“It is also clear there are a number of quite entrenched positions in this debate informed more by personal experience than by data or research.”Outlining how stakeholders had responded on the contentious issue of scheme mergers compared with greater collaboration across authorities, the SSAB’s report noted that the majority spoke out in favour of framework agreements, whereby one authority tenders for services in such a way that allows other funds to benefit from the selected managers.“The scale and extent of existing collaborative work is encouraging,” the summary said. “However, the savings identified above are relatively minor when compared with total investment costs.”It continued that collective investment vehicles, allowing the funds to achieve the benefits of scale without a full merger, was the second most cited reform proposal, with some recommending the UK’s recently launched Authorised Contractual Scheme as a means of tax-efficient pooling.The report also remarked that many had proposed a switch to passive investment, one that nonetheless raised concerns that it would concentrate mandates among a smaller number of asset managers.The Board added: ”One key issue to consider is the potential impact on financial markets should all LGPS funds move to passive management where they are able to do so.” The majority of respondents also raised concerns about the lack of data to reach informed decisions on reform, urging the creation of a set of data that puts all 89 funds in England and Wales on even footing.While the absence of research was also an issue of concern, the Board highlighted work undertaken by Dutch pensions manager APG showing that, in the eight years to 2009, the LGPS outperformed its benchmark by 1 percentage point, returning 1.7% over the period.“This research also showed large differences in investment performance between funds and revealed that larger funds consistently achieved higher investment returns over this period,” the Board’s response said.,WebsitesWe are not responsible for the content of external siteshttp://www.lgpsboard.org/index.php/structure-reform/board-analysis-menu Local authority pension funds in the UK remain split over government proposals to reform the sector, as some advocate collective investment vehicles and others argue in favour of switching all investment mandates to a passive approach in an effort to reduce costs across the sector.The Shadow Scheme Advisory Board (SSAB), set up to advise on the reform of the UK Local Government Pension Scheme (LGPS), said there was “universal agreement” on the need for more transparent and consistent report data across the sector that could inform potential reforms.However, the Board’s chair Joanne Segars noted that there was less agreement as to what shape the reforms should take.“There is a clear divide between those in favour of mergers and further consolidation and those who favour the status quo or a more modest move to scheme collaboration,” Segars, also the chief executive of the National Association of Pension Funds, said in her foreword.
Swisscanto also stressed that, within the cost debate, the individual net yield of each product must not be forgotten.Only when a Pensionskasse knows the total costs of an investment can it judge whether the achieved net return is reasonable compared with the costs, it said.UBS Global Asset Management “welcomed” the trend towards more transparency and said it had introduced a synthetic TER for certain alternative investments such as funds of hedge funds.However, it also argued that institutional clients using hedge funds understood that, “for conceptual reasons”, some investments are less transparent than, for example, listed equities – “and they know this will not change”.UBS added that higher regulatory demands, as well as the increasing complexity of investments, were leading to higher costs “that have to be covered”. Swiss pension funds have “no reason” to invest in funds that are not fully transparent on costs, Swisscanto has said in a debate on the cost of asset management.The asset manager said it was convinced a Pensionskasse should implement its investment strategy “completely with cost-transparent investment vehicles”.It pointed out that, even with hedge funds, it was possible to demand an audited annual financial statement and thereby calculate a total expense ratio (TER).As part of the structural reform that has been implemented over the last few years, every Pensionskasse must calculate a TER and list vehicles for which no TER is calculated separately in its annual report.
Mercer and Aon Hewitt have suggested the European Central Bank’s (ECB) programme for monetary easing through the large-scale purchase of government bonds is to blame for Dutch pension schemes’ funding decreases in March. Both consultancies estimated that the coverage ratio of Dutch pension funds fell to 104% on average over the month, with Aon Hewitt reporting a 2-percentage-point drop.Dutch schemes’ ‘policy funding’, based on the 12-month average of current coverage, fell to 108% on average.Aon Hewitt noted that current funding had fallen below the required minimum of 105% and attributed the decrease largely to the ECB’s quantitative easing (QE) programme. It said the drop of interest rates in March increased Dutch pension funds’ liabilities by 7.1% in March.Mercer concluded that, on balance, the coverage ratio had fallen by 3 percentage points since the ECB initiated QE on 9 March.The consultancy pointed out that the 30-year swap rate had dropped 46 basis points to 0.8% over this period, causing liabilities to increase by 6.3% for the average pension fund.However, this was, in part, offset by returns as a result of the interest hedge on liabilities, it added.For the first quarter, Mercer said the 30-year swap rate had decreased from 1.46% to 0.8%, leading to a 9% increase in liabilities.However, the negative impact of this was mitigated by a combination of interest hedges, rising equity markets and a drop in the euro relative to other main currencies.This was a benefit to pension funds with no currency hedges, or limited ones, according to Dennis van Ek, actuary at Mercer.He attributed the drop in policy funding to the relatively high coverage of the first quarter of 2014, which is gradually disappearing from the 12-month average and being replaced by the relatively lower funding of the past three months.Aon Hewitt estimated that policy coverage – now the criterion for indexation and rights cuts – dropped by 1 percentage point in March to 108%.This is 2 percentage points short of the level where pension funds can start granting inflation compensation.Frank Driessen, chief commercial officer for retirement and financial management at Aon Hewitt, concluded that the prospects for indexation would decline further in the coming years.“As the current coverage ratio has been lower than the policy funding for quite a while, the latter is to decrease further,” he said.“As a consequence of the low interest rates, many pension funds must submit a recovery plan with supervisor DNB before 1 June.” Mercer’s Van Ek also noted that the current coverage without the application of the ultimate forward rate (UFR) was 95%.This is equal to the average funding at the start of the financial crisis in 2008, when pension funds had no obligation to use the UFR for discounting liabilities.Earlier in that year, before equity markets collapsed, Dutch schemes’ funding stood at 144% on average.
Asset managers applying must have at least CHF5bn under management in total, according to the search.The deadline for responses is 15 April at 5pm UK time, with the final selection to be made by the board on 18 June.Separately, on behalf of a client, Grontmij Capital Consultants (GCC) is using IPE Quest to find a manager to take on an infrastructure investment mandate with an expected commitment of €20m.The target investment will be a diversified, multi-sector infrastructure fund, the consultancy said.The firm said it aimed to make a commitment between June and August this year, with the geographical focus being OECD investments initially.The final closing date for responses is 8 April at 5pm UK time, with a shortlist to be drawn up on 1 June. An unnamed Swiss institutional investor is putting out a CHF500m (€479m) mandate for global small-cap equities excluding Switzerland, in a search on IPE Quest.The assets are to be managed passively, with the MSCI World ex Switzerland Small Cap index as the preferred benchmark.The currency used is to be the Swiss franc, and the mandate style is stipulated as core.Maximum tracking error is 0.5%.
An undisclosed European pension fund is looking for asset managers to run a potentially $50m-100m (€45m-90m) global large-cap equity mandate, to be managed on a passive basis, using IPE Quest.In search QN-2088, the pension fund said this was a request for information (RFI) and that it was not offering a mandate at this stage, so a manager might not be appointed.It said it was evaluating established or emerging multi-factor strategies for global equities smart beta.The final closing date for responses is 25 July at 5pm UK time. The pension fund said proposing firms could be either asset managers or index providers.Applicants will have to meet minimum criteria including the use of a long-only investment strategy with no leverage, observing a tracking error of less than 5% on a three-year rolling per year basis.Other minimum criteria were stated in the search, including the requirement that the firm should use a smart-beta multi-factor approach with a combination of at least two factors.Investment should be rule-based and/or passive, with no – or few – active fundamental management elements. The benchmark stated in the search is the MSCI World ACWI.The IPE news team is unable to answer any further questions about IPE Quest tender notices to protect the interests of clients conducting the search. To obtain information directly from IPE Quest, please contact Jayna Vishram on +44 (0) 20 7261 4630 or email [email protected]
Former UK pensions minister Steve Webb has joined Royal London Asset Management (RLAM) as its new head of policy.Webb, until the May election a Liberal Democrat MP and member of the junior coalition party, is the UK’s longest-serving pensions minister, having held the position for the entire five-year duration of prime minister David Cameron’s first term.The newly created role of director of policy and external communications will see him working on policy areas including long-term saving and consumer protection, both areas of focus as the 2014 pension freedoms – which allow savers over 55 to draw down the entirety of their pension pot – bed in.Webb said it was exciting to be taking on a role at RLAM “at a time of such dramatic change in the world of pensions”. “Having been involved in designing policy in areas such as automatic enrolment, I am looking forward to seeing how it is implemented on the front line. “As someone who has always wanted a better deal for pension savers, the customer-focused ethos of Royal London is a perfect fit with my priorities and I am greatly looking forward to this opportunity.”Phil Loney, RLAM’s chief executive, praised Webb’s time in government and background in public policy.The former minister, who lost his seat at the election after the collapse of the Liberal Democrat vote, was a professor of social policy at Bath University before entering parliament in 1997, and spent nine years at the Institute for Fiscal Studies.During his time in government, he oversaw the introduction of the single-tier state pension and led the debate around defined ambition (DA), which culminated in the passage of the Pension Scheme Act allowing for the introduction of collective defined contribution in the UK. Since leaving office, he has sought to defend his legacy, arguing DA was more than an academic exercise. Webb’s move to the asset management industry follows Aberdeen Asset Management’s hiring Gregg McClymont, the former Labour shadow pensions minister, as its new head of retirement savings.
In the context of the UK’s pensions freedom agenda, with increased choice for members in terms of how they obtain benefits, industry players are compelled to come up with solutions for members.But Falvey highlighted the importance for the UK government to step in with specific incentives.This would be needed to facilitate the creation of solutions on issues such as increasing longevity and encouraging members to invest for late in the decumulation phase.The Aon survey included 297 UK DC schemes with nearly 1.2m members and £33bn (€47bn) in assets, and found that many schemes were “without the knowledge and management reporting needed to facilitate an improvement in outcomes” for their members.According to the survey, although 90% of respondents receive information on investment performance, only 16% receive regular management information on outcomes.Aon’s survey shows that achieving better member outcomes was among the top three objectives for 57% of the schemes interviewed.The other priorities were achieving specific communication goals (46%) and evidence of increased member engagement (45%).However, 68% of the schemes in the survey had no knowledge of the expected replacement ratio for their members.Another measure of the disconnect between members’ expectations and schemes’ capabilities was the relatively low percentage of trust-based schemes (43%) that either had a preferred drawdown solution in place or were developing one.Drawdown solutions have been a focus for the UK pension industry since the government removed the requirement to buy an annuity at retirement in its March 2014 Budget, with the rules coming into effect in April this year.The 2014 changes introduced the possibility to access pension pots from the age of 55, with 25% accessible as a tax-free lump, and the rest at the marginal rate of taxation.However, Aon believes the annuity market is “not dead”, and that annuities may be marketed later in pensioners’ life, to see them through the latter stages of their lives. Further changes to UK pension regulation could be included in this year’s Autumn statement, due to be released today.Earlier this year, the government began an industry consultation on the DC tax framework, proposing to move from the current EET framework (tax-free contributions and returns, taxed benefits) to a TEE one, removing tax relief on contributions and introducing tax incentives on returns and benefits.Aon’s Singleton pointed out that, although the government would weigh the opportunity of receiving a large tax windfall from such a change, such a move would “completely rewrite the pension book”.Aon has put forward its proposal for a new DC tax framework, in response to the UK government’s Green Paper.The company’s approach, dubbed “IET (Incentive-Exempt-Taxed) plus”, consists of contributions paid from net income, a Treasury bonus of £1 for each £2 of contributions (with a maximum £10,000 per annum) and marginal tax paid on employer contribution. Defined contribution (DC) pension schemes in the UK are ill-equipped to meet member objectives, according to pensions specialist Aon Hewitt.A survey carried out by the company showed “a stark disconnect” between schemes’ ambition to achieve better outcomes for their members and what schemes can actually deliver.Sophia Singleton, a partner at Aon, said: “If expectations are out of step with what is realistically possible, schemes need to address this urgently to avoid future problems.”However, according to Debbie Falvey, DC proposition leader, “the industry is unlikely to find a solution on its own.”
France has attracted major institutional backers for its inaugural green bond, launched yesterday, including Dutch and French pension investors.Dutch asset managers APG, PGGM, and MN subscribed for a combined amount of €967m, with French pension funds ERAFP and Ircantec also among those known to have participated in the issuance.The deal was a €7bn 22-year green bond issued by Agence France Trésor (AFT), the government office managing French sovereign debt. The bond will pay a coupon of 1.75% and was priced at 100.162 for an issue yield of 1.741%.It was the first green bond to be issued by a euro-zone sovereign. In December last year, Poland became the first European sovereign to issue a green bond, having priced a €750m five-year deal. *As at 25 January, Agence France Trésor listed the following investors as having “wished to disclose their participation in the issue”:Achmea lnvestment Management, Actiam, AG2R La Mondiale, Amundi, APG Asset Management , Apicil, Aviva Investors France, AXA France, Barclays Treasury, BlackRock, BNP Paribas, BNP PARIBAS CARDIF, Caisse Régionale du Crédit Agricole Mutuel de Paris et d’Ile de France, COVEA FINANCE, Crédit Agricole SA, DekaBank, ERAFP, HSBC Assurances Vie (France), IRCANTEC, JP Morgan Asset Management, Kempen Capital Management N.V., MIF : MUTUELLE D’IVRY (la Fraternelle), MIROVA, Nippon Life Insurance Company, NN Investment Partners, Nordea Asset Management, PGGM, Pro BTP, SCOR SE, Standard Life Investments, Sumitomo Mitsui Trust Bank Limited, WWF FRANCE. It was also the largest and longest-dated green bond to have been issued so far, according to AFT.France’s green bond issue was more than three times oversubscribed, drawing €23bn of demand. ParticipantsWith a share of 37%, French investors made the largest investment. Dutch investors came second, buying a total amount of €1.3bn (19%).Asset managers were allocated the largest chunk of the €7bn bond, buying €2.31bn (33%). Pension funds took the third largest amount, just behind banks, with €1.4bn. Insurers were next in line after pension funds, being allocated 19% of the bonds.ERAFP said it was proud to have contributed to the deal, having allocated €40m.“For an investor as involved as we are in financing the green energy transition, it is natural to support this kind of initiative,” said Philippe Desfossés, chief executive of the €26bn civil service pension fund.Ircantec last year decided to launch a fund dedicated to green bond investments.In the Netherlands, APG invested €600m in France’s issue, of which €540m was on behalf of its largest client, the civil service scheme ABP. PGGM and MN purchased €330m and €37m for their clients the healthcare scheme PFZW and the metal pension fund PME, respectively.Achmea Investment Management, NN Investment Partners, Kempen Capital Management, and Actiam also made investments.The Dutch investors stated that green bonds were a good match for their sustainable investment goals, with APG adding that the yield of 1.74% included a “small” surcharge relative to regular French government bonds with the same duration.An APG spokesman cited the fact that the green bonds were the first in the euro-zone as the reason for the surcharge.PGGM emphasised that the credit-worthiness of the green bonds was equal to any other regular French government bond, and said that it expected proper liquidity.Other major French institutional investors that participated in the deal were AG2R La Mondiale, Amundi, Aviva Investors France, AXA France, BNP Paribas, HSBC Assurances Vie (France), and Mirova. (See a fuller list below*).‘Milestone’ for ESG investorsMarc Briand, head of fixed income at Mirova, the specialist socially responsible investment arm of Natixis Asset Management, told IPE that the green bond represented “a new stage of market development”.He said: “We need major investment to meet the climate targets agreed at COP21, and after agencies, regions, utilities, other corporates, and banks, the next step was for governments to issue green bonds.”The French government said that it has made “an unprecedented reporting commitment” for the bond, including reports on the use of proceeds from the issue and on the “ex-post environmental impact of eligible green expenditure at appropriate intervals, depending on the type of expenditure”. A key preoccupation for those wanting to see the green bond market grow has been the shoring up of the instrument’s green credentials, not least to to address “greenwashing” concerns. Briand said that reporting was “key for the integrity of the market” and “critical” for Mirova as an investor. “We need to finance the green revolution and we are happy to do that, but we need to pay attention to the integrity of the market to be sure that the impact is real and that we are financing projects that go beyond business as usual,” he said.Alex Struc, portfolio manager at PIMCO and co-head of the asset manager’s ‘ESG Initiative’, said France’s deal is “a milestone for global investors who are exploring or emphasizing assets focused on ESG [environmental, social, and governance] principles”.The French Treasury has identified €13bn of eligible proceeds to back yesterday’s deal and future issuance of green bonds. Struc said that although some sceptics may argue that this was a relatively small amount, “the number still represents around 5.2% of the outstanding green bond market and is substantially larger than green issues from any corporate”.The French government has indicated that it will use the funds largely to tackle climate change and its effects, including increasing the energy-efficiency of buildings, environmental research, and sustainable forest management.It expects to issue €20bn worth of green bonds in total for sustainable projects, and plans to grow the 22-year bond it issued yesterday to €10bn by the end of the year.MN has called for the issuance of green bonds by the Netherlands, but the Dutch cabinet doesn’t have any plans at the moment. However, Italy, Sweden, China, India, and Nigeria have all announced plans to issue green bonds.
Birch, who joined LD on 1 November last year, said one of his first tasks was to take a fresh view of the equity portfolio to see if anything could be done to reduce risk. “What I found is that historically our risk was very much country-focused on Danish equities, [which] are very concentrated in the handful of biggest companies,” he said, adding that this was the biggest risk in the equity portfolio. The fund manages cost-of-living allowances granted to workers back in the 1970s and receives no current contributions. As such, its members are over 60 on average and entitled to withdraw all their money with very short notice. More volatile markets in the past few years and heightened geopolitical uncertainty have made it harder for institutional investors to achieve stable returns, Birch said. “Our first line of defence is the asset allocation between equities and fixed income, and on the equities side we can improve the risk management and optimise that going forward,” he said.Lessons from Novo Nordisk Last year the steep fall in the share price of Danish multinational pharmaceutical company Novo Nordisk – when the stock lost 45% of its value in Danish kroner terms by November – threw concentration risk into sharp relief, he said. “Last year our equity portfolio underperformed by 4.3 percentage points, and 2.8 points of this could have come from Danish equities,” Birch said. Roughly half of that domestic underperformance was due solely to the Novo Nordisk share price collapse. “We’ve earned a lot over the year from Novo Nordisk shares, but if we’d had tighter risk management we might have been able to catch these risks,” he said. “That really hurt our performance last year, so what we’ve decided to do is the freshen up the equity allocation by dividing it clearly between a strategic and tactical part. We have increased the risk management in the strategic part. Reducing the exposure to individual names in the portfolio by shrinking the Danish equities exposure was one of the main things we did.”New-look portfolioThe second part of the new strategy was to slice the portfolio differently, Birch said. Prior to the revamp – which LD finished at the beginning of this month – the portfolio was divided between four external active managers: one for emerging equities, another for Danish equities, one for global equities, and one for environmental equities. Alongside these active mandates, LD also had an index manager for global equities. LD has now created four risk buckets:Pure beta, containing indexed equities with no tracking error risk but no potential outperformance;‘Beta plus’, comprising factor investments (currently enhanced index) with relatively low tracking error and potential for small outperformance;Core alpha, with higher tracking error and higher outperformance potential;Special alpha, containing off-benchmark bets and themes with high tracking error and high outperformance potential.“We have categorised our existing managers so that they each belong in one of the buckets,” Birch said.For example, Danish equities are categorised as special alpha, while the global developed markets manager is in the core alpha bucket.“Now they are each scaled in such a way that no bucket will hurt performance if that specific type of risk doesn’t perform well that year,” Birch said. Based on analysis, LD has weighted the portfolio so that the most risky slice – special alpha – has the smallest weighting in allocation terms. Those with the least tracking error and the most stable securities have the biggest weighting. “At least once a year, we will re-balance our equity portfolio,” he said. Tactical tweaksWhile this takes care of the strategic side of equities for LD, Birch said other changes have been made to the tactical side. Whereas tactical allocation was previously done by overweighting a certain mandate, it will now be done through a TAA overlay portfolio with derivatives, allowing swift changes to overall equities exposure based on LD’s view of changing risks in the market environment.The overhaul has not been aimed at insourcing more investment operations, Birch emphasised.“We have actually increased our corporation with colleagues in the pension business in Denmark and taken in more managers,” he said, adding that strategic planning and TAA have always been done in-house. Lønmodtagernes Dyrtidsfond (LD) has completed a major overhaul of its equities investments in its main pension product with the aim of making it easier to guard against risks that could make large dents in the portfolio’s value. The DKK42.8bn (€5.7bn) Danish closed pension provider has slashed exposure to the Danish market to 8% from 25% in LD Vælger, its main balanced fund that accounts for 90% of LD’s assets.Other key elements of the new approach are a more detailed categorisation of equity mandates for index investments and alpha-generating strategies, and the addition of a separate tactical asset allocation (TAA) overlay. Kristoffer Fabricius Birch, LD’s head of equities who masterminded the revamp, told IPE: “We definitely need to be more adaptable and have firmer risk management, because our overall goal is to minimise the downside risk and have a stable return on assets.”
An Australian politician has called for the creation of a single agency to oversee the investment of the country’s superannuation funds.Former Australian treasurer Peter Costello, who is now chairman of Australia’s Future Fund, said so-called super funds – which manage more than AUD2.3trn (€1.52trn) – should be run by a central government agency.Currently, the assets are managed by industry super funds, which are not-for-profit, as well as funds run by for-profit organisations – mostly large commercial banks. There is also a growing number of self-managed super funds.Costello, speaking in a personal capacity at a conference of superannuation managers in Melbourne, urged the government to “show some interest in managing [super funds] in a cost-efficient way”. He cited the Canada Pension Plan as a good model of how a government agency was able to drive the investment of national pension savings.The national pension pool of Canada, a country that shares many similarities with Australia, is managed and invested by a government body, the Canadian Pension Plan Investment Board (CPPIB), he said. “CPPIB currently has C$300bn [€203bn] in investments. It has economies of scale. It is extremely active in Australia. It would be one of the most respected investors in the world,” Costello said.CPPIB was an example of how a long-term sovereign fund investing defined contributions could get global reach and valuable diversification in asset class and geography, he added.Costello’s comments coincide with discussions about consolidation of pension funds in several other countries, especially the UK – where public sector pensions are actively pooling investments – and the Netherlands.According to Costello, such a body should be a not-for-profit agency, which could then either set up its own CPPIB-like investment board or contract out the management.“A bigger pool with economies of scale and access to the best managers would likely drive down costs and drive up returns,” Costello said. “There would be huge economies of scale.”Costello also criticised the efficiency of compulsory superannuation, a system established 25 years ago, which now requires 9.5% of workers’ earnings to be diverted into private accounts. The system was a direct influence in the UK when the government set up its auto-enrolment programme.“This is not a system still in infancy. We are now starting to get people who have spent nearly their whole working lives in it,” said Costello. “On average (male and female) the balance is AUD137,144. That balance is worth less than the value of six years of age pension.”Australia’s superannuation system “has certainly delivered benefits for those working in it – but it does not exist for them”, he continued. “It exists for those who are forfeiting wages month in and month out in the expectation that in 10, 20, 30, 40 years, they will get to enjoy the fruits of their labour.”Note: This article has been updated to clarify that Costello’s remarks were in regard to a government agency running super funds’ assets, not full mergers between schemes; and to include not-for-profit funds in the description of the super funds industry.