GERMANY – BHF-Bank, one of Germany’s oldest private banks, has become the latest company to remove pension liabilities from its balance sheet and finance them via an external fund called a contractual trust arrangement (CTA).
Frankfurt-based BHF-Bank said its CTA would finance €165m in pension liabilities stemming from around 1,000 of its employees. Asset management for the CTA is being entirely handled by Frankfurt-Trust, BHF-Bank’s internal asset manager.
In terms of asset allocation, Frankfurt-Trust said €160m would be invested in two separate institutional funds, known as Spezialfonds in German.
In one Spezialfonds, 50% is invested in fixed income and 10% in equities, to include European stocks. The remaining 40% is held in cash. In the other Spezialfonds, the allocation is 75% in short-term fixed income, 15% in foreign bonds and 10% in cash.
The emergence of CTA at BHF-Bank is in part related to the arrival of international accounting standards (IAS) in corporate Germany. Since 2005, all capital-market oriented companies in Germany must report under IAS, which generally treats pension liabilities financed via on-balance sheet assets as unfunded.
International rating agencies have reinforced the trend towards IAS by lowering the credit ratings of firms that still rely on the internal funding of pension liabilities.
BHF-Bank, which as a bank is very active on the capital markets, said it hoped the creation of the CTA would improve its credit rating.
BHF-Bank is just the latest in a spate of German companies that have set up CTAs. Last week, IPE reported exclusively that DZ Bank, another Frankfurt-based bank, created the vehicle to finance €1bn in pension liabilities that it formerly had on its balance sheet.
Other well-known German companies that have set up CTAs since early 2005 include media giant Bertelsmann, truck and engineering firm MAN, energy giant E.ON, chemical giant BASF, consumer chemicals firm Henkel and Dresdner Bank.
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