“In the Netherlands, a strategic asset allocation process was – and perhaps is – dominating pension funds’ [thought process]. When we look at the long-term strategic asset allocation, then there is an implicit, or perhaps sometimes explicit, use of a long-term world view.”Trip questioned how investors should come to decisions on long-term investing, given the developments in the financial markets since 2008.“The credit crisis shattered beliefs in long-term modeling in a way that you really can’t be certain whether your long-term view can be relied on.”He said there were several ways for investors to react.One was to become more short-termist, identifying bubbles and changing asset allocation accordingly – a short-term, tactical approach that was “undesirable” for a number of reasons, most notably the time associated with each change.Alternatively, investors could seek to improve modeling, but Trip said creating evermore complex models would only serve to complicate reading results clearly.“We do face a challenging environment, and we need to re-invent our investment policy,” he said. The ability to act as a long-term investor has been “shattered” by the 2008 credit crisis, according to Dutch fiduciary manager MN.Jeroen Trip, senior client portfolio manager at the €90bn Dutch fiduciary manager, said it has proven difficult to hold a long-term view when most models used to predict future outcomes were proven wrong.He said that while there had been a number of “major” financial events in the past – such as the 1987 crash or the dotcom bubble at the turn of the last decade – no previous crisis made the investment community “doubt the future” as much as the credit crisis had done.He told delegates at the WorldPensionsSummit in Amsterdam: “We are still in unknown waters, unknown territory, and that has profound implications for the decision-making process.
One common goal for everyone, he said, is sustainability in the energy world.“The real challenge has been, and still is in some countries, to decouple economic growth from energy consumption and greenhouse gas emissions,” he said.Lombardi said politicians needed a clear, long-term strategy and to be consistent in the details of their political work and in the details of the laws they passed, as well as in the implementation of the laws they had backed.They also need to work together with other politicians for a common goal.“The worst thing politicians can do is to be so eager to win the next election, or get some results in the opinion polls, that they immediately react to everything,” he said. ”This makes life very difficult for normal people and destroys the market, and when you achieve destruction of the market, you do not have any progress.”Lombardi pointed to the European energy market as an example, where several countries fought with good intentions against nuclear energy, which in the end led to involuntary support of the cheapest energy source without subsidies – coal.“We need jobs, and in Europe we are losing jobs, and with the clean tech challenge comes a possibility to create more jobs and opportunities in the economy,” he said.However, the clean energy challenge could also make European economies less competitive with the rest of the world.He said that question had yet to be solved. Strategies – both in finance and in politics – should by their nature be long term, according to Filippo Lombardi, president of the Council of States in Switzerland.He told the audience at the TBLI conference in Zurich last week that while politics and the financial sector both viewed each other in a bad light, they actually had something in common – short-termism.Lombardi said: “Short-termism is the rule for a bad financial approach and it is the rule for bad politics. Politicians who only [look] to the next election or the next opinion poll and [investors and businesses] that only think of the next quarterly report or tomorrow’s performance at the stock exchange do not try to build on the long term.“This is the mentality we have to change – in the investment world and in politics. And we have to learn from each other, and we have to listen to each other. We must learn to listen to the advice and concerns of people and the experiences from experts who have been studying and researching certain issues.”
“Pension funds are looking abroad to the UK stock exchange and the German stock exchange,” she told delegates at the second-annual pension funds in CEE conference in Prague.According to her, OFEs currently hold 40% of Polish shares and 26% of free-floating shares – a figure she said would change in the near future.She added that the reform was having an impact on overseas investors that were now less likely to invest in companies listed at the region’s largest stock exchange.As a result, Rusewicz said the Warsaw exchange was dealing with “stagnation”, and that the question remained over what would step into the role previously played by OFEs in assisting the government with the privatisation of formerly state-owned assets.For his part, Lucian Anghel, chief executive of Romania’s BCR Pensii, accepted that all Central and Eastern European pension funds were facing the “huge” domestic bias risk.But he said it was a risk managers needed to take into consideration, given that governments often had the choice between keeping taxes low or maintaining the mandatory systems and increasing taxes.“If we are not showing commitment to Romania, then we are facing a bigger problem than volatility risk and market risk, or exposure to the country,” he said.Asked to explain why Romania’s small but growing pensions sector, estimated at €4.3bn, was more than 90% invested domestically, he said it was “a free choice, but a guided free choice”.“We were more exposed outside Romania before we saw what happened in Hungary and Poland,” he said. Poland’s pension funds are looking to increase their overseas equity holdings over concerns a continued domestic bias could cause problems with liquidity.The move to diversify comes after the private pension funds (OFEs) were stripped of around half their assets as the Polish government transferred all sovereign debt holdings to the state Social Insurance Institutions (ZUS).The reform, now subject to a class action suit, also saw the pillar barred from investing in domestic sovereign debt, with minimum 75% exposure to equities.Małgorzata Rusewicz, president of the Polish Chamber of Pension Funds, said the reform was having a negative impact on the Warsaw Stock Exchange despite the high minimum threshold.
The deficit in one of Ireland’s largest pension funds has increased by €700m in the wake of the European Central Bank’s programme of quantitative easing (QE).Bank of Ireland (BoI) said that, despite a 10% increase in asset value, up from the €6.5bn reported at the end of December last year, the fund’s deficit nevertheless increased.According to the company’s most recent annual report, liabilities for the Bank of Ireland Staff Pension Fund (BSPF) – employing a discount rate of 2.2% and inflation assumptions of 1.5% – stood at €7.5bn at the end of last year.In an interim management statement, BoI said the impact of the central bank’s QE programme had resulted in a €700m increase, to €1.7bn, in the IAS 19 deficit. However, the 80-basis-point drop in discount rates should have resulted in a nearly €1.3bn increase in liabilities.The impact of QE would have been offset by lower than expected inflation.The bank calculated in its 2014 annual report that, for every 10bps decrease in inflation, it would see liabilities fall €101m, compared with a €407m increase per 25bps decrease in the discount rate.Industry association PensionsEurope recently warned that pension funds risked being “collateral damage” as further monetary easing policies were launched, and urged regulators to consider postponing valuations or being more lenient as deficits increased.It echoed calls from the Irish Association of Pension Funds that pension regulation should be reviewed in light of the “artificial and unprecedented conditions” in bond markets.However, the Pensions Authority has since insisted that it would not relax the funding standard applied to pension schemes in Ireland as it could give members and schemes a “false impression” the situation could be easily resolved.
Clwyd Pension Fund has joined Cornwall’s local authority scheme in appointing Man FRM as its hedge fund manager, replacing four existing managers.The £1.4bn (€2bn) Welsh fund, administered by Flintshire County Council, said Man’s managed account solution granted it the transparency not always available in other fund-of-fund arrangements.The mandate follows Cornwall Pension Fund’s appointment of Man in January, and will see both mandates pooled.The hedge fund manager has implemented a system for local government pension schemes (LGPS) that will see fees reduced across the collective local authority mandate as more funds opt to join Cornwall and Clwyd. JLT Employee Benefits, which oversaw the tender process for Clwyd, said the arrangement offered by Man was “compelling”.Kieran Harkin, director at JLT, added: “In the context of the current LGPS environment, the collaboration between Clwyd and Cornwall should be seen as an example of what can be achieved by funds working together in a proactive way.”As a result if Man’s appointment, Clwyd severed ties with its former hedge fund managers Lionsgate, SSARIS, Bluecrest and Duet.The mandate, which also encompasses managed futures, is set to be worth 9% of the fund’s assets, an estimated £120m.Cornwall in January allocated £120m to Man, meaning Clwyd’s allocation effectively doubled the size of LGPS mandates.In other news, LCP has been hired to advise the Rebus Insurance Services Limited Pension Scheme.The final salary fund is currently implementing a revised investment strategy, with LCP’s assistance.LCP’s advice will cover both short and long-term strategies.
Asset managers and proxy advisers should hold some responsibility for pension funds’ stewardship, the UK pension fund association has said in its response to the Financial Reporting Council’s (FRC) draft strategy for 2016-17.The Pensions and Lifetime Savings Association’s (PLSA) submission addressed corporate governance and reporting, and investor stewardship, among other aspects on which the FRC sought feedback.The consultation was on the FRC’s plans for the first year of its new three-year strategy. It closed on Friday. On the topic of investor stewardship, the PLSA said it supported the FRC’s focus on three key constituencies of the investment sector – asset owners, asset managers and proxy advisers – but that “differences in stewardship capacity” across these groups should be acknowledged.This is because many pension funds do not have the resources to dedicate significant time to stewardship issues, “part of the reason why asset managers and proxy advisers are contracted in the first place”.“These industries should hold some responsibility to highlight the importance of stewardship to their clients, even if the pension funds do not raise it themselves,” said the PLSA.The association welcomed the FRC’s work on corporate culture and board effectiveness, and specifically on succession planning. However, it called on the regulator to do more to improve corporate reporting on “human capital” and environmental, social and governance (ESG) performance.“We would like to highlight the importance of ‘human capital’ to culture and advise the FRC to monitor practices and reporting in relation to companies and the people who work for them,” said the association.Human capital represents an asset estimated to be worth “billions”, but it is also a source of major strategic risks in the form of industrial disputes, employee misconduct or poor customer experience, it said. The FRC is the body responsible for the UK Corporate Governance and Stewardship Codes, which set out best practice for companies and institutional investors, respectively.In December, it announced plans to publicly rate pension funds and asset managers on their level of engagement with the Stewardship Code.,WebsitesWe are not responsible for the content of external sitesLink to: FRC ‘Draft Plan & Budget and Levy Proposals 2016/17’
Short-termism in capital allocation will not be fixed without fundamental structural change, Paul Myners, the former UK City minister and author of an influential report on institutional investment in the UK, said at an FCLT Global event in London yesterday.As per what the organisation’s acronym stands for, the event was about focusing capital on the long term, its benefits and how this can be achieved.The discussions mainly related to equity investing. Myners’s intervention came during a panel discussion that had already addressed aspects such as the rise of a professional class of corporate bond members and the role of investment consultants in the investment chain. Lord Myners addressing panellists at the FCLT Global event in LondonBefore that, Lars Dijkstra, CIO at Kempen Capital Management, had given an asset management perspective on long-termism in equity investing, saying the main mindset change needed from asset managers was a shift to focusing “on companies not securities”.Stefan Dunatov, CIO at Coal Pension Trustees Limited, the in-house executive for two closed defined benefit schemes worth some £20bn (€22.5bn), had earlier given an investor perspective, emphasising that in-house resourcing was “critical” but that care needed to be taken in decided what exactly should be in-sourced.“There’s an interesting risk in the asset-owner space, which is that asset owners are creating internal asset-management functions that replicate asset managers but that don’t fully reflect the asset owners’ needs or are not aligned to their objectives,” he said. “That’s an important challenge for the asset owner industry.”But for Myners, these and many other recommendations for solutions to short-termism would seem to amount to mere tinkering, given his call for more fundamental change.“I fully support what you are doing here,” he said. “You’re being pragmatic, but you’re staying within the mould of the existing market structure. Nobody’s rice bowl is being placed at risk by the current way of thinking.”He recommended thinking “more radically about whether the public company is the most appropriate model for many businesses, whether more high conviction and concentrated ownership might make more sense, whether much less turnover might be consistent with better outcomes”.These ideas, he added, “take me in the direction of making it difficult for open-ended equity funds to be offered with immediate liquidity for an asset class that should be inherently illiquid”.He added: “The problem is that your sponsorship doesn’t allow you to go that far, to consider the truly radical.”Radical ambitionsFCLT counts asset owners, asset managers and corporations as its members; yesterday’s event was hosted by Kempen Capital Management.Myners went on to criticise managing assets against a benchmark when this leads to fund managers taking underweight positions in securities of companies they are fundamentally not very convinced are a good investment.“When you manage against a benchmark, you have underweight positions because a company is too big not to hold it, and yet, if you look at it in cold light, it’s entirely illogical,” he said.“You are actually investing clients’ money in a security you believe will underperform but your conviction level is not high enough not to own it all.”He added: “Unless we begin to address the fact fund managers are paid to invest their clients’ money in shares they think will do worse than a neutrally picked random portfolio, we will not break some of the pressures that lead to the manifestation of short-termism.“It is almost impossible to explain to the man from Mars that you put your client’s money in a share you think is going to underperform a randomly selected portfolio, and your client pays you a fee for that.”Kempen’s Dijkstra said benchmarks were “a very good thing” when they were invented to provide transparency but that they had now “become the goal”.He suggested the active/passive debate was a red herring in the context of promoting long-termism and that “a new paradigm” was needed.“We need people to take personal leadership,” he said.Responding to Myners’s comments, Dunatov said passive investment had lowered fees, which was to be welcomed, but that it was important to ask “what is our belief system that says to us passive investing is the right thing to do”.With regard to Myners’s point about underweight positions, Dunatov said regulation had a lot to do with this, in that it had inhibited the ability of fund managers to create long-term relationships with companies.He questioned the assumption there should be a level playing field of public information.Responding to Myners’s comment about FCLT Global not being able to be radical enough, Sarah Keohane Williamson, chief executive at FCLT Global, said: “We’re actually really interested in doing things that are radical.”One of the reasons why the organisation was set up as an independent not-for-profit entity is to enable it to be radical, she said.On the question of whether it is better for a company to be publicly or privately owned, Williamson said there was a worrying phenomenon of companies in the US wanting to stay unlisted for as long as possible.“While that may be good for the company in question, it’s not good for our capital markets in general if the right answer is for growing companies, which are creating a great deal of value, to opt out of those markets.”Sarah Keohane Williamson is a keynote speaker at the IPE Conference & Awards in Berlin on 1-2 December
Under German law, it is nearly impossible to make changes to pension benefits members have already earned based on their number of work years. Employers have argued that they suffer as a result of this.Pensionsfonds were given some flexibility to relax minimum guarantees under what has become known as the Lex Bosch law.More recently, the German government has proposed a pensions reform that would introduce industry-wide pension funds without guarantees, either within existing schemes or new vehicles to be set up by social partners.Addressing the Dutch pension sector’s objection to having to apply low discount rates for liabilities, EIOPA’s chairman said low rates were “just reality”.Bernardino, however, sought to put the problems of the Netherlands into perspective by noting that many other countries, contrary to the well-funded Dutch pensions sector, lacked private pensions, adding that “Europe is facing an enormous pensions deficit”.Bernardino also warned against insurers selling pension products with a guaranteed interest rate for the very long term.“In my opinion, this is not possible, or sufficiently attractive to clients, in the current economic climate,” he said. The Netherlands is discussing changing its predominantly defined benefit system into a more sustainable set-up, which is scheduled to come into force from 2020.At the moment, the Social and Economic Council is weighing the possibility of individual pensions accrual, as well as a “target contract” – with both being combined with collective risk-sharing.A new government is set to make the final decisions on any new pensions system, following national elections in March. Gabriel Bernardino, chairman at European supervisor EIOPA, has called for a public debate on the issue of past pension promises becoming untenable as a result of the low-interest-rate environment.In an interview with Dutch news daily Het Financieele Dagblad (FD), he argued that a public discussion was necessary to avoid friction between the younger and older generations.“Some generations getting privileges at the expense of others will not work well forever, and risks won’t just disappear by ignoring the issue,” the FD quoted him as saying.Bernardino said benefit guarantees were a growing challenge for traditional pension funds in the current economic climate, with those in Germany being a case in point.
50Plus, the Dutch political party for the elderly, has tabled a bill that would allow pension funds to use a discount rate for liabilities of at least 2% during the next five years.Currently, pension funds must discount liabilities against market rates with the application of an ultimate forward rate of 2.8%, which translates into a discount rate of approximately 1.2%.The party launched its initiative in order to prevent schemes cutting pension rights after having been underfunded for a consecutive period of five years, as required by the new financial assessment framework (nFTK).Clarifying the proposal, Martin van Rooijen, a candidate MP for 50Plus for the parliamentary elections next week, said that the 2% rate would automatically be cancelled as soon as the European Central Bank (ECB) stops its programme of quantitative easing. The ECB today decided to maintain its programme, which will see it purchase €780bn worth of bonds by the end of the year.The five-year period suggested by the party matches calculations of the Netherlands Bureau for Economic Policy Planning (CPB), which found that the effect of a 2% discount rate on the various generations of workers and pensioners would be limited.Van Rooijen, who is currently a senator for 50Plus, also referred to Han de Jong, chief economist at ABN Amro Bank, who recently argued in favour of a higher discount rate.According to De Jong, it would be “historically absolutely unique, if pension funds would not achieve higher returns than 1.2% on a properly diversified investment portfolio”.In other news, John Kerstens, MP for the labour party PvdA, warned against reducing the accrual limit, as several political parties promise in their election manifestos.During a meeting of KPS, the lobbying organisation of pension specialists, he argued that employers and unions need support from their rank and file for adjustments to the pensions system.In his opinion, this won’t happen if politicians start interfering with the level of tax-friendly accrual, which is currently capped at an income of €103,317.The left-wing green party GroenLinks along with the religious right-wing parties ChristenUnie and SGP have all announced that they would decrease the tax-facilitated accrual, while socialist party SP said the issue was “negotiable”.The Pensions Federation made clear that it was still too early to comment on the issue, as the manifestos of the 15 parties likely to win seats following the election varied too widely.PGGM, the pensions provider for the €185bn healthcare scheme PFZW, indicated that the plans to limit tax-friendly accrual were ill thought-through and would undermine support for the pensions system.Meanwhile, the PvdA and the liberal democrat party D66 said they wanted to reduce the income level subject to mandatory pensions accrual.However, Pieter Omtzigt, MP for the Christian democrats CDA, rejected the plan of PvdA and D66, arguing that this would come at the expense of solidarity between higher and lower paid workers within companies.
UK public sector pension schemes increased their overall exposure to alternative assets by nearly two-thirds in the three years to the end of 2016, according to State Street.At the end of the year the 105 public pension funds in England, Scotland, Wales, and Northern Ireland had collectively invested £16.6bn (€19.1bn) in asset classes including infrastructure, real estate, and private equity, according to State Street’s research. This amounts to roughly 6.6% of the total assets in the local government pension scheme (LGPS).Andy Todd, head of UK pensions and banks at State Street, said the rise was “significant”, although the starting point was low.“Pension funds do want to investigate these asset classes – some of them, maybe, for the first time,” he said. “When you look at alternatives they tend to be long term asset classes,” Todd added. “Ultimately, the LGPS funds are open defined benefit schemes, so they have an investment time horizon that is arguably infinite.”The UK government has tasked LGPS funds in England and Wales to pool their assets to save costs and give more scale to invest in infrastructure projects in the country. Some have begun scaling up their resources in alternatives already: the London Pension Funds Authority and Greater Manchester Pension Fund have created a joint infrastructure fund, and were joined last year by the Berkshire Pension Fund.The £35bn Northern pool – involving the Greater Manchester Pension Fund, West Yorkshire Pension Fund, and Merseyside Pension Fund – has said it wants a long-term allocation of 15% to infrastructure, increasing by 10 percentage points the combined funds’ current allocation to the asset class.State Street’s research also found that, in the three years to the end of 2016, LGPS funds’ total exposure to UK equities declined by 5% to £37.9bn (15% of total assets).In contrast, the allocation to emerging markets equities rose by a third – albeit from a low base. LGPS funds had £446.5m invested in emerging market equities at the end of 2016, State Street reported, accounting for just 0.2% of overall assets.Todd said of the overall results: “This research highlights how these pension funds are becoming increasingly comfortable navigating complex asset classes such as alternatives as well as emerging market equities. These changes to the investment landscape are systematic, so we will likely see a continued trend toward such investments.”