Back when they were far mightier than they are today, Germany’s big universal banks eagerly displayed their power by building bold-looking headquarters.
In Frankfurt, Deutsche Bank’s cool blue twin towers and the totally metallic-looking Dresdner Bank were quite the sight until 1997. That year, Commerzbank surpassed them with an awesome glass and steel skyscraper designed by the UK architect Sir Norman Foster.
It seems ironic then that the headquarters of the pension fund for these banks, known as the BVV, should be so unassuming. BVV inhabits one of those dull but functional office buildings in west Berlin that were typical of Germany’s post-war reconstruction. And the only indication that the building belongs to the BVV is a tiny sign on the glass door, making the place difficult for visitors and taxi drivers to find.
“Our headquarters are modest, because as a pension fund, we have an obligation to be very thrifty,” quips Rainer Jakubowski, BVV board member responsible for asset management.
Yet beyond the modest façade stirs a giant in the German pensions industry. With total assets of e17bn, BVV is Germany’s second-largest pension fund after first-ranked Bayerische Versorgungskammer, the Munich-based multi-employer scheme, which uses the Versorgungskammer model. Among pension funds, BVV is the biggest.
It is no accident that the BVV enjoys such a dominant position. Until the start of this century, banks more or less thrived in Germany, ensuring an ever growing number of employees to offer a pension to. BVV’s pension is also attractive in that its guaranteed return on contributions is 4%, above the 2.75% standard for other Pensionskassen.
To its credit, BVV realised as early as 1990 - when groups such as Deutsche and Dresdner were at their mightiest - that good times do not last forever. So it refocused its efforts on not just expanding its business with German private banks but with the many foreign banks active in the country.
The strategy has paid off. Today, BVV has no less than 557 members, including banks rnaging from Netherlands-based ABN Amro to Ziraat Bank International. Between 1990 and 2003, the number of insured members at the BVV jumped from 222,000 to 313,000, which is even more impressive considering that bank employment during this period only advanced slightly.
Government pension reforms have helped fuel BVV’s growth. The Riester reform of 2001, which gave employees the right to a defined-contribution scheme, has given the fund 10,000 additional clients – or one-third of its potential base created by the reform.
BVV’s huge member base means that annual contributions to the fund currently total upwards of e500m. BVV also pays out e479m in pensions to around 78,000 former employees each year.
Despite its impressive growth since 1990, the BVV is not resting on its laurels. Recognising that more and more private bank jobs are being lost due to a weak German economy, the pension fund opened itself to the entire financial service sector in 2003. According to the fund, 10% of its members now include accountants, finance lawyers, tax advisers and even private equity companies.
Yet even if BVV continues to grow rapidly in the future, asset managers not associated with the fund should not become too excited. For all its largesse, BVV is mostly closed to outsiders both because of its conservative approach to investing and because it relies heavily on the gamut of investment services from its numerous member banks.
Jakubowski stresses that BVV’s investment strategy follows the principle of, “security, security and more security”. As a result, the fund has 80% of its e17bn in assets in government bonds, almost all of which originate in Germany or Europe. Jakubowski and his team handle all of this investment themselves, though he adds that for bond investments outside of Europe, BVV works with such houses as PIMCO, the US arm of Allianz Global Investors.
Investment of the other 20% of BVV’s assets is outsourced to asset managers. This includes 10% in equities, 5% in real estate funds, 4% in mostly European corporate bonds and since last year, a remaining 1% in five separate fund of hedge funds. A breakdown of the equity portion shows that 8% of assets is invested in Germany and Europe. Asia and the US account for 1% each.
Jakubowski declines to disclose the names of these asset managers. “If I did so, and you printed it, I would get a flood of calls from other asset managers telling me I should buy their products.”
Still, Jakubowski says the fund is constantly reviewing its asset allocation to achieve a higher return than the guaranteed 4%. In 2003 and 2004, BVV’s return was 4.5% and during the equity boom of the 1990s, it hit a high of 7%.
“There are a number of adjustments we could make. There is potential for further diversification of the equity portion, which is under the 20% limit enshrined in our charter. For this, we are considering investments in Asian blue chip stocks. Increasing our exposure to hedge funds - let’s say to 3-4% - is another option,” he says.
Unlike other big German institutional investors, BVV does not employ a master fund, which enables the investor to centralise back-office administration of institutional funds within one provider in a bid to cut costs and boost efficiency.
This is partly political: BVV’s member banks prefer that the fund draws on the services of their asset managers instead of going to an independent master fund provider like Universal-Investment, Metzler or Helaba. Custodial services are also provided by BVV’s member banks.
BVV also differs from other institutional investors in that it uses an investment consultant only in special cases like for the review of the investment process or for risk controlling. “The use of consultants is becoming more widespread in Germany, but we only use one for areas where we are not specialists,” adds Jakubowski.
Commenting on BVV’s prospects, Jakubowski says the fund has not fully realised its growth potential within the German banking – an industry that employs 712,000 people. This is mainly because the private bank-focused fund has acquired only a handful of co-operative and public savings banks (Sparkassen), which, together, dominate the German retail market.
“Going forward I would say that the major growth areas for us are Sparkassen and co-operative banks looking for alternatives to the current corporate pension system as well as other financial service providers,” he says.
As BVV sees its growth potential chiefly in the domestic financial services industry, it does not attach much importance to the EU pension funds directive - expected to be transposed into German law in September – which gives EU-based pension funds the right to do business anywhere in the Euro-zone.

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