The UK pensions industry has begun digesting the surprise announcement by the government to overhaul the way it taxes and restricts savings in defined contribution (DC) vehicles, with warnings on the implications for defined benefit (DB) savers.Yesterday, in his annual Budget speech to Parliament, chancellor George Osborne announced a raft of changes to the DC at-retirement market.A tax surcharge on DC savers accessing the full value of their savings is to be removed, as is the compulsion for pots to be annuitised.However, in its policy consultation, the government said it needed more detailed analysis on whether to allow DB savers the same allowances. It has already moved to block the DB savings to DC vehicles in the unfunded public sector pension scheme, and may spread this across funded DB schemes.John Ball, head of pensions at consultancy Towers Watson, said: “The government is thinking about going further and erecting a wall between private sector DB and DC schemes in order to avoid suppressing demand for Gilts.”The impact on DB investments was a key concern in the consultation released by the government.With UK schemes being vast owners of government debt, as well as corporate bonds, any need for trustees to shift assets to maintain appropriate cash levels to match bulk outflows would hamper growth and liability-matching assets.“Given that the stock of defined benefit liabilities and assets exceeds £1.1trn (€1.3trn), even relatively small changes to this stock could have a significant impact on financial markets,” the government conceeded in yesterday’s annoucement.Ball also said the removal of the need to annuitise would require DC pension schemes to overhaul current investment strategies.“Where savers do not make investment decisions themselves, the strategy is usually to protect them against swings in annuity prices as they approach retirement,” he said. “It could be back to the drawing board.”While industry reactions to the Budget announcement were generally positive, the National Association of Pension Funds (NAPF) said the move was “perplexing”.The pension fund lobby group’s chief executive, Joanne Segars, pointed to a contradiction between auto enrolment, the flagship policy to increase pensions coverage, and allowing savers unrestricted access to their pension.“Experience tells us that people are often ill-informed and make poor decisions about financial planning for old age,” she said.“It is concerning there appears to be little robust modelling to reassure us the government has understood the risk that a number of people will run through their pension pots far too quickly.“We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age.”However, on the other side of the table, the Society of Pension Consultants fully backed the government proposals, calling them a “breath of fresh air”.President Roger Mattingly said: “In one fell stroke, [Osborne] has broken down the barriers to the customisation of individual benefits for those living in increasingly modern circumstances.”Jan Burke, a partner at consultancy Aon Hewitt, admitted the firm was concerned running costs for DC schemes would increase.“There is an inevitable need to review administration, scheme design and in particular the default design, as well as the additional communications to members who will need to understand their new options and how this might influence their investments,” he said.
The scheme for medical consultants also reported a return of 1.8% over 2013.As a consequence of rising interest rates last year, the scheme’s liabilities decreased, boosting funding by 4.2 percentage points to 116.8% at year-end.SPMS said its coverage ratio included its annual unconditional indexation of 3%.Last year, the pension fund’s 36% equity portfolio returned 17%, with investments in Japan, the US and Europe returned 50%, 28.5% and 27.2%, respectively.The four hedge funds in its alpha mandate returned 8.5%, outperforming its benchmark by 4.8%.However, rising interest rates caused a 5.4% loss on its 43% fixed income holdings, as well as a 4.1% loss on its interest hedge.Emerging market debt lost 12.5% over the same period.The scheme’s credit holdings varied, with European corporate bonds returning 4.7% and US investments losing 4.4%.The scheme also lost 7.8% on inflation-linked bonds.Non-listed property returned -1.2%, against a benchmark of 6.5%, whereas listed real estate returned 4.4%.SPMS reported costs for pensions administration of €444 per participant last year and said it spent 1.12% of its assets on asset management, including 20 basis points for transactions.The scheme provides pensions for 8,000 self-employed medical consultants and more than 6,500 pensioners. SPMS, the occupational pension fund for Dutch medical consultants, has produced an 11.2% return over the first six months of 2014 on the back of positive investment performance and falling interest rates.The scheme attributed the result, in equal measure, to investment returns and a 70% hedge – using swaps – on the interest risk of its liabilities.Over the first two quarters of the year, the pension fund’s assets rose to €7.8bn, while its coverage ratio improved by 3 percentage points to 120%. However, the pension fund took pains to point out that, were its funding discounted against market rates rather than against the three-month average and application of the ultimate forward rate, its coverage would drop from 115% to 112%.
Danica Pension’s investment director Peter Lindegaard is leaving the Danske Bank subsidiary as the firm hunts for a replacement with the skills to implement its new strategy focusing on direct holdings. A spokesman for Danica Pension said news reports that Lindegaard had been fired following years of disappointing investment results were “a bit strong”. He told IPE: “Jacob Aarup-Andersen (Danica Pension CFO) and Peter Lindegaard believe it is sensible to find another investment director with different skills.” The company and Lindegaard – who has held the position of investment director for five years – had agreed it was the best thing to do, he said. Danica Pension will unveil a new investment strategy in the autumn that will focus on investing directly in companies. “The CFO is working on it right now,” the spokesman said. “In the future, we will do things differently from the way we have done up to now.” Last month, Danica Pension made its first major direct investment, heralding the start of its new strategy. The pensions firm bought a minority stake in marine logistics firm Unifeeder for DKK400m (€53.6m), as part of its overall strategy to replace some bond investments with this type of investment. Over the next two years, Danica Pension said it expected to make direct investments of more than DKK10bn. Although Lindegaard has not yet left the company, an interim investment director has been put in place, the spokesman said. Lars Pano Thørs, who was already working in Danica Pension’s investment department, has taken over Lindegaard’s role temporarily, he said. Danica Pension had not yet initiated a search for a new investment director, but this process will begin very soon. Its spokesman added: “Peter has been a valued member of staff in Danica, and we thank him for his efforts.” Lindegaard himself was unavailable to comment. Aarup-Andersen joined Danica Pension at the beginning of June as CFO and one of the subsidiary’s three directors, coming to the pensions subsidiary from another part of the Danske Bank group – Danske Capital. At Danske Capital, he headed the launch of the Europe Long-Short Dynamic fund. He has a background in hedge fund management, having co-founded the Montrica hedge fund in 2006, which was then sold to TPG-Axon in 2010. Before that, he worked in London for Goldman Sachs’s investment banking unit between 2002 and 2005.
The use of these structures can potential reduce the liability burden of a scheme entering the PPF, thus reducing the levy.In October, the PPF launched its final consultation on changes to the PPF levy formula, as new insolvency-risk score provider Experian takes over from 2015.The Association of Consulting Actuaries (ACA) said it was concerned by the consultation and surprised by the lifeboat fund’s attempt to extend the legal duty of care.“We would prefer to maintain the existing chain of accountability through the trustees,” the organisation said.“As a minimum, the maximum extent of any liability would need to be made clear. Typically, there is a liability cap in the agreement between advisers and trustees. It would not seem appropriate for advisers to have an uncapped liability to the PPF.”Towers Watson, a consultancy, also raised concerns about the PPF’s move. Joanne Shepard, senior consultant at the firm, said it could potentially undo a lot of good work.“Extending each adviser’s liability is unnecessary – there is already a duty of care and liability to the trustees [whose role the PPF assumes on insolvency] or sponsor,” she said.“Subject to legal opinion, extending each adviser’s duty of care to the PPF may not always be unachievable – in which case, perfectly good assets would not be recognised for levy purposes.”Aon Hewitt called on the PPF to clarify its stance on the extension.“Will the accounts value of an ABC be subject to scrutiny by the PPF, with any attaching advice needing to be explicitly relied on by the PPF Board, despite this being an audited figure?” it asked.The ACA also raised concerns over new provider Experian’s ability to interpret a sponsor company’s annual accounts.It said where companies had not clearly defined ‘capital employed’ or ‘current liabilities’, Experian could not calculate figures, and thus set them as zero and skew the scoring.The ACA called for Experian to be allowed to use its judgement to approximate data items set by the PPF’s criteria.This is the lifeboat fund’s final consultation before Experian takes over from Dun & Bradstreet (D&B) for the 2015-16 levy calculation.The move to Experian has been beset by delays, as the lifeboat fund wanted to create a bespoke insolvency risk score after significant complications with D&B in its eight-year relationship.This article originally and mistakenly said the PPF could provide transitional arrangements for levy-payers buyt his has since been ruled out by the fund. Apologies for any inconvenience. Consultants have dismissed attempts by the UK’s lifeboat fund to extend a duty of care on services provided to schemes operating asset-backed contribution (ABC) products.Wording in the latest Pension Protection Fund (PPF) consultation caused concern among advisers as ABC structures would require independent valuation recognising a legal duty of care to the PPF.This would have to be provided by the advisory community and places additional legal strain on those providing services to schemes.ABC structures involve sponsors giving schemes legal claim over an asset that provides income streams in return for a reduction in deficit contributions.
In contrast, assets for individual pension plans totalled €64.1bn at end-2014, covering 7.8m participants.According to INVERCO, the biggest single component of pension fund portfolios is invested in Spanish government bonds – 35.3% as at end-December 2014, up from 33.9% the previous year. A further 18.6% is invested in Spanish corporate bonds, compared with 20.7% at end-2013.Equities have risen slightly over last year as a percentage of both domestic and foreign segments, with Spanish equities making up 8.6% of portfolios as at end-2014. An average 11.5% was invested in foreign equities.The cash component at end-2014 had risen to 8.9%, from 6.9% the previous year. Spain’s occupational pension funds made average investment returns of 7.14% over calendar year 2014, according to the country’s Investment and Pension Fund Association (INVERCO).The results indicate a moderate decline over the previous year’s return of 7.7%, taking average returns for the three years to 31 December 2014 to 7.73%, and for the five years to that date, to 5.09%.Total assets under management for the occupational sector rose to €34.2bn, an increase of 1.2% over the previous year. However, the number of participants fell slightly to 2m.
“As risk appetite returned, long-dated interest rates rose by around 0.15%, reducing liability valuations and further driving improved funding levels.“Corporate bonds outperformed government bonds, which also contributed positively to funding levels.”However, despite the 1.5% growth in scheme assets compared with the end of September, the 4.5% year-to-date asset growth was easily outpaced by the 11% growth in liabilities since the beginning of the year.In other news, the pension fund for cheese manufacturer Dairy Crest sold its stake in several properties back to its sponsor.The £8.3m deal will reduce the company’s contributions by £2.8m a year through to 2018, and comes as it finalises the sale of its dairy business.Ahead of the sale of the properties, which finalised in early November, the fund’s deficit stood at £33.2m, down from £47.1m at the end of March this year.The £1bn pension fund currently pursues a liability-matching investment strategy, with nearly £600m invested in bonds and cash, and only £53m in equities.The properties owned by the fund stand apart from the £60m asset-backed vehicle agreed in 2013, which saw the pension fund granted ownership of the company’s stock of maturing cheese. Recovering equity markets have helped improve the average funding of UK pension funds, according to October’s data by the Pension Protection Fund (PPF).According to the PPF 7800 index, funding improved to 82.7% at the end of October, up by nearly 3 percentage points, equating to an aggregate deficit of £262.5bn (€367.6bn).Arno Kitts, head of UK institutional at BlackRock, credited improved valuations of higher-risk assets with the higher funding levels, with assets across the index rising by £18.5bn.“Over the month, these assets recovered strongly with global equities delivering an 8% return, which explains the improvement in pension assets,” Kitts said.
Meanwhile, Deborah Cooper, partner at rival consultancy Mercer, urged pension trustees to monitor market events “closely” and consider its impact on future funding and sponsor covenants.“Boards should review exposure to currency risks and how that might affect future investment strategy and current funding levels,” she added. Bob Scott, partner at LCP, highlighted the small benefit some funds might derive from the decline in sterling’s value.“While this uncertainty is unlikely to be good news for pension schemes, it is worth noting those schemes with significant unhedged overseas investments could actually see their asset values increase – at least in sterling terms,” he said. However, the Pensions and Lifetime Savings Association called on the government to address the market uncertainty, while stressing the long-term nature of investments held by its members.Joanne Segars, the association’s chief executive, said the volatility was “expected but still unnerving”.“Even though pension schemes are long-term investors with diversified portfolios, continued uncertainty and the increased volatility that goes with it makes it difficult for schemes to protect savers’ interests,” she said.She urged the British government to “reassure” markets.“[The government] and policymakers must quickly turn their attention to making clear their long-term plan for the UK, its economy and its place in the European and global markets to protect pension schemes and their savers,” she aid.Segars earlier on Friday warned that the UK’s departure from the EU would not immediately see changes to UK pension legislation, noting certain areas would need to be “disentangled”. Rising inflation, volatile markets and “stubbornly low” bond yields will see UK pension funds faced with increasing deficits, consultants have predicted in the wake of Britain’s decision to leave the EU.Consultants variously warned that pension funds were in for a “rough ride” as equity markets around the world adjusted to the British electorate’s vote to depart the Union, and would be faced with volatile exchange rates as sterling fell to lows not seen in 30 years.Stewart Hastie, a pensions partner at consultancy KPMG, predicted rising UK inflation and a drop in the value of pension assets in coming years.“Long-end government bond yields will likely stay stubbornly low, keeping pension liability values high and meaning pension deficits are likely to increase and be more volatile,” Hastie said.
Dutch pension funds should prioritise setting up frameworks to manage liquidity risk, according to the country’s financial regulator.In its newsletter, it said it had discovered that, in the event of a sharp increase in interest rates, a large number of pension funds would lack the funds to meet counterparty collateral requirements.The watchdog, which examined the investment reports of all 300 pension funds, said it had assumed current swap portfolios would be fully cleared, as required by the European Market Infrastructure Regulation.Pension funds have been exempt from the requirement to conclude their contracts with central counterparties until 16 August 2017. They have opposed mandatory central clearing, as these clearinghouses usually demand cash as collateral.The Dutch regulator warned that non-cleared swap transactions were coming with ever-higher collateral demands.It also argued that currency hedges posed liquidity risk, as a consequence of the often short duration of the swaps and the fact they must also be paid in cash.The regulator said pension funds should prepare for the expiration of the exemption of the central clearing requirements and the changes on the OTC market – by seeking alternatives for non-cleared derivatives, for example.
A spokeswoman for the fund told IPE that Indonesian hackers were believed to be responsible for the act, and would have targeted Ogeo’s website because it contained the word “fund”.The Belgian media report raised the question of whether the attack could have anything to do with what has become known as the Publifin scandal in Belgium. Belgian media have this year reported on an investigation into inappropriate payments to public officials sitting on sector committees of Publifin, a Belgian inter-municipal electricity and telecommunications company.Stéphane Moreau, chairman of Ogeo Fund’s executive committee, is also chief executive of Nethys, a subsidiary of Publifin.However, the spokeswoman for Ogeo Fund said that the hacking of its website did not appear to have anything to do with the Publifin affair. She emphasised that the source and motivation for the hacking had not been established for certain.Cybercrime has risen up the agenda of risks that specialists are advising pension funds to be prepared for.In a blog post aimed at UK occupational pension schemes, Peter Sparshott, partner at PwC, earlier this year said that pension schemes were an attractive target for cyber criminals. He said the pensions industry had been slower than many other financial services institutions to address the threat.There is a regulatory imperative to address cybersecurity risks – stemming from the European Union General Data Protection Regulation – but also simply because otherwise “a major attack is almost inevitable”.“That might mean a serious breach of data security, in which members’ bank details are stolen; it could mean the loss of assets through, for example, a systematic programme of fraudulent transfer requests that goes undetected for years or even decades until members seek to retire,” he said.Trustees should elevate cyber security to an agenda item that ranks alongside discussions about deficits, investment strategy and other priorities, Sparshott said. The website of Belgian pension fund Ogeo Fund was hacked yesterday, apparently targeted for containing the word “fund”.The site was hacked such that visitors were confronted with pornographic images, according to a report in the Belgian press that was confirmed by an Ogeo spokeswoman.The €1.1bn multi-employer first pillar pension fund filed a complaint and asked a bailiff to confirm the piracy, according to the media report.The website was unavailable for several hours yesterday, but was back online this morning.
Natixis CEO Jean Raby addresses the PRI In Person conference“In this sense I feel, and I hope it’s not the case, that ESG has not become the means to an end but an end in itself,” he said.‘What are our objectives?’He urged investors to “go back to the basics”, adding: “Let’s ask ourselves ‘what are we trying to achieve?’, ‘what are our objectives?’, ‘are we getting any closer to these objectives?’.”Raby acknowledged that the impact of responsible investment on “real world sustainability” was difficult to assess, and that “the timeline is long”, but that it was important the industry knew by what measures of success it wanted to be judged.He argued that “collaboration and co-operation” between the financial sector, governments and regulators was “probably the most powerful tool we have to fight some of the most pressing issues of our time”.“Short-termism” also needed to be fought, said Raby.“The issues we are tackling are a long time in the making but also a long-time in resolving,” the Natixis CEO said. “Alignment is required not only on substance, but also on timeline.”He also argued that, although there were positive aspects to the plethora of initiatives that had emerged over the last few years “to mobilise our industry” over a range of environmental and social issues, “I do believe that the time has come for the industry to better channel its efforts”. ESG investing has become an empirical target for investors rather than a means to achieve other outcomes, according to the chief executive of Natixis Investment Managers.Addressing delegates at the PRI’s annual conference in Paris yesterday, Jean Raby suggested there was insufficient progress on a range of environmental and social issues despite rapid growth in funds “launched by us asset managers to fulfil demand for strategies driven by the incorporation of environmental, social and corporate governance [ESG] and non-financial factors, broadly speaking”.“Perhaps we focus too much on trying to demonstrate empirically the answer to the question of the relationship between ESG and performance,” Raby said.“I don’t need empirical evidence to convince me that if […] I make an investment in an entity that destroys the environment, doesn’t treat well its workers and has a governance that is full of conflicts of interest, then I cannot see that as a reasonable assumption of long-term sustainable performance.” After giving a few examples for where “the winds of change” were not yet visible, Raby said the question he was asking, “with no pretence of having a comprehensive answer, is why are we not making as much [of] a difference as we should given the current state of the world”.He said that “a lot of effort has been pushed on measuring what we do in terms of exclusionary approaches” – or using ESG factors as a risk management tool – “and perhaps not as much on investment that actually enables positive steps towards the goals we are pursuing”.There was a lot of focus on “headline statistics”, such as the percentage of assets under management run in accordance with ESG-related strategies, or the number of engagement instances with corporates.