Proposals by the European Insurance and Occupational Pensions Authority (EIOPA) to assess the value of sponsor support could be overly simple and mask important risk-management information, PensionsEurope has warned.The lobby group also warned that models proposed by the European regulator’s discussion paper on sponsor support – published over the summer and now closed to consultation – risked causing problems for companies with multiple pension funds or multi-employer schemes, such as those common in Germany and the Netherlands.PensionsEurope’s response reiterated it does not support the proposed holistic balance sheet (HBS) approach for which the technical specifications under consideration could be employed.However, it welcomed aspects of the consultation – such as EIOPA’s suggestion to provide a “practical and proportionate” method for measuring support by employing sponsor credit ratios. It said EIOPA had “clearly put thought into designing a system that draws on existing information” by suggesting an approach that would seek to grade firms on a six-step scale broadly equivalent to AAA-CCC credit ratings, but that it would still demand that “detailed work” be produced by scheme advisers.“If, as seems likely, this is additional to existing work, then it would be a significant increase in the scheme’s overheads,” the response said.“Furthermore, it is still very unclear how to apply these ratios to group entities, multi-employers schemes, multinationals, public sector funds and industry-wide funds.“In addition, the access to the relevant and complete information is likely to be difficult.”PensionsEurope also raised concerns the six-step scale would fail to define the levels of support.“For instance, there is an enormous gap between ‘weak ’ and ‘very weak’,” it said, levels that EIOPA equated to a credit rating of B and CCC in its discussion paper.The lobby group further said the approach could result in an “oversimplification that will mask important risk-management information”, and that every approach that differed from a basic formula of a single sponsor and single IORP with one pension promise in one country would prove difficult to assess.In suggesting other measures to assess the likelihood of a sponsor default, the response suggested that funds sponsored by relatively large companies could employ credit default swaps.“The credit spread in the cost of funding of the sponsor could also be examined as a possible measure,” it added.It also urged EIOPA not to penalise sponsors deemed strong by shortening the potential period for recovery payments to only five years.“Penalising stronger sponsors is not an adequate way of regulating the pension sector,” it said. “The stronger the support, the less the imperative for shorter recovery periods.”PensionsEurope stressed the importance of local protection funds when asked to say whether pension funds should be barred from being a creditor upon sponsor default, but it said it was “too strict” to rule out any recovery of assets, especially as this was often regulated on a national level.It also rejected EIOPA’s suggestion that a recovery rate of 5% would be appropriate for most sponsors, saying it was “very likely” to be higher.“For example, in Germany, sponsoring employers of Pensionsfonds are legally obliged to pay into the national insolvency protection system (Pensions-Sicherungs-Verein), which would lead to a probability of recovery close to 100%,” it said.It therefore urged that the default probabilities be adjusted according to the individual IORP’s wishes based on the likelihood of asset recovery.,WebsitesWe are not responsible for the content of external sitesLink to PensionsEurope discussion paper response
Torben Möger Pedersen, chief executive at PensionDanmark, hailed the fund as “a brand new type of public-private partnership”, allowing government and pension assets to make the most of Danish companies’ experience in the energy sector.The commitment follows a similar government-backed project that saw Danish funds provide export credit to foreign companies investing in domestic manufacturing.Discussing the provider’s DKK200m commitment, Möger Pedersen said: “We are expecting the Danish Climate Investment Fund to deliver solid returns to our members in the coming years, while serving to boost the standing of Danish companies in the new growth markets.”Healthcare pension provider PKA also committed DKK200m in capital, while PBU invested DKK125m.PensionDanmark’s Möger Pedersen will sit on the fund’s investment committee alongside PKA managing director Peter Damgaard Jensen.The climate fund, which the IFU said was expected to grow a further DKK200bn in size after its second close, will invest in technologies aimed at reducing greenhouse emissions in all countries included in the OECD’s Development Assistance Committee.To that end, projects to be considered include solar, hydro and wind power plants, as well as urban transport construction, biogas plants and projects that can improve energy efficiency, thereby cutting emissions by at least 20%.“Furthermore, the Danish Climate Investment Fund will invest in projects with the purpose of adjusting to climate change – for example, disaster preparedness, coastal management and climate change information,” the IFU said in a statement.It added, however, that it would not consider investment in any energy projects that produce carbon, nor in any carbon capture or storage facilities.The IFU will act as fund manager for the four-year investment lifespan, with projects then divested.It said it expected annual returns of 12%. Two of Denmark’s largest pension providers have committed launch capital to a DKK1.2bn (€160m) fund investing in renewable energy projects in emerging economies.The Danish Climate Investment Fund, launched by the country’s investment fund for developing countries (IFU), has attracted commitments from the DKK200bn PKA, DKK150bn PensionDanmark and Pædagogernes Pensionskasse (PBU), the DKK50bn fund for kindergarten and nursery teachers.The remaining DKK675bn has been supplied by the IFU, the Danish government and Dansk Vækstkapital – a DKK4.8bn venture capital fund launched jointly in 2011 by the government, ATP and LD Pension.The fund requires a Danish co-investor for all projects, allowing local companies to benefit from the investment.
Altogether, the consultancy undertook 760 searches last year globally, down from 776 in 2012.Deb Clarke, global head of investment research at Mercer, said: “The trend away from traditional asset classes observed in recent years continues, driven mainly by investors seeking to diversify their growth portfolios and ensure they incorporate multiple return drivers.”She said investors were continuing to raise their allocations to global strategies, as well as to more diverse mandates, including investment in diversified growth funds and alternative assets.The firm said demand for multi-asset strategies was still strong, and that the number of searches in this area had risen by more than a third during the year. These searches were mainly in the UK and the US, but also seen in several other regions, it said.In the UK, the number of manager searches rose by 5% last year, and assets placed climbed to $22bn (€16bn) from $17.8bn, according to the survey.International multi-asset strategies were the most popular searches there, but, in terms of the weight of assets placed, developed market equities continued to dominate search activity, it said.Search activity rose in the rest of Europe, driven primarily by a big hike in both search numbers and assets placed in Germany.Infrastructure and timber were the most popular search categories in the region, it said.In Asia, manager search activity jumped to 66 in 2013 from 17 the year before, while assets placed rose to $3.5bn from $2bn.In Australia, search activity dropped to 85 from 111, with assets placed rising to $13.7bn from $6.8bn.In the US, meanwhile, manager searches continued to decline across defined benefit (DB) and defined contribution mandates.Within DB in the country, Mercer said, equity and bond searches fell while interest in alternatives grew. The most popular search category in the US last year was emerging market equities, although Mercer said US fixed income had had the largest share of assets placed. Manager search asset volumes around the world grew last year, and the pattern of activity reflected a shift towards non-traditional mandates, according to a study by Mercer.The consultancy said its 2013 global manager search trends report showed fixed income search activity had continued to move away from government and credit-benchmarked mandates.The survey, based on activity reported through Mercer’s client base internationally, revealed the number of searches had grown between 2012 and 2013 in the UK, the rest of Europe and Asia, but had decreased in Australasia and North America.However, across these regions as a whole, the value of assets placed increased markedly, it said.
Swiss unions have branded flexible pension pay-outs introduced in some of the country’s second-pillar funds “a curse”, and warned the model increases both administrative workloads and costs for funds.The topic of flexibility was among the most hotly debated topics during this month’s Swiss second pillar pension conference Fachmesse 2. Säule was the one on flexible pension pay-outs, with Doris Bianchi of union umbrella group SGB highly critical of the model.“It is a curse for all current employees who will have to accept not knowing the level of their pension pay-out in future and for pension funds because of legal uncertainties,” she said during a debate at the conference referring to possible problems in evaluating such schemes and transferring members to other Pensionskassen.However, two pension funds which already introduced the flexible model said they had no such problems. The pension fund of accountancy PwC in Switzerland pioneered the model in 2005, by introducing a “bonus pension” model in which the level of pension is calculated every three years. “We need less than an hour to set the new benchmarks every three years and adjusting the pension pay-outs is no big deal either,” Josef Bachmann, managing director at the PwC pension fund told IPE.He confirmed that it had taken some time and resources to develop the model – “especially as we were the first” – but he stressed the positive effect this flexibilisation has on the pension fund fully justifies the costs.Over the last years, many Swiss pension funds have been forced to adjust their technical parameters, such as the discount and the conversion rate, in order to ensure that no money from active members had to be transferred for paying out pensions to retired members.However, amending the technical parameters only offered limited assistance, with other solutions needed to ensure sustainability of the second pillar.One solution could be flexible pension pay-outs where only the legal minimum is guaranteed – a model similar to the one introduced by energy sector fund PKE this year.Ronald Schnurrenberger, managing director at the PKE, confirmed the administrative effort was minimal after the initial costs for setting up a new IT system.“Our system has been set up to ensure simple administration: The system only has five steps,” he explained, referencing target pensions of 90%, 95%, 100% – which is the target pension – 105% and 110%.Those steps depend on the certified funding level as per year-end with the target pension being paid out if the funding level is between 100% and 120%.This target pay-out level is also used for assessing the value of the pension fund in the company’s accounts and for possible transfers of members to other pension funds.Schnurrenberger stressed his members understood the need for the measure and those active members on the trustee board had voted in favour of the introduction fully knowing they would be receiving only a minimum guarantee on their pension in the future.Bianchi had argued the model helped employers save on second pillar costs as in case of underfunding retirees were covering a part of the deficit, while currently it was only the employer and the employee contributing to the recovery.At the conference, Christoph Ryter, president of the Swiss pension federation Asip, stressed “every additional bit of room for manoeuvre” given to the trustee boards was “a good thing”.He mentioned when the mandatory second pillar was set up in the 1980s many Pensionskassen had introduced a legal clause to cut pensions if necessary which they had to revoke after the first revision of the law governing mandatory occupational pensions in Switzerland, the BVG.“This increased the ‘de-solidarisation’ between active members and retirees – with the introduction of a flexible pension pay-out this would be amended to a certain extent,” said Ryter.He stressed, however, that a flexibilisation should never be introduced for pay-outs below a legal minimum.For his fund, the Migros Pensionskasse (MPK), a flexible pension pay-out model was “no option” at the moment as “financial security is very high” and in fact the MPK remains one of the few funds to still be run as a defined benefit scheme.Meanwhile, the Pensionskasse of Swiss railways SBB is still discussing whether or not to introduce flexible pension pay-outs and managing director Markus Hübscher said he expected a decision by the board of trustees this year.
The £2bn (€2.5bn) United Utilities Pension Scheme has allocated 7.5% to private debt after the fund’s triennial valuation revealed the scheme’s improved probability of reaching full funding by 2020.Sponsored by the FTSE 100 water supplier, United Utilities, the defined benefit (DB) plan had as much as 60% in growth assets in 2011 before trimming back in a bid to reduce investment risk.Aided by an internal inflation hedging mechanism, the scheme now holds 80% of its assets in a liability matching portfolios, which it told IPE would be diversified even further give the expected positive funding news.However, the fund said despite also looking at real estate and infrastructure assets, it chose a pooled fund which allocates to real estate and infrastructure debt, alongside private loans. Steven Robson, head of pensions at United Utilities, told IPE the £150m allocation to the debt vehicle was funded by cutting exposure to synthetic equities, corporate bonds and other alternatives.“We see infrastructure and real estate debt as a better option to holding real assets because the debt fund is backed by collateral and felt it was better than the actual asset classes,” Robson said.“It’s the ‘looking for slightly better returns for a similar level of risk’ argument.“We haven’t gone to try and shoot the lights out, but a more certain return and aiming to capture the illiquidity premium.”Robson also said given the fund’s performance from its reduced investment risk and 90% interest rate hedging, it had begun to reduce its reliance on an inflation hedging mechanism.After its 2010 valuation, the scheme agreed an arrangement with its sponsors by which it increased its exposure to inflation risk in return for company contributions to fluctuate based on real inflation levels.It set the fund’s inflation liability projections at an annual increase of 2.75%, well below the market rate of 3.8%.This reduced the fund’s projected liabilities, which allowed the team to take advantage of lower required investment returns by decreasing investment risk and increasing interest rate hedging.In return for the reduced risk in the fund, the sponsor agreed to make cash payments into the scheme to match real liability increases from inflation.Water suppliers in the UK see their revenue increased by inflation each year as part of the agreement reached at privatisation, meaning United Utilities’ revenue would increase by the same proportion as scheme contributions.However, Robson said the scheme was now increasing its inflation expectation to 3%, still below long-term expectations, but reduces the fund’s reliance on the company covenant.In addition, Robson said given the performance of interest rate hedging, and reduced investment risk, the fund was now more likely to be fully funded on a technical basis by 2020.“But that is not the true end game, Robson said. “The end game is fully-funded on a self sufficiency basis, and we are looking at putting a second trigger in place to see how we can get there by a slightly later date.”“Nothing is off the table,” he added.
Norwegian pension fund KLP saw an influx of 150 corporate and 16 local authority pension scheme transfers in the third quarter of this year following the withdrawal of major providers from the public sector pensions market.In interim results, the public service pensions giant said the transfers, which took place between July and September, represented NOK10.4bn (€1.2bn) of funds, and brought the total new membership inflow this year to 132,000 individuals.The transfers are a continuing effect of the decisions by Storebrand and DnB Livsforsikring to withdraw from the public occupational pensions market, leaving KLP as the only provider in the sector.However, Norwegian public bodies also have the option of setting up their own pension funds for staff. In June, KLP predicted its membership would grow by a total of 150,000 in 2014.It said that, of the 18 municipalities that still have their pension scheme with other providers, 16 of these had asked KLP to make them an offer with a view to transferring on 1 January 2015.Sverre Thornes, chief executive, said: “This migration represents one of the biggest ever influxes of new members to KLP’s pension schemes.”He said the company was responding to the changed market situation with continued focus on value creation through good returns, low costs and good service.KLP reported an overall return from January to September of 4.9% but said equities made almost nothing in the last three months of the period.Over the whole of the nine months, equities, short-term bonds and property were the primary contributors to the positive return.Total assets grew to NOK470bn from NOK399bn at the end of December.The nine-month return compares with 4.5% in the same period last year.Meanwhile, the Norwegian Financial Supervisory Authority (Finanstilsynet) warned that Norwegian pension funds and life insurers faced major challenges in the next few years, despite making strong returns so far this year.In its 2014 financial trends report, the supervisor said rising stock prices and capital gains on bonds had brought good results for pension institutions so far this year. “However,” it added, “the institutions face major challenges in coming years.”Low interest rates are making it difficult for them to secure a return above the guaranteed minimum rate, it said.“Although the volume of defined contribution pensions is rapidly growing, the bulk of life insurers’ liabilities still consists of contracts providing a guaranteed annual return,” the report went on.Other problems facing the sector are low interest rates, the effects of Solvency II regulation and rising longevity, it said.When Solvency II takes effect in the EU on 1 January 2016, it will bring substantially higher capital charges for a number of life insurers, Finanstilsynet said.“The latter must either reduce risk or increase their capital to meet the new requirements,” it said.Noting that the directive amending Solvency II – Omnibus II – allowed some relaxation of the requirements because of the difficulties facing many life insurers, the Norwegian supervisor indicated it would take advantage of this leeway.“Finanstilsynet has recommended applying some of these relaxations to Norwegian life insurers to give them more time to adapt to the new capital requirements,” it said.
It had already offloaded its second-pillar operations in the country to the insurer last year. Achmea also indicated that it would develop “specific products” to help employers moving to defined contribution arrangements, noting that “quite a few” companies were still reluctant to abandon the “existing certainties” of defined benefit.In its annual report, it also said Syntrus Achmea would now focus on streamlining and centralising operational processes and teams, with the ultimate aim of achieving a single process, system and location.To minimise costs for its customers, improve its risk/return ratio and increase diversification of investments, Syntrus Achmea said it launched several new investment funds in 2014.It added that it was working to reduce risk and complexity in pensions management – by withdrawing from a number of separate accounts to reduce the volatility of investment returns, for example. Syntrus Achmea saw its institutional assets under management increase by €16.8bn to €86.8bn.It said new customers – including the industry-wide scheme for the dairy sector, as well as extended and expanded mandates for existing customers – had more than offset the departure of the large pension fund for the retail sector (Detailhandel).Syntrus Achmea has more than 70 clients with approximately 2m participants in total.The company covers 13% of the Dutch market for collective pensions and life insurance. Pensions provider Syntrus Achmea is to launch its own Algemeen Pensioenfonds (APF) to exploit new opportunities in the evolving Dutch pensions system, parent company Achmea has said in its 2014 annual report. An APF vehicle can implement various pension plans, enabling pension funds and employers to cooperate whilst allowing them to keep their own identity.Schemes’ assets in an APF are ring-fenced.The annual report also revealed that Syntrus Achmea wanted to transfer its third-pillar operation in Romania to insurer Aegon this year.
“The message to stop the development of the HBS will be welcomed by those who saw it as an expensive distraction and largely pointless,” he said.“It is a fairly clear steer from the Parliament that EIOPA needs to put the breaks on anything that could cause IORPs additional work.”He welcomed Hayes’s approach, as well as the MEP’s observing Council of the EU recommendations to simplify the Directive.Dowsey said the rapporteur had been true to his word in trying to mend the funding issue for cross-border pension funds, which cannot be underfunded.However, the current wording on funding has caused the consultancy some concerns.Similarly, James Walsh, EU policy lead at the UK’s National Association of Pension Funds, said the current wording in relaxing the full-funding requirements could have unintended consequences.The new version states that a fund’s technical provisions should be fully funded “from the moment when the institution starts operating a new or additional scheme”.The text, however, fails to specify what constitutes a “fund launch”. Dowsey said: “Hayes clearly wants to do something about the [fully-funded cross-border situation], but the amendment he has made is open to conjecture.“The sentiment is welcome, but, as drafted, it is potentially less helpful … the intention is to facilitate cross-border schemes without making it more onerous than the domestic situation.”Dowsey also highlighted that, in Article 13/3, the IORP II Directive suggests that bulk transfers between IORPs will require most of their members’ approval, regardless of geography.However, Ireland and the UK have special regulations in place to allow transfers without consent, subject to protections from members and independent actuarial approval.“As drafted,” Dowsey said, “[the regulations] could prevent bulk transfers and potentially frustrate M&A activity.” The European Parliament’s latest draft of the IORP Directive calling for limitations on the EU regulator will be largely welcomed by the industry, Towers Watson has said.In a draft published earlier this week, Irish MEP Brian Hayes, IORP rapporteur for the Parliament’s Economic and Monetary Affairs Committee (ECON), said the controversial holistic balance sheet (HBS) accounting approach was “not realistic in practical terms”.He also suggested other European Insurance and Occupation Pensions Authority (EIOPA) projects should be pegged back, and argued that neither the European Commission nor the regulator had the power to draft additional technical standards.Mark Dowsey, senior consultant at Towers Watson, said the latest draft – likely to enter trialogue by the end of the year – sent a clear message to EIOPA.
Swedish life and pensions provider Folksam Liv reported rapid growth in premiums in the first half of this year, rising 59% to SEK8.94bn (€939m) from SEK5.60bn in the same period last year, but warned that growth would stall in the second half.In its interim report for January to June 2015, Folksam said the continued strong growth was due to a high level of interest in its traditional life insurance, which it said carried good conditions for policyholders.Jens Henriksson, deputy director and group head of Folksam Liv, said: “Folksam Liv is expected to have lower growth in the rest of the year, compared with the first half.”This was because it had made changes to its traditional life insurance pension product and stopped selling the mortgage and insurance product Senior Capital, he said. On July 1, the guarantee level for the company’s traditional pensions was cut, with the return promise applying to only 85% of contributions after that date compared with 95% before.Folksam said most customers had accepted the new conditions and carried on with their pension savings, but that the changes were expected to result in a slowdown in growth in the autumn.Folksam Liv’s return for January to June fell to 3.7% from 5.3% in the same period last year.The solvency level rose to 162% at the end of June from 155% at the end of December, and total assets grew to SEK165.6bn from SEK156.2bn at the end of last year.Meanwhile, local government sector pension fund KPA Pension, which is 60% owned by Folksam and 40% owned by the Swedish Association of Local Authorities and Regions (SKL), reported a 4.0% return from January to June, down from 6.0% in the same period the year before.Premiums grew in the first half to SEK10.2bn from SEK8.8bn, the fund said.KPA Pension said it had won several pensions contracts in the first half, including contracts from municipalities of the city of Stockholm and of East Gotland.Assets under management grew to SEK134.6bn at the end of June from SEK116.7bn.
The €4bn pension fund of retailer Ahold has divested its 2.5% stake in commodities and begun selling its private equity and non-listed property holdings in a bid to lower its risk profile.In its annual report, it said it wanted to replace the divested assets with mortgages.The allocation changes come in the wake of an asset-liability management study and the adoption of a dynamic asset allocation, where the ratio between fixed income and equities depends on the scheme’s funding.When the pension fund’s coverage ratio falls below 130%, for example, it seeks to reduce risk by scaling back equities. Its funding at the end of March was just over 108%, following a drop of 2.6 percentage points over the previous quarter.The pension fund’s new strategic asset allocation is 27% equity, 68% fixed income and 5% listed real estate.The Ahold scheme reported a 1.3% loss for 2015, with its 5.7% return on investments failing to offset the 7% combined loss on its interest and currency hedges.Because the currency hedge had such a marked impact on overall returns, the pension fund said it raised its cover of the British pound, the Japanese yen and the Swiss franc to 100%, while introducing a dynamic hedge for the US dollar.The scheme said it could gradually increase its dynamic interest hedge – 60% at the end of last year – to the strategic level of 75% if interest rates rise.Equity and fixed income returned 6.9% and 4%, respectively, over 2015, while non-listed real estate and private equity returned 15.3% and 19.3%, respectively.Commodities returned 9.8% before they were sold in April, while emerging-market debt produced a 6.4% loss. Last year, Ahold offloaded its stake in the commodities investment fund of Bank of America Merrill Lynch and terminated its credit mandate with asset manager Wellington.The Ahold scheme, which employs AXA IM as fiduciary manager, has invested 79% of its asset through mandates.In other news, the €1.6bn pension fund of Dutch regulator De Nederlandsche Bank (DNB) has raised its risk profile, increasing its strategic property allocation from 5% to 8% and expanding its equity portfolio by 1 percentage point to 26%.The pension fund, which kept its interest hedge at 75%, said the adjustment would offer the best opportunity to increase returns with a limited increase in risk.The DNB scheme raised its risk profile last year as well in an effort to increase its surplus return from 1.2% to 1.6%.At the time, it grew its property allocation from 3% to 5% and increased its equity holdings from 17.5% to 25%, while reducing its interest cover from 93% to 75%.