The Germans sound as if they have got themselves into a mess with their pension investments. We can hardly crow (we lost up to a third of the capital in our DB plans in the autumn of 2022) but this suggests that we have got to grips with funded public sector schemes (like LGPS) in a way we don’t associate with Germany.
Florian Muller in the weekend FT tells us
German public pension funds are facing more than €2bn in losses and potential writedowns from mandatory investment.
Thanks Florian Muller in Financial Times
The rather grim picture relates to a large number of those impacted being high powered public sector workers.
A painful business
German pension funds are facing more than €2bn in losses and potential writedowns from risky property and private-market investments, sparking concerns that the sector is in a “catastrophic” state.
We learn;
German pension funds are facing more than €2bn in losses and potential writedowns from risky property and private-market investments, sparking concerns that the sector is in a “catastrophic” state.
None of our business we might say , while we wait till work starts again in September. We are Brexited , let them get their house in order. But there are echoes here of earlier in the year , here in Britain.
“These are mandatory pension contributions,” said Peter Mattil, a Munich-based lawyer who is seeking an independent investigation into BVK’s investments. “That places a particularly high duty of care on those managing the money.”
Tom McPhail and Josephine Cumbo will be reading with interest. The investments are being made by groups of lay-investors who sound rather like what we had until the corporate trustees came along.
Investment decisions are frequently taken by honorary board members who continue to work full time in their professions, supported by comparatively small executive teams.
I can see a few with vested interests cutting out the article and pinning it to the office notice board (well I live in the past). I’ll finish with this bombshell
“How can anyone think it’s a good idea to entrust investment decisions to people performing the role on an honorary basis alongside their regular jobs — without requiring independent scrutiny and expert advice? This isn’t a gardening club,”
said Holger Wassermann, a professor of controlling and accounting at FOM University of Applied Sciences who reviewed the Berlin dentists’ fund.
The mix of lay and professional trustees, the use of managers who are well supervised and a little more reporting , all seem necessary. Sometimes you feel a little happier being British after reading an investment article; not often- but sometimes!
In the phrase “German pension funds are facing more than €2bn in losses and potential writedowns from risky property and private-market investments” is it saying that property and private market investments are all risky?
In the UK we have seen substantial write-downs on property investments even those well managed by professional fund managers. The reason appears to be that pension fund investors in those funds submitted redemption requests en masse leading to the funds becoming illiquid. These losses were not due to poor investment decisions either by professional or non-professional trustees or by the extremely professional fund manager. DB Trustees in the UK were also required to obtain s36 advice from an investment consultant when selecting the investment. None of these safeguards stopped the losses being experienced.
In private markets we are now seeing the same thing occurring particularly in North America where managers of LTAF’s and similar are struggling to sell long dated assets or non quoted equities to allow the fund to meet redemption requests. The problem with unquoted investments is that fund managers effectively control and operate as a cartel in the valuation of those assets, Fund managers seeking to offload assets to meet redemption requests are anxious to secure an exit price as close to the acquisition price plus the projected yield forecasted at time of acquisition. This is increasingly challenging in an increased interest rate environment.
While write-downs become inevitable, manager controlled valuations seek to delay their impact in the hope that new investors will replace those seeking to redeem, While this obviously applies to evergreen funds, the same pressures apply to closed end funds whether the new investor is another fund taking over the asset, or the public market in an IPO, or an acquiring company. We have recently seen a number of closed end funds not achieving their target maturity date and running on holding onto assets rather than accept a write-down.
It is very unfortunate that the UK Government is seeking to encourage (or potentially mandate) pension schemes to invest in private market assets at a time when valuations look overstated and write-downs resulting from increasing interest rates around the world look probable.
“the UK Government is seeking to … potentially mandate pension schemes to invest in private market assets” Then you can safely assume that it’s a stupid bloody idea. If it were a naturally attractive idea they’d be doing it anyway without any need for a bayonet tickling their backs.
Sometimes amateur investment managers do terribly well. Consider the cell biology Fellow who made Trinity College Cambridge rich as Croesus.
https://en.wikipedia.org/wiki/John_Bradfield_(biologist)
TCC has been mentioned honourably in despatches on these pages before:
eg https://henrytapper.com/2026/01/04/db-pension-schemes-stagnant-bt-uss-shell-ba-fail-says-the-times/
IPE ran this story nearly seven months ago. But, as you say, Henry, many are on holiday just now, including some at the FT it seems.
http://www.ipe.com/news/bvk-members-line-up-lawsuit-over-failed-us-real-estate-investments/10134580.article
While it’s tempting to invest in overseas property, when I was a pensions trustee we thought it better to invest only in UK rental
properties, which paid rents in sterling with which we could pay pensions in sterling. Being closer to home, it was also easier to monitor property valuation issues.