When Andreas Hilka joined Allianz Global Investors Europe (AGI Europe) in July this year, he brought with him a different skill set than your typical asset manager.
He first got involved in the world of pensions straight out of university in 1995 by joining the treasury department of chemical company Hoechst, and soon found himself managing the entirety of their pension assets, which at the time were mainly fixed income (Pensionskasse der Mitarbeiter der Hoechst-Gruppe VVaG).
“Pensions was not what I wanted, but it worked out well in the end,” he notes.
His time at Hoechst until 2008 taught Hilka many lessons on the balance between risk and return for pension fund assets.
He says: “In 1995 we were all bullish, with everyone expanding their equity allocations. In 1999 we started looking at other risk-bearing assets, such as corporate debt, as well.”
In 1995 Hoechst started off with long equity positions up to 40%: “As we had a strong sponsor company, we thought we could continue forever,” he says.
“With the burst of the tech bubble in 2001 to 2003, we realized we may have taken on too much risk. For the first time, regulators responded quickly with stress tests and implementing regulation. It was at this point that people first started to bring the asset and liability parts together systematically. Before, there was a certain disconnect between actuaries and asset managers. The data was all there, but we were not using it accordingly. However, people generally started to become more aware of the risk situation.
“The lesson learned is you need to know your risk and have some kind of risk overlay in place to be able to react to markets. In the 1990s, many held on to equity portions expecting things to get back on track. Many have learned the hard way this may not happen for a long period. Many small and medium pension funds still have difficulties in differentiating the various components of risk they take on and what effect this can have long term.”
Hilka believes that this heightening of awareness of risk held by pension funds and insurance companies was one of the major drivers behind regulatory change in Europe, including the Solvency regulations.
“Over the last five years, dealing with this regulation and the potential effects of Solvency II has been a major concern for my clients. Interest rate related risk is perhaps the highest risk for a pension scheme. In general, should Solvency II be applied to pension funds, many may have to find up to an extra third of capital.”
Hilka and his team are currently preparing vigorously for Solvency II and how they can achieve attractive enough returns for clients to meet current pension provision: “Solvency II has a potential massive impact on sponsoring companies’ balance sheets,” he explains.
“Interest rate risk is a potential problem. Pension funds are set up for the long term, but the problem is you cannot find instruments to hedge this risk where there is not a liquid enough market. Few counterparts are willing to enter such long swaps, and this has a massive impact on pricing. Besides, we wouldn’t dare propose entering into 50-year swaps without being able to foresee any possible changes in counterparty risk, as you never know what is over the horizon.”