FRANKFURT - German companies finally are setting up advance-funded pension plans, prompted by U.S. credit-rating agencies that downgraded debt of publicly held companies without such schemes.
But money managers shouldn't get their hopes up just yet. Leading German pension consultants are often part-owned by leading German banks and insurance companies, and sometimes steer clients to the parents for money management services. Also, some newly adopted retirement schemes more closely resemble insurance plans than U.S.-style pension arrangements.
Among companies either establishing or expected to establish advance-funded plans are:
- Bertelsmann AG, G%FC;tersloh;
- KarstadtQuelle AG, Essen;
- Citigroup AG, Cologne;
- Aventis Pharma Deutschland GmbH, Bad Soden; and
- Deutsche Bank AG, Frankfurt.
The change follows a decision last month by the two major U.S. credit ratings agencies - Standard & Poor's, and Moody's Investor Services Inc - to treat companies' pension obligations as corporate debt.
This decision resulted in the debt of German steel manufacturer Thyssen Krupp AG being downgraded to junk-bond status from investment grade, while several other DAX 30 members also were adversely affected.
S&P's actions outraged German business leaders, and prompted German politicians to call for tighter controls on credit rating agencies' activities. Hans Eichel, finance minister, said he would consider introducing a bill aimed at reining in the agencies' influence.
"It's made lots of company finance people sit up and start looking at the options for pensions. They saw what happened to Thyssen Krupp, and they know their credit ratings and their ability to raise cost-effective finance may be in trouble," said Oliver Bilal, an actuary with Pension Consult, Munich. The natural option available for companies is to put in place a plan to finance the pension obligations and take them off the books, he said.
Major German companies that also have U.S. listings, such as DaimlerChrysler AG, Stuttgart, and Siemens AG, Munich, have adopted funded plans in recent years. But the rating agencies' move could drive second-tier publicly held companies to fund their pension debt. Morgan Stanley Bank AG, Frankfurt, estimates publicly held German companies have e190 billion ($208 billion) in unfunded pension obligations.
"I think it (advance funding) really will snowball now, the standard has been set (by larger companies setting up advance-funded schemes), and this action by S&P and Moody's will be the catalyst," Mr. Bilal said.
Moves to adopt International Accounting Standards also are driving companies to cover their retirement liabilities.
Under European Union law, German companies must adopt the standards by 2005. The IAS standard on pensions is much stricter than the German equivalent, requiring pension liability calculations to include salary and pension increase calculations. Experts estimate this measure alone will increase German pension liabilities by 25%.
The most recent company to acknowledge considering advance funding is troubled media group Bertelsmann.
A source close to the situation said treasury staff at the firm, struggling under a e2.7 billion mountain of debt, were "rattled" by the Thyssen Krupp downgrade.
The company, which has e1.687 billion in unfunded pension liabilities held as book reserves, would suffer dramatically if its debt was downgraded by one of the agencies. "They are worried about that, and that could be one of the reasons for them considering this," the source said.
Markus Payer, Bertelsmann spokesman, confirmed treasury staff had met with S&P officials to discuss the matter and that the ratings agency's view was a factor in contemplating a scheme. "Nothing is definite yet; it is a very early stage at the moment," he said.
Retail giant and DAX 30 member KarstadtQuelle AG, Essen, is another example. A spokesman confirmed the company was moving to set up a pension trust, which initially would be funded with €312 million cash. In addition the corporation is transferring its 94% interest in real estate companies, Kepa Kaufhaus Gesellschaft GmbH and Warenhaus Wertheim GmbH, to the new pension trust - assets worth a combined €180.4 million.
According to KarstadtQuelle's 2002 annual report, as of Dec. 31, the company had direct and indirect pension obligations of €3.3 billion.
"We are aware of the ratings agencies' view. We are pleased to be able to say we are moving away from the book-reserve system and establishing a new trust. The pension liabilities we hope to fully fund in the next few years," said the spokesman, who declined to be named.
Another company believed to be in the process of moving to the funded system is Citigroup. Sources familiar with the situation said the group is transferring its German employee pension obligations into a defined contribution-oriented scheme. It has appointed consultant Rauser AG, Reutlingen, to advise on the process. Company representatives did not return phone calls seeking comment, and further details were unavailable at press time.
But foreign money managers looking to Germany as a boom market in the near future might be in for a disappointment.
Companies setting up schemes are being steered toward the traditional players in Germany and away from cutting-edge money management specialists. In many cases, they're also being advised to set up insurance-style schemes rather than Anglo-American pension arrangements.
The consultants providing the advice, in many cases, are partly owned by the banks or insurers who are selling the service.
For instance, Buck Heissmann International Services GmbH, Wiesbaden, one of the major benefits advisers in Germany, is 47% owned by Allianz AG. Buck Consultants Inc., New York, owns 32% of the firm.
Buck Heissmann recently advised the newly formed Metal Industry Pension Scheme, Berlin, to invest its assets with Allianz, although it is expected the Munich-based insurer eventually will manage just a portion of the assets.
Alfred Gohdes, Heissmann chief executive officer, said in a written response to questions posed by P&I: "We act, conduct and are generally perceived by the market as independent consultants. We would not hold the competitive position we have if this were not the case. Our independence is reflected both in the structure of the mandates we place and consult on in the insurance or investment markets and in the professional credo of our associates."
The industry scheme recently appointed another consultant, Feri Trust GmbH, Bad Homburg, to advise on manager selections, retaining Buck Heissmann for benefits advice.
Similarly, Bode Grabner Beye AG & Co., Grunwald, another influential consultant, is 49.9% owned by Hypovereinsbank AG, Germany 's second-biggest bank. (It has a joint venture with Watson Wyatt Worldwide, but the commercial terms have not been disclosed.)
When advising the Chemie Pensionfonds AG, Munich, the chemical industry scheme, Bode Grabner Beye recommended HVB. Georg Thurnes, managing director, was unavailable for comment at press time.
However, Pension Consult's Mr. Bilal said this activity is normal practice in Germany. (Pension Consult was set up in 1988, and is 100% owned by HVB AG.) He denied there was any undue influence that led these consultants to recommend certain investments.
" `What bread I am eating is what song I'm singing' is an old saying in Germany," said Klause-Dieter Rauser, managing director of consulting firm Rauser AG and a critic of what he calls the lack of independence within Germany's pensions consulting community.
"How can there be independent advice when there is a financial incentive at stake?" Mr. Rauser said.
A number of foreign-owned investment managers operating in Germany cited the perceived lack of consultant independence as a potential problem in gaining further market penetration. None was willing to make comments for publication.
Another factor that may stifle foreign firms' expansion strategies is the incentive for companies that decide to fund pension schemes using direct insurance and pensionskasse vehicles - insurance-type pension schemes with strict investment guidelines being offered by the major insurers.
According to Sabine Mahnert, a vice president with Morgan Stanley Bank, more companies are choosing to finance their pensions using these insurance vehicles rather than the pensionfonds - a legal entity that seeks to replicate Anglo-American structures.
Whatever the reason, only about 20 companies have established pensionfonds in the last year, according to Mr. Rauser.
However, foreign money managers are encouraged by another method of funding company pension arrangements - through contractual trust agreements. CTAs are legally binding agreements between a company and a third party on how the money should be managed.
"There's a lot of these being considered; it seems to be where the growth is," said Josef Kaesmeier, chief executive at Merck Finck Invest MBH, Munich. n