Pension Funds Can Rev Up Germany Inc.

Stock prices are rising in Germany as middle-class Germans, anxious about saving for retirement, get the stockholding habit and foreign pension funds from the United States and other countries pour money into shares of German companies.

Stocks of such major companies as Siemens, SAP and Deutsche Telekom have risen more than 100% in the last year. And the big news lately has been the record-setting $180-billion planned buyout of Mannesmann, the German steelmaker turned telecommunications giant, by VodafoneAirTouch of Britain.

The new consensus among investment analysts is that the world’s third-largest economy, still burdened by 10% unemployment and stuttering economic growth, is going to change its industrial structure to one focused on shareholder value.

The Mannesmann deal is seen as a breakthrough in that regard. Big companies are restructuring. Siemens, for example, is divesting old businesses and expanding communications and Internet divisions under a program that will culminate next year with the Munich company’s listing its shares on the New York Stock Exchange.

Barton Biggs, global strategist for Morgan Stanley, recently wrote in an investment essay titled “Germany Unbound” that the country “should be the best market in Euroland over the next three years.”

Maybe he’s right--but it’s not that simple. German companies face a handicap as they try to modernize, because Germany lacks the abundant capital markets that pension funds have brought to the United States, Britain, Japan and other countries. Compared to $7.4 trillion of pension fund assets in the U.S. and $1 trillion-plus in Britain and Japan, Germany at $130 billion has little more in pension assets than Sweden--which has one-tenth Germany’s population.

Lack of pension funds is a danger because Germany faces a stiff bill for retirement income for its aging work force. With just about one retiree for every active worker at present, Germany’s tax-financed retirement system is showing strain. Retirement ages are being raised. Taxes, already high, really can’t be raised further.

So there are debates about setting up U.S.-style pension funds in Germany, even as changes in business there attract investments from pension funds in other countries.

It is a fascinating time, one that reminds us of the benefits pension funds have brought to the U.S. economy while alerting us to changes ahead for Germany, France and other economies.

Pension funds have been a force in the U.S. economy for 50 years, growing from $14 billion invested in fixed-income securities in 1949 to a total of $7.4 trillion in stocks, bonds, real estate and venture capital--plus $2 trillion in insured annuities--in 1999.

Independence has been key to their success: Company funds invest in stocks of other companies, not their own stock. Annual contributions are mandatory, and the funds are professionally managed and overseen by federal regulation.

Pension funds today own more than 60% of most major U.S. companies and many smaller ones. For 20 years they have invested in venture capital and also have pushed U.S. corporate managers to think first of returns to shareholders.

“They have been responsible for all the bull markets and, through venture capital, for the technological engines powering the U.S. economy,” says Michael Clowes, editor of the trade publication Pensions & Investments and author of “The Money Flood: How Pension Funds Changed Investing,” a history to be published in June.

For the last 10 years, pension funds have steadily increased their investments abroad. And they have been criticized as speculators by European politicians and corporate managers just as they were denounced by U.S. managers in the 1980s. The criticism reflects misunderstanding, says William Crist, president of the California Public Employees’ Retirement System, or CalPERS, the nation’s largest pension fund at $164 billion in assets.

“We represent patient capital,” Crist says. “Our average holding period for a stock is 10 years.”

Crist received hostile receptions on visits to Germany and France last year. In Germany, labor union leaders said that workers and managers confer on retirement matters and that there was no need for independent funds. In France, President Jacques Chirac complained of French companies being held hostage to “California retirees.”

Yet, rhetoric aside, France wants now to set up independent pension funds so that its companies can benefit from investments to finance French workers’ retirement.

In Germany, the clamor of small investors for stock markets that give prompt service to their small accounts, as well as the number of German companies raising capital outside Germany, indicates a need for new approaches. Simply put, German companies can’t escape world markets. Mannesmann resisted Vodafone’s takeover offer but couldn’t defeat it because more than half of Mannesmann’s stock is held outside Germany--13% of it by U.S. pension and mutual funds, which invest through indexes of foreign companies devised by Morgan Stanley and other banking firms.

Daimler-Benz, before it acquired Chrysler, listed its stock on the New York Stock Exchange in 1995 because it wanted access to world capital markets. Now Siemens will do so next spring, after it completes the conversion of its accounting system to comply with U.S. standards and Securities and Exchange Commission regulation.

Siemens’ move is significant, says Stephan-Gotz Richter, a Washington-based publisher of the Globalist, an Internet magazine on the world economy. Siemens is the 150-year old aristocrat of German industry, a company of 370,000 employees and $54 billion in annual sales of power plants, telephones, appliances and sophisticated electronic systems. That Siemens is spending $2 billion and four years to restructure its businesses is a clear signal that all of German industry must adapt to a changing world.

In the next three years, thanks to corporate tax changes now moving toward passage in the German parliament, the structure of most companies in Germany will be transformed. And it’s a good bet that provision will be made for independent pension funds, too.

And what does all such change portend? A big idea: The democratization of capital. Money saved for the retirement of workers is being made available to finance innovation, the forming of new businesses and the renewal of old ones. It’s a pattern that has brought the U.S. economy to its present state of low unemployment and healthy growth. It has to be beneficial that the pattern will now spread into the heart of Europe.

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James Flanigan can be reached by e-mail at jim.flanigan@latimes.com.