Germany, a country usually associated with financial discipline, strong institutions, and conservative money management, is facing serious problems in one part of its pension system.

According to an analysis by the Financial Times, German professional pension funds are facing more than €2 billion in losses and potential write-downs, primarily due to investments in real estate and riskier private-market assets.

What makes this particularly interesting is that these are not conventional state pension schemes, but so-called Versorgungswerke – professional pension funds into which members of certain professions are required to contribute, including lawyers, doctors, dentists, pharmacists, and architects.

Together, these funds manage more than €300 billion in assets for approximately 1.4 million members and pensioners.

The problem, therefore, is far from small.

How did the problem arise?

For years, German professional pension funds were highly conservative investors. Their primary objective was not to generate spectacular returns, but to preserve capital and ensure that future pension obligations could be paid reliably.

As a result, a significant portion of their money was traditionally invested in bonds.

However, the long period of extremely low, and in some cases negative, interest rates in Europe created a serious problem. Bond yields were no longer sufficient to finance future pension obligations.

Funds therefore began searching for higher returns.

Capital gradually moved toward real estate, private equity funds, infrastructure, private debt, and other alternative investments.

During the era of cheap money, such a strategy appeared rational.

But from 2022 onward, interest rates began to rise sharply.

Real estate values fell, refinancing became significantly more expensive, some projects were left without the capital they needed, and investments that had appeared relatively safe began generating serious losses.

More than €2 billion may only be the beginning

According to data reported by the Financial Times, pension funds for lawyers, doctors, pharmacists, and dentists in several German federal states recorded more than €800 million in write-downs and impairments over the past four years.

The situation at some funds is even more serious.

The Berlin dentists' pension fund warned that investments in various companies and projects – ranging from hotels to a U.S. plastic-recycling startup and a shrimp-farming project – could wipe out more than half of its €2.2 billion in assets.

For this fund, estimates indicate approximately €1.1 billion in impairments, while members have also been warned of possible painful pension reductions.

Meanwhile, Bayerische Versorgungskammer – Germany's largest asset manager for professional pension funds – has warned of potential losses of more than €850 million on its U.S. real estate portfolio.

In its case, however, this represents less than one percent of its total investment portfolio, worth approximately €120 billion, which is why the institution emphasizes that pension payments are not at risk.

This demonstrates a very important point:

the amount of a loss is not the only thing that matters; its size relative to total capital and the degree of portfolio diversification are crucial.

The problem is not just about investments

Perhaps the most important part of the entire story is not what the money was invested in.

The problem is who made the decisions and how the control system was organized.

Germany has approximately 90 such professional pension funds. Unlike major pension investors in Canada, the Netherlands, or Switzerland, the system is highly fragmented.

Some funds are enormous and have professional investment teams, while the smallest manage less than €100 million in assets.

Supervision is largely carried out by institutions of Germany's individual federal states rather than by the central financial regulator, BaFin.

This means different governance structures, different reporting standards, and different levels of expertise.

That is precisely why Germany is now asking whether supervision of these institutions should be centralized and transferred to BaFin or the Bundesbank.

A 3.7% return versus 6.8%

There is another figure that deserves attention.

According to data reported by the FT, German professional pension funds generated an average annual investment return of approximately 3.7% over the 15 years ending in 2024.

During the same period, Dutch funds achieved around 5.4%, while Canadian funds generated approximately 6.8% per year.

At first glance, the difference between 3.7% and 6.8% may not look dramatic.

In long-term investing, it is enormous.

If, purely for illustration, we invested €100 million for 15 years without additional contributions, at a return of 3.7% the capital would grow to approximately €172 million.

At a return of 6.8%, it would reach approximately €268 million.

The difference is almost €100 million for every initial €100 million.

That is the power of compound returns, but it is also why institutional investors must think very carefully about the relationship between risk and return.

The conservative investor's paradox

The German case reveals an interesting paradox.

An institution can remain so conservative for so long that, because of insufficient returns, it eventually becomes forced to take significantly greater risks.

That is partly what happened here.

When traditional assets were no longer generating sufficient returns, some funds moved toward more complex and less liquid investments.

The problem is not necessarily investing in private equity, real estate, or private debt. These asset classes have a perfectly legitimate place in institutional portfolios.

The problem arises when an investor does not have the expertise, risk controls, and sufficiently broad diversification required for the investments it is buying.

What can private investors learn from this?

Standard Prva believes that the German case offers several useful lessons for both companies and private investors.

First, the size of an institution is not a guarantee of good investment decisions. Managing billions of euros does not eliminate the possibility of misjudgment.

Second, diversification is not about the number of investments but about their actual interdependence. Ten different real-estate projects financed under similar conditions can represent essentially the same risk when interest rates rise.

Third, illiquid assets require special attention. While shares of a large company can be sold almost immediately, exiting a private fund, business project, or large real-estate investment can take months or years.

Fourth, higher expected returns must always be considered together with the risks that need to be accepted in order to achieve them.

And finally, investment management is just as important as the choice of investment itself.

Clear exposure limits, independent oversight, expert investment committees, regular risk measurement, and the ability to acknowledge in time that an investment thesis is no longer working are all essential.

Standard Prva conclusion

Germany is not facing the collapse of its pension system. Most professional funds say that the losses recorded so far are under control and will not affect pension payments.

But the case represents a serious warning.

When institutions managing hundreds of billions of euros begin suffering major losses, the question is not simply “How much has been lost?”

A much more important question is:

How was it possible for so much risk to accumulate before the system recognized it?

Investing often focuses on how to achieve higher returns.

The German case reminds us of something even more important:

an investor's first task is not to make as much money as possible. The first task is to understand where the money is, how much risk is being taken, and what can happen when the market stops behaving as expected.

Standard Prva – We analyze the economy, finance, and markets to turn major global events into understandable business lessons.