To ensure its future success in a fast-changing pensions market, Munich-based Bayerische Versorgungskammer (BVK), an independent pensions holding company with over 1.5m active members and retirees and a capital value at 31 December 2003 of €31.4bn, felt it needed a new structure that was not only cost-effective, efficient and transparent but which was long-lasting and allowed each pension fund to continue to be managed individually.
Managing funds in the medical, civil service, architects, lawyers and other professional sectors, BVK’s old structure was made all the more complex and unwieldy by the fact that each fund had its own Spezialfonds and was managed by a different asset manager with its own custodian. Diversifying the portfolios by investing in other asset classes on top of the 82% fixed income, the 6% real estate and 12% Spezialfonds elements was considered practically impossible and would have led to total chaos as well as a significant hike in hidden costs.
The first step in the restructuring process was separating the asset manager and custodian activities. But this doesn’t go so far as to include administration, which both the asset manager and custodian undertook to a large degree, This is not an area BVK felt it needed to diversify. Indeed, it consolidated the roles by using just one global custodian and the master fund structure through one KAG.

The global custodian was first to be selected since this role is fundamental with respect to reporting, performance analysis and attribution and measuring and also managing risk for the overall asset base. The custodian plays an important role regarding the risk management of the total assets, including the BVK’s directly held investments, which are bundled in a virtual fund, to track and measure the right levels of risk and correlation.
Next, BVK selected its master fund provider. Key criteria BVK looked at included the capacity for electronic data transfers, experience vis-à-vis international asset management and the ability to communicate effectively with the global custodian.
Selection for both positions was decided by internally organised beauty contests.
Before BVK could go ahead and select individual asset managers for the various mandates, it first needed to determine the best management styles and benchmarks for its assets.
The first step was to define its strategic asset allocation to define the asset classes making up the restructured portfolios. Then it was a question of finding how the master funds should reflect these asset classes without diverging too much from the efficient frontier.
This meant keeping the number of master funds to a minimum whilst providing the pension schemes with the asset mix that suited them: equities versus fixed income (static); equities versus fixed income (dynamic); Euro-land equities versus global equities; large caps versus mid/small caps; government bonds versus corporate bonds; currency risk versus no currency risk.
Having analysed various asset allocation scenarios for the master funds, BVK decided that a structure based on five master funds, made up of the single asset classes, would be the best solution. This would provide flexibility at scheme level with only a marginal loss of efficiency; potential to achieve a minimum variance portfolio; high correlation within the master funds; low correlation among the master funds; high diversification potential; an asymmetrical risk profile in master fund 5; potential for additional asset classes or master funds to be added smoothly.
This new asset allocation structure allows BVK to generate a common production platform for all the pension schemes it manages, which means assets can be allocated efficiently with respect to each individual fund’s risk profile. Furthermore, using asset-liability studies allows BVK to ascertain the stake in the different master funds that each pension fund would take.

BVK used consultancy firm Alpha Portfolio Advisors in its asset manager search. The end result saw 20 different asset managers selected. Though some represented the same asset class, their selection was based on approach and style. Hence, BVK now finds itself with a roster of managers, some of which are passive or enhanced and others that use fundamental or quantitative methodologies. Remarkably, only a few of BVK’s former asset managers survived the beauty contests and none of these continue to manage the same mandate as before.
The final stage in BVK’s restructuring was to organise a transition management process. This also entailed a manager selection contest. The transfer form the former structure to the new one, with a total volume of €4.5bn, took place in a single day effortlessly and smoothly, without causing any ripples in the market place, and BVK saw savings of some €4.3m during the transition process compared with pre-trade estimates.

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