Interview: Asset allocation for social partner pensions

At the end of October, energy company Uniper and trade union Ver.di announced they had received approval from the financial supervisory authority BaFin for the first pure defined contribution (DC) plan Metzler rBZ 1 provided by the Metzler Sozialpartner Pensionsfonds.

How will the Metzler Sozialpartner Pensionsfonds (MSPF) strategically invest the assets of the Metzler rBZ 1 pension plan?

There are four so-called “meta asset classes” – equity, fixed income, real estate and gold. The social partner advisory board (Sozialpartnerbeirat) determines the range for investments for these main asset classes, which are: equities 25-70%, fixed income 20-70%, real estate 5-20%, and gold 0-25% The current allocation is around 35% equities, 45% fixed income, 12% real estate and 8% gold.

Will MSPF also allocate assets to alternative investments, such as private equity, private debt, infrastructure, hedge funds?

In the initial asset allocation, real estate represents the only illiquid asset class. The social partner advisory board will look at the possibility to add other asset classes, and further develop the mix of liquid/illiquid asset classes, with MSPF. The prerequisite (to add further asset classes to the mix) is always that this can be done within the regulatory limits of a Pensionsfonds.

Do you take into account the inflation scenario or other scenarios when investing the assets of the Metzler rBZ 1 pension plan?

The allocation is based on an asset/liability management (ALM) study including very long historical time series, going back around 100 years. The allocation is the same for the contribution and retirement phase, a very long-term period. A lifecycle model is not envisaged. For this reason, too, a conventional ALM study including only the last 10 to 15 years is inadequate for the design of a portfolio. Different capital market regimes were to be considered for the ALM study, the two zero-interest phases of the 1930s and 2010s were relevant, as well as the phase of debt monetisation that followed the 1930s.

The approach is not that history repeats itself, but conclusions can still be drawn on when, for example, new capital market regimes will begin. Applied to the current situation, one could already see that the “Lower for Longer” regime has ended. There are strong fiscal policy stimuli, the increase in inflation and the beginning of a loss of confidence in currencies are evidence of the start of a new phase in capital markets, also reflected in rising interest rates at the short and long end of the yield curve. These developments were already accelerated by the COVID-19 pandemic, and above all inflation, that at the time was still a threat and today is widespread, and was recognised as a risk factor leading to a long-term allocation to gold.

The geopolitical risks, problems in supply chains, and questions of energy security are also exacerbating the developments just mentioned. In order to leave historical data as unchanged as possible, but taking into account the current situation, the data was then adjusted to the current interest rate level in the euro zone. The starting values for short and long-term interest rates were adjusted to the current situation and, based on this, further development was based on the historical scenario. Moreover, current data for today’s return and correlation expectations for individual asset classes were used to extract a “forward looking view” from the historical data.

The Metzler Sozialpartner Pensionsfonds will initially use a Spezialfonds to invest: why is using a Spezialfonds, who launched and manages it, and how will assets be invested in a second phase after the Spezialfonds?

The pure DC plan (reine Beitragszusage) starts in the truest sense on the “green field”, that means that from January 2023 the first contributions flow into the Metzler Sozialpartner Pensionsfonds. In order to be able to invest the contributions in a diversified and professional manner from the very first euro, we draw on the asset allocation of an existing Spezialfonds of around €300m. This has been managed jointly by Metzler Pension Management and Uniper for six years.If the security assets of the pure DC plan reach a critical size, an asset allocation tailored specifically for the pure DC plan is created and implemented on the basis of an ALM study designed for this purpose.

Capital investment focuses on the four meta-asset classes and the alocation for each depends on the underlying scenario, which is continuously checked by an ALM study. The focus is more on longer periods in the past, such as periods of zero interest rates, high inflation or government debt.

What is the social partner advisory board (Sozialpartnerbeirat) and what role does it play in the asset allocation design?

If a pure DC plan is agreed under a collective bargaining agreement, there is a legal obligation for the parties signing the agreement to participate in the so-called implementation and control (of the plan).Participation takes place via the social partner advisory board, where each side in the collective bargaining agreement sends representatives. This advisory board is chaired in turn by the employers’ representative and the trade union. The establishment of the social partner advisory board is anchored in the collective bargaining agreement and in the Metzler rBZ 1 pension plan, and is constituted under the umbrella of the Metzler Sozialpartner Pensionsfonds. The social partner advisory board specifies the investment strategy and monitors the development of the security assets.

There aren’t guarantees with the pure DC plan rBZ 1, but there is a buffer or security mechanism: how does this buffer mechanism work?

Direct participation in capital investments is possible without guarantees. In order not to leave employees and those entitled to pensions completely to the mercy of the markets in the retirement phase, the social partner model foresees various security mechanisms. A security contribution is stipulated in the collective bargaining agreement. An additional, an actuarial reserve is built with contributions and returns. The resulting security buffer is used to fully or partially offset temporary market fluctuations during the retirement phase. Thus, after retirement, a buffer mechanism is in place in the event of setbacks in capital markets, minimising potential reductions in pension benefits for retirees.

The use of the funds from the security buffer requires a corresponding decision by the social partner advisory board. The parties that signed the collective bargaining agreement (to offer the rBZ 1 plan) have set a so-called upper limit for the amount of the actuarial reserve in the collective bargaining agreement. If this threshold is reached, the next payment of a security contribution is not offset against the additional actuarial reserve, but credited to beneficiaries as an additional contribution from the employer. The upper limit is initially set and monitored by the social partner advisory board. This allows for an efficient use of the security contribution and prevents the security buffer from growing unnecessarily.

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