Investments at PKA, the DKK195bn (€26.1bn) administrator for five Danish pension funds, generated a 9% return last year, supported by strong returns for quoted equities, the company said.It said the investment return for 2013 was 9%, or DKK13bn, in absolute terms, but added that, including results from the interest-rate hedging portfolio, the return was 4.2%.It said buoyant equity markets in 2013 meant the pension fund’s portfolio of quoted shares contributed positively to the overall return, producing a near-22% profit.Since most of the fund’s equity exposure was passive, it made a return in line with the market return, with very little in costs, PKA said. The fixed income portfolio produced an “extraordinarily good” return of 9% in 2013, according to PKA, which added that this was particularly satisfying in a market environment marked by big price falls as a result of rising yields.Peter Damgaard Jensen, managing director of PKA, said: “PKA has consciously maintained and expanded its exposure to Southern European and Irish bonds, as well as Danish mortgage bonds, and avoided investment in Danish government bonds.”In addition, PKA reduced its sensitivity to interest-rate increases.It had been able to do this because the pension fund was financially sound, Damgaard Jensen said.“We have been able to afford to act long term and be cold as ice,” he said.Absolute return strategies, which had been introduced in the last few years to increase diversification, provided a 13% return last year.Damgaard Jensen said PKA would increase its focus on investments in green investments.“We have had good experiences with the offshore wind farms we have invested in up to now, and we expect to undertake more green investments in 2014,” he said.
The price has been set at approximately PLN242m (€58m).On its website, the bank stated that this would be adjusted depending on the dividends paid out by ING PTE in 2013 and 2014, as well as two factors resulting from this year’s reform of the second-pillar system.One is the number of pension fund members its OFE retains this year.Between April and July, Poland’s 16.7m OFE members have to inform ZUS, the Polish Social Insurance Institution, whether they want to continue paying the 2.92% social contribution into the second pillar.The alternative (default) option is that their full 19.52% future contributions go to the first pillar.In April, only some 61,000 had chosen the second-pillar system.The second factor concerns the outcomes of any legal challenges to the Constitutional Tribunal, Poland’s constitutional court.The two parties expect to sign a binding sale agreement in the fourth quarter of 2014, pending approval from the Polish Financial Supervision Authority. ING Bank Śląski, the Polish bank majority owned by the Netherlands’ ING Bank, has signed a non-binding letter of intent to sell its 20% stake in the pension management company ING PTE to Amsterdam-based ING Continental Europe Holdings.The latter already holds 80% of the pension company’s shares.ING PTE manages the ING open pension fund (OFE) and a voluntary pension fund (DFE).Of the 13 OFEs, it is the market leader, with 18% of membership and 24% of net assets as of the end of March.
The revised IORP Directive could remain “impossible” as European Union member states continue their opposition to Brussels being granted the requisite competences, the MEP charged with scrutinising European pensions legislation has said.However, Thomas Händel, elected this week as chairman of the European Parliament’s Employment and Social Affairs Committee (EMPL), said it was still important for him and his four committee colleagues to continue the push for a more integrated employment market, including a focus on pension matters.The MEP, a member of Die Linke – the left-leaning opposition party to Germany’s governing grand coalition – told IPE the “main question” for EMPL in the coming years would be how to address issues of social equality by addressing workers rights.Asked about the passage of the revised IORP Directive, published by internal markets commissioner Michel Barnier in March, he said he believed it would “remain impossible” so long as any of the 28 member states “oppose and deny any EU competences”. “In addition, the very different systems might be impossible to equalise,” he said.Händel said he was uncertain whether any elements of the former Portability Directive, revived last year after Barnier dropped more stringent capital requirements from the revised IORP Directive, would once again be discussed.“Concerning certain elements of the Portability Directive,” Händel said, “we have to wait for the first exchange of views between the political groups here in the Parliament.“But the increase of eurosceptics and the anti-EU movement will not make it easier to discuss the free movement of workers, and therefore pensions as well.”The Portability Directive was eventually passed by Parliament in April as a directive on supplementary pensions rights.It introduced universal vesting periods for benefit accrual but backed away from 2005’s initial suggestion that rights should be transferable when a worker moves to a new employer.Händel, now in his second term as an MEP, said he hoped a parliamentary majority could be found to “ensure the promise” made by the EU decades ago to create an environment where employees were free to work and live wherever they chose.“That necessarily means everyone should have the right to take pension credits with him, wherever he chooses to live,” he said.His comments come after the newly elected deputy chairman of the Economic and Monetary Affairs Committee (ECON) – in charge of tax affairs, as well as scrutiny of proposals to allow the European Insurance and Occupational Pensions Authority to raise a direct levy to fund itself – said the pensions industry should not cry foul, as it had never been hit.
As of 17 November, investors will be able to use Shanghai-Hong Kong Stock Connect to invest in almost 600 renminbi-denominated local shares of Shanghai-listed companies – directly and without the need for a license. Until now, investment has been possible only indirectly, and most often through expensive, Hong Kong dollar-denominated H-shares, Van den Brink said.He highlighted the “huge potential” of the Chinese market, “with 100m rich citizens, as well as 250m internal migrants who have been promised education and care in their new residence”.He added: “These migrants are the up-and-coming people with money. But, for the time being, they need the complete selection of Marks & Spencer. Rabobank has estimated that the disposable income of the average Chinese workers will have doubled by 2017 compared with 2009.”In Van den Brink’s opinion, the investment sector is now properly regulated, and the new government has the “political will” to reward shareholders.He said interest rates in China were “attractive”, and that the renminbi was relatively stable and on its way to becoming the world’s third trade currency, which can already be exchanged in London and Frankfurt.However, the Van den Brink – also a former professor of financial markets at Nyenrode Business University – warned against investing in “almost broke” local banks and “weak” state-owned enterprises.PME’s former CIO said China would refrain from introducing a capital gains tax for foreign investors, which will “boost” several investment funds, “as most of them had anticipated a 10% tax rate”.Van den Brink said he expected Chinese equities to become part of the MSCI within two years, and predicted that Chinese bonds and derivatives would, in turn, become available for foreign investors. The launch of the Shanghai-Hong Kong Stock Connect on 17 November will be a “watershed moment” and an excellent opportunity for European pension funds to invest in China, according to Roland van den Brink, former CIO at the €38bn Dutch metal scheme PME.“For institutional investors prepared to look thoroughly into the options and build personal relations, there are interesting opportunities,” he said.Since PME invested in local A-shares more than 10 years ago, Van den Brink has been monitoring developments closely, he said.“The climate for foreign investment in China – 8% of the world market – is maturing,” he added.
Under the “shock” scenario, higher inflation would erode the basic state pension by £137 per year in real terms by 2017-18 – compared with staying in the EU – while the “severe shock” scenario would increase this loss to £142 per year, said the analysis.Someone receiving a basic state pension and an average annuity would lose £190 a year in real terms, according to the calculation.The report also predicted declines in house prices and in UK equity and bond prices.It said: “After two years, the total loss of wealth of those aged over 65 would be around £170bn in the shock scenario and £300bn in the severe shock scenario. For a person aged over 65 with the median portfolio of housing and non-pension assets, the loss in wealth is estimated to be around £18,000 in the shock scenario and around £32,000 in the severe shock scenario.”Furthermore, the predicted long-term fall in incomes and profits would mean future pensioners were able to save less for their retirement, and earn lower investment returns, the report said.It calculated that someone currently aged 50 on median earnings, with median defined contribution pension assets, could lose between £3,800 and £5,800 from their pension savings by 2030 under the shock and severe shock scenarios, respectively.Based on current annuity rates, that would mean pensioners losing retirement income of between £223 and £335 per year, compared with remaining in the EU.But former work and pensions secretary Iain Duncan Smith, who supports Brexit, said: “I don’t accept there will be a short-term shock to the UK economy if we leave the EU. When Britain left the European exchange rate mechanism in 1992, instead of being a shock, it was a huge rise in income, and pensions did very well as a result.”Duncan Smith warned of “two big threats of remaining in the EU” for pensions.“They postponed the solvency directive [Solvency II], but it will come back again, and it is estimated their plans will cost UK pensions £400bn,” he said.“Secondly, and even bigger, is the harmonisation directive, which will really do damage.”He also warned that both these directives would be approved under qualified majority voting, so that the UK alone could not stop them. UK pensioners could lose up to £32,000 (€42,050) off their assets if the UK votes to leave the European Union (EU), according to an analysis published by the UK Treasury.But in contrast, a former work and pensions secretary warned that, if the UK stayed within the EU, EU pension directives could inflict major damage on pension funds.The Treasury analysis relies on the conclusion of its own macroeconomic research, which was that “a vote to leave would cause an immediate and profound economic shock creating instability and uncertainty, which would be compounded by the complex and interdependent negotiations that would follow”.George Osborne, chancellor of the Exchequer, said: “That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000, average real wages would be lower, inflation higher, and house prices would be hit compared with a vote to remain.”
The FCA’s comments echoed those made by the Bank of England – of which the FCA is a part – in 2014, when then-executive director for financial stability Andrew Haldane said it was viable to consider the risks to the wider economy of the collapse of an asset management company.The FCA also confirmed its plan to publish the final report into its asset management market study in the second quarter of 2017. As well as reiterating its findings from the market study, the regulator also highlighted other areas of concern, including asset managers overpaying for services and custody banks’ reluctance to invest in IT systems.Amanda Rowland, asset management regulation partner at PwC, said the regulator’s focus on liquidity management supported “broader operational concerns” linked to the UK’s imminent exit from the European Union. It also indicated that “some movement around enhanced stress testing and redemption disclosure is possible”, Rowland added.“While acknowledging that Brexit will require regulatory flexibility, the FCA has focused on asset management initiatives such as cost disclosure and liquidity management that have wider international support and will likely be successfully progressed regardless of where Brexit takes the UK and the FCA,” she said.In the immediate aftermath of the UK’s vote to leave the EU, several open-ended property funds were forced to temporarily close to redemptions due to a high level of withdrawals.Chris Cummings, chief executive of the Investment Association, the asset management trade body, welcomed the regulator’s approach and its willingness for industry dialogue. He added: “As we move into a post-Brexit world, it is vital that the UK regulatory framework continues to foster a globally competitive environment to set up and run an asset management business.” The failure or “disorderly wind-down” of one or several large asset managers could pose a financial stability risk to the UK’s system, the Financial Conduct Authority (FCA) has warned.Outlining its views of various sectors of the UK financial system as part of its annual mission statement and business plan, the FCA said: “Market stability could be affected by the failure or disorderly wind-down of a very large asset manager or several asset management firms as end-investors attempt to redeem their holdings on demand, creating a downward selling spiral.”In its business plan for 2017/18, the FCA said: “Following stakeholder feedback, we will review our policy options and the available tools that asset managers have to manage liquidity when facing redemptions and valuation issues, and assess how adequate they are in managing conduct risks and addressing financial stability concerns. This work should ensure that liquidity management in funds allows for a fair treatment of all customers, including those who remain invested, and does not amplify disruptions to the financial system in stressed market conditions.”International regulators such as the International Organisation of Securities Commissions and the Financial Stability Board have previously suggested treating large asset managers as systemically important, putting them at a similar regulatory priority level as the world’s biggest banks and insurers.
Group CEO Galvin said views of USS had been “pulled to and fro by the 2017 valuation and commentators with polarised agendas”.“At various points we were accused of being reckless for taking too much risk in our investment strategy, or of being recklessly prudent for our plans to invest more in ‘safer bonds’,” he added.Objective observers, argued Galvin, would find neither of these statements to be true, just as they would with regard to accusations the scheme was “creating ‘smokescreens’ to hide bigger funding problems” or “manufacturing” deficits.Compared with many other private pension schemes, USS was “an excellent pension plan” and “doing a good job in difficult circumstances”, he said.The figuresUSS’ funding deficit fell from £12.6bn (€14.1bn) to £12.1bn as at 31 March, on a monitoring basis using 2014 valuation assumptions. The scheme has not yet completed its 2017 valuation due to the disagreement between universities and members. The ongoing 2017 valuation has reported a £7.5bn deficit (89% funded).Its assets grew by £3.9bn to reach a total £64.4bn, the vast majority of which are assets in the DB section (£63.6bn).Investments supporting the DB section of the scheme gained 6.2% over the year under review and 10.6% per annum over five years, which amounted to an outperformance of 1.4% and 0.8%, respectively.The DB fund also outperformed UK government bonds by £5.6bn over five years to the end of March.USS also highlighted its performance on value for money, noting that an independent assessment found it was able to achieve its five-year investment performance at a cost £61m less than that incurred by comparable pension funds in the latest 12-month period assessed.Investment in internal investment capabilities, which was partly behind a £2.1m increase in staff wages, helped reduce overall investment costs, as a proportion of assets under management, to 31bps, 16bps lower than in 2013/4, according to the scheme. The chief executive of the UK’s largest pension scheme – the Universities Superannuation Scheme (USS) – has expressed alarm at the “confusion, concern and distrust” generated among its members as a result of commentary about the scheme’s funding position.Commenting on USS’ annual report and accounts for 2017, Bill Galvin said that “whatever the contributions of others might have been in that outcome, we clearly failed to communicate simply enough, convincingly enough, or from a basis of sufficient trust, to make the key messages clear”.USS would therefore review its process for the scheme’s valuation with employers, in particular “the early discussions regarding their risk appetite and capacity,” he said.The 2017 valuation of USS led to the scheme proposing to close its defined benefit (DB) section to future accrual, which in turn led to strike action across UK universities and heated debate about the scheme’s approach to the valuation.
Improvements in UK defined benefit (DB) scheme funding have masked challenges facing smaller pension funds, according to Goldman Sachs Asset Management (GSAM).The fund manager reviewed DB schemes attached to the UK’s largest 350 listed companies and found that smaller schemes – those with less than £500m (€557m) in assets – tended to experience more volatility regarding their funding position.Schemes with less than £100m had a funding level on average 15% lower than those with £5bn or more, GSAM reported.The group said the data reflected small schemes “have not managed their risk exposures as effectively as larger schemes, likely due to a lower degree of governance”. Larger schemes have adopted liability-driven investment strategies, diversified their portfolios and implemented currency hedges, GSAM added. However, these strategies were increasingly available to small schemes, the asset manager said.David Curtis, head of UK and Irish institutional business at GSAM, said: “While the funding rate of smaller pension schemes improved this year, we see much greater volatility in their funding position than larger schemes who have consistently improved their funding level every year of the four years we have run our FTSE 350 study in the UK.“This highlights that larger schemes better implement risk management strategies that protect and advance pension scheme solvency consistently.”Although limited to FTSE 350 companies, the study had implications across the UK’s pension system GSAM said, as roughly 87% of private sector schemes had less than £500m in assets.Overall, UK schemes have experienced a positive year in terms of aggregate funding positions. Multiple estimates have reported that assets have grown faster than liabilities during 2018, with FTSE 100-listed companies hitting 100% funding for their DB schemes earlier this year.However, Shoqat Bunglawala, head of GSAM’s global portfolio solutions group, warned that risks were rising. “In the next year alone, schemes are likely going to have to navigate higher interest rates in some markets, continued conflicts around trade, Italian budget negotiations and other macroeconomic risks that come with being in the late stages of the economic cycle,” he said.“UK schemes in particular will be faced with their own challenges including the outcome of Brexit, potentially increasing interest rates and a volatile currency. In this environment, we think an enhanced focus on risk mitigation and a dynamic approach to asset allocation will prove invaluable.” Source: JLT, Mercer, PPF
A campaign group has successfully challenged a UK court ruling that would have restricted local authority pension funds’ ability to divest from companies on ethical grounds.The UK’s Supreme Court this week granted the Palestine Solidarity Campaign (PSC) permission to appeal against a decision from the Court of Appeal, which ruled last year that funds within the £274.6bn (€303.2bn) Local Government Pension Scheme (LGPS) could not make divestment decisions contrary to UK foreign policy.The PSC said a hearing on the case was likely in the second half of this year.Jamie Potter, partner at law firm Bindmans and solicitor for the PSC, said: “The potential ramifications of the Court of Appeal decision are significant and worthy of consideration by the highest court in the UK. The UK’s Supreme CourtAt the time, the then Cabinet Office minister Matthew Hancock said the ban would “help prevent damaging and counter-productive local foreign policies undermining our national security”.However, the PSC challenged the ban through a judicial review in 2017, claiming it was aimed at stopping funds from divesting from Israeli companies. The government has denied this is the case.In June 2017, the UK High Court ruled that government guidance on boycotts and divestments had been used “unlawfully”. The relevant section in the guidance was subsequently cut.In June 2018, the Court of Appeal overturned the High Court’s ruling, prompting lawyers to warn that it could open the door to greater influence from politicians on impact investing strategies and environmental, social and governance issues within the LGPS.The PSC has been campaigning for many years to persuade investors to cut from their portfolios companies with links to Israeli settlements in contested territories in the Middle East.Several European pension investors – including Norway’s Government Pension Fund Global and PGGM in the Netherlands – have divested from specific Israeli companies in recent years because of concerns about the treatment of Palestinians. “If the Court of Appeal decision is allowed to stand, it permits the executive carte blanche to impose their own political perspective on the investment of citizens’ money. However, if PSC is successful in its appeal, the government will not be able to interfere in the ethical investment decisions of LGPS [funds] and their members.”The case dates back to 2016 when the UK government moved to ban public sector schemes from divesting from certain industries or countries through so-called “town hall” procurement boycotts.
“Historically there has been 80-100 new mandates a year and we would expect that to continue into the future,” he said. “On top of that you have the retenders, and estimates are somewhere in the region of 400. When you bring those together you have about 160 mandates coming to market every year for the next five years.”According to KPMG’s 2019 survey of the UK fiduciary market, there were 946 mandates in total with £172bn (€202bn) in combined assets, marking an 83% increase in mandates and 139% increase in assets in the past five years.It has been almost a year since the Competition and Markets Authority (CMA), the UK’s competition watchdog, called for mandatory tendering of fiduciary mandates as one of its “remedies” for the investment consulting and fiduciary management industries to boost competition. Since then, some of the country’s biggest providers of fiduciary services have been hiring new staff to prepare for the requirements.Preparing for busy timesCompanies including Barnett Waddingham, BlackRock, LCP, Mercer, MJ Hudson, SEI and Willis Towers Watson have all added resources in the past 12-18 months, they confirmed to IPE.Peter Daniels, head of Barnett Waddingham’s FM Evaluate service, said his company expected “quite a large pickup in demand over 2020-21 and subsequent years”.“There are hundreds of mandates which are captured by this mandatory requirement,” he said. “Over the last month or so we’ve seen that start to pick up but we haven’t seen the full extent of work coming to market yet.“We are making sure that we have enough people to be able to advise clients, but also we are developing our services so that they can be delivered in a way that can easily respond to the pickup in demand.”Steady growth in UK fiduciary market Chart MakerBen Gunnee, UK head of fiduciary management at Mercer, said trustees had “a large degree of flexibility” regarding how to implement tenders, from a full market review to a desktop exercise.“Trustees need to understand the options and undertake an exercise that best suits their needs,” he said. “Overall, we expect it will be a very busy time for trustees and fiduciary management providers during 2020 and 2021.”Tim Giles, EMEA managing director of investment at Aon, said: “We have had plenty of time to gear up fully for what may be a significant increase… We have the resources in place to maintain our focus on existing clients while also making the most of the new opportunities that are likely to emerge.”For some firms, more rigorous tenders have already started. André Kerr, head of fiduciary management oversight at XPS Pensions Group, said the listed consultancy had already started helping clients through retenders and had introduced a “streamlined” process that allowed existing fiduciary manager clients to comply efficiently with the new rules.Last week, The Pensions Regulator (TPR) published a detailed guide for trustees, detailing the requirements. Tenders must include at least three independent providers, but TPR said more would likely be “prudent”. Trustees must also fully document the tender process.TPR also indicated it would provide further guidance on how to assess fiduciary manager performance once the proposed industry standard had been approved by the CMA.CFA Institute has acquired the intellectual property rights to the voluntary fiduciary management performance standard developed by IC Select and TPR said it was proposing to submit the revised standard to the CMA for approval by 10 December. Providers have been hiring staff and recalibrating services to prepare for mandatory tendering rules that come into force on 10 DecemberUK pension consultants and fiduciary managers have been scaling up resources to cope with an expected large increase in the number of new mandates coming to market from next year.From 10 December 2019, UK pension schemes must run a formal tender process for any fiduciary mandate that exceeds 20% of scheme assets. For those that have already outsourced investment functions to a fiduciary, this must be retendered within five years.This is expected to put a greater burden on providers, according to Sion Cole, head of UK fiduciary business at BlackRock.