Month: September 2020
Dutch pension funds are keen to increase their allocations to infrastructure significently in the near future, according to some of the largest asset managers in the Netherlands. APG, PGGM, MN and Blue Sky Group – with combined assets under management of more than €600bn – have noted a growing interest in the alternative asset class, with individual clients willing to increase their allocations by up to 100%.Ron Boots, head of European infrastructure at the €346bn APG, said: “Most of our clients have an allocation of approximately 2%, but they have allowed us to raise their holdings to 3%, or even more if opportunities arise.”APG – the provider of civil service scheme ABP – has invested approximately €5bn in total under a worldwide mandate, but focuses on Europe and the US. It has recently established an infrastructure team in its New York office.Both APG and the €153bn PGGM said they targeted not only roads but also water companies, sustainable energy, power and gas grids, as well as telecommunications infrastructure, and aimed at returns of between 7% and 10%.The two largest asset managers, which started investing in infrastructure 10 years ago, made clear that they were gradually moving away from indirect investments to individual projects, to drive down costs and increase their grip on the investments, including their respective duration. They cited a stable long-term cashflow, managers’ expertise and an inflation link as their main selection criteria.According to Henk Huizing, PGGM’s head of infrastructure, its five clients with existing investments have indicated that they want to more than double their current holdings of approximately €3.5bn.He said PGGM was very pleased with its unique joint venture with building company BAM for the construction and co-financing of Europe-wide projects.“We have almost used up the committed €400m,” he added.PGGM identified the risk of government policy changes as one of the most important pitfalls for investing in infrastructure.“For example, our participation in a Spanish solar energy project suffered from a decision to a restrospective subsidy decrease,” Huizing said.The €90bn asset manager MN has invested €600m in infrastructure for 10 pension funds, including the large metal schemes PMT and PME.The clients wished to review their current and limited allocation of approximately 1% through indirect investments, said fund managers Sebastiaan Ranner and Jeroen Reijnoudt, who added that MN was also looking into the option of co-investment to cut costs.They underlined the importance of security and transparancy as well as sound SRI credentials of new investments.All managers indicated that they were interested in increasing local investments, but stressed that this would always depend on the right risk/return profile and sufficient scale.They also cited the promise of public private partnerships.Ranner and Reijnoudt also said MN would avoid emerging markets for the forseeable future, as it deemed the current risks too high and the markets and regulatory regimes too opaque. The €16bn asset manager Blue Sky Group (BSG) said it was looking into the possibility of starting infrastructure investments, “as infrastructure funds now offer more variation in both duration and strategies”.Currently, it manages a limited portfolio as part of existing portfolios of pensions funds that placed their asset management with BSG, according to Marleen Bosma-Verhaegh, its senior fund manager real estate.
The 28 founding investors are currently analysing allocations to look for commonality.This could result in the funds identifying duplicated asset class and manager mandates, with the view to renegotiating fees given the larger scale.London Councils said the CIV, once up and running next year, could also support infrastructure investment.Hugh Grover, local government finance policy director at London Councils, said focus was now on setting up the tax-transparent fund the organisation would use for its CIV.But, he said, given these funds are relatively new, it will take time.“We would look to set up the fund on Day One based on those common mandates,” he said.“There is work to be done – this is partly setting up the legal framework, but, because it is a tax-transparent fund, and we are local government, we are working on the final detailed operating model.“We do not have the usual fund structure of an asset manager, so we need to think about how we put this together.”London Councils is yet to approach the Financial Conduct Authority (FCA) for approved use of a tax-transparent fund.The use of common investment vehicles is currently being considered by central government for implementation across the 89 LGPS funds in England and Wales.These would be focused on asset class and be accessible to all LGPS funds.However, Grover said the group was not working with the government on this model.“They have told us they have a process to go through and ministers have yet to take final decisions,” he said.“They are very aware of what we are doing, and have not told us to stop.”Grover said, once the fund was set up, it would aim ensure the local councils influenced the decisions of the CIV.“The fund is being set up for the local councils, so it needs to reflect what they need, and we will think about how we allow that influence to flow through in an acceptable, regulated structure,” he said. Mayor Jules Pipe, chair of London Councils, said pension funds outside London had also expressed an interest in the CIV.“The government asked whether a separate CIV should be set up for ‘alternative assets’, but we see no reason to divide the model by asset class,” he added.“There is sufficient flexibility to allow a variety of funds to be constructed that meet the boroughs’ investment objectives, including, in the alternatives space, where it makes sense and delivers the right returns.” A collective investment vehicle (CIV) being set up by a group of London’s local government pension schemes (LGPS) is set to make its first investments by June 2015.Twenty-eight of the 33 LGPS funds in London have so far committed to the creation of a city-wide investment vehicle, which would look to create economies of scale.Each has committed £25,000 (€31,590) to fund the set-up costs for the CIV, as discussions are ongoing with the remaining five funds over their participation.Last week, the organisation responsible for the CIV, London Councils, announced the creation of the holding company for the vehicle in what it called a “significant milestone”.
Taha Lokhandwala considers how the new rules around DC decumulation might pan out in futureIn the midst of a quiet bank holiday in the UK, the defined contribution (DC) pensions market awoke on Monday to see itself in a new light. Last year, chancellor George Osborne famously bellowed from the House of Commons dispatch box that no one would have to buy an annuity and in one fell swoop changed the way the British looked at DC pensions decumulation, and pensions in general.As the clocks turned 0900 this morning, DC pension providers could have been inundated, as they recently predicted, with calls from those over 55 wanting to access their pension savings and run riot over the notion that pensions savings should eventually become retirement income. We shall learn down the line whether they were inundated or not. But it leads to an interesting discussion. Whether you agree with the reforms or not, they are here. What happens henceforth is what is important – whether you believe in ‘paternalism’ or liberalism, market forces or intervention. The gates of pensions freedoms have been opened, and it is likely savers will come flooding through.So, what next? No one really knows. No one has been able to predict how savers will react. The pensions minister Steve Webb spent his Easter weekend entreating savers not to wake up today and splurge their savings before even considering retirement. Webb, true to his Liberal Democrat colours, stands by the view that savers should have the right to do so – and this, really, is the core matter. Liberalism always comes at a cost, and that cost is bad decisions – sometimes bad decisions created by coercion. The policy of forcing people to buy an annuity is based on the notion that they cannot be trusted to make the ‘right’ decisions. This government argues that only the people themselves know what is right.The abandonment of the so-called nanny state in pensions, however, exposes savers to a new and potentially bigger predator – the pensions and insurance industry. With freedom and choice to select retirement solutions comes just that – choice. The UK industry is already complex enough to the general public, with splits among defined benefit and DC, trust-based options and insurance contract-based arrangements. It’s complex enough to see pensions saving continuously fall until state intervention in the form of auto-enrolment. Adding choices, while giving people freedom, merely increases complexity, not to mention opportunistic sales tactics from shareholder-bound, return-driven firms.To its credit, the government has provided free guidance, but the question of whether enough resource and emphasis on this guidance has been provided is debatable, as the entire policy hinges on the ability of a saver to select the right product, at the right time and at the right price.The policy is difficult to argue against and, more important, difficult to redact. Freedoms are popular. Webb himself, in a debate with his opposite number in the Labour Party, said the polls spoke for themselves. However, there is the bigger concern. Liberalism, even with its costs, can be welcomed, but one should always look at the motives. The freedom to spend one’s DC savings is one of the biggest, and certainly most popular, policies of this government – and it comes into force weeks before a general election. Short-term electioneering over long-term concerns for the electorate? Perhaps.The next government, whatever its form, has much to contemplate. More intervention to fix its freedoms? Rules around targeting customers? Cost caps for new products? Extending the freedoms to those already with annuities? All of these have been discussed. Momentum behind the notion of having a default decumulation option is building. The idea is to help those who just do not know what to do while still providing freedoms to those who want to exercise them. MPs scrutinising pensions policy, the National Association of Pension Funds (NAPF), the National Employment Savings Trust (NEST) and a think tank all support this idea. However, the current pensions minister is strongly against it.After much talk over the last 13 months, the day has arrived. Pension providers opened themselves up to a raft of enquiries this morning. The reforms can help create a more active, fluid and beneficial pensions industry where people get out of it what they desire. But only time will tell if freedom and choice was truly the right way, or whether the UK government merely replaced a nanny with a shark.
The chief executive of the UK’s Pension Protection Fund (PPF) has said he is disappointed with the take-up of liability-driven investments (LDI) by UK pension funds over the last 10 years.The PPF, which acts as a lifeboat fund to UK defined benefit (DB) schemes stranded through sponsor insolvency, operates a lower risk tolerance level to most, with an investment strategy focused on matching liabilities.The £16.3bn (€19.7bn) fund has around 70% of its assets in bonds and cash, making heavy use of derivatives in its LDI portfolio as it aims to outperform increases in liabilities and a LIBOR + 1.6% target.PPF chief executive Alan Rubenstein said that, while he did not encourage other UK schemes to mimic its strategy, as the PPF must remain contrarian, he was disappointed with the number of schemes failing to hedge liabilities. Speaking at the London conference, The Investment Agenda, Rubenstein told delegates in 2005 that, when the PPF was formed, UK pension schemes had an average deficit recovery plan length of 8.1 years with 75% within 10 years.“You would hope that, 10 years on, there would only be one-quarter of schemes in deficit,” he said.“But, in fact, the [average recovery length] is now 8.5 years, and you have to go up to 11 years to capture 75% of schemes.“In that sense, it does not feel like we have made a lot of progress. I am disappointed by the rate of uptake of LDI by pension schemes.”He accepted that LDI strategies meant expecting a lower investment return, but he added that schemes with strong sponsors should accept this.“There is no doubt, if you are going to do [LDI] over the long term and you can cope with the volatility, then you should probably accept [lower investment returns],” he said.“If you are a typical pension fund with a sponsor that is comfortable with that, then, frankly, I have no difficulty with it whatsoever.”Rubenstein defended the stance that the PPF’s lower risk tolerance and returns meant levy payers had to contribute larger amounts to complement its strategy.The PPF charges an annual levy on UK DB schemes, which potentially could require cover, and uses this to fund its strategy and pay benefits.“We have to strike a balance between protection for members, who have already lost part of their pension by being in the PPF, and understand that this has to be paid for,” he said.“We think of the levy as the balancing item between benefits and the returns we get on the assets.“It is right we run a relatively low-risk approach, and that does have consequences, but the alternative of putting it all on red would lead us into pretty big trouble pretty quickly.”The PPF recently lowered its estimates of levy collection by 10% as the level of risk posed by sponsor failure decreased.Given the scheme’s significant LDI portfolio, net investment returns were negative 0.7% in its last financial year. However, its assets increased by 9%, with levy collections and new schemes entering the fund.It did beat its liability benchmark by 2.9%, with Rubenstein highlighting a 19.5% return in its small equity portfolio as key.According to research from consultancy KPGM, the UK LDI market was at £517bn as of the end of 2013, from more than 800 mandates and accounting for more than one-third of DB assets.
It also welcomed added emphasis on the role of the Scheme Advisory Board (SAB) and its being given new responsibilities, saying that a stronger SAB would “support member-direction over the pace and nature of change being undertaken through pooling”.Quinn said: “[We] is pleased to note the guidance reflects several of the key concerns exercising LAPFF member funds over the last few months about the direction of travel that pooling was taking. This new guidance alters that course for the better.”The LAPFF also said the guidance made two “very important” new points with respect to ESG, namely the requirement for the LGPS to commit to the Financial Reporting Council’s Stewardship Code, and to have a policy on corporate governance and voting.“This closes the door on those who have ignored their responsibilities by assuming that not having a policy is acceptable,” the association said. New guidance on investment regulations shows the UK government as having heeded local government pension scheme concerns about asset pooling, according to the Local Authority Pension Fund Forum (LAPFF).The association welcomed the guidance published last week by the Department for Communities and Local Government (DCLG) for local government pension schemes (LGPS), saying it shows the government to be in “listening mode”.Kieran Quinn, chair of the LAPFF and of the Greater Manchester Pension Fund (GMPF), said: “The real value of this new guidance is that it reflects many of the views submitted to the government by funds about the challenges facing their plans for pooling and the new investment frontiers for local authority pension funds.”The LAPFF praised the guidance on pension fund governance in the pooling context, particularly the renewed emphasis on the autonomous role of pension funds and the need for pools to be accountable to their individual member funds.
This “derisking nudge” is reinforced by other nudges, said Kupta, such as the belief that it is what the regulator wants, but he added that, overall, less investment risk only serves to “lock in the deficit and bake in a longer recovery period”.In the end, risk has just transferred from investment risk to covenant risk, he said.Defined benefit pension schemes are capable of bearing more investment risk, he added.On a different conference panel, Sorca Kelly-Scholte, head of the EMEA Pensions Solutions & Advisory at JP Morgan Asset Management, said deficit headlines were “at best distracting and at worst can drive poor investment decisions”.She said using a broader-based valuation framework than a Gilts-based one could help stabilise balance sheets.One of the remedial actions that the PLSA DB taskforce has proposed is consolidation, saying the current system – with nearly 6,000 DB schemes – is too fragmented.The reform in the local government pension scheme (LGPS), where the 89 funds are forming eight asset pools, was flagged as a possible model for the private sector DB sector.Tim Sharp, policy officer in the economics and social affairs department at trade union TUC, suggested investigating whether “we can replicate in private sector DB some of the work we’ve seen happening in local government pensions” as a means of achieving economies of scale.Different models would need to be explored to see how consolidation might be achievable, he said.It could involve merging schemes or the government’s taking a role in “ensuring schemes have access to large investment pools”.Gupta acknowledged asset consolidation as a possible way forward but said “the real win comes if you can also consolidate liabilities”.This, he added, “takes you down the route of benefit flexibility”.Reacting to the taskforce report in an e-mailed comment, Marcus Fink, pensions partner at Ashurt, said allowing schemes to pay less generous inflation rises could be a way forward as long as the power to do so was tightly controlled.“The DB framework is premised on safeguarding historic benefit entitlements and rightly so,” he said.“However, allowing some flexibility to alter the level of inflationary increases when pensions come into payments could mean the difference between a distressed company failing or securing a future for itself and its employees.”Janet Brown, partner at Sackers and a member of the PLSA DB Council, said the taskforce’s “diagnosis” showed that DB schemes were under pressure for a number of complex reasons.“Questions abound, and it may be that, while RPI/CPI gets a lot of attention, there are different solutions for different schemes,” she said.“All involved need to be prepared to think more widely about DB schemes, including in the context of the economy, in a given employer’s remuneration package – noting the tension with employees with DC benefits – as well as how the industry is regulated.” Deficit figures – “as big and scary as they may be” – are not a good guide to understanding the problems facing the UK defined benefit (DB) pensions sector, according to the chair of a taskforce created by the country’s pensions association to untie the “Gordian knot” of challenges in the system. Presenting the interim report of the taskforce yesterday at the annual conference of the Pensions and Lifetime Savings Association (PLSA), Ashok Gupta (pictured) said “the DB sector has a problem” but that it is “not a problem you can understand just by looking at deficit numbers – big and scary, and wildly fluctuating, as they may be”.A better starting point, he said, was to understand the risk that “really matters” – namely, the risk to members’ benefits. He later highlighted the volatility of scheme deficits as problematic in that a desire to reduce the volatility encourages sponsors to try to match assets and liabilities and to “take investment risk off the table”.
He added that prices in the US have cumulatively risen by more than 40% during the past 17 years.De Boer suggested setting up an inflation hedge similar to the the interest-rate hedges employed by many Dutch schemes. He recommended pension funds investigate whether they could replace part of their exposure to government bonds in their matching portfolio with inflation-linked bonds.According to De Boer, these bonds could be used to manage both inflation and interest-rate risk. He emphasised that inflation-linked bonds were easier to deploy than inflation swaps.He said research by AXA had shown that, if half of a 20% government bond allocation was replaced with inflation-linked bonds, the tracking error relative to real liabilities including indexation would drop significantly. The tracking error relative to nominal liabilities would only slightly increase.In a scenario of rising break-even inflation of 0.35%, AXA expected that the bonds would deliver a surplus return of five percentage points during an eight-year period relative to nominal government bonds, according to De Boer.He said inflation in the Netherlands would be an important criterion for an inflation hedge. However, as the Dutch state doesn’t issue inflation-linked bonds, pension funds should consider similar assets issued by other countries, drawn on inflation in the euro-zone.Countries such as France, Germany, Spain, and Italy all issue inflation-linked bonds. De Boer suggested that pension funds look at French and German issuance if they preferred euro-denominated bonds, as the risk profile of Italian and Spanish inflation-linked paper was “too big”.US inflation-linked debt was an alternative, he said, but a currency hedge – and possibly also a hedge of the US interest rate risk – would be necessary.De Boer also recommended pension funds define both a nominal and an inflation-related benchmark – based on a pension fund’s cashflow – in order to manage interest rate risk as well as inflation risk. Pension funds should map out their exposure to inflation risk and develop policies to manage it, according to AXA Investment Managers.With improving coverage ratios and a growing potential for indexation, inflation risk will also increase, Heiko de Boer, senior client relations manager at AXA IM, argued.In a presentation at the annual congress of IPE’s Dutch sister publication Pensioen Pro last week, he said investors had been paying less attention to inflation risk in favour of managing interest-rate risk.“However, inflation risk is crucial for the long term,” he said, “as many economists expect that inflation could climb to the [European Central Bank]’s target of 2%.”
Last year, the £10bn (€11.5bn) ICI scheme said that, based on a full actuarial valuation, the employer was still due to pay additional contributions of £125m for 2019, 2020 and 2021.At the time, it said that with these additional contributions “the pension fund would have sufficient assets to continue to pay benefits for many years”.The AkzoNobel (CPS) Pension Scheme said that the pension fund and the sponsor had earlier agreed that the latter would pay additional contributions of £42m (€48m) annually until March 2018.‘A lead ball around our neck’Speaking to Dutch financial newspaper FD, Thierry Vanlancker, AkzoNobel’s chief executive, said he was relieved about the agreement with both pension funds.He said his company had been insufficiently aware of the weak financial position of the schemes when taking them on.“The problem has been like a lead ball around the neck of the company, costing us hundreds of millions every year,” the CEO told FD.He highlighted that the pension funds themselves would now be responsible for filling in any future shortfalls.The ICI Pension Fund has been gradually securing members’ benefits with insurance buy-ins over the past few years, securing roughly £7bn worth of liabilities with insurers including Legal & General , Scottish Widows and Prudential.The payments to the UK schemes followed AkzoNobel sale of its specialist chemicals subsidiary last year for €7.5bn.Trade unions in the Netherlands at the time demanded a €400m share of the proceeds of the sale, but the company declined .“In this case, we would have committed to a promise that could lead to enormously high costs for the company,” Vanlancker said.He added that, based on IFRS accounting rules, such a payment would have entitled the defined contribution pension fund to demand further additional contributions in the future.Further readingDutch firms pay higher contributions to UK subsidiaries, survey finds Barnett Waddingham research finds Dutch parent companies paid pension contributions to UK subsidiaries of 1.6% of total revenue on average, versus 0.7% from UK-based groupsThis article was updated on 20 February to clarify that the payments are the last AkzoNobel will make to the two UK funds. Dutch chemicals giant AkzoNobel is to pay €639m to two of its UK pension schemes in a final settlement to fill funding deficits.In its financial report for 2018, the company said it would contribute €481m to cover deficits at the ICI Pension Fund and AkzoNobel (CPS) Pension Scheme, as well as €158m of pre-funding into an escrow account for the CPS fund.It said its contribution was in addition to a top-up payment of €139m paid in January, in accordance with the previously agreed recovery plan.Both UK pension funds – AkzoNobel’s main defined benefit schemes in the UK – were affiliated with the chemical companies ICI and Courtaulds, which were taken over by AkzoNobel in 2008 and 1998, respectively.
The major organisations setting standards and frameworks for corporate reporting will this week launch a consultation about how to better align sustainability reporting frameworks.The consultation is one of the first steps of a two-year project announced by Corporate Reporting Dialogue participants in November.The consultation will be open for six weeks and asks respondents for their views on how to support effective disclosures, addressing the Task Force for Climate-related Disclosures (TCFD) recommendations and identifying how non-financial metrics relate to financial outcomes and how this can be integrated in mainstream company reports.In a statement, the project participants said information gathered from the consultation would inform an initial report due for publication in September, which would show the links between the TCFD recommendations and different corporate reporting frameworks. BNP Paribas tightens coal policyBNP Paribas Asset Management has unveiled a new coal policy for all its actively managed open-ended funds.From next year it will exclude companies that derive more than 10% of their revenues from mining thermal coal and/or that are responsible for 1% or more of total global thermal coal production.It will also exclude all power generators with a carbon intensity above the 2017 global average of 491g per kilowatt per hour. The asset manager will also exclude power generators who do not keep pace with a reduction of the power sector’s carbon intensity to 327g of carbon dioxide per kilowatt hour by 2025.The asset manager said it would consider exceptions to the exclusion rules in certain circumstances, with decisions to be made by the investment committee on a semi-annual basis. The aim of the project framing the consultation is to “make it easier for companies to prepare effective and coherent disclosures that meet the information needs of capital markets and other stakeholders in society”.The participating organisations are: CDP, the Climate Disclosure Standards Board, the Global Reporting Initiative, the International Integrated Reporting Council, and the Sustainability Accounting Standards Board.PPF joins TPIThe UK’s pension lifeboat fund has become a supporter of the Transition Pathway Initiative (TPI), an asset owner-led research programme that assesses how well companies are prepared for the shift to a low-carbon economy. The £30bn (€35bn) Pension Protection Fund is one of more than 40 investors who have pledged support for the TPI.It said it was “committed to understanding how our investments might contribute to and be exposed to material climate-related issues”.
The negotiator said the union would continue with its preparations for industrial action in case the minister failed to promise to put cuts on hold.In a clarification to Dutch pensions publication Pensioen Pro, Elzinga noted that concrete actions would be possible after a debate in parliament about lowering pension rights on 21 November.He added that the Dutch government coalition would not put the pensions agreement on the line one year ahead of elections.Elzinga added that clarity on cuts was needed before year-end, when the funding ratio of pension funds must be at the minimum required level.In order to prevent cuts, the government had – as part of the pensions agreement – already temporary lowered the minimum required level from 104.3% to 100%.The coverage ratio of dozens of Dutch pension funds has dropped to below 100% during the past months, largely due to low interest rates.At the end of October, funding of Dutch schemes stood at no more than 104% on average, according to Mercer and Aon Hewitt.Pension schemes that have been underfunded for a consecutive period of five years, must apply cuts in order to reach the minimum required coverage ratio.The large metal schemes PMT (€86bn) and PME (€50bn), for example, are facing cuts next year, if their funding levels haven’t recovered by December-end. FNV, the largest Dutch trades union, has warned that the country’s pensions agreement between the government and social partners would be in jeopardy if pension rights cuts were to be implemented as legally required.Speaking on a radio programme on Tuesday, Tuur Elzinga, the FNV’s lead pensions negotiator, said social affairs’ minister Wouter Koolmees “would be sensible to take a discount of pension rights off the table”.“Otherwise we would put the elaboration of the accord with its agreed targets on the line,” he argued.Elzinga emphasised that workers and employers agreed on this, and said the shared opinion would make it easier to find a proper solution.