The new approach to pension risks contained in the European Union’s draft IORP II Directive would hamper long-term investment, as pension funds reacted by increasing the liability-matching part of their portfolios and reining in asset-class diversification, Allianz Global Investors (AllianzGI) has warned.Elizabeth Corley, chief executive of AllianzGI, said: “We share regulators’ objective to ensure a well-funded and healthy pensions industry in Europe, and understand the desire to establish a level playing field for different long-term investors. “Unfortunately, this study shows a number of unintended consequences stemming from the risk-based approach currently under consideration.”Corley said it seemed counter-productive to discourage investment across a properly diversified range of asset classes, when this could lead to more stable returns and potentially cut risk. AllianzGI said the study modelled the expected strategic asset allocation of long-term pension investors. It said this showed pension funds would probably alter their behaviour in two key aspects – the liability-matching part of the portfolio would grow at the expense of the growth segment, and diversification and expected returns from the efficient growth segment of the portfolio would shrink.“The sustainability of pension provision depends on funds being able to make investments that generate an adequate return for their long term liabilities,” Corley argued. This needs a more nuanced and differentiated approach to risk factors – and the capital requirements associated with them – than the one being considered at the moment, she said.AllianzGI said its study showed that the risk-based solvency regulation gave long-term investors a strong incentive to expand their liability-matching portfolios. On top of this, given the different capital charges for certain asset classes, few asset classes will be attractive for the remaining growth segment of portfolios, it said.These few asset classes, the model revealed, would be cash, long-duration government bonds, emerging market bonds and – in the portfolios promising higher returns – a high portion of private equity. Most growth portfolios would be composed of only two or three asset classes, the study showed, with at most four asset classes being used at the same time.A solution to the problem could be using an economics-based approach rather than the risk-based model, AllianzGI said. This would allow for differentiation between specific investment categories such as hedge funds, private equity, infrastructure, commodities and emerging market equity, which would otherwise be lumped together as ‘other equity’, it said. As a result, growth segments of pension portfolios would consist of up to 10 asset classes.
Standard Life Investments – Chris Faulkner-MacDonagh has been appointed market strategist, while Alex Wolf has been appointed emerging markets economist. Faulkner-MacDonagh joins from Ziff Brothers Investments, where he held the post of senior economist. Before then, he held posts at the International Monetary Fund and the US Treasury Department. Wolf joins from the US State Department, where he served as a US diplomat in Beijing and Taipei. Before then, he held posts at BAE Systems and Lehman Brothers. Amundi – Michael Hart has been appointed deputy chief executive officer and global head of business development. He joins from Aberdeen Asset Management, where he was responsible for developing and implementing the global business strategy for alternative investments. Before then, he worked at Bfinance and Morley Fund Management.Pension Insurance Corporation – Mark Stephen and Steve Sarjant are to join the board as non-executive directors. Stephen was previously a partner and UK insurance leader at PricewaterhouseCoopers. Sarjant spent 20 years as a senior actuarial consultant in the insurance and financial services practice at Towers Watson.Insight Investment – Victoria May has been appointed head of institutional for North America. She joins from JP Morgan Asset Management, where she spent 15 years, most recently as managing director of asset management solutions for the Global Multi-Asset Group. Edmond de Rothschild Group – Marcus Money-Chappelle has joined the asset management division as head of sovereign funds. Money-Chappelle, who has 28 years of experience in banking and asset management, started his career at Barclays Bank in 1986 and subsequently built and managed international teams and offices from Singapore to London, including a spell in Bahrain.4AlphaDrivers – Oliver Roll has founded an asset management consultancy in Germany called 4AlphaDrivers. Roll served as managing director at max.xs AG and held a number of leading positions in institutional business and investment consulting, including head of Germany at Threadneedle, and head of bank consulting at Feri.Berenberg – David Mortlock has been appointed head of the London office. Mortlock joined Berenberg in 2010 as head of sales and was promoted to global head of equities in 2013 – a role he retains. Irish Life Investment Managers, National Treasury Management Agency, London Pensions Fund Authority, PensionsEurope, Standard Life Investments, Amundi, Pension Insurance Corporation, Insight Investment, Edmond de Rothschild Group, Berenberg, 4AlphaDriversIrish Life Investment Managers – Peter Haran has been appointed head of alternative strategies. He joins from the National Treasury Management Agency, where he was head of investment strategy for Ireland’s National Pension Reserve Fund. As part of his role, he was chair of the NPRF Investment Committee. Before joining the NTMA, he was a portfolio manager with IIU Asset Strategies.London Pensions Fund Authority – Chris Rule has been named CIO at the LPFA, following the departure of Alex Gracian. Rule has worked at Old Mutual Asset Management, where he spent nearly four years, as well as at SEB Investment Management and Key Asset Management before starting his new role last month.PensionsEurope – Joanne Segars has been re-elected as chair of the federation for one year. Segars, who is also chief executive at the UK National Association of Pension Funds, has been chair of the industry group since November 2012, when she succeeded Patrick Burke. Simultaneously, Pierre Bollon of Association Française de la Gestion financière and Benne van Popta of MKB Nederland were re-elected as vice-chairmen.
He was setting out what pension boards needed to do to keep up with the evolving meaning of fiduciary duties in the 21st century, “rather than suffering the regret of having to play catch-up ball in possibly unpleasant circumstances a few years down the road”.Listing reasons given in the academic research on why pension funds need to act now to keep up with fiduciary duty expectations, he said funds were relying too heavily on simplistic investment theories.He said this was interfering with exercising the fiduciary duties of prudence, loyalty and impartiality.Investment theories such as the Efficient Market Hypothesis (EMH) are elegant, he added, but the assumptions behind them do not reflect reality.“Boards of trustees have an obligation to understand the world as it is and not as it is posited in order to create elegant investment theory,” Ambachtsheer said. Other reasons why pension funds need to take action on updating their understanding of fiduciary duty are the growth of the pension fund sector, the pervasive influence of consultants and money managers and emphasis on the short term, and recent legal opinions and actions that have come out in court, according to Ambachtsheer. Pension fund boards are falling behind the law courts in the way they understand their fiduciary duties and need to catch up if they are to avoid unpleasant consequences, argues pensions expert Keith Ambachtsheer.Citing academic research by legal specialists Doug Sarro and Ed Waitzer, funded by the Rotman International Centre for Pension Management (ICPM) at the University of Toronto, he said board governance in the financial sector focused too much on “doing things right” – meaning technical compliance – rather than “doing the right thing”.Ambachtsheer said: “In their view, this will be the basis on which their decisions and actions will increasingly be judged, both in courts of law, and of public opinion.”Ambachtsheer is president of KPA Advisory in Toronto, as well as director of the ICPM.
The UK government should not stop issuing debt linked to the retail prices index (RPI), even if it adopts an amended version of the consumer prices index (CPI) as its primary inflation measure, AXA Investment Managers (AXA IM) has argued.The manager’s comments come after the UK Statistics Authority published a review of price statistics by Paul Johnson, head of the Institute for Fiscal Studies, which recommended that CPIH, a variant of CPI that accounts for owner-occupier housing costs, should be used as the main measure of inflation.The Johnson Review also proposed that the Office of National Statistics publish yearly data that shows the change in living costs for different parts of the population, leading to concerns that a future government could come under pressure to uprate the state pension in line with a pensioner measure of indexation.Jonathan Gardner, senior economist at Towers Watson, said the pressure on governments to increase pension benefits in line with the measure catered to retirees would be particularly pronounced in years where it was higher than the universal inflation measure. He added: “Ultimately, moving to CPIH might not make any difference to the pension increases that schemes have to award.“If the Bank of England successfully targeted 2% CPIH inflation instead of 2% CPI inflation, the inflation number should be the same even if it is measuring something else.”Garner also welcomed the suggestion that the country’s Debt Management Office (DMO) could begin issuing Gilts linked to CPIH.“However, demand would depend on clarity that statutory pension increases would continue to be based on the main national inflation measure rather than a pensioner index,” he said.David Dyer, inflation-linked bonds manager at AXA IM, stressed that any issuance in CPIH would be a while off, as the means by which the index was calculated was still considered flawed.He agreed that there was likely to be demand for CPIH-linked Gilts, and predicted that the DMO would not go to the market with any RPI-linked bonds that exceeded the latest current maturity date of 2068.Richard Gibson, associate at Barnett Waddingham, noted that the DMO had consulted on CPI issuances as recently as 2011, after the UK switched its measure of indexation away from RPI, but concluded there would be little demand.“It seems surprising this situation might have changed in a space of only four years, but CPI-linked debt would be strongly welcomed by pension schemes, which could use it to protect themselves more efficiently against inflation risk,” he said. Dyer’s colleague Lucy Barron, senior solutions strategist within AXA IM’s liability-driven investment team, also urged that any decision over future issuances should not be a binary one.“Given that the majority of pension schemes also have part of their liabilities linked to RPI, and given the large supply and demand imbalance that exists already in this market as a result of long-term pension scheme demand for inflation-linked Gilts, we believe it would be preferable for CPI-linked debt to be in addition to RPI-issuance rather than fully in place of it,” she said.
Zakostelsky left the company to pursue a political career as an MP and focus on his role as chairman of Austrian pension fund association FVPK, a position for which he was given another five-year term in 2015.At the VBV, Karl Timmel is currently chief executive of the Pensionskasse and chairman of the board at the holding company VBV-Betriebliche Altersvorsorge AG.This holding was founded in 2006 – one year after Timmel became joint chief executive of the VBV Pensionskasse with Johannes Martinek – to combine the in-house consultancy, the Pensionskasse, the provident fund and sustainable investment provider VINIS.In September 2015, the VBV Pensionskasse announced a third member to its board.Alongside Timmel and head of asset management Günther Schiendl, Gernot Heschl was appointed risk manager.He started his new role in January 2016.In recent years, the VBV and the Valida have competed to become Austria’s largest pension provider.The VBV Group currently manages approximately €8.4bn in assets, while Valida manages around €7.6bn. Andreas Zakostelsky, former head of Austria’s Valida Holding, is to join competitor VBV Group, IPE understands. Exactly what role Zakostelsky will assume at the VBV remains unclear, and no contract has yet been signed, according to anonymous sources in the Austrian pension industry.Both Zakostelsky and the VBV declined to comment. In February last year, the Valida Group named Stefan Eberhartinger – formerly with the Siemens Austria Pensionskasse – as successor to Zakostelsky.
Deficits in UK defined benefit (DB) pension schemes shrank slightly in September, but funding levels were still hovering near historic lows and well below levels seen this time last year, according to data from the Pension Protection Fund (PPF).The UK’s pension fund rescue vehicle reported that the average funding ratio for the DB schemes potentially eligible for entry to the PPF had risen to 77.5% by the end of September from 76.1% at the end of August.However, this is still well below the 82.8% level reported at the end of September 2015, on a section 179 (s179) basis.A scheme’s s179 liabilities broadly represent the premium it would have to pay an insurance company to take on the payment of PPF levels of compensation. The aggregate deficit of the 5,945 schemes in the PPF 7800 Index was estimated to have fallen to £419.7bn at the end of September 2016 from £459.4bn at the end of the previous month, but it was still down from the £260bn reported for September 2015, according to the PPF.Aggregate assets grew by about £10bn from August to September, and liabilities shrank by around £50bn, according to the data.Andy Tunningley, head of UK strategic clients at asset manager BlackRock, said: “UK pension funds remain in urgent need of life support.”The aggregate funding ratio has allowed “a faint pulse” to be found as it halted its downward spiral in September, he said.He added that contracting liability values had compensated for weak returns from growth assets, resulting in an overall positive impact on funding levels.“A sell-off in UK government bonds, causing yields to rise and liability values to fall, was linked to an announcement at the end of the month that a UK parliamentary committee is to investigate proposals allowing UK private sector pension schemes to temporarily amend or suspend inflation-linked pension increases,” Tunningley said.Even though no details have been confirmed, it is assumed this so-called “conditional indexation” will help challenge DB schemes by decreasing the value of liabilities, strengthening funding status and reducing insolvency risk, he said. However, he said the firm would warn clients not to change portfolio allocation just because of these developments. “Not only would this consultation likely be advisory only – i.e. with no requirement for the government to follow its recommendations – it is likely to be highly political, with strong voices on either side of the debate, and it is not clear what changes, if any, will result,” he said.
Thomas Schönbächler, chief executive at the BVK, pointed out that “many authorities have already voted to stay”, although he acknowledged others were still deliberating.The municipality of Erlenbach, for example, with 75 employees, was the most recent to vote to leave the BVK, while the university of Zurich, with 4,500, decided to remain.Schönbächler said the BVK had investigated many of the offers being made by other providers and warned its members against falling for their “bait offers”.“These offers are often based on unrealistic assumptions, or compare apples with oranges,” he said.“Many pension funds are offering high conversion rates to get new clients, which means the providers are knowingly accepting losses when people are retiring. This has to be paid by the active members, who have to accept lower interest rates on their assets.”He added: “For people retiring during the period where a high conversion rate is guaranteed, this can be an advantage, but all younger workers are better off paying higher contributions now.”Increasing contributions from employers and employees was part of the BVK’s strategy to make funding more sustainable and avoid cross-financing between active and retired members in the future.Other pension funds, such as that of Credit Suisse, have made similar adjustments to technical parameters. But while company pension funds have only to convince their own employees of the efficacy of these measures, the BVK faces competition.Since many cantonal pension funds were transformed from subsidiaries of regional authorities into independent entities from 2014, they have been able to offer their services on the open market.But that also means members now have the right to leave cantonal pension plans and choose other providers. The BVK has warned members against taking unrealistic “bait offers” of higher conversion rates at rival pension providers, as the pension confirmed that some authorities in the Swiss canton of Zurich were leaving the scheme. The full extent of upheaval at the CHF29bn (€24bn) scheme will not come to light until it releases its 2016 annual report, but it will be enheartened that several regional authorities and other entities have voted to stick with the cantonal pension fund. A debate has raged in recent months over the BVK’s decision to slash a number of technical parameters, such as the conversion rate (Umwandlungssatz) and the discount rate (Technischer Zins), exposing members to an average 8% pension loss. While some pensions experts have argued that the BVK made a “brave” decision in a difficult market environment, several unions and other worker representatives deemed it “theft” and a step towards “dismantling” the scheme.
What will soon provide a catalyst to the debate will be the impact of the huge weighting China will have on the MSCI index and the problems that will bring. One solution would be to take China and possibly India out and start looking at them in isolation. But perhaps investors seeking exposure to emerging markets should move away altogether from GEM equity benchmarks and decide what exactly exposure to emerging markets could and should represent. There are far more opportunities in emerging markets than the universe represented by GEM ETFs. What is also worth considering is that it should also be possible to produce portfolios that are less volatile.A key problem with the flows into GEM ETFs is that the major indices themselves – while logical from a consistency viewpoint, with a market-capitalisation-weighting scheme – also look nonsensical from other viewpoints. The big downside of GEM fund strategies, particularly with benchmark-constrained approaches, is that there will be a tendency to concentrate exposure in larger companies and larger countries. The BRICs, together with Korea, Taiwan and South Africa, dominate most traditional GEM institutional portfolios, yet this leaves a large part of the opportunity set untapped.But if that is the case, are investors really getting exposure to what is perceived as the great tidal wave driving the growth of global GDP, the rise of the emerging-market consumer? One fundamental point often missed is that listed equities in many emerging markets can account for a much smaller proportion of the economies than found in developed markets. Adopting a market-cap-weighted approach to benchmarks does not reflect the relative size of economies and focuses on larger companies that have historically been more export and commodity orientated.Moreover, in many markets, many of the listed stocks are so small and illiquid it makes little sense to differentiate them from private equity investments, with private equity firms in India, for example, including listed stocks in some cases into their portfolios, along with all the trappings of private equity investment, such as board representation and value-added advice.Emerging markets are the elephant in the room for any investor. But deciding how best to ride that elephant requires more thought than merely hopping onto the nearest market-cap-weighted global EM index fund.Joseph Mariathasan is a contributing editor at IPE Joseph Mariathasan is surprised by the lack of debate over how best to gain GEM exposureFew would disagree with the statement that emerging markets are too large and important to ignore for any institutional investor. Yet what is surprising is the lack of debate over how best to gain exposure to the future driving forces behind their growth beyond commodity exports. Should they be seen as a tactical play? Or should they be seen as an integral and perhaps even the major component of long-term portfolios?We are witnessing a historic shift as the emerging and frontier markets as a whole evolve into economic powers rivalling the developed markets during this century. That shift in power lies behind much of the tensions seen within developed markets. US president elect Donald Trump’s moves to rein back outsourcing manufacturing to emerging markets is just one manifestation of that. Yet, 400 years ago, living standards in China and India were arguably higher than in Europe. There is no a priori reason why developed markets should continue to maintain higher living standards than many of the developing. Indeed, Beijing is now a First-World city, with the infrastructure and pollution to prove it.Yet while the importance of emerging markets may be accepted in theory, in practice, allocations have become less than optimal. Invariably, investments tend to be couched in a framework based on market-capitalisation-weighted indices, which are leading to increasingly concentrated exposures. The high volatility associated with emerging market equities is, to large measure, a result of the concentration of countries (seven) and sectors (export-orientated) in the MSCI EM. Yet, with different approaches to investment in emerging markets, it should be able to produce less volatile allocations, which are paramount to the preservation of capital.
The UK’s pension fund trade body has rejected changes proposed by the government in relation to trustees taking members’ views into account, saying they were “neither practical nor purposeful”. Last month the Department for Work and Pensions (DWP) launched a consultation on proposed changes to the investment regulations for occupational pension schemes, which aimed to clear up confusion – stemming from the wording of the current rules – about trustees’ duties to consider environmental, social and corporate governance (ESG) matters in investment.Responding to the consultation, which closed yesterday, the Pensions and Lifetime Savings Association (PLSA) said it supported the proposed clarification of the difference between ethical considerations and financially material ESG considerations, but that it did not support the proposed changes with respect to scheme members’ views.“As currently presented, we think that the proposals in this area run the risk of causing greater confusion for trustees, raising false expectations among members and potentially reducing members’ willingness to engage with their pension savings,” said the PLSA. Caroline Escott, investment and DB policy lead at the PLSA and author of the response to the DWP consultationThe desirability of any regulatory requirements could then be considered once evidence had been gathered to inform potential solutions to the challenges involved in taking member views into account, the PLSA said.According to the association, the risk of misinterpretation and false expectations being raised among pension scheme members was despite the DWP’s consultation document making clear that trustees retain primacy on investment issues and the government’s commitment to getting this message across – including to the “surrounding press”.Clarity needed on interaction with IORP II The association also registered concerns about the proposals for trustees of defined contribution (DC) schemes to report on how they implemented their investment principles.The PLSA warned that the costs of producing such a report, in particular for smaller schemes, would outweigh the limited benefits.It also urged the government to explain to the industry how the proposed changes to the investment regulations align with new requirements for responsible investment placed on schemes by the new EU pension fund directive.IORP II, as the legislation is known, must be implemented by member states by 13 January, two months before the UK is to leave the EU.The PLSA also suggested that the DWP consider whether requirements for schemes to produce a statement of investment principles should be split for defined benefit and DC schemes.Row over climate change reference The PLSA also said it did not believe a reference to climate change specifically should be included in the new regulations.The association said it was not helpful to pick out specific examples of ESG factors in the regulations themselves, as doing so might lead trustees to infer that it was the most important factor to consider when others may be more relevant to their portfolio.Explicitly mentioning climate change also suggested it would always be material in all cases, when this may not be the case, the association said.However, activist law firm ClientEarth hit back at the PLSA’s stance.Alice Garton, a finance lawyer at ClientEarth, said: “Climate change must be on trustees’ agendas – too many pension professionals are still worryingly under-informed about the pressing portfolio risks it poses.“The recent proposals from the DWP are a crucial step in making that happen and not a moment too soon. It would be hugely irresponsible to row back on this important development.”In a statement ClientEarth acknowledged that the pension fund association’s response to the DWP consultation stated that “climate change poses a substantial risk to the business models of companies in nearly every sector, and the stability of the financial system”.According to ClientEarth, the scale and systemic nature of the risks associated with climate change and the low carbon transition set climate change apart from other ESG factors.The PLSA and ClientEarth co-published a report in 2017 to support trustees in integrating climate risk into investment decision-making. The DWP proposed that trustees be required to set out the extent to which they take members’ views on non-financial matters into account when making investment decisions.The PLSA said the government should drop the proposed changes and the Pensions Regulator should instead provide further guidance on what constituted best practice “on thinking about when to canvass member views”.
Credit: Kevan CraftThe Silver Jubilee Bridge in ManchesterUnison, the UK’s biggest union, claimed in a statement that existing staff earning £22,000 could lose out on more than £1,000 a year in retirement income.The union said 89% of members who voted in a recent “consultative” ballot opted in favour of strike action. A formal vote was scheduled for today with the strikes slated for next month.Under a career average DB plan, members’ annual benefit is based on their average yearly salary and length of service, rather than the wage they earned when they left the scheme or retired.The University of Manchester pension scheme is separate to the main national higher education fund, the Universities Superannuation Scheme. Lecturers and teaching staff staged walkouts earlier this year to protest against proposals to shift entirely to a DC arrangement.Smaller companies open to master trust switchingMore than half of small and medium-sized businesses have switched their auto-enrolment pension provider less than five years since pension provision was made mandatory for them in the UK, according to a survey.DC master trust Welplan Pensions polled 500 senior staff at smaller companies and reported that 54% had changed their provider since their original staging date.In addition, 49% said they planned to switch provider in the future, with 20% of those questioned saying they would do so in the next six months before the next mandatory contribution increase.Two in five respondents cited value for money as a reason for switching, while more than a third cited investment performance and ease of transacting. Customer service, investment choice and communication quality were also cited.Companies with less than 250 staff have been required to automatically enrol them into a workplace pension scheme since 1 April 2014.Bruce Kirton, chief executive of Welplan, said: “There has been huge focus by master trust providers on cost at the expense of value. This research blows that assumption out of the water: people also want good investment performance and robust systems that streamline administrative challenges.“Smaller business owners are savvy and well-advised. They know what to look for in their auto-enrolment provider and how to get their needs met. Everyone in the pensions industry should now see switching as the norm. Employers want the best for their employees – and that’s exactly how it should be.” Calculating and administering changes to defined benefit (DB) schemes as a result of this month’s ruling on guaranteed minimum pensions (GMPs) could cost schemes more than any additional payments to members, according to JLT Employee Benefits.The UK’s high court ruled last week that GMPs – adjustments made to compensate some DB scheme members for changes to the state pension – were in breach of gender discrimination laws as they paid men and women at different ages. As a result, pension funds must recalculate benefits accrued between 1990 and 1997.Last week estimates for the cost of the changes ranged from £15bn (€17bn) to £20bn, but Charles Cowling, chief actuary at JLT Employee Benefits, said company profits could be hit with costs as high as £32bn in total, depending on how the costs are reported on company balance sheets.“The calculations are fiendishly complicated and could incur huge additional costs and resources,” Cowling said. “Indeed, for many pension scheme members, the cost of doing the calculations alone could be much greater than the cost of the additional benefits that may be awarded.” He continued: “We argue that as this Lloyds Banking Group case only confirmed what was already a legal requirement, nothing has changed – other than we now know how the courts want us to do the calculations. This cost should therefore go through company accounts as an ‘actuarial loss’.“But the major audit firms may think differently – they are currently discussing the options and hoping to come to a consensus view on their preferred accounting treatment.”Cowling claimed that, if auditors applied the cost to profit and loss statements rather than actuarial losses, “it could see £6bn wiped off the government’s anticipated corporation tax receipts”. University staff to vote on strike actionStaff at the University of Manchester are to strike over plans to shift the pension scheme for cleaners, caterers, administrators and security staff to a ‘career average’ plan, according to their union.The university also plans to close the DB scheme to new members and roll out a defined contribution (DC) plan.