Some pension managers are already betting on inflation-linked government bonds.
(Photo: imago images / Becker&Bredel)
Frankfurt 2022 does not necessarily look like another golden year for managers of large pension assets. In 2021, the pension assets of companies from the Dax, which are managed outside the companies in CTA trust companies, increased by a good 12 percent to around 300 billion euros. Adequate returns of a good eight percent in the good stock market year and capital payments into the pension funds of the now 40 index companies contributed to this. The investment professionals are now preparing for a more difficult year. This is reported by the management consultancies Mercer and WTW.
“A broadly diversified capital investment and good risk awareness,” says Jeffrey Dissmann, head of investment consulting at Mercer Germany, as the basis for not being forced to act in this phase of extreme fluctuations. Above all, he sees further inflation shocks as a challenge for the portfolios.
Some pension managers are already using inflation-protected government bonds, observes the advisor. However, only a few portfolios appear to be comprehensively hedged against inflationary risks.
In view of rising capital market interest rates, managers have reduced the maturities of their bond portfolios. They also rely on personal loans, so-called private debt. Such securities often have variable interest rates, so they offer investors protection when interest rates rise, says Dissmann. “As bank funding has plummeted, demand for credit from private equity circles is increasing,” he says.
Top jobs of the day
Find the best jobs now and
be notified by email.
In terms of the structure of pension assets, however, global equities are still among the most important return drivers, as the advisors report. In the Dax portfolios, they give the share on average between 21 and 36 percent. With a view to rising interest rates, pension managers are weighting sectors such as banks will benefit from them in the long term, says Dissmann.
Alternative investments are becoming more popular
Bonds continue to form the focus of the portfolio, accounting for around half of the assets. According to Mercer, almost a fifth is made up of higher-yielding paper. Depending on the further development of interest rates, bonds with high credit ratings, some of which have recently shown negative returns, could be in greater demand again, says Hanne Borst, senior consultant at WTW.
According to the consultants, alternative investments such as private equity, infrastructure investments as well as private debt and real estate are gradually making their way into portfolios. On average, this asset class, which is considered stable, accounts for around a tenth of assets, but some companies have already invested significantly more, as Borst notes.
The pension assets largely finance the pension obligations reported by the DAX companies at the end of 2021 at around 412 billion euros. These future obligations are discounted to a present value using an interest rate close to the capital market, which the company then shows in its balance sheet.
Last year, this long-term interest rate rose for the first time in a long time – by 0.4 percentage points to 1.2 percent, as Borst calculates. By the end of March, she expects the discount rate to rise further by 0.2 points to around two percent. Such an increase relieves the obligations mathematically.
Hardly any change due to DAX expansion
However, the expansion of the Dax in September 2021 to 40 stocks caused relatively small changes in the overall balance, as Mercer notes. With the exception of Airbus, which has pension obligations of more than 20 billion euros and externally managed pension assets of more than 13 billion euros, most of the newly added companies have only minor CTA pension plans.
In addition, there were regular changes in the leading German index in 2021: In March, Beiersdorf left the Dax 30 in favor of Siemens Energy, in October Beiersdorf was included again in the Dax 40 at the expense of Deutsche Wohnen. All in all, according to Mercer, the changes increased pension obligations by 27, 9 billion euros to 434.8 billion euros. The value of the pension assets increased by EUR 16 billion to EUR 281 billion as a result of the index changes alone.
The pension costs of the Dax companies are thus more than 72 percent – higher than ever before – covered by the assets in the trust companies, as the consultants calculated from the business figures for the end of 2021. The difference up to 100 percent coverage is financed by the companies through provisions. Fluctuations in the coverage ratio of the CTA assets thus have an indirect impact on the companies’ equity, but do not endanger company pensions.
More: Why every third pension fund could get into trouble