Sponsor covenant strength will be key in determining 2014 asset allocation for UK pension schemes approaching the decision of investing for growth or moving towards bulk annuities, BlackRock has said.Pension schemes in the UK are currently mulling asset allocations after 2013 proved to be an exceptional year for growth asset returns.However, the yield on government bonds also rose, after the downward pressure imposed by quantitative easing began to ease, lowering the value of Gilt holdings.Inverse performance from equity and fixed income assets has left underfunded pension schemes with something of an allocation dilemma. Schemes wanting to increase their funding level via asset increases are again being encouraged to move into riskier assets, such as equities.Simultaneously, schemes are also being encouraged to look towards bulk annuity markets to pass on obligations to the insurance industry, thus reducing liabilities.In order for the latter option to be commercially viable, schemes would need to invest in assets easily transferable, and preferable, to the insurance sector.Bulk annuity insurers have a preference for fixed income assets, and price insurance contracts depending on the spread between Gilts and corporate bonds.Arno Kitts, head of institutional business at BlackRock, said the decision within pension schemes should be based on two factors.One would be the scheme’s distance from achieving 100% funding on a buyout basis, thus allowing it to pass on all obligations to an insurance company.More important, however, would be the scheme’s support structure, such as its sponsor covenant, Kitts said.“Mainly, it is the strength of the covenant, which does dictate the amount of risk a pension fund can afford to take,” he said.“If you’re underfunded, a strong covenant affords you the ability to take growth risk, as someone can back you, if you really need to make up the ground on funding.”However, the move for growth assets to plug funding gaps may prove detrimental should the pricing for bulk annuities further improve, as is expected.Consultants at LCP, in a recent report, said 2013 was a record year, but 2014 could dwarf this, given that pensioner buy-in pricing remains attractive.Aon Hewitt, in its monthly bulk annuity market report, also found that volatility in growth assets was affecting schemes planning to transact with insurers, and highlighted the conflicting aims for schemes.At the end of January, schemes planning to price up an insurance contract could have seen the affordability fall by 5% in a week, solely due to equity movements.“This highlights the importance of considering when risk settlement would be desirable and what changes to the operation of the scheme may be made – perhaps including asset switches – in preparation,” Aon Hewitt said.Kitts said schemes, once set on a strategy, needed to think tactically about asset allocation.He suggested discussing with insurers which assets were more attractive to them, given the constant movement in pricing markets.Kitts pointed out that schemes allocating for bulk annuities could not follow calls to move into illiquid growth assets, which are long term and index-linked, and potentially provide equity-like returns.He said insurers would have admissible limits over illiquid assets and further capital requirements for volatility, resulting in higher pricing for bulk annuity deals.
Sponsor covenants ‘key’ in resolving UK schemes’ asset allocation dilemma
APG: Dutch pension funds have ‘no clue’ about their true tax liabilities
Dutch pension funds have “no clue” of their true tax burden and should begin mapping their tax liabilities by seeking clarity about their fiscal role, tasks and responsibilities, according to Roelof Goudswaard, fiscal head at the €377bn pensions provider APG.Speaking during the Pensioenforum in Scheveningen, Goudswaard estimated that Dutch pension funds’ tax liabilities currently stood at no less than 2% of their assets.He specifically suggested that schemes check which party is liable for tax on any outsourced activity.During his presentation, Goudswaard referred to the general exemption from VAT on pensions administration, which is to expire on 1 January 2015, and noted that the Inland Revenue had intensified its monitoring. He also said several pension funds had failed to register with the Inland Revenue for VAT, and advised them to get in touch with the tax man to prevent getting fined.APG’s director of fiscal affairs said he expected the Inland Revenue to evolve into a third supervisor for pension funds, in addition to watchdog De Nederlandsche Bank (DNB) and the Financial Markets Authority (AFM).He also predicted that the tax rules would be increasingly set by the EU, as well as by the US, citing the FATCA legislation, which makes it mandatory for Dutch pension funds to report about their US clients to the US tax authorities.Also during the Pensioenforum, Marco Folpmers, professor of financial risk at Tilburg University, criticised the lack of guidance from the Ministry of Social Affairs in the national debate over the future of the pensions system.In his opinion, state secretary Jetta Klijnsma has failed to produce a vision of the desired sustainable set-up, and the direction of the current dialogue is unclear, as every citizen and organisation can have a say, while no subject of off-limits.“This carries the risk of polarisation and failure, and also includes the risk of outcomes that are at odds with the aim of deploying pension assets for pension goals,” he said.Folpmer’s opinion about the ministry’s lack of guidance was echoed by pensions expert Emilie Schols, who said the pensions debate would need to be “forced through” within three months.She suggested Social Affairs did have a vision of the future pensions system – it would merely carry on with its initial plans after the national dialogue had finished.
Dutch regulator rejects Wonen, Detailhandel merger for second time
For the second time, the Dutch regulator (DNB) has blocked the planned merger between Wonen, the pension fund for the home-furnishing industry, and Detailhandel, the retail sector scheme.The regulator concluded that the funding gap between the two schemes was too great.The pension funds are now faced with two choices: work together within the new ‘general’ pension fund (APF) – expected to come into force from 1 January 2016 – or continue as they were, independently.The companies and workers involved in the schemes initially aimed to merge the €3.2bn Wonen and the €12.9bn Detailhandel on 1 January 2015. As of the end of 2014, Wonen had a coverage ratio of 111%, Detailhandel 117%.To bridge this gap, the schemes suggested the companies associated with Wonen would increase their contributions over a five-year period. Other proposed measures included passing on the benefits of scale for Detailhandel to the participants of Wonen, as well as re-allocating Wonen’s early retirement reserves to its general pension assets.However, André Steijaert, chairman at Wonen, said the regulator concluded the merger would come at the expense of Detailhandel’s participants, as well as Wonen’s future participants.He added that he felt the social partners involved in the proposed merger had set Wonen’s board “an impossible mission”.In 2013, the regulator rejected a funding-gap plan that would have seen Wonen’s participants forego indexation and face a series of rights discounts.Steijaert said the APF was a now potential option, assuming the industry-wide schemes could ringfence their assets.Continuing independently is also an option, he added, explaining that Wonen’s contribution for 2016 would be lower than the expected premium under the new merger scheme.Steijaert added that the Wonen social partners had shown no interest in merging with any other pension fund than Detailhandel, and that this option was, therefore, not on the agenda.Wonen’s board will discuss the situation with its social partners next month.At July-end, Wonen’s funding ratio was 102%, while Detailhandel’s coverage stood at 109%.The pension funds have 132,000 and 1m participants, respectively.
PLSA chief outlines possible solutions to UK pension challenges
Structural changes such as asset and liability pooling in the private sector, more action against underperforming schemes and greater regulatory flexibility must be among the mix of possible measures that need to be considered to address the challenges facing UK pension schemes today, said Joanne Segars, chief executive of the country’s industry association.Opening the second day of the Pensions and Lifetime Savings Association (PLSA) investment conference, Segars set out four main areas where change was needed to ensure that – against a challenging backdrop of low interest rates, volatile markets and longer life expectancy, and a £320bn-plus section 179 deficit – the UK’s funded pension schemes can continue to provide for their 16m members.The PLSA, for its part, has just launched a defined benefit (DB) taskforce to tackle these questions.Segars stressed the need for action “now” from government and regulators but also said the industry itself could take steps to make a difference. With respect to the latter, there is a need for some “honest conversations” about the efficiency of schemes despite improved trusteeship in recent years, said Segars, who asked whether there was a case for more action against schemes that fail to live up to the mark.Structural changes to schemes themselves may also have a part to play, she said, asking whether something like the pooling underway in the local government pension scheme (LGPS) sector could be replicated in the private sector in a bid to reap investment efficiencies.“Can we go further and think about what that might look like on the liability side of the equation?” she added.Regulation, meanwhile, needs to be more flexible and mature to help schemes be more efficient and sustainable, according to Segars.More specifically, valuation periods longer than triennial are needed, she said.As to “thinking the unthinkable”, she asked whether liabilities could be rebalanced.She argued that some risk aversion came from regulation that made schemes more risk averse than they might like to be.Separately, she welcomed the FCA’s market study of the asset management industry as a contribution to making markets “work better”.The study “asks important questions about the value chain”, said Segars, questioning some of the pricing disparity in the asset management industry that can be seen if you “scratch beneath the surface”.For example, almost identical global equity mandates can be bought for 45-90 basis points, while the difference is even starker in active real estate, she said. The Financial Conduct Authority’s study and whether the asset management industry is serving pension funds and other end investors has been a big theme of the PLSA conference, surfacing as a topic during speeches and panel discussions. On the topic of cost, UK pension funds were recently urged to look towards the cost-reporting framework established in the Netherlands, with an industry kite-mark proposed.
Private equity giant buys stake in UK’s PIC
Tracy Blackwell, PIC’s CEO, said: “The combination of their financial services expertise and long-term, strategic financial support is important to us as we continue to meet the demand for securing pension obligations in the UK’s established and expanding pension insurance market.” Peter Rutland, global co-head of the financial services team at CVC, added: “There is growing demand from companies in the UK to remove the financial and operational risks related to their defined benefit pension obligations.”PIC has already demonstrated its industry-leading ability to respond to this trend, providing its customers with long-term stability and financial security.” CVC’s only other insurance investment is Fidelis, a specialist in insuring energy, marine, property, aviation, and political risk, which it bought in June 2015. It also has previously invested in Belvedere, Brit Insurance, and NRGA, according to its website.The acquisition of the PIC stake is the third investment made by CVC in its Strategic Opportunities Platform, for which it raised €3.9bn last year.In other acquisition news, rival private equity firm Blackstone on Friday agreed a deal to buy the pension administration businesses of financial services conglomerate Aon. Blackstone agreed to pay up to $4.8bn (€4.5bn), with $500m of this dependent on the performance of the business, according to an announcement from Aon.Aon – which owns investment consultant Aon Hewitt – said it wanted to focus on its risk, retirement, and health advisory services. The deal is expected to be completed in the second quarter of this year. Private equity firm CVC Capital Partners has bought a stake in the parent company of Pension Insurance Corporation (PIC), it announced on Friday.It has not revealed the size of the investment, but a Sky News report in December claimed CVC was seeking a 10%-20% slice of Pension Insurance Corporation Group. The report suggested the Royal Bank of Scotland was among the sellers.PIC runs the defined benefit pension funds of more than 130,000 former employees of UK companies such as Cadbury, London Stock Exchange, and Cookson. It runs more than £20bn (€23.5bn) in assets.In 2015, the insurer backed a £2.4bn full buyout of the Philips Pension Fund – this is still the biggest transaction of its kind completed in the UK.
PRI signatory delisting model to come into effect before year-end
The Principles for Responsible Investment (PRI) is to decide on the process and criteria for delisting signatories in December, according to a spokeswoman.Amid strong growth in the number of signatories and concerns that many were only paying lip-service to the organisation, PRI has in recent years come under pressure to hold signatories to account about their pledge.Last year the PRI formally announced it would delist signatories that do not live up to the principles.The organisation has already defined the minimum criteria signatories must meet to avoid being kicked off the list, and the process for delisting. The responsible investment organisation has made increasing accountability one of its priorities for the next 10 years, as set out in a blueprint it published in May. “For signatory status to be meaningful, and for beneficiaries to see the benefits they are entitled to, we must ensure that signatories are living up to the commitments they make when signing up to the Principles,” the PRI wrote.The number of signatories has grown significantly since the Principles were launched in 2006. At the time, there were around 100 signatories – today there are more than 1,750. Many asset owners require managers to be PRI signatories to consider them for mandates.At the moment, a manager, asset owner or service provider can become a signatory simply by filling in a declaration form, signed by a chief executive officer or equivalent person. The only way they can be delisted is if they do not publicly report every year on their responsible investment activity based on a PRI framework. There is a grace period of one reporting cycle after signing up to the Principles.How the PRI’s membership has grown Final sign-off must come from the board, however. It is due to decide on this in early December, and communicate the outcome of its decision to signatories thereafter.The PRI has already identified some 200 investors that were falling short of the proposed new standards, comprising both asset owners and investment managers. It will not make this watchlist public.The proposal the board will review in December is for the at-risk signatories to be delisted if they fail to meet minimum standards of progress over a two-year period. This would be subject to appeals.The PRI board would oversee the delisting process and hear any appeals. Based on the current proposal and timeline, the earliest any signatory could be delisted would be 2020. Fiona Reynolds, managing director, at the PRI (pictured) , told IPE that the new accountability model would formally come into effect before the end of this year.“All of our signatories will be informed about the minimum criteria standards we have developed ahead of the 2018 reporting season, which begins in early January,” she said. “We will also work with signatories who do not currently meet these minimum standards to assist them in every way possible during the two year period they will have for improvement. “This is a very important step in the PRI’s evolution and we have no doubt that it will strengthen the PRI and set out clear criteria to investors. Working together, it is our aim to progress responsible investment strategies and our signatory base has been very supportive of these new measures.” Source: PRI
Netherlands roundup: Pension funds, social partners to tackle diversity
Subsequently, the pension fund organisation and StAr – which represents the biggest unions and employer associations – would flesh out best practices for increasing diversity and come up with policy proposals and a rota for appointing trustees, Koolmees said.The rota is meant to support an early search for new board members.Accountability boards to get approval over cross-border transfers The Pensions Federation and the Labour Foundation (StAr) are to collaborate to encourage Dutch pension funds to increase board diversity, social affairs minister Wouter Koolmees has announced.In a letter to parliament, Koolmees said many schemes still failed to comply with the Code Pensioenfondsen, which stipulates that every pension fund must have at least one female trustee as well as a board member of under 40 years old.According to the minister, 40% of the 240 pension funds lacked a woman on their board, while 65% of boards don’t have a younger trustee.He indicated that the federation would engage with non-compliant pension funds in order to hear about their “experiences and barriers”, starting with the country’s 20 largest schemes. Wouter Koolmees, social affairs ministerThe accountability boards (VO) of Dutch pension funds will be given the right of approval over transfers to cross-border schemes, social affairs minister Wouter Koolmees has said.Answering questions from parliament about the implementation of the IORP II directive, Koolmees said representatives of workers and pensioners would have to agree with such a transfer.However, he said this wouldn’t apply for a collective value transfer between Dutch entities “as this would remain subject to the Dutch prudential framework”.The Christian Democrats (CDA) indicated that the minister’s answer did not entirely dispel their fears regarding different supervision regimes abroad. The minister didn’t exclude the possibility that other EU member states would tax pension assets, the party said.However, Koolmees argued that pension funds considering a value transfer would logically take aspects of stability and taxation into account before making a decision.He emphasised that individual participants also had a right to object.
ESMA: ‘We need to be more nuanced about sustainability’
The EU financial markets watchdog has thrown its weight behind stewardship as a means by which investors can help bring about the transition towards a sustainable economy.In a report containing technical advice to the European Commission on the integration of sustainability risks and factors by investors, the European Securities and Markets Authority (ESMA) said the transition could not be achieved “by simply implementing a binary approach between ‘green’ and brown’ assets”.“To this end, sustainability must be assessed in a more nuanced manner,” it said.The supervisor said some respondents to a recent consultation had called on ESMA to clarify whether “integration of sustainability risks in the investment process” was only concerned with the potential for environmental or social matters to adversely affect the financial value of a portfolio, or whether investors should also – or instead – assess the impact of their investments on environment and society. The answers to these questions, said ESMA, were “of paramount importance for the overall scope and actual impact of the sustainable finance initiative”.The comments were made in ESMA’s report on integrating sustainability risks in the UCITS and AIFMD frameworks for fund management.Investors’ due diligence processes were most effective where sustainability was assessed from both perspectives, according to the watchdog, and should not become “a mere tick-box exercise”.Investors should be able to integrate emerging risks and identify potential and actual adverse impacts and seek to mitigate them “where possible”, said ESMA.This included active engagement with investee companies as well as employing investment strategies such as negative, norms-based and positive screening, sustainability-themed investments or impact investing.Institutional investors already applied engagement strategies and the stewardship principle was already recognised in EU regulation, ESMA said, referring to the revised Shareholder Rights Directive.“ESMA is of the view that the transition towards a more sustainable and inclusive growth should also rely on this important principle,” said the supervisor.Consideration of adverse impacts not mandatory for allThe EU’s draft sustainable finance disclosure regulation “clarifies that the consideration of principal adverse impacts of investment decisions on sustainability factors in the due diligence process” would not be mandatory for all market participants, ESMA said. It proposed wording in the delegated acts to reflect this.The disclosure regulation is one of the three main legislative proposals the European Commission has put forward to implement its sustainable finance action plan. Political agreement was reached on it in March.ESMA’s technical advice relates to various pieces of EU financial legislation already in force, which the Commission is planning to add to via the introduction of so-called delegated acts on the integration of sustainability risks in investment decision-making or advisory processes.The EU insurance and workplace pensions supervisor, EIOPA, received a similar mandate from the Commission with regard to existing legislation under its remit – Solvency II and the Insurance Distribution Directive – and the two supervisors said they co-operated with each other to ensure consistency across sectors.When the Commission tasked them to provide the technical advice last year, it said they should be aware that a delegated act could be adopted under IORP II, but based on the text of the provisionally agreed disclosure regulation this did not appear to have happened.
Ex-regulator slams piling up of pension fund rules
Rein van DamSpeaking to IPE’s Dutch sister publication Pensioen Pro, Van Dam explained that one side effect was that a scheme’s board could “become distracted from its main task of investing, hedging investment and interest risks, providing efficient governance, and clear communication”.In his opinion, the current focus on risk prevention could lead to a reduction in the quality of a pension fund’s core tasks.Van Dam said previous pensions legislation in the Netherlands had only stated about investment requirements that “a pension fund had to invest solidly”. He also questioned whether investment had improved, despite all the new rules.However, the former regulator did not blame the government or DNB for the increased regulatory pressure on pension schemes, but instead highlighted a social trend towards more rules.“There is an increased fear of making mistakes and being held liable,” said Van Dam. He made a comparison with the past “when children played outdoors without mobile phones and with less worries about getting a scrape”.Van Dam said he was under no illusion that the trend would turn, and predicted that the introduction of additional rules would continue.DNB declined to comment on Van Dam’s article.Further readingDutch pension rules undermine funding and confidence, says DNBThe Dutch regulator has criticised the the country’s financial assessment framework (FTK), which it says allows for contribution payments that are too low and benefits that are too high Risk reduction requirements for pension funds are over the top and counter-productive, according to a former Dutch pensions regulator.In an article on the website of the staff pension fund of Dutch supervisor De Nederlandsche Bank (DNB), Rein van Dam argued that governing a pension fund should not be complicated, but the emphasis on risks had increased too much.Until 2002, Van Dam headed the supervisory division of the PVK, the predecessor of DNB as pensions regulator.“The board must ensure that contributions are paid in, assets are properly invested and benefits are paid,” Van Dam said. “Nowadays pension funds must take in account approximately 15 risks, such as IT risk, outsourcing risk and integrity risk, with each risk including up to 70 sub-risks that need assessing annually.” According to Van Dam, who is leaving his role as a trustee of the DNB scheme, every individual rule makes sense, but all rules combined are counter-productive.“Compare it, for example, with combining five different – but each necessary – medications, which could lead to unwanted side effects,” he said.
Danish roundup: Prime minister starts talks on early retirement pension
Denmark’s new prime minister Mette Frederiksen is to discuss the notion of early retirement disability pensions with labour market partners including the Danish Trade Union Confederation (FH) and the Danish Employers Association (DA), her office announced.News of the meeting, which is to take place on 8 August, follows recent debate in Denmark over whether some groups in the labour market — employees who have been working the longest and those whose jobs are labour-intensive — should be entitled to earlier retirement than others.Frederiksen said in a statement: “Many Danes have worked hard since they were very young. It has taken its toll on body and soul. That is why we must now ensure a dignified retirement, so that everyone gets good years on a pension with time for children and grandchildren.”Her office said that after the meeting, the prime minister would discuss with the organisations plans how to implement the proposal. A plan to extend coverage of the early-retirement disability pension formed part of an agreement signed in May by the then coalition government led by the Liberal Party, and the Danish People’s Party and Radical Liberal Party.The pact involved 17,000 Danes receiving the senior pension in 2025, and the creation of a commission to examine the pros and cons of differentiated pensions.PBU stows DKK100m in microfinance focussing on womenDanish labour market pension fund Pædagogernes Pension (PBU) is investing just over DKK100m (€13.4m) in microfinance via a fund that it said helps enable women in developing countries to influence their own futures.The fund, called the Nordic Microfinance Initiative (NMI), focusses on poor people in Africa and Asia, many of whom are vulnerable women who depend on men, are unable to borrow from banks and therefore achieve independent economic standing, PBU said.Sune Schackenfeldt, the pension fund’s chief executive, said: “The investment has a clear link to our strategy for responsible investments, where we focus on women and equality, among other things.”PBU said the microfinance fund aims to provide small loans and simple banking, creating the basis for income-generating activities to help affected families.The NMI’s microfinance fund supports a number of the United Nation’s Sustainable Development Goals, including gender equality and the elimination of poverty, PBU said.Lærernes Pension hunts for new CEODanish Teachers’ Pension Fund, Lærernes Pension, has hired local consulting firm Basico to search for its new chief executive.Advertising the job, the fund said candidates should have at least five years of leadership experience at a high level and be confident communicators.“Lærernes Pension puts great weight on openness,” said Lærernes Pension.The future chief executive must understand the importance of the firm’s communication, so that it always appears proactive in this regard, and supports the needs and expectations of its members and shareholders, the fund said.The job search began after current CEO Paul Brüniche-Olsen announced the date for his retirement as 1 October, having headed up the fund for most of its 26-year history, since 1995.Lærernes Pension also said candidates must be able to speak and write in Danish and English fluently, and have general social knowledge and understanding. Basico said it will be receiving applications until 15 August.