.jpg "Stefan Nellshen, Bayer Pensionskasse")
Stefan Nellshen poses a question to European regulators in Frankfurt.Germany is an unusual place when it comes to pensions.
Many large companies fund final salary plans direct from their balance sheets, rather than in standalone vehicles. Those that are structured as separate entities are strictly regulated, as if they were life insurance companies, complete with solvency requirements and asset allocation restrictions.
The unique nature of the German pension system means it is not particularly welcoming to outside interference. This was certainly the experience of the European Insurance and Occupational Pensions Authority (EIOPA) when Euro Finance Week brought the continent’s retirement industry to Frankfurt in November 2014.
EIOPA has pushed on with plans for a pan-European pension solvency concept, known as the “holistic balance sheet” (HBS), despite it being scrapped by other regulatory bodies and criticised by almost every corner of the industry. It has been termed “conceptually wrong” and “very questionable” by trade body PensionsEurope.
“The whole holistic balance sheet methodology just does not fit German pensions.” —Stefan Nellshen, BayerStefan Nellshen, chief financial officer for German pharmaceutical company Bayer’s retirement funds around the world, is equally unimpressed. At November’s conference he took representatives of EIOPA and the European Commission to task over the HBS concept and other proposals, several times glaring over the top of half-moon spectacles at the visibly ruffled regulators.
“The whole HBS methodology just does not fit German pensions,” Nellshen tells CIO. The €8.4 billion ($9.1 billion) Bayer Pensionskasse that he runs is already subject to strict local rules on solvency, but a trial run of the HBS system showed large contributions may still be needed from sponsors into German funds.
“The HBS will probably mean less security for employees, fewer high-quality occupational pensions, and lower future economic growth,” Nellshen adds. “I am pretty sure that this is not what we should strive for.”
Among Nellshen’s chief concerns is the potential for employers to be forced to make additional contributions to meet high solvency levels—an “unnecessary and inadequate burden” for employers, which could tie down capital otherwise available for investments into future growth. Anything that raises the operating costs for employers could impact the likelihood that quality pensions remain open—as defined benefit pension funds around the world know all too well.
For Bayer, however, misguided regulation is not a big distraction, despite the strength of feeling.
“Investments into single funds will only be [made] after we have gained more experience with regard to infrastructure.”Nellshen’s day-to-day responsibilities involve monitoring the funding levels and performance of the various guaranteed pensions Bayer offers around the world, and adjusting asset allocations and investment strategies accordingly. The German fund is the largest of these.
In 2014, Nellshen and his team took their first tentative steps into infrastructure investment, buying into a diversified fund of funds to sit alongside a longer-standing core real estate position. “Investments into single funds will only be [made] after we have gained more experience with regard to infrastructure,” he explains.
Bayer’s ability to explore different asset classes is limited by the strict requirements placed on German Pensionskassen. “Risky assets”—including public equity, private equity, and subordinated debt—are limited to a combined maximum of 35% of the portfolio. With real estate limited to 25% at most, most funds are left with no choice but to hold at least 40% in fixed income—not a favourable exposure when yields are so low.
“In our fixed income portfolios we always strive to have a very widespread and well-diversified profile of maturities,” Nellshen says. “This is, in my opinion, the best measure to ensure that in a given year there is no inadequate accumulation of maturities, and hence a necessity for new investments in bad conditions.”
This will not protect Bayer indefinitely, but Nellshen is confident the strategy will only cause “significant harm” if low rates are maintained for a long time—in which case all pension funds across Europe will suffer.
In the meantime, Nellshen and his team will continue to ensure Bayer’s multiple pension plans can navigate the challenges of their various locations.
As for the HBS, EIOPA appears to be still working on finding a plan that will not draw the ire of the entire industry it is supposed to represent.
“All I can say,” says Nellshen, “is that we will continue to engage, to bring forward our sound arguments against the application of the HBS in its current form, and we will play an active role in the discussion about a reasonable future solvency regime.”
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