German pension fund slammed for 98% bond allocation

GERMANY - The €252m civil servants pension fund for the German province of Brandenburg has drawn fire for its ongoing exposure to the bonds of Europe's downgraded peripheral member states.

The pension fund, set up in 2010, has invested solely in bonds, with more than 90% rated A to AAA due to investment regulations. 

A finance ministry spokeswoman confirmed to IPE that nearly 98% of the portfolio was invested in the bonds of companies, banks and EU member state governments.

Brandenburg's finance ministry sold off some of the scheme's Portuguese holdings earlier this year amid growing fears of a default, while a few of its bond holdings in Cyprus and Ireland have recently been downgraded below investment grade.

Yet Helmuth Markov, Brandenburg's finance minister, noted during a parliamentary question hour that the scheme was not planning to sell off any more holdings in Cyprus and Ireland, given that it did not anticipate major losses, and the fact the scheme had adopted a 'buy-and-hold' strategy.

In response to growing criticism of the scheme's strategy, the Brandenburg finance ministry pointed out that the "decision to invest mainly in EU member state debt had been made when the fund was set up".

Last year, the pension fund's portfolio produced €6m in interest - a 2.5% return - which is below the expected annualised 4% for the period until 2020, when first payments from the fund will be made.

Since the scheme's creation, the finance ministry has had to adapt its strategy and diversify on duration, as 10-year bonds - which it had initially identified as its best investment - underperformed.

The ministry said it wanted the scheme to return 100 basis points above the rate of borrowing Brandenburg must currently pay the market, in order to make the fund profitable over the long term. Brandenburg 10-year bonds are paying an interest of 3.5%.

Politicians and industry experts have criticised the civil servant pension funds of a number of German provinces for "shifting debt" and postponing the "inevitable funding gap".