- Executive Summary
On June 27, 2024, the German Federal Ministry of Labor and Social Affairs (Bundesministerium für Arbeit und Soziales) and the German Federal Ministry of Finance (Bundesministerium der Finanzen) published a draft of a Second Act to Strengthen Occupational Pensions and to Amend Other Laws (Zweites Betriebsrentenstärkungsgesetz). The draft, inter alia, proposes the following amendments to the German Investment Ordinance (Anlageverordnung – "GIO") which contains rules for investments of German pension schemes (Pensionskassen) as institutions for occupational retirement provision:
- Implementation of a separate infrastructure quota of 5 % of the guarantee assets (Sicherungsvermögen);
- application of the escape clause (Öffnungsklausel, cf. § 2(2) GIO) for investments exceeding applicable issuer-related diversification limits; and
- expansion of the risk capital investment quota from 35 % to 40 % of the guarantee assets.
The amendments should also be relevant to German professional pension schemes (berufsständische Versorgungswerke) and supplementary pension funds (Zusatzversorgungskassen) to which requirements equivalent to those set forth in the GIO apply under applicable German state laws and even to insurance companies subject to Solvency II, in the latter case to the extent that the relevant entity is subject to the GIO in accordance with its internal investment guidelines. As regards to the infrastructure quota in particular, both the investment strategy and reporting of an AIF concerned are expected to be decisive going forward.
- Proposed Amendments in Detail
The substantial proposed changes to the GIO provided for in the draft are outlined below:
- Implementation of a Separate Infrastructure Quota
- Proposed Changes
The draft provides the introduction of a new infrastructure quota (amounting to 5 % of the guarantee assets). Where the quota applies to an investment, such investment would not have to be taken into account for existing asset-mix quotas such as the risk capital investment quota (35 % of the guarantee assets, possibly 40 % in future) and the participation quota (15 % of the guarantee assets) or the quota for alternative investments (7.5 % of the guarantee assets). To be eligible for the infrastructure quota, an asset needs to be in line with existing requirements for one of the asset types set forth in the GIO, i.e. eligibility of an investment under the so-called escape clause would not be sufficient. The new quota is to apply to equity and debt financing for projects for the provision, expansion, operation or maintenance of a substantial asset. According to the explanatory memorandum relating to the draft, this refers to assets:
- which are considered to be in the common public interest;
- the operator of which is domiciled in a country in accordance with the respective requirement of the corresponding asset type under GIO; and
- which are located in such country.
- Initial Assessment
Infrastructure investments are not captured separately in the asset catalogue of the GIO. To date, they used to be included in the risk capital investment quota and the participation quota, or alternatively in the real estate quota (25 % of the guarantee assets). Due to the increasing allocation of investments by institutional investors to alternative investments, the above quotas tend to be utilized to a greater extent. As a result, infrastructure investments may not be pursued in view of the competition for quotas with other alternative investments.
The current initiative in form of the draft bill is intended to provide some relief in this respect by creating a quota exclusively reserved for infrastructure investments (as such investments are also considered to be of political desire). A specific asset-mix quota for infrastructure investments has already been in place for professional pension schemes in North Rhine-Westphalia since 2021. However, using such quota requires prior approval by the regulator for each pension scheme concerned. In contrast, the current draft provides for a general infrastructure quota without any filing requirements.
The scope of infrastructure projects covered by the proposed regulation appears to be comprehensive in principle. However, some questions remain unresolved in detail – particularly in the context of infrastructure AIF – which should be clarified in the course of the further legislative process, e.g.:
- geographical requirements: There appears to be a need to clarify the requirements regarding the domicile of the operator of the project and the location of the infrastructure assets for investments through infrastructure funds. This applies in particular to fund-of-funds the capital commitments of which are to be invested in a number of underlying AIF;
- requirements for qualification as "infrastructure": The question arises as to the extent to which participations in AIF should be assessed solely and uniformly on the basis of the relevant AIF's investment strategy or on the basis of a look-through to underlying (target) AIFs or individual projects/assets. A look-through would require granular reporting on the respective target funds or projects and their classification as infrastructure investments (similar to the requirements for Solvency II or CRR investors).
The draft does not provide for the implementation of an infrastructure quota for pension funds (Pensionsfonds) regulated under the German Pension Fund Supervision Ordinance (Pensionsfonds-Aufsichtsverordnung – "PFSO") which contains the same asset types as GIO. At first glance, this appears to be consistent as almost no fixed asset-mix quotas apply to most pension funds so the existence of a separate infrastructure quota seems less relevant. However, infrastructure investments might qualify as investments in investment funds with an alternative investment strategy which have to be limited to a prudent level. Not having to take into consideration certain infrastructure fund investments for this limitation could facilitate infrastructure investments by ensuring that such investments do not compete with other investments. Thus, it would be preferable to clarify that infrastructure projects held via alternative AIF are not subject to the asset-mix requirements otherwise applicable to alternative AIF under PFSO.
- Application of the Escape Clause for Investments Exceeding Debtor-Related Diversification Limits
- Proposed Changes
The draft provides that the so-called escape clause can be used in cases where an investment in a debtor would exceed applicable issuer-related diversification limits (e.g. in the amount of 1 % of the guarantee assets with respect to an investment in a closed-ended AIF).
- Initial Assessment
The escape clause to date applies to investments that do not fall under a category of the regular catalogue of asset types eligible for GIO investors or for which one or more asset-mix quotas have already been fully utilised. The draft now provides that the escape clause can also be used if an issuer-related diversification limit would otherwise be exceeded. However, this does not entail an extension of the escape clause. It remains limited to 5 % of the guarantee assets with the possibility of an increase to 10 % in individual cases.
- Expansion of the Risk Capital Investment Quota to 40 %
- Proposed Changes
The risk capital investment quota is proposed to be increased from 35 % to 40 % of the guarantee assets.
- Initial Assessment
The risk capital investment quota relates to a majority of investment types that are relevant for alternative investments. In addition to equity investments, it also includes subordinated debt and profit participation rights as well as direct private equity investments and shares in private equity/debt funds or funds with alternative strategies. The increase in the quota also supports numerous commitments in connection with infrastructure and renewable energies and is a positive signal in this respect.
- Conclusion and Next Steps
The draft is one of a series of current measures at German state level and legislative proposals at German federal level that are intended to raise capital, particularly from institutional investors, for investments in infrastructure and renewable energies. We will keep you up to date on the current legislative process and further developments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.