IPE Awards Seminar: Pension funds to take on alternatives, loans as banks deleverage
“For many pension funds, these private assets fit the bill perfectly,” he said.Rather than a new trend, however, Stoter said he saw this as a move back to the old days, since many of these pension funds had been investing in this type of asset to a greater extent before the introduction of the euro.However, Stoter warned it was a buyer-beware market.“It is very difficult to find a large insurance company these days that doesn’t have a couple of hundred million set aside for infrastructure, and the difficulty with most of these assets at the moment is in origination,” he said.The origination of such assets is becoming more difficult than getting the exposure to them, he said.“The trend is there, but the question is, will it be done at the right spread?” Stoter said.Panellists told the seminar the outlook for global economic growth was closely linked to interest rate prospects – both of which are far from clear.Jeremy Lawson, senior international economist at Standard Life Investments, said the pace at which bond yields increase from here is a critical question for the future of the economy.“The Fed’s reaction function is still somewhat unclear, and […] the US economy is only able to absorb a gradual rate of increase in interest rates,” he said. “There is still a lot of despondency about the global economic outlook.”Peter Hensman, global strategist at Newton Investment Management, warned there was still an “extraordinary stock” of debt outstanding, with US household debt standing at 155% of GDP compared with 180% in 2010.“The reason we’re not feeling the pain of this debt is just low interest rates,” he said. “That’s one reason to be more cautious.” Pension funds and insurers are set to take on a much greater volume of assets such as infrastructure, real estate loans and private debt placements in future as bank balance sheets shrink still further, a seminar at the IPE Awards in Noordwijk heard on Thursday.Hans Stoter, CIO at ING Investment Management, told the seminar on investment strategy and outlook: “We see a trend for smaller balance sheets on banks, and there is a lot more to come.”On an absolute basis, there are still a lot more assets to come onto the market, and they will have to be absorbed by insurance companies and pension funds, he said.This trend, combined with the need from pension fund investors for income and low-volatility assets, will lead to pension funds taking on assets such such as infrastructure, real estate loans and private placements of debt, Stoter said.
Earlier this year, Canadian institution Bank of Montreal made a move to take over UK manager F&C in a £700m deal.This followed Aberdeen Asset Management’s move for Scottish Widows Investment Partnership in a £550m cash and equity deal, as well as Schroders’ takeover of retail manager Cazenove.Any finalisation of SLI’s plans to acquire Ignis would also see it join the £250bn AUM ‘club’, with its list of managers growing ever longer.However, further consolidation in the market may be a cause of concern for asset owners, experts have warned, as a lack of competiiton might lead to fee increases.Aon Hewitt’s UK head of equity manager research, Phil True, said consolidation in the industry could be positive or negative, depending significantly on the foundations of any movement.He said the “weeding out” of poorer performers, being taken over by superior managers, could lead to cost efficiencies for asset owners.“What we are always wary of is when consolidation is driven by asset gathering, in a bid to boost the value of assets held under management,” he said.“This is trying to grow the company at the top level without thinking about the negative impact of clients, such as the turnover of investment staff. In terms of the current trend, it is a bit of both.”He said the market was moving towards larger asset managers that could offer the benefits of scale, and boutique managers with strong investment philosophies, with managers in the middle susceptible to takeovers.“It is a Darwinian process,” he said, “and that is not a bad thing. What will be negative is if it reduces choice in the market, and the regulators will be looking at that in detail.”The trend is not unique to the UK market. Recent research from accountancy and advisory firm PwC argued that the Dutch market also faced significant consolidation.It said asset managers would need to invest heavily in technology, or move abroad, to survive any prolonged period of negative market forces. The latest in a series of consolidations and takeovers within the UK asset management industry could take place as Standard Life Investments (SLI) moves to take control of Ignis Asset Management.The firm, with around £67bn (€80bn) in assets under management, announced the approach from SLI amid market speculation of a deal.Phoenix Group, the parent of Ignis, said as a caveat that the talks provided no certainty any deal would be agreed, with a further announcement expected in the coming days.Any such deal would create the latest link in a chain of consolidation in the UK market in recent years.
APG is to spend $650m (€390m) on a 20% stake in Chinese warehousing developer and operator e-Shang as part of a joint venture agreement.The Dutch pension fund asset manager’s stake gives it exposure to China’s logistics sector.The partnership will invest in and develop logistics assets across China.Sachin Doshi, APG head of non-listed real estate for the Asia Pacific region, said the asset manager had watched the sector “closely” in recent years as it experienced the growth of third-party logistics and e-commerce, and the evolution of domestic consumption patterns. “Combined with a severe shortage of supply for modern facilities, logistics in China will be a long-term beneficiary of these trends,” he added.E-Shang, founded by private equity firm Warburg Pincus in 2011, owns 1.5m sqm of completed and ongoing projects in Shanghai, Beijing, Guangzhou and second-tier cities.Late last year, the company, which has raised $1bn of equity capital, secured a $120m pre-IPO loan from Goldman Sachs.Combined with project-level financing, the company said it had “several billion dollars” of funding.Chinese real estate has attracted institutional money in recent months, with joint venture strategies a common theme.In March, Canada Pension Plan Investment Board (CPPIB) formed a partnership with China Vanke, the country’s largest residential developer.CPPIB, which invested in logistics in 2012, said it would invest $250m in the Chinese residential market.However, despite the renewed appetite, economic uncertainty in China slowed investment volumes for the Asia Pacific region in the first quarter of this year – with a 15% year-on-year fall to $23.1bn, according to JLL.Direct investment in China’s commercial real estate markets fell 18% year-on-year to $3bn.
Pension scheme accountants need to act now if they are to meet the challenge of complying with a new, wide-ranging accounting framework, Baker Tilly has warned.Philip Briggs, audit director at Baker Tilly’s pensions group, said: “Many accountants responsible for preparing pension scheme accounts will face a real challenge in complying with the new rules, which come into force this year.”He added: “Pensions accountants will need to identify likely problem areas for individual schemes as early as possible and agree a plan of action to ensure the transition to the new standards can be effected as efficiently as possible.His comments come of the back of a Baker Tilly poll of accounting professionals that found that more than 20% of pensions professionals think a new Statement of Recommended Practice (SORP) for pension scheme accounting will push up the cost of preparing statutory accounts by more than 25%. The survey questioned some 80 pension professionals who attended Baker Tilly’s national series of SORP seminars recently.Respondents also singled out new requirements for the need to make disclosures about investment risk and fair-values, as well as changes to the way annuities are valued, as the three areas where they expect to face the biggest challenges.But Kevin Clark, a partner at KPMG and chairman of the Pensions Research Accounting Group’s SORP Working Party, said he was confident scheme accountants would comply with the new rules.Clark said: “There will be challenges in the first year or so in terms of gathering information together. On the other hand, the information is there, so it is just a question of finding it.“For pension funds to do that, particularly around risk disclosure, they will need to work with their custodians or investment managers. The key is all about engaging early and making sure they are in a position to deal with the with the new disclosures.”Paul Cooper, corporate reporting manager with the Association of Chartered Certified Accountants in London, added: “The SORP means pension schemes will need to do certain extra things. There are gains and losses with the move to FRS 102. It shouldn’t be a big extra burden, but it will be a bit of a culture shock in year one.”He went on: “We’ve been here before. When the Companies Act 2006 came in, medium-sized groups had to consolidate for the first time. It seemed like a big deal, but people got used to it. I am confident it will be the same here.”The FRC issued an exposure draft of the now finalised SORP in August 2014.The document detailed a number of changes to an earlier 2007 SORP.The changes to the 2007 guidance became necessary after the FRC consolidated UK GAAP into a single accounting standard known as FRS 102.The standard is a modified version of the International Financial Reporting Standard for Small and Medium-sized Entities that has been adapted for use in the UK and Ireland.It is also a root-and-branch reform of financial reporting in the UK.Among the areas of accounting it addresses is accounting by pension funds.The SORP provides a layer of recommended practice on top of those requirements.The recent changes to UK GAAP follow a number of legislative and regulatory changes.Since the last update to the SORP in 2007, the UK pensions landscape has seen both the introduction of auto-enrolment and a growing number of pension schemes entering the Pension Protection Fund.The new SORP sets out guidance on accounting for scrapping the exemption that allows schemes to report an annuity’s value at nil, a new valuation hierarchy based on IFRS 13, Fair-value Measurement, and investment risk disclosures.KPMG’s Clark said: “The new accounting framework, which requires the grossing up of annuities rather than offsetting at present, reflects the legal position, as there is no legal right of offset, a fact that is highlighted when schemes enter the PPF.”Cooper added: “Under FRS 102, you are supposed to show an asset and a liability. The changes mean pension schemes must now value the two separately. This is a compliance burden, but using an actuary will soften the blow.”On the new fair-value requirements, Baker Tilly’s Philip Briggs said: “The pricing hierarchy in FRS 102 is different from that used in IFRS, which will create some challenges for agreeing consistent reporting formats with investment managers and custodians.”This will be especially relevant where different reporting is required for clients reporting under FRS 102 and clients reporting under IFRS, he explained.In other changes, the new SORP also includes a recommendation to disclose direct transaction costs for each significant asset class, introduces new accounting requirements for auto-enrolment, and addresses disclosures around actuarial liabilities.Clark warned, however, that the UK government must still tidy up the statutory framework surrounding pension scheme accounting.“One point worth noting is that we still have in place the statutory disclosures introduced in 1986,” he said.“But both the SORP and the accounting framework in the UK have moved on.“There was a general agreement among SORP working party members and respondents to the exposure draft that these need to be withdrawn to clear the decks for more relevant and current disclosures.”Briggs added: “The DWP has indicated the appropriate changes will be made, and the industry hopes the changes will be made before the SORP is adopted by the majority of pension schemes.“However, until the legislative changes are made, the existing requirements exist.”Both FRS 102 and the revised SORP for pension scheme accounts apply to financial statements beginning on or after 1 January 2015.
The UK Pensions Regulator (TPR) has followed an £8.5m (€11.9m) settlement for the Carrington Wire Defined Benefit Pension Scheme with a contribution notice (CN) to an individual involved in the sale of the sponsor.Russian outfit Severstal purchased Yorkshire-based Carrington Wire in 2006, but after informing the trustees it would wind down the business in 2010 while honouring the guarantee to the scheme, it sold the business for £1 to a shell company owned by Richard Williams only informing the trustees and TPR after.Severstal and another Russian firm reached a settlement for their involvement in the scheme earlier this year.As a result, a further CN worth £382,136 has now been made against Richard Williams. The guarantee provided to the scheme from Severstal was no longer valid after Williams bought the company, leading to the regulator launching legal proceedings against Williams after he inherited £400,000 of working capital in the business.Executive director for defined benefit regulation, Steven Soper, said the latest case demonstrated the regulator’s stance on pursuing targets.TPR said the latest CN, alongside its £8.5m settlement, will still not be sufficient to avoid the scheme entering the PPF and it will continue its entry assessment.Elsewhere, the EC De Witt & Company Pension Scheme has completed a £17m transation with Pension Insurance Corporation (PIC), shifting the schemes liabilities to the insurer in a buyout.The deal was arranged after the scheme’s sponsoring employer, E.C. DeWitt & Company, a Liverpool-based pharmaceutical company, stopped trading in 2011 after it was sold to a private equity firm.The scheme’s sole trustee, Steve Southern, said the transaction was completed within the time frame thanks to PIC’s flexibility and adviser support.Southern was advised by Mercer and Mitchell Consulting Actuaries.Finally, RMPI Railpen, the asset manager for the Railways Pension Scheme, has selected BNP Paribas Dealing Services to manage its dealing activity.The £21bn asset manager runs investments in-house and needed a dealing agent to execute transactions on behalf of the scheme.BNP Paribas will now provide the manager with access to capital markets, executing deals and sourcing liquidity across the different asset classes.Rchit Sharma, senior investment manager at RPMI Railpen, said French bank’s platform will help the scheme’s investment process in the long-run and it would benefit from the firm’s track record and wide transaction client base.
The Principles for Responsible Investment (PRI) has recommended that the European Commission use its Capital Markets Union (CMU) project as an opportunity to clarify that fiduciary duty requires that asset owners pay attention to long-term factors, including ESG, in their decision-making.The Commission should do this as part of providing guidance to EU member states on responsible investment in the context of the CMU initiative, according to the organisation.Specifically, it said the Commission should incorporate in EU financial services legislation a definition of risk and transparency that integrates so-called ESG (environmental, social and governance) issues as part of investment practice.The UN-supported organisation made its comments in a submission to the Commission’s call for evidence on the EU regulatory framework for financial services. It welcomed a “sustainable” CMU, particularly proposals to increase opportunities for long-term investors in sustainable infrastructure.It also highlighted as a positive the Commission’s link between investment, climate change and sustainable development in Europe.“The PRI believes the CMU should explicitly incorporate ESG issues to form a key component of Europe’s plan to develop responsible financial markets,” it said.It also recommended that the Commission reference the PRI responsible investment reporting framework, which would “strengthen and streamline” institutional investor reporting on responsible investment.“In particular, the PRI reporting framework is relevant for pension fund risk-evaluation requirements in the IORP Directive and annual disclosure on equity investment strategy in the Shareholders Rights Directive,” it said.ESG data, as part of companies’ reporting through the Non-Financial Reporting Directive, should be published alongside annual financial reporting, it added.Another responsible investment organisation, however, argued for a different reporting framework to be the reference for the Commission.Eumedion, the Dutch corporate governance and sustainability forum for institutional investors, called for the International Integrated Reporting Council (IIRC) reporting framework to be used.“We would encourage the European Commission to consider requiring listed companies to draft its annual report in accordance with the IIRC reporting framework,” it said.Like the PRI, Eumedion believes it is critical for investors to take non-financial information into account as part of their assessment of a company’s overall, long-term performance.Such integrated reporting is also helpful for the “preparers” of such information, it said.The IIRC framework, Eumedion added, “draws an accurate picture of what long-term investors need for their investment analysis and their engagement activities”.
The €7bn pension fund for doctors in Berlin is exiting “CO2-intense investments in the area of fossil energy production”.In a statement, the “Berliner Ärzteversorgung” (BÄV) noted this was a “first step” towards reducing CO2-intense shares in oil and gas-related companies in the portfolio.It said it would divest all of its shares in companies that generate more than 25% of their turnover from coal mining, as well as those that base more than one-quarter of their energy production on coal.For the BÄV, this affects 40 companies, or 1% of the equity portfolio in total. “The share is rather small because companies from the energy sector never were a focus in our investment strategy,” it said.The BÄV invests less than 20% of its portfolio in shares but almost 40% in bonds, which were not mentioned in the exit strategy.“We will continue to monitor our investments regularly to decide on possible fine-tuning in the future – for example, by including gas and oil,” it said.It emphasised that the 25% hurdle was stricter than the one Allianz set for its divestment from coal, at 30%.The BÄV said it based its decision on the results from the world global climate conference in Paris in 2015.However, in a separate statement, a group of doctors, all of which are members of the BÄV, pointed out that they had urged their fund to divest from coal two years ago.The doctors added that they would like the BÄV to divest from companies along the coal-production value chain as well.They called on all pension funds for doctors to have their sustainability strategies – if they have implemented one – evaluated externally and make them more transparent. Divestment from coal has been a major trend over the last two years, with Allianz being one of the largest players.Since then, other insurers and pension funds have followed suit, including most recently France’s FRR, as reported on IPE.
The bulk of the assets under management at Publica are from the open pension schemes (CHF33.6bn).In a statement, Publica described the 5.06% return for 2016 as “comfortable” and said it came close to the “pleasing” level of 2014 (5.87%).The 2016 result would have been 5.88% without currency hedging, it said.The pension fund noted that both its investment strategies outperformed their benchmarks by 0.35%.It attributed this to the appreciation of its real estate investments and “positive tactical investment decisions overall”.It highlighted its decision to invest 16% of the open schemes portfolio in emerging market bonds and equities, noting that these asset classes returned around 10% in 2016.On a weighted basis, its emerging market investments’ contribution to the total return was 1.6%. Publica said domestic real estate also performed well, returning almost 10% to contribute around 0.7% to the overall performance in 2016.It said there were big regional differences in its equity portfolios’ performance in 2016, with emerging markets and North America on a currency-hedged basis gaining more than 10%, but Swiss and Japanese holdings posting a loss of 3%.It said the contribution from equities to the overall performance was 2.4%, which is also the figure it cited for the contribution from its developed market investments. Publica estimates that the average funded ratio at the 20 pension schemes it covers was 103% as at the end of 2016.Last year, Publica reported a 2.5% loss on its open portfolio and 2.1% for the retiree portfolio.The performance for the total portfolio was a loss of 1.93%. Publica, the CHF37bn (€34bn) pension fund for federal employees in Switzerland, achieved an estimated net return of 5.06% in 2016, saying its developed market investments contributed the most to performance, followed by emerging markets.The return on its open portfolio was 5.1% and that on its investments for closed pension schemes 4.3%.Publica is a collective institution comprising 20 pension schemes, seven of which are closed and 13 open.It runs different investment strategies for the open and closed schemes, with that for the latter most notably featuring a bigger allocation to Swiss government bonds and direct domestic real estate investments.
“We are convinced that IT is to become increasingly important for the quality of pensions provision,” added Petra de Bruijn, chair of Meubel.She said Centric’s proposition would fit with the pension fund’s online communication service implemented by Bridgevest: “Combined with Centric’s pension management, this will create a digital implementation chain that is customer-friendly, transparent and efficient.”Meubel indicated that it had also made arrangements for legal and actuarial matters.Custers said he didn’t exclude the possibility that back office staff at Syntrus Achmea would be offered the opportunity to join Centric.He added that Centric used the same IT system as Syntrus Achmea, and that it had indicated its willingness to further invest in the platform.The deputy chair estimated the annual cost saving at almost 15%, and added that Centric would not charge one-off transition costs.A spokeswoman for Centric said that “during talks with several parties, the firm had received positive responses to its proposition”. Meubel, the Dutch €4bn pension fund for the furniture sector, is the first scheme to join Netherlands-based IT provider Centric, which has recently entered the market for pensions provision.Meubel had to leave Syntrus Achmea following the provider’s announcement in October that it would stop serving 23 sector schemes within two years. Syntrus Achmea said its new IT system could not accommodate the multitude of pension arrangements offered by industry-wide schemes.Steeph Custers, deputy chair of Meubel said that, from the eight providers that had initially been selected, Centric had offered the best proposition.He pointed out that Centric had ample experience in software and cloud services, and that it has been serving other financial service providers for quite a while.
Swiss pensioners should be given the option to draw down higher levels of pension income on a time-limited basis, according to Willis Towers Watson.The consultancy’s model is for the portion of pension savings capital that exceeds the minimum cover prescribed by law.It proposed the model in response to falling conversion rates, which are used to calculate how much pensioners can take as income from their pensions every year. It was pitched as a means of alleviating pressure on pension providers and offering flexibility and fairness for pensioners.Swiss pension providers have been cutting conversion rates in response to demographic change, increased life expectancy, and low interest rates. At many pension funds the rate is 5% or less for the overall plan. “The lower the conversion rate, the higher the risk a pensioner will not be able to use up the capital s/he has accrued,” Willis Towers Watson said.The consultancy added that pension providers and scheme members close to retirement have to assess life expectancy and future yields over a 25 or 30-year timeframe. The longer the timeframe for which such estimates are needed, the higher the probability that the assumptions used will not materialise.Under the model proposed by the consultancy, a pensioner would choose for how long he or she wished to receive a pension – for example 15, 20, or 25 years.Once this period has lapsed the pensioner would receive the accumulated interest as a final payment.Willis Towers Watson said this model would increase pension funds’ ability to plan and minimise interest rate risk and longevity risk.Pensioners would benefit because their accrued capital was guaranteed to be paid out, instead of going back to the fund.If the pensioner died before the end of the chosen time period, the remaining retirement savings capital accrued above the mandatory level would be paid out to the surviving relatives. Under the current approach the rest of the savings capital stays with the pension fund, leading to departure gains. Taking a lump sum payment instead of a regular pension would still be an option under the consultancy’s model.According to Willis Towers Watson, more than 50% of future Swiss pensioners could benefit from increased flexibility in the way they draw down their accrued above-mandatory pension without this affecting their base pension provision.Christian Heiniger, pension fund expert at Willis Towers Watson, said: “Conversion rates have been falling continuously in [recent] years and the trend continues unabated. The lower the conversion rate the more attractive the model of time-limited pensions with a refund guarantee becomes.”The consultancy’s proposal comes as various industry associations in Switzerland are positioning themselves either for or against a comprehensive pension reform programme that will be put to a referendum in September.