Dutch pension funds’ coverage ratios have improved to 110% on average over the month of October, according to pensions advisers Mercer and Aon Hewitt.Mercer estimated that funding increased by as much as 2-3 percentage points over the month.Dennis van Ek, actuary and principal at the consultancy, said: “Following the averaging effect of the forward rate of the previous three months, the discount rate has risen 8 basis points.“As a result, pension funds’ liabilities decreased by 1.25% on average, while their funding rose by an equal percentage. “In addition, a 4% return on equity further pushed up the coverage of the average pension fund by another 1-1.5%.”Van Ek further noted that market rates, on balance, had remained stable in October.According to Mercer, the three-month average of the forward curve now exceeds the current market rate by 6bps.“If the market rates are to remain stable,” said Van Ek, “the legal discount rate will decrease, leading to a reduction of the average funding of approximately 0.5%.”Aon Hewitt, which reported an average funding of 107% at September-end, found an increase of 3 percentage points in October and concluded that the average coverage ratio of 110% was now at its highest since January 2012.However, it predicted a funding decrease of 0.6% if long-term interest rates remain unchanged in the coming months.The required minimum funding for pension funds is 104.3%, and schemes with a lower coverage ratio at year-end will need to take corrective measures, such as rights cuts.According to Aon Hewitt, pension funds’ assets increased by 1.7% on average over last month.
Month: September 2020
The organisation running the Principles for Responsible Investment (PRI) initiative has published a draft scope for the review of its own governance, first announced in September last year.The PRI’s two main governing bodies agreed to carry out the review following concerns by some signatories about the process used to adopt a new legal and governance structure for the organisation.In 2010, it had been incorporated as the PRI Association, a not-for-profit company limited by guarantee under UK law.The PRI said the structural changes were driven by the rapid growth of its signatory base, the need to strengthen management oversight of the secretariat and a decision to move from voluntary to mandatory fees, payable annually by all signatories. But there were particular concerns about how the changes affected the rights of asset owner signatories.And, in spite of the plans for a review, eight Danish signatories left the association last December.Fiona Reynolds, managing director at the PRI Association, said: “The governance review will look at the rights of each category of signatory and the roles and responsibilities of the various bodies and committees that make up our governance structure.“We want to establish what structure the PRI should adopt to ensure it fulfils its mission and ensure it is transparent and accountable to our signatories.”The draft scope will effectively be a top-to-toe examination of the association’s constitution.At present, asset managers make up the majority of PRI members, but asset owners hold most council and board positions within the association.The PRI said the review would not consider whether asset owners should remain predominant in the PRI’s governance structure, or whether non-asset owners should be excluded from being signatories or from being involved in the PRI’s governance.However, it will consider the extent to which asset owners should predominate, and how this predominance is best enshrined and exercised to ensure broad representation for other categories of signatory.The review will evaluate the difference between the former and current constitutions, as well as carry out a peer review to compare the PRI’s governance with that of similar global membership organisations.It will cover signatory input, signatory status and annual general meetings.It will also include scrutiny of most aspects of the PRI governing bodies and their committees, such as number, composition, decision-making processes and conflicts of interest.The review will be carried out by an external independent individual or organisation, working with the council’s governance committee, the PRI executive team and the new council chair, who is to be appointed within the next few months.The process will also include consultation with signatories.The independent adviser is expected to have prepared his report and recommendations by end-June.These will then be published for further consultation by signatories.Meanwhile, the PRI is inviting input on the draft scope from all signatories and other stakeholders, with a deadline of 28 February.Feedback should be e-mailed to [email protected] copy of the final scope will be published on the PRI website in April.
“Fundamental to the proposal to reform the system of AP funds, tabled at the start of the new millennium, was the principle that responsibility for the management of this buffer fund capital was to be strictly separated from the government,” she added.The managing director noted that the proposed National Pension Fund Board, would introduce “considerable risk” that management of the remaining three funds would be subject to political control, as government could decide matters of administration, while the board could set overall cost ceilings for asset management.Halvarsson is not the only AP fund head to come out against the reforms.Mats Andersson, managing director of AP4, previously warned the reforms could “destroy” the buffer fund system, and echoed concerns about political interference.The chair of the 2012 Buffer Fund Inquiry, Mats Langfensjö, also criticised the proposals, telling IPE they removed the system’s “strongest competitive advantage” as long-term investors and risked seeing the funds becoming index trackers.Halvarsson nonetheless said that she would spend “considerable effort” in responding to the government’s proposals.But she added: “Given the considerable professional competence and expertise possessed by the Second AP Fund, I am already sceptical as to whether the extensive, costly and risky changes proposed are really necessary to creating the best possible conditions for the future development of the national pension system. The head of AP2 has branded the proposed restructuring of Sweden’s buffer fund expensive and risky, questioning whether the reform will produce the desired outcome.Eva Halvarsson, managing director of the SEK306.5bn (€Xbn) fund, expressed surprise at a number of reform proposals announced by the government earlier this summer, when it confirmed the long-expected closure of AP6 and a second, yet-undecided buffer fund.Writing in the fund’s half yearly report, which saw AP2 return 5.2%, Halvarsson said she welcomed the admission that investment regulations should be relaxed and that at least one of the three remaining funds would be based in Gothenburg, but took issue with other elements of the proposal.“What worries me, however, is the proposed formation of a new AP Fund committee, raising the increased risk of political control over investment activities that this implies.
The European Central Bank (ECB) has suggested the low interest rate environment embedded within Europe and plaguing pension scheme funding has not been caused by its monetary policy.The Frankfurt-based bank’s vice president, Vítor Constâncio, said the criticisms laid at the feet at the bank over the financial stability risks its policy were unfair.Speaking at an economic congress at the University of Mannheim in Germany, Constâncio said that while stability risks from the search for yield were real, they needed to be addressed by macro-prudential policies from regulations, not the central bank.He said those criticising the bank for causing the low-interest rate were incorrect, and that the opposite was true. The ECB lowered its marginal lending facility interest rate in four stages, reducing it from 2% in November 2009 to 0.3% in September last year.It has also embarked on policies aimed at adding liquidity into the euro-area including a €1.1trn quantiative easing programme of euro-zone sovereign bond purchase in order to stave off deflation.Constâncio said the ECB and partner central banks operating similar low-rate policies were attempting to fix problems they did not create.Low interest rate policies in the euro-zone, UK and US have hampered pension scheme funding by driving down discount rates for liabilities, with quantitative easing leading to lower yields on assets due to crowding.Constâncio said: “Medium and long-term market interest rates are mostly influenced by investors and market players.“For a few decades we have been witnessing a sort of secular trend towards lower real interest rates.“This trend is related to secular stagnation in advanced economies, resulting from a continuous deceleration of total productivity growth and an increase in planned savings accompanied by less buoyant investment prospects.“Monetary policy short-term rates are low because of those developments, not the other way around.”He said the ECB’s monetary policy had been implemented to bring inflation closer towards its 2% target and normalise growth rates – which would allow higher interest rates.Constâncio also said he did not think quantitative easing, and increasing pressure on investors’ search for yield was leading to asset bubbles.In May, ECB president Mario Draghi denied the quantitative easing programme would damage pensions in the long run.At the time of the announcement, fears around the industry began over the asset purchase programme increasing liabilities via lower yields, while making returning assets more expensive and difficult to find.But Draghi said quantitative easing would lead to higher contribution and saving rates, thus not damaging pensions.
The pensions industry worldwide is underestimating the risks posed by cyber crime, and too few experts are available to help tackle the problem, internet security experts have claimed.Speaking at the World Pension Summit in The Hague, Lloyd Komori, vice-president of risk management at Canada’s €43bn Ontario Municipal Employees Retirement System (OMERS), argued that internet crime was one of the industry’s biggest risks.“Of all external and non-investment-related risk for pension funds, this is the scariest,” he said, adding that his pension fund had listed cyber crime in the top three of its “risk shortlist”.According to Komori, pensions funds acknowledge cyber security risk but do not seem to act “as if there is an enormous shortage of security experts”. He pointed out that hackers are often after not just money but also valuable information.Phil Zimmermann, a US-based expert on encryption, took pains to emphasise that cyber criminals were far ahead of the business world.“Hacking is no longer a matter of adolescents in black T-shirts,” he said. “It is now carried out by countries with political and commercial interests that are in full attack mode.”Neither Zimmermann nor Komori was able to produce concrete examples of cyber attacks on pension funds or asset managers.But Zimmermann said this was logical, “as the chance is very small this would be published because of the immense reputational damage it would cause”.Victoria Wang, senior lecturer on cyber crime at Portsmouth University, highlighted that cyber thieves operated everywhere there is money, including the pensions sector.She said that, since the UK introduced the option of a lump-sum payment at retirement, cases of internet fraud at the expense of retirees – tricked into making fake investments – had doubled within a short period.Zimmermann said the pensions sector could tackle cyber crime by investing in their own IT systems, as well as in start-ups in the security sector.“Pension funds could achieve attractive returns, as the cyber-security sector is to grow into a €158bn industry within the next five years,” he said.
Gothenburg-based AP2, one of Sweden’s four main state pension buffer funds, has invested in a social bond that focuses on gender equality, issued by the World Bank.AP2 said the bond met the criteria of the UN’s 17 Sustainable Development Goals (SDGs). The fourth SDG specifically relates to gender equality.The purpose of the bond was to raise awareness of gender issues in general, and to promote the empowerment of women and girls – thereby promoting economic growth, reducing poverty and creating the conditions for a more sustainable society, the SEK336bn (€34bn) pension fund said.A spokeswoman for AP2 declined to say how much the fund has invested in the Canadian dollar-denominated issue. Overall, the bond issue raised more than CAD1.2bn (€787m), according to the World Bank. It said more than 40 investors had placed orders and described the issue as “comfortably oversubscribed”.AP2 said its policy was to reveal the size of investments only twice a year, when it publishes its holdings.Data from the World Bank showed the bond, which carries a coupon of 2.25%, sold just below face value at 99.433% of its target.Some 55% of the investors were based in Canada and 24% were from Europe and the Middle East, the bank said. Asset managers, insurance companies and pension funds made up 42% of the investors by type.Kristalina Georgieva, World Bank CEO, said: “We need US$7trn (€5.7trn) to achieve the Sustainable Development Goals – and we will not achieve them if we leave half our population behind.”This was why the World Bank and Canada were committed to advancing gender equality and the empowerment of women, she said.Last June, AP2 invested an undisclosed amount in a social bond issued by the Netherlands’ NWB Bank to finance affordable housing in the country.
The ESG investing wave that is sweeping through Europe has started to affect supply and demand, with a subsequent effect on stock prices since 2014, according to research from Amundi.An Amundi research team studied the performance of 1,700 companies from different regions in the period from January 2010 to December 2017.It said it focused on more recent years to benefit from higher confidence in the ESG data used. Before the 2008 financial crisis, ESG investing had been “more of an anecdotal and explanatory investment idea”. The asset manager found that the impact of screening companies on the basis of environmental, social and corporate governance (ESG) criteria had little impact on portfolio risk during the study period, but was crucial in terms of portfolio returns. Amundi claimed 2014 had marked a turning point for how the stock market integrated “extra-financial” metrics. In the first half of that period, ESG investing tended to penalise both passive and active investors, but from 2014 to 2017 ESG investing was a source of outperformance in Europe and North America.In the euro-zone, for example, buying the 20% best-ranked stocks on an ESG basis and selling the 20% worst-ranked would have generated an annualised excess return of 6.6% during that period. That was in contrast to losses of 1.2% between 2010 and 2013.“ESG investing remains an alpha strategy in North America, whereas it has become a beta strategy in the euro-zone”The most important trend reversal occurred in relation to the corporate governance component, according to Amundi. The social component improved significantly from 2015 and had now been positively priced by the stock market.Overall, Amundi said, the study revealed that ESG did not affect all stocks, but tended to influence best- and worst-in-class assets.“The causal mechanism lies on demand and supply dynamics, as well as the virtuous circle created by the intrinsic added value of ESG screening,” it said. “Impact on performance is driven by increasing investor demand for ESG approaches, which generates flows into best-in-class stocks, which in turn boosts stock prices and performance.”‘No free lunch’Amundi found exactly the same results for passive management as for active management – but warned that “there is no free lunch”.“Being an ESG investor requires taking on a tracking error risk,” the company said.Amundi found that, in the case of the MSCI World index, improving the ESG score by 0.5 implied accepting a tracking error of 32bps on average.Developing ESG-based strategic asset allocation policy and ESG-based equity indices was “the only way to avoid being constrained by the traditional cap-weighted benchmarking framework”.The asset manager also studied the effect of applying ESG investing within a factor investing framework, saying the case for it was “more puzzling”.“Backward looking, ESG seems not to be a new risk factor in North America, whereas ESG could improve the diversification of multi-factor portfolios in the euro-zone,” it said.In other words, it added in a footnote, “ESG investing remains an alpha strategy in North America, whereas it has become a beta strategy in the euro-zone”.“Forward looking, ESG appears to be a very serious candidate to join the very exclusive club of risk factors that explain the cross-section of stock returns,” Amundi said.Thierry Roncalli, head of quantitative research, added: “This new scientific research confirms the time-varying dynamics of ESG performance.“Since stock prices reflect supply and demand balance, our research shows that ESG screening has influenced stock market performance. It is apparent that ‘extra-financial’ ESG risks have become financial risks and that asset pricing momentum is in favour of ESG investors.”The research paper can be found here. Further readingIPE’s ESG special reportESG: The sustainability factorIs ESG inherently multi-factor?
The value of pooled investments held by German pension funds increased by more than 300% between 2005 and 2018, according to research company Kommalpha. Along with life insurers, pension schemes were the most interesting investor segment for the German fund and asset management industry, it said.In a long-term survey of insurance companies and pension funds, Kommalpha found that both investor types had significantly increased their use of investment fund vehicles over the past decade. Pension funds’ assets held in pooled funds grew by 338.2% between 2005 and 2018.Before the financial crisis roughly €85bn from an aggregate €242bn (35%) in pension assets had been invested via funds. This figure hit €370bn out of a total of €611bn (61%) at the end of June 2018. The researchers confirmed a “strategic market trend of reallocating assets from the classic direct investments to indirect investments via a fund structure”.This was linked to a “specialisation, internationalisation and diversification of the investment structure”, Kommalpha said.It also meant that the use of “external asset managers within the framework of Master-KVG mandates” – a German pooling vehicle for institutional investors – has increased, the company reported.However, Kommalpha emphasised that this development was also creating risks, “which is not always acknowledged within the asset management industry”.The analysts pointed out the increase in indirect investments in the portfolios of pension funds and insurers means there might be “disruptions” to these asset pools “given the fragility of the financial markets”.This risk was particularly pronounced at times when “a significant amount of assets is allocated within a relatively brief period”, they added. Pension funds and life insurers in Germany usually have a strong annual inflow of contributions.Kommalpha warned of defaults including “depreciation, write-offs or indeed a complete loss of assets”.However, the company said these were worst-case scenarios, and that the management of institutional portfolios in Germany was “characterised by diversification, risk management and the professionalism of the stakeholders”. The full report (in German) can be downloaded on the Kommalpha website here.German Spezialfonds still king, but not for bondsAs their use of pooled fund vehicles increases, German pension funds and insurers still prefer domestic providers, the survey showed.Given the complex regulatory framework for institutional investments in Germany, most investors still rely on the domestic “Spezialfonds” structure created for them.Similar fund structures domiciled in Luxembourg were mainly used for alternative investments, Kommalpha found.Over the last decade the share of bond allocations held in Spezialfonds vehicles reduced significantly, from over 40% to less than 10%.This was mainly down to this asset class dwindling in importance for institutional portfolios, but also to some large pension funds and insurers having taking bond management in-house.As per end-June 2018 German pension funds had invested €410.7bn in 741 Spezialfonds.The highest increase in volume was found to be among providers of funds-of-funds and mixed-asset Spezialfonds.
The UK’s audit regulator has come under strong criticism from political parties in a debate about emergency legislation to create an endorsement mechanism for International Financial Reporting Standards (IFRS).In the debate in the UK parliament’s upper chamber, the House of Lords, peers discussed a framework to apply if the UK falls out of the EU without signing off the withdrawal agreement drafted in November. The framework would be temporary until the government can introduce primary legislation to set up a successor organisation to the Financial Reporting Council (FRC).Long-standing FRC and IFRS critic Baroness Sharon Bowles argued that the FRC had “converted” UK generally agreed accounting principles “into IFRS-like rules” to the detriment of long-term investors.Bowles, a former chair of the European Parliament’s Economic Affairs Committee, said the FRC’s actions had potentially breached the capital maintenance requirements of the UK Companies Act 2006. Referencing a March 2013 FRC impact assessment of the policy, she said it read like “a business plan for the big four [audit firms]”. Source: Liberal DemocratsBaroness Sharon BowlesShe said a recent fitness check on the FRC by former senior servant Sir John Kingman had revealed that the organisation was “a captured regulator that was designed to take account of the companies and professions that it regulated”.Conservative party peer Lord Hodgson said: “If there is to be a clash between international standards and UK law, UK law must prevail because it is the law of this country.” Hodgson highlighted a briefing note from the Association of British Insurers (ABI), the insurance industry lobby group, that disagreed with the premise that the secretary of state should delegate all his functions to an endorsement board for the accounting standards. The ABI argued it would be “counterproductive” and “inconsistent with the aims of the Withdrawal Act”, under which the UK will exit the European Union.The note continued: “We strongly urge that, in the House of Lords debate… assurances are sought from the responsible minister that the new [legislation] will provide for active political oversight of the endorsement board by the secretary of state”.Central to the ABI’s concerns was the fear that ‘offshoring’ responsibility for IFRS endorsement would mean that the UK lost the ability to represent its political and commercial interests as new accounting standards were developed.The government has signalled it would introduce a further statutory instrument – at an as-yet unspecified point in time – to deal with IFRS endorsement and other matters in the longer term.Audit sector under scrutinyThe House of Lords debate comes as the audit profession, accounting and the FRC together face unprecedented political and regulatory scrutiny.Alongside the Kingman review of the FRC, the audit sector is currently the subject of an inquiry by the Competition and Markets Authority.In addition, an inquiry led by Sir Donald Brydon is examining the quality and effectiveness of the UK audit market.The Brydon review is running in parallel to actions in the UK parliament, most notably by members of the Business, Energy and Industrial Strategy (BEIS) Select Committee, which has turned its fire on numerous high-profile corporate collapses such as construction firm Carillion and bakery chain Patisserie Valerie.Earlier this month, business secretary Greg Clark announced the government intended to abolish the FRC and introduce a new, independent regulator with tougher powers.Labour peer Lord Stevenson has questioned the wisdom of the decision to “host” the new audit regulator within the FRC.In a response for the government, Lord Henley said the FRC “would host it purely in terms of human resources and other such matters” and would remain under the political control of the government.However, a group of pension funds has called for a thorough clear-out of staff to ensure a clean slate for the new regulatory body.
Ryerson University – Internationally recognised pension expert Keith Ambachtsheer has been appointed senior fellow in retirement income security at the Canadian university’s National Institute on Ageing (NIA), a think tank specialising in “policy solutions at the intersections of healthcare, financial security, and social well-being”. Michael Nicin, NIA executive director, said: “Keith’s credentials, leadership, and willingness to tackle difficult questions on the Canadian retirement income landscape make him invaluable to our growing organisation.”Ambachsheer is co-founder of KPA Advisory Services and CEM Benchmarking Inc and holds myriad other roles, including adjunct professor of finance at University of Toronto’s Rotman School of Management, and director emeritus of its International Centre for Pension Management. Willis Towers Watson – Alfred Kool, senior consultant for strategy and communication at Willis Towers Watson in the Netherlands, is to leave the company after eight years in the job. As of 1 May, he is to start as an independent adviser for strategic pensions communication, while also remaining available for WTW as an external adviser.Before joining WTW Kool was co-founder of communication firm Kool Baas & De Quelerij and worked as an independent communication consultant since 2005. In 1997 he started as director of communication at pension fund PGGM .Nikko Asset Management – The $201.8bn (€178.4bn) Japanese investment group has appointed a new global executive committee, naming six existing staff members to work alongside Junichi Sayato, chairman and co-CEO, and Hideo Abe, president and co-CEO, in supporting the management of the company. This will be effective 1 May.The individuals are: Yuji Ooyagi, Hiroki Tsujimura, Osamu Morita, Kunihiro Asai, Stefanie Drews, and Maho Nakada. They will each be responsible for a specified part of the business, and assist the co-CEOs “on all relevant matters”. Nikko said the new organisational arrangement will “further strengthen [the company’s] management systems, appropriately delegate authority, and thereby speed up business execution”. BNP Paribas Securities Services – Mark Schilstra has been hired as head of securities services for the Netherlands and Nordic area. He succeeded Robert van Kerkhoff, who started as head of Luxembourg, Netherlands and the Nordics on 1 March. During the past two years, Schilstra worked at State Street Bank, where he had been co-head of its operations team in Luxembourg. The Investor Forum – Luba Nikulina, global head of manager research at Willis Tower Watson, joined the not-for-profit organisation’s board of directors as a non-executive director effective 1 April.Simon Fraser, chairman of The Investor Forum, said “she brings the range of perspectives of her asset owner clients that we were seeking, as well as diversity of experience and competencies”. The Investor Forum organises and facilities dialogue between shareholders and companies, and was set up by institutional investors following the findings of the 2012 Kay Review of the UK equity market and long-term decision-making.TPT Retirement Solutions – The UK master trust has hired Gill Walker as business development manager. Walker joins from NOW: Pensions, where she was regional partnership manager, and has also held senior roles at Legal & General, Aegon and Scottish Equitable.Amundi – Ryan Myerberg has been appointed head of absolute return, global fixed income, joining Amundi from Janus Henderson Investors where he was a senior portfolio manager for global macro and global credit strategies. Before that he was head of European fixed income for CF Global Trading in the UK and a trader at BlueMountain Capital Management in London. PGGM, Ryerson University, KPA Advisory, National Institute on Ageing, WTW, Nikko Asset Management, BNPP, The Investor Forum, TPR Retirement Solutions, AmundiPGGM – Edwin Velzel, chief executive of the €217bn asset manager and pensions provider PGGM, has returned to his position after five months’ absence due to illness. Kees Beuving, a veteran in the financial sector, was named temporary chief executive in January and worked as co-CEO with Paul Boomkamp, PGGM’s chief finance and risk officer. Beuving had been willing to stay on as long as needed.PGGM also said that Boomkamp would leave after the summer, following his appointment as financial trustee at Erasmus Medical Centre in Rotterdam. Boomkamp started at PGGM in 2015. Before then he worked at the insurers Aegon and Axa as well as the Catharina Hospital in Eindhoven.