Polish president’s comments dash pension industry’s hope for reprieve
Opposition to the bill among Polish authorities has pretty much melted away.Even the new finance minister Mateusz Szczurek, who replaced the deeply unpopular Jacek Rostowski, one of the key architects of the changes, in mid-November, and who had earlier supported the second pillar, has had to renounce his earlier views.The bill gets its first reading in the Sejm (lower house of Parliament) in the first week of December and the Senate (upper house) the following week.Opposition parties could prolong the Sejm debate with amendments, but this would not necessarily work to the industry’s advantage.Law and Justice, the largest opposition party, prefers the Hungarian variant of total nationalisation.The president has until early January to sign off the law.The government wants it on the statute book by the following month: 3 February marks the start of the transfer of government bonds, and other assets making up 51.5% of each fund’s portfolio, to workers’ first-pillar sub-accounts. Hope is running out for Poland’s pensions industry to modify the government’s overhaul of the second-pillar system after president Bronisław Komorowski suggested he would be unlikely to veto the bill.At the end of September, Irena Wóycicka, secretary of state in the presidential Cabinet, raised the constitutional implications of the impact on returns following the ban on pension funds buying government bonds in the future while the following month Komorowski stated that he would examine the bill for its constitutional implications.On 28 November, the president told Radio RMF FM that while the reforms were not the ideal solution, they centred on securing the Budget and public finances, which was the government’s preserve and something he could not veto.Komorowski said he hoped the final law would eliminate all constitutional doubts, adding – without specifying – that the government had made some improvements here since its earlier announcements.
The €5bn pension fund for Dutch social security agency UWV is facing a rights discount at year-end, following the impact of the continued deterioration of interest rates on its liabilities.The scheme’s coverage ratio – at July-end still 103.7% – must be at least 104.5% at the end of August, to avoid a rights cut for its 52,000 participants.Due to the effect of the three-month average of the interest rates on its discount rate, its funding is likely to drop further this month.If conditions remain unchanged, the average coverage ratio of Dutch schemes would to drop 3 percentage points by August-end, Dennis van Ek, actuary at pensions advisor Mercer estimated. He added that the expected funding decrease would be less for a pension fund with predominantly older participants, but bigger for ‘young’ pension funds.The probable rights cut is a consequence of the UWV scheme’s short-term recovery plan expiring at the end of this month.Pensioenfonds UWV pointed out that the negative effect of falling interest rates on its liabilities exceeded the positive impact on its investment portfolio, consisting largely of government bonds.Since the financial crisis, the pension fund claimed to have been following a “solid investment strategy, matching the risk appetite of both participants and its board”.Thanks to this defensive approach – with 71% of its assets invested in fixed income and less than 20% in equity – the scheme was able avoid rights cuts so far, it said.It had already increased the contribution from 19.1% to 20% of salary, and also reduced the annual pensions accrual from 2.1% to 1.67%.The UWV scheme, which reported a 1.5% loss over 2013, further made clear that it was unable to suddenly change its asset allocation, as it was restricted due to the conditions of its recovery plan.The three-year recovery plan was based on the assumption of an annual return on investments of 4.9%.The pension fund has set up a new website dedicated to keeping its participants posted of the development of its coverage ratio and the expected rights discount.
Angelien Kemna, chief financial and risk officer at €377bn Dutch asset manager APG, has called on the world’s governments to produce “workable and stable” climate policies to increase the pace of institutional investment in sustainable energy.Speaking on behalf of the Global Investor Coalition on Climate Change (GIC) – representing nearly 350 institutional investors with more than €24trn in assets – at the UN Climate Summit in New York, Kemna said the €194bn currently invested in clean energy worldwide would need to double over the next few years to counter the worst effects of climate change. To achieve this goal, she said governments should abolish fossil-fuel subsidies, increase the price of CO2 emission rights and boost their support for research in clean-energy generation.The GIC’s members will now press companies in which they are invested to provide more clarity on the risks posed by climate change. Kemna also announced that, over the next three years, APG will double its investments in sustainable energy to €2bn.Further, APG, PensionDanmark and US pension fund CalSTERS have committed themselves to making more than €24bn in combined allocations to green investments by the year 2020. During her speech, Kemna also confirmed that APG had doubled its sustainably managed property holdings to €11bn over the last two years, claiming that the real estate industry had been responsible for 40% of greenhouse gas emissions worldwide.Her announcement came just after APG’s main client, the €325bn pension fund ABP, said withdrawing from fossil fuel-related investments for was “unrealistic” at the present time, after a number of environmental lobby groups called on the pension fund to divest.ABP said, rather than divest, it preferred to increase its holdings in sustainable energy sources, pointing out that sustainable energy sources such as wind or solar power could not yet meet global demand. It also pointed out that new investments in sustainable energy must also provide “proper returns”, and said it sought investments in “proven technologies of sufficient scale and low risk”, citing land-based wind farms as an example.“Unfortunately, there are not many projects available meeting these criteria yet,” it said.A spokesman at APG said the asset manager’s stake in the larger oil companies currently stood at approximately €10bn.He said APG was unafraid of holding ‘stranded assets’ due to the evolution of stricter environmental regulations worldwide, as well as the fact that “oil and coal will still be needed for a long time”. In an op-ed in the New York Times last June, Henry ‘Hank’ Paulson, US secretary of the Treasury when the credit bubble burst, warned of the potentially catastrophic implications of climate change for the global economy, if the use of fossil fuels continued at the current level.At the time, he wrote: “Viewing climate change in terms of risk assessment and risk management makes clear to me that waiting for more information before acting is actually taking a very radical risk.”
The plan by Italy’s prime minister Matteo Renzi to give employee severance pay – Trattamento di Fine Rapporto (TFR) – directly to workers each month from next year, rather than having it kept until the end of the employment, has met with warnings from pensions sector consultants.Employers’ organisation Confindustria has already expressed its opposition to the move, which potentially removes an important source of self-financing for smaller companies in Italy.Meanwhile, consultants and academics warn that giving the TFR in cash to Italian workers would effectively deprive them of a key part of their pension provision and fail to achieve the fillip in consumption the premier is hoping for.Renzi said on Monday: “From next year, I would like the TFR money to go straight into the monthly pay packet.” In an electronic newsletter to the public, he said the money belonged to the workers, and that the philosophy of putting this money aside – to prevent people from “burning” it all at once – seemed too protective and the action of a “nanny state”.“[The TFR proposal] could translate itself into a doubling of the €80 operation, giving more possibilities to buy,” Renzi said, referring to an earlier move to give workers in Italy an €80 monthly tax credit.But Giorgio Squinzi, president of the employers’ association Confindustria, told small businesses this week: “This idea about the TFR, which could wipe out with a single stroke of the pen €10bn-12bn from small Italian companies. If this is the road they intend to follow, we give our reply, very simply: No.”As the pensions sector awaits the final form of the proposal, with discussions taking place on this and other issues between trade unions, industry and government, experts warned about the possible consequences.Claudio Pinna, managing director at consultancy Aon Hewitt in Rome, said if employees were given the option of receiving their TFR money immediately, many would choose to receive it now rather than later because of the weak economic situation.“But this is very dangerous because the TFR is really the main source of financing of post-employment income, and if you use this, you will have really serious pension issues in the future,” he said, with the caveat that the shape and details of this proposal were still unknown.On top of this, Renzi should also consider that it is uncertain whether workers will in fact use the money to purchase goods and services, Pinna said, due to the economic situation.“When people are not comfortable, they do not spend,” he said.Pinna also pointed out that, for companies with less than 50 staff, which have decided not to direct the TFR to pension funds or to the state social security institution INPS, the TFR money they held was an important source of self-financing.“This cash is very important for these little companies, especially at the moment, when they have problems with the banks,” he said.Stefano Gatti, professor of economics and finance at Milan’s Bocconi University, said the plan would weaken pension provision for Italian workers, and argued that the real motivation behind the proposal was to boost consumption and revive aggregate demand.“Are you really sure about incentivising consumption but leaving people with no savings after retirement?” he asked. “This is really the question.”Andrea Canavesio, partner at MangustaRisk, said though Renzi seemed to be pushing the idea hard, there were still many unknowns.“For a politician who is looking to get elected soon-ish, there is nothing better than putting money in the electorate’s pockets,” he said.He said there could be a taxation on the TFR when added directly to pay packets, which would increase overall tax entries.Gatti pointed out that payroll income is taxed at the marginal personal tax rate, while the TFR, as things stand now, is taxed at a reduced rate.Canavesio also said the move, if it were to happen, might have a big negative effect on second-pillar pension funds if it were also to apply to those people who were automatically enrolled in those funds, and also to the people who had decided to enrol voluntarily. “It would be a disaster if it included all the TFR that has already been accumulated,” he said.Renzi is today putting an overall labour-market bill before the Italian Parliament designed to increase workforce flexibility and employment.The proposal on the TFR is not part of this raft of legislation but will form part of the Budget law that is set to be approved in the middle of October, Pinna said.
Pension funds will be unwilling to take part in a further holistic balance sheet (HBS) impact assessment until the European Insurance and Occupational Pensions Authority (EIOPA) decides how to treat existing deficits, the supervisor has been told.The recently concluded HBS consultation said EIOPA would consider the possibility of “grandfathering”, so that any changes would only affect future defined benefit (DB) accrual.In their responses, pension associations and consultancies argued that the matter would need to be resolved before the supervisor pushed ahead with a further quantitative impact study (QIS), but warned that any exemption would undermine the purpose of the HBS.Aon Hewitt argued that its clients would be “unwilling to invest significant time, cost and resources” in a future QIS until the treatment of past accrual were decided, especially in light of the previous study assessing a shortfall of €450bn across IORPs in the European Economic Area (EEA). “In the short term, EIOPA should advise the [European Commission] on how a long transition or exemption could work in practice,” the consultancy added.“This would be supported by the EEA pensions industry, and then there is more likely to be greater engagement in any subsequent QIS work.”EIOPA’s occupational pensions stakeholder group (OPSG) agreed that there would either be a need for prolonged transitional periods, or potentially grandfathering, or the introduction of new pension contracts, depending on the system.“Very long transitional periods are not recommended but, in some cases, may be absolutely necessary under some supervisory frameworks,” the group said.“Therefore, the choice of the supervisory framework should be evaluated also compared with the duration of transitional periods.”For its part, PensionsEurope said it would welcome both grandfathering and long transitional periods for the introduction of the HBS, while the UK’s National Association of Pension Funds (NAPF) supported grandfathering but warned that it could threaten the very purpose of the HBS.It noted that the approach would leave out of its scope funds no longer open to accrual – the large majority of UK DB funds – which were never designed to deal with an HBS.“This approach would, of course, reduce the effectiveness of the HBS as a means of protecting the full range of members’ benefits and, therefore, call into question the value of the whole exercise,” it said.“But – as explained in this response – the NAPF is confident members’ benefits in the UK already enjoy robust protection.”Respondents also warned that the HBS was being undermined by the flexibility being proposed by EIOPA in the wake of fierce industry resistance.
The Pension Protection Fund (PPF) has produced a shortlist of potential providers of various specialist investment advisory services, according to a mandate award notice on the EU tender website. The board of the UK lifeboat scheme said it was looking to set up a panel of specialist investment advisers who could be “engaged on short notice” to advise on one or more areas. The PPF’s shortlist includes the following asset managers and consultants: Allianz Global Investors Europe, Altius Associates, Aon Hewitt, Bfinance UK, Cambridge Associates, Cardano Risk Management, CBRE Indirect Investment Services, Goldman Sachs Asset Management, Inalytics, KPMG, Mercer, Redington, Russell Investments, State Street Bank and Trust, StephStone Group Europe and Towers Watson.According to the framework agreement, the areas of advice would include asset overlays, asset rebalancing, collateral management, derivatives, hedging, illiquid assets, responsible investment, stock lending, structured products, transition management and the “development and management” of the PPF’s investment approach. They also include liability-driven investment management, strategic asset allocation and tactical asset allocation, as well as other areas such as fund-manager due diligence, analysis of co-investment/direct opportunities, manager monitoring, research and selection in new/existing asset classes and operational reviews.
The fund, responsible for CAD273bn (€181bn) in assets, has been joined by ATP, PGGM, the Ontario Teachers’ Pension Plan, the New Zealand Super Fund and fellow Singaporean sovereign investor GIC in backing LTVC’s launch, as a number of the consortium allocate $2bn to the index.Together, the asset owners manage approximately €650bn in assets.Else Bos, chief executive of Dutch pension provider PGGM, said the launch was an important step in the right direction, as it would build awareness within the asset owner community about the importance of long-termism.“Benchmarks are a necessary ingredient for the road towards investing on a longer horizon,” she added.“When combined with a long-term mindset in investment decision-making, active ownership and proper ways to evaluate the value created by investors on a long horizon, we see the emergence of a powerful tool-kit for long-term investing.”Carsten Stendevad, chief executive of Denmark’s ATP, agreed the index was the kind of “innovative solution” required to drive companies’ long-term behaviour.The chief executive of S&P Dow Jones Indices, Alex Matturri, said the past few years had seen increasing investor demand for benchmarks capturing companies willing pursue a long-term approach when reaching decisions.“The launch of the S&P LTVC Global Index,” he said, “is a manifestation of the long-termism concept with an independent and transparent approach.”Stendevad has previously praised the FCLT initiative, which led to the index’s creation, telling IPE last year that it started by examining the “paradox” of long-term institutional investments remaining focused on short-term gain. “This is an example of where we’re grappling with some issues, and they’re grappling with the same issues,” he told IPE in September. “We should just be very humble and say, if we can be inspired by others, then absolutely, we should try to do that.”For more from Carsten Stendevad, read his interview with IPE from September 2015 ATP and PGGM have backed the launch of a long-term equity index by S&P, joining sovereign funds and two of Canada’s largest pension investors, as several of the investors allocate $2bn (€1.8bn) to the benchmark.The S&P Long-Term Value Creation (LTVC) Global Index comprises firms that have, according to the index provider, a proven ability to manage the long-term economic and governance opportunities in the market, based on analysis provided by RobecoSAM.The creation of the index was recommended as part of the Focusing Capital on the Long Term Initiative (FCLT), founded by the Canada Pension Plan Investment Board (CPPIB) and consultancy McKinsey in 2013.CPPIB’s chief executive and president Mark Wiseman argued that those availing themselves of the index would be sending a “clear signal” to company management to focus on long-term value.
Regulation tends to be procyclical. In considering government bonds as the optimum investment class, bonds are bought at very expensive levels, risking asset bubbles and rising pension deficits when interest rates are increased. Regulators should do more to acknowledge we are going through extraordinary, unprecedented market conditions. Their rigid, rule-based regulation could lead to new risks and a situation where pension funding is no longer affordable from an economic point of view.Supervision should focus on the sustainability and affordability of IORPs in terms of pension benefits for participants, as well as their potential to recover in bad times – that is, on the current and future financial position, as well as the communication of that to participants. Adequate supervision on these issues will no doubt lead to better pensions for participants.Philip Neyt is chairman at PensioPlus (Belgian Association of Pension Institutions), a member of EIOPA’s occupational pensions stakeholder group and a senior adviser to APG Rigid regulation could lead to a situation where pension funding is no longer affordable, warns Philip NeytThe environment for pension funds is a very challenging one, due not only to the overall economic situation but also the actions of central banks, policymakers and regulators. Safe-haven or risk-free assets no longer exist, and EU-government bond volatility is reaching levels not seen since World War II, with expected nominal returns close to 0%. Although quantitative easing (QE) policies have boosted asset returns, the considerable reductions in bond yields have pushed liability values to heights never before seen. Pension funds are forced to invest in higher-risk asset classes, yet trustees and regulators are calling for de-risking, given the results of stress tests hitting funding levels that are already low. This increases the downward pressure on long-term bond yields. Pension deficits may increase further, while pension funding has never been so expensive. Moreover, when interest rates are raised, pension funds will suffer huge losses, which could compound their deficit problems even further. Central banks and regulators should know that low bond yields are not “matching” assets but rather increase the risk of pension portfolios considerably, since pension liabilities move in line with longevity, earnings and prices and not just interest rates. I am concerned pension funds are pulling out of stock markets and buying bonds at evermore expensive levels, rather than investing in assets that can boost growth. But policymakers are ignoring the implications of falling bond yields on long-term economic performance, even though the risk of dangerous asset bubbles is clear. QE has distorted investment markets in ways we do not yet understand, and pension funds, in an effort to be prudent, may be adding much more risk than they realise.
A group of environment law campaigners has accused the UK Financial Reporting Council (FRC) of failing to grasp the magnitude of the financial risks investors and businesses face from climate change.This latest attack on the under-fire audit and financial-reporting watchdog comes in response to the FRC’s submission to a consultation on the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) project.In its statement, ClientEarth, an EU-based non-governmental organisation, said the FRC’s response to the TCFD recommendations was an indication of the regulator’s attitude to its role in enforcing climate risk reporting rules.Alice Garton, a lawyer at ClientEarth, said: “The signs coming from the FRC in this response are worrying. They suggest the regulator – when it comes to climate risk – is not effectively ensuring high-quality reporting to foster investment. This is the very purpose of the FRC’s oversight role. “The FRC’s reluctance to step in and take on its responsibilities leaves an enforcement gap, which will impact negatively on investors. It is not the role of investors to police reporting to the market – that is the regulator’s job.“The response suggests that, even with these recommendations in place, the FRC will fail to effectively regulate the market when it comes to climate risk disclosure.”When asked for comment, an FRC spokesperson said: “The FRC supports the publication of the TCFD as a stimulus to develop thinking and practice in this area. We agree that climate change is an area that boards need to consider when identifying the principal risks and uncertainties facing the company, when disclosing information about environmental matters (including the impact of a company’s business on the environment), and when describing the company’s strategy. We also agree that information on climate change is important for investors when making investment decisions and support clear and concise disclosures of climate risk for those entities where the impact is material.”The charge that the FRC has failed to step in and regulate follows a claim made by Pensions & Investment Research Consultants (PIRC) that the watchdog had failed to compel companies to report on how they have complied with section s172 of the Companies Act 2006.Section 172 requires company directors to “act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole”.ClientEarth put the issue of s172 under the spotlight last August when it fired off two regulatory complaints to the FRC against UK listed companies SOCO International plc and Cairn Energy plc. The complaints alleged a number of breaches of the duty to report compliance with s172.Both companies rejected the complaint and told IPE that they believed they were in compliance with requirements of the Companies Act. The FRC has declined to comment, citing confidentiality.Meanwhile, in its response to the FSB’s climate change task force, the FRC said it welcomed the TCFD initiative.But it warned: “[W]e are concerned that the size, complexity and detail of the recommendations may impair their usefulness.“There are risks that, on the one hand, some companies will be dissuaded from engaging because they consider the recommendations to be too onerous or, on the other hand, the recommendations will lead to disproportionate focus on one risk, irrespective of its specific impact on a company or the other potentially more immediate and significant risks it faces.”The watchdog’s stance on the utility and scope of the disclosure proposals puts it on a potential collision course with the other regulatory bodies around the world.The Governor of the Bank of England, Mark Carney, recently signalled that investors currently lack the information they need to respond to the challenge of climate change.
Gresham House – Andy Hampshire has been named chief technology officer, a newly created role. He will oversee the creation of the firm’s new co-investment platform, a projected backed in part by the Berkshire Pension Fund, which bought a 20% stake in Gresham House earlier this year. Hampshire joins from LDC, a private equity subsidiary of Lloyds Banking Group.S-Pensionsmanagement – Olaf Keese, managing director of German pension provider S-Pensionsmanagement, has left the group. He has also exited positions on the boards of Sparkassen Pensionskasse, Sparkassen Pensionsfonds, and Heubeck. He has been replaced in his role at S-Pensionsmanagement by Wolfgang Wiest.Redington – The UK investment consultant has hired Zoe Taylor as director of strategy. She joins from Aon Consulting where she was a member of the group’s UK management team. Redington’s previous director of strategy, Paul Richards, is now head of governance and decision research. In addition, Ian Mills has joined from LCP as a managing director in the investment consulting team.State Street Global Advisors – Andrew Benton has joined SSGA as head of its UK institutional business amd senior managing director. He joins from Baring Asset Management where he was head of sales, business development, and international client services. He has also previously led the sales teams at Schroders and RCM. SSGA said Benton would oversee distribution across defined benefit and defined contribution pension clients, fiduciary management, and other financial institutions.Aviva Investors – The asset manager has hired Darryl Murphy from KPMG as head of infrastructure debt. He will oversee origination, structuring, execution, and asset management for infrastructure within its wider “alternative income solutions” (AIS), the company said. At KPMG he was head of deal advisory for power and utilities clients.Aviva Investors has also hired Sarah Wall from the Pension Protection Fund (PPF). She also joins the AIS team to work on infrastructure, and is a named manager on the company’s recently launched AIS fund. At the PPF, Wall was a portfolio manager for illiquid credit, specialising in infrastructure. Prior to this she was head of investment risk at Pension Insurance Corporation.JLT Employee Benefits – The consultancy firm has appointed Harry Harper as head of buy-in and buyout services. He was previously at Mercer, where he worked for 19 years and was head of the group’s buyout and de-risking team.Metzler Asset Management – Claudia Otremba has joined the German fund management group to strengthen its customer support for institutional investors. She has previously held senior roles at Rogge Global Partners and Gartmore Investment Services.Jupiter Asset Management – Former Pioneer Investment Management CEO Matteo Dante Perruccio has been appointd head of global key clients and strategic partners, a newly created role. He was previously a non-executive director of Jupiter, and helped set up the group’s Italian office. Jupiter has been expanding into Europe and Asia in recent years and now has clients in 12 countries outside the UK.MFS Investment Management – MFS has overhauled its fixed income team, appointing regional heads and research directors.Pilar Gomez-Bravo is now director of fixed income for Europe. She has worked for MFS since 2013.Joshua Marston is director of fixed income for North America. He joined the group in 1999.Lior Jassur has been promoted to director of fixed income research for Europe. Previously a fixed income analyst, he will lead the London-based resarch team. Melissa Haskell, previously head of municipal credit research, has been named director of fixed income research for North America.In addition, MFS has named Sean Cameron as fixed income strategic solutions analyst, a newly created role designed to support clients with customised portfolios.FundRock Management Company – The Luxembourg-based fund services company has appointed Ronan Doyle as head of risk and operations for its Irish branch. He joins from Capita Asset Services. His appointment follows that of Louise Harris, who joined last month as FundRock’s head of legal and compliance. AP6, Silverfleet Capital, Railpen, Gresham House, S-Pensionsmanagement, Redington, Aon, SSGA, Barings, Aviva Investors, KPMG, PPF, JLT, Metzler, Jupiter, MFS, FundRockSilverfleet Capital/AP6 – European private equity firm Silverfleet Capital has hired Karl Eidem from Swedish pension fund AP6. Eidem is now co-head of the Nordic region alongside Gareth Whiley.At AP6 – which specialises in private equity – Eidem was an investment director. AP6 entered into a “co-operation partnership” with Silverfleet in 2015, according to its annual report for that year, taking a stake in the Silverfleet Capital Partners II fund. Silverfleet said it had made three investments and completed one exit in the Nordics since 2013.RPMI Railpen – The UK’s industry-wide scheme for the railways sector has appointed Steve Mitchell as compliance and risk director for its investment business. He will be responsible for compliance and risk management as the pension group grows its internal asset management capabilities. As well as senior roles at firms including BNP Paribas, Lombard Odier, and NatWest Bank, Mitchell has also worked for the UK regulator the Financial Conduct Authority, and the Association for Financial Markets in Europe.