The German pension funds for professionals (Versorgungswerke) are readjusting their investment strategies towards direct bonds, while alternatives could fade into the background.

“Versorgungswerke have not bought almost any bonds in the last few years, and invested a lot in real estate and alternatives. But with higher interest rates, things change,” said Manfred Mönch, managing director of analysis and consulting firm GAC.

Alternative investments for the funds have likely slowed down in 2023, reversing a trend seen during the protracted period of low interest rates, he added.

In the past few years professional pension funds in Germany avoided investing directly in bonds, subsequently bringing the allocation to the asset class down from almost 60% of total assets to around a fifth since 2008, according to GAC’s figures.

The proportion of direct and indirect pension investments (including mortgage loans) has fallen from over 70% to around 40% in recent years. Indirect investments have increased to over 70% and in absolute terms by over €100bn since 2014, GAC said.

Professional pension funds invest €20bn per year and manage assets worth €270bn, GAC noted, adding that they invest 40% of total assets in alternatives, 23% in real estate, and 18% in private equity, infrastructure and private debt.

“I don’t think 2023 is a turning point for alternative investments. I think Versorgungswerke will continue to invest in alternatives, but at a lower level,” Mönch said.

The schemes still have open commitments, for example in private equity, while private debt now plays an important role in their asset allocation.

“Investments in private debt will continue, more than in private equity probably, in a higher interest rate environment,” he added.

In Germany, some 92 Versorgungswerke have on their books over one million people entitled to pensions, with 400,000 benefit recipients.

The number of members grew in 2022 by almost 2% to about 1.15 million, due in part to the fact that membership is mandatory. The number of pension recipients grew significantly faster, at over 5%, it added.

Contributions also increased in 2022 by almost 2% to over €12bn pension payouts by over 5% to almost €8bn, it said.

Looking for IPE’s latest magazine? Read the digital edition here

Luigi is IPE's Berlin-based DACH correspondent. His coverage includes regulation and the latest pensions and investments trends, and, being a native Italian, he also covers Italy’s pensions market. He has reported from Italy and Germany on international politics and business for European and US publications including USA Today, Bloomberg BNA and for the investigative magazine L’Espresso. He was previously Germany correspondent for Mergermarket covering M&A.View full Profile

More from Luigi Serenelli

Topics