Resolution of the Federal Government on the Second Act to Strengthen Company Pensions

At a glance:

• The government draft of the Second Act to Strengthen Company Pensions is now available.
•  To facilitate infrastructure investments, a separate infrastructure ratio (Infrastrukturquote) of 5% is to be introduced into the Investment Regulation (Anlageverordnung) as a new minimum diversification requirement (Mischungsquote).
• This includes direct and indirect investments in "infrastructure facilities and infrastructure companies".
• The increase in the risk capital investment ratio (Risikokapitalanlagenquote) from 35% to 40% of the guarantee assets (Sicherungsvermögen) and the expansion of the so-called opening clause (Öffnungsklausel) remain unchanged.

On 18 September 2024, the Federal Government (Bundeskabinett) adopted the draft of the Second Act to Strengthen Company Pensions and to Amend Other Laws (Second Act to Strengthen Company Pensions)¹. Compared to the draft bill proposed by the Federal Ministry of Labour and Social Affairs (Bundesministerium für Arbeit und Soziales - BMAS) and published on 24 June 2024²  (Referentenentwurf), this government draft (Regierungsentwurf - the “Government Draft Bill”) contains important specifications regarding the planned changes to the Investment Regulation (Anlageverordnung – AnlV)³. This article examines the implications of these changes.

We have already analysed the previously published draft proposed by the BMAS with regard to these planned changes (Link). The AnlV regulates the investment of the guarantee assets (Sicherungsvermögen) of Pensionskassen (pension funds), small insurance undertakings and funeral expense funds (hereinafter referred to as "AnlV Investors"). It is therefore a very important set of rules for AnlV Investors and for the asset management industry, which offers corresponding products for these regulated investors as an important client group.

Specification of the new minimum diversification requirement for infrastructure

The new separate infrastructure ratio of 5% of the guarantee assets (Section 3(7) AnlV-E) has been specified in its scope of application in the Government Draft Bill. Direct and indirect investments for the financing of infrastructure facilities and infrastructure companies that are structured as a permissible form of investment in accordance with Section 2(1) AnlV are now to be covered by this ratio. In addition, these investments must be used for the construction, expansion, renovation, maintenance, provision, holding, operation or management of infrastructure. This includes both equity and debt instruments.

The infrastructure ratio is not an independent investment type, but a new minimum diversification requirement. Investments that can be allocated to the new infrastructure ratio are not offset against the existing minimum diversification requirements in accordance with Section 3(1) to (6) AnlV and are therefore not part of the risk capital investment ratio in accordance with Section 3(3) sentence 1 AnlV. These investments in infrastructure therefore do not compete with other investments. This is intended to create legal certainty for AnlV Investors. It is also intended to create greater flexibility in asset allocation for infrastructure investments.

The explanatory memorandum for the introduction of the infrastructure ratio also states that the investment of guarantee assets in infrastructure is not limited to 5% in total. Investments in infrastructure can continue to be allocated to the other minimum diversification requirements in accordance with their investment form pursuant to Section 2(1) AnlV. They do not have to be included in the infrastructure ratio - not even as a matter of priority.

Changes to a definition compared to the previously published draft (Referentenentwurf)

In contrast to the previously published draft, the Government Draft Bill no longer contains the requirement for the infrastructure ratio that the projects must be for the provision, expansion, operation or maintenance of a major asset that is considered to be in the general public interest. Instead, the Government Draft Bill now stipulates that the respective facility must serve the construction, expansion, renovation, maintenance, provision, holding, operation or management of infrastructure.

The new wording avoids the vague legal term "major assets". This avoids difficulties of interpretation and complications in the practical application of this standard. It is not even necessary to answer the question of whether further requirements need to be imposed on infrastructure investments as a result of "major assets". The new wording also removes the term "[infrastructure] projects", which is open to interpretation.

It is very positive that infrastructure companies are now also explicitly included in the definition. This is particularly important given that investments in international infrastructure funds often involve investments in both infrastructure projects and infrastructure companies.

Definition of Infrastructure

However, the Government Draft Bill does not include a definition of the term "infrastructure". The explanatory memorandum also does not contain a definition either, nor does the German Capital Investment Code (Kapitalanlagegesetzbuch - KAGB). However, Section 1(19) no. 23a KAGB continues to provide guidance on the classification of infrastructure project companies According to this, infrastructure project companies are "facilities, plants, structures or parts thereof that serve the functioning of the community" and are intended to construct, refurbish, operate or manage them⁴.

It remains to be seen whether the very broad definition of investments that can be covered by the infrastructure ratio, as currently contained in the Government Draft Bill, will be maintained or narrowed during the legislative process or through subsequent interpretative notes. Further specification would certainly be desirable in practice.

Increase in the risk capital ratio and use of the opening clause for exceeding the diversification limits

As already provided for in the previously published draft, the risk capital investment ratio pursuant to Section 3(3) Sentence 1 AnlV is to be increased from 35% to 40% of the guarantee assets. This is intended to expand the scope for investments. The extent to which the extended scope for investment can be utilised will continue to be determined by the investment and risk management as well as the risk-bearing capacity of the respective AnlV Investors.

The planned changes to the so-called “opening clause” are also included unchanged in the Government Draft Bill. The opening clause in Section 2(2) AnlV is to be extended so that in future investments exceeding the diversification limits pursuant to Section 4(1) to (4) AnlV can also be covered by the opening clause. This is intended to create more flexibility for investments in individual debtors or individual investments and to widen the scope for investments with higher returns.

The advantages of the planned changes are obvious, both for AnlV Investors and for the asset management industry as a provider of infrastructure investments. However, it will only become clear in the years following the enactment of the Second Act to Strengthen Company Pensions comes into force whether the changes envisaged in the Government Draft Bill are sufficient to achieve the goal of diverting more investment into infrastructure projects. 

Published: October 2024

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_{¹ Regierungsentwurf - Government Draft Second Act to Strengthen Company Pension Schemes and to Amend Other Laws, download here} 

_{² Referentenentwurf - Draft of the Federal Ministry of Labour and Social Affairs and the Federal Ministry of Finance - Second Act to Strengthen Company Pension Schemes and to Amend Other Laws, download here} 

_{³ Ordinance on the Investment of the Security Assets of Pension Funds, Death Benefit Funds and Small Insurance Companies}

_{⁴ See also Emde/Dornseifer/Dreibus/Verfürth/Emde, 3rd ed. 2023, KAGB § 1 para. 304a}