Interactive solutions can assist with future investment planning, and resulting performance can be compared and evaluated against both private and public benchmarks. Users can also access and aggregate data in line with SFDR regulations, supporting their ESG objectives.
ESG data barriers
Yet while institutional investors are incorporating ESG in their investment and portfolio management decisions, inconsistent and incomplete data (cited by 71% of the respondents to our ESG Global Survey) are key barriers to greater adoption of ESG investing. To overcome these challenges, two-thirds of respondents use and compare multiple data sources, while 37% conduct their own research methodologies.
The results were echoed in a recent BaFin study[7] examining the collection and handling of ESG data and ESG rating procedures by capital management companies. The majority of companies surveyed (83%) use ESG data and ratings from external providers, of which 84% use one specific data provider. In addition, most companies (81%) consider ESG ratings costs to be unreasonably high, while the majority complained that the data on which the ratings are based is sometimes incomplete and not of consistent high quality. Data quality, the study concluded, needs to improve as the most important factor.
Improving ESG data quality and consistency: how BNP Paribas can help
How can pension funds access more, better quality ESG data, and better compare
different data points and methodologies? Our investment services platform Manaos*
enables investors and asset managers to source reliable ESG data and report on the
sustainability of their investments.
German investment companies predominantly use just one data provider. It is well documented that different ratings providers use different methodologies, and without access to more data sources, pension funds cannot gain a balanced view of their investments’ ESG ratings/ performance.
The Manaos open-architecture platform provides access to a growing range of ESG data and analytical tools generated by over 20 data providers across all dimensions of ESG, including risk, climate and exposures. Investors can:
- Securely share enriched portfolio data with ESG data from more than 20 providers
- Access comprehensive, in-depth ESG analysis at portfolio and asset level (look
through) - Choose from standard or custom reporting to produce proprietary/ regulatory
reports (such as SFDR and Taxonomy) at portfolio level plus fund-level European
ESG Templates (EET) in just a few clicks.
The way forward – evolving together as partners
As German pension funds look for new sources of return and diversification while responding to stakeholder demands around sustainability, one thing is clear: data holds the key. Globally, pension funds are grappling with the wealth of data from public and private sources; making sense of this data, and developing the right balance of in-house and external resources. Asset servicers will be a central conduit for pension funds and their scheme members in this new world. Across major pension markets such as Australia, the Netherlands, and Germany, BNP Paribas is working closely with clients to navigate this world, together.
*Manaos is developed by AELX SAS, a technology subsidiary of the BNP Paribas Grou
[1] Gesetz zur Stabilisierung des Rentenniveaus und zum Aufbau eines Generationenkapitals für die gesetzliche Rentenversicherung, Bundesministerium für Arbeit und Soziales (BMAS), 05 March 2034, Gesetz zur Stabilisierung des Rentenniveaus und zum Aufbau eines Generationenkapitals für die gesetzliche Rentenversicherung – BMAS
[2] Old-age security in Germany, Federal Ministry of Labour and Social Affairs, 17 March 2023, https://www.bmas.de/EN/Social-Affairs/Old-age-security-in-Germany/old-age-security-in-germany.html
[3] Germany Plans Pension Reform, Establishment of 200B-Euro Fund, Chief Investment Officer, 8 March 2024, https://www.ai-cio.com/news/germany-plans-pension-reform-establishment-of-200b-euro-fund/
[4] 2023 was a remarkable fund year, BVI, 13 February 2024, https://www.bvi.de/en/news/detail/fondsjahr-2023-br-war-beachtlich1/
[5] Global Private Markets Review 2024, McKinsey, 28 March 2024, https://www.mckinsey.com/industries/private-equity-and-principal-investors/our-insights/mckinseys-private-markets-annual-review
[6] ESG Global Survey 2023, BNP Paribas, September 2023, https://securities.cib.bnpparibas/global-esg-survey-2023/#survey-summary
[7] BaFin-Studie: Daten und Ratings zu ESG sind teuer und verbesserungswürdig, BaFin, 12 February 2024, BaFin – Aktuelles – BaFin-Studie: Daten und Ratings zu ESG sind teuer und …
