Administration - European Pensions

Transcription

European Pensions
November 2015
Scheme management:
Investment:
Scheme management:
Investment:
Administration
Commodities
Costs
Property
The need for a balance
between automation and
human intervention
Why some investors
are now sitting on the
sideline in this space
Cost control and efficiency
within the European
pension fund space
Why the asset class is
growing in popularity
amongst pension schemes
A battle ahead
the need for Italy to reduce reliance on the
first pillar and grow the second
Plus:
News round-up
Case study:
Fondenergia
www.europeanpensions.net
17 Investment shocks - how funds should react to surprises in the market
44 capItal markets unIon - the impact on pension funds
Interview:
Irish MEP Brian Hayes
Pension board relationships
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Putting up a fight
“
The European Union would not pass its own stress test” was the
message of the day delivered by the UK’s former Conservative
leader William Hague at the National Association of Pension Funds
2015 conference recently - a message that could easily have suppressed
the appetites of many delegates looking forward to their conference lunch.
Hague, who stood down as an MP in May this year, told delegates that
the threats to the British economy are cyclical and external, rather than
policy based, and that if EU financial institutions were subjected to a
stress test against the challenges likely to arise over the next few years,
they would not survive.
The global financial crisis of 2007-2008 certainly tested financial
institutions such as pension funds and I would hope that lessons have
been learnt as to how to combat future threats of that nature. At a time
when newspapers and other media outlets are dominated by talks of
external terrorist threats from the likes of ISIL, financial threat coverage
often falls into the background and
whilst Hague’s message might not fill
I BELIEVE EIOPA’S PENSION
the individual with a great deal of
optimism, it is one which should not
STRESS TEST, LAUNCHED
be ignored.
EARLIER THIS YEAR, IS NOT
It is for that reason that I believe
EIOPA’s pension stress test, launched
NECESSARILY A BAD MOVE
earlier this year, is not necessarily a
bad move, despite receiving criticism from some sections of the industry.
Covering both DB and DC schemes, the aim of the stress test is to
assess the resilience of IORPs and their pension schemes to adverse
market scenarios and a longevity scenario. It is hoped the stress test will
provide insight and raise awareness of the occupational pensions’ sector
risks and vulnerabilities. At the time EIOPA chair Gabriel Bernardino said
pension funds are experiencing a “challenging environment” with low
interest rates and rising life expectancy and that is certainly still the case.
Results of the stress test are expected in December this year. The report
will certainly be an interesting read as to how prepared IORPs across
Europe are, in dealing with the financial stresses set to arise over the
next few years.
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All rights reserved. The views expressed
in this journal are not necessarily those
of the publishers. Member of the ABC,
the PPA and the NAPF.
Adam Cadle, Deputy Editor
European Pensions has agreements with several associations
to reach their membership.
For details contact john.
woods@europeanpensions.net
03
In this issue
Contents
November 2015
38
23
37
General features
38 Balance of power
With heightened funding concerns,
tensions could be set to rise across
European pension boards as
traditional power bases are
challenged, finds Marek Handzel
41 Robots versus humans
Nick Martindale explores the need for
a balance between automation and
human intervention within pensions
administration
46 A question of cost
Edmund Tirbutt assesses levels of
cost in the European pension fund
space and whether schemes will
place greater importance in this
area in the near future
04
Investment features
Country spotlight
37 Out of the blue
The world’s financial markets
were rocked recently by the
Volkswagen scandal and the
crashing of the Chinese stock
market. Peter Carvill explores
what funds could and should
do in the wake of such events
23 A battle ahead
David Adams explores the need for
Italy to reduce reliance on the first
pillar and grow the second, while
navigating the tricky arena of
intergenerational fairness
30 A stable footing
Andrew Williams analyses the
reasons why European pension
funds are increasingly turning
their attention towards property
and what areas within the asset
class are being closely examined
26 Case study: Fondenergia
David Adams speaks to
Fondenergia director Alessandro
Stori, an Italian pension fund for
workers in the energy sector
currently managing €1.8 billion of
assets for over 40,000 members
In this issue
Contents
41
09
Interviews
Regulars
36 Solving Europe’s pension
puzzle
As lead negotiator on the IORP II
Directive, Irish MEP Brian Hayes has
said Europe faces a “demographic
crisis”, which is why it is necessary
to update the current directive for
future generations. Natalie Tuck
speaks to him about his proposals
for the new directive
06
News
14
Appointments
Regulation
16
Industry column:
Europe Economics
28 The meaning of MiFID II
Michael Hufton explains just what
MiFID II means and why it matters
48
Pension talk
50
Directory
42
05
Investment
News
Pension funds interrogate major car
makers on emissions standards
EuropEan pEnsion funds form a coalition to
invEstigatE car makErs' position on Emissions
lEgislation following thE vw scandal
written by: lauren weymouth
s
and disclosure of activities by the European Automobile
ome of Europe’s largest pension
Manufacturers' Association (ACEA).
funds and investors have formed
Analysis by InfluenceMap recently found these areas
a coalition to probe into the lobbying
to be the main issues in which companies do not provide
position major car manufacturers
sufficient reporting detail, and areas that could be crucial
take on emissions legislation.
for investors in predicting future crises like the one at VW.
According to ShareAction, the
InfluenceMap executive director Dylan Tanner said:
investors, which include Swedish
“When it comes to the engagement underway between
National Pension Funds AP2, AP3,
a company and the key regulations affecting it, there
AP4 and AP7, the Environment
are often sparse details available to investors. The
Agency Pension Fund and AXA
Volkswagen case highlights the need for a much greater
Investment Managers, have written
disclosure regime, both of the company's specific
letters to request detailed information
position on key legislation and its involvement in the
from Volkswagen, BMW, Honda,
policy process.”
Daimler, General Motors, Ford, Fiat,
The world’s fifth largest pension fund, ABP, has
Peugeot and Toyota.
subsequently announced it intends to review its investment
The letters, which ask for specific
portfolio in a bid to follow a new sustainability policy.
details on the companies’ positions
The Dutch pension fund, which currently invests more
on proposed EU CO2 emissions
than €30bn in fossil fuels, compared to just about €1bn in
standards and US CAFE efficiency
renewable energy, has launched its new investment policy,
and GHG-related standards, come
which would apply to more than 4,000 companies in which
in the wake of the recent VW
it owns stakes.
scandal, which exposed the
ABP said it will review its entire portfolio of stock and
automobile giant’s use of
bonds by 2020 and will divest from any companies
software to beat emissions
that don’t at least try to meet sustainability criteria.
and air quality tests.
"The VW case
However, in response to the fund's 'green'
The latest expose has
highlights the need for
move, campaigners urged ABP to completely
triggered a broader
axe all fossil fuel investments, which are
scrutiny of the
a greater disclosure regime,
currently helping to drive the climate crisis.
relationship between
both of the company's specific
“The ABP has now put climate change on
automobile companies
position on key legislation
their agenda but if you want to be sustainable,
and regulators, as
you cannot continue to invest in the companies
legislative standards are
and its involvement in
that are pushing us into climate chaos,” ABP
currently being debated
the policy process"
co-founder of the Fossil Free campaign Vatan
in the EU and US on
Hüzeir said.
transport emissions.
“The majority of fossil fuel reserves cannot be burnt to
ShareAction has revealed the
avoid catastrophic climate change. Fossil fuel companies are
letters also call for further information
grossly overvalued and we already see them lose value. ABP
about the companies’ interactions with
is not transparent in this regard but similar pension funds in
the regulatory process on these
the UK and USA have lost billions on their fossil fuel
standards, their spending on trade
holdings last year.”
associations, and ask for greater clarity
06
Ratings
News
o
EU countries voted as having the
best pension systems in the world
ver half of the top 10 best pension
systems in the world are European
countries, with Denmark and the
Netherlands leading the way in first and
second place.
new report reveals five out of ten of the world's best
Denmark and the Netherlands were
pension systems belong to european countries
both voted as having the best pension
systems in the world by the 2015
written by: lauren weymouth and adam cadle
Melbourne Mercer Global Pension
Index, both becoming the only two
countries to have ever scored an ‘A’
grade for their pensions savings culture.
The index ranked Denmark as the best
system globally, with an overall score of
81.7 out of a possible 100, followed by
the Netherlands with 80.5 – 80 being the
score needed to earn an ‘A’ grade.
This can be compared to the
"We know
UK, which narrowly missed
a ‘C’ grade, by scoring a
there is no perfect
65, which is the
system that can be applied
minimum score required
to enter the ‘B’ grading
universally, but there are
bracket. Sweden,
many common features that
Switzerland and Finland
world to learn from the most adequate and
however, obtained more
sustainable systems. We know there is no perfect
can be shared for better
comfortable places within
system that can be applied universally, but there
outcomes"
the top 2-10 pension systems
are many common features that can be shared for
in the world, scoring 74.2, 74.2
better outcomes," Knox said.
and 73 respectively.
Earlier in October, the EU's Social Protection Committee’s
Denmark's place at the top for the
2015 Pension Adequacy Report revealed Europe’s pension
fourth consecutive year was attributed to
systems can be expected to deliver adequate pensions to
its "well-funded pension system with
future generations of retirees, provided member states pursue
good coverage, high level of assets and
strong policies to enable as many workers as possible to stay
contributions, provision of adequate
in jobs until they reach the statutory pension age.
benefits and a private pension system
The report said employment policies should provide more
with developed relations".
possibilities for older workers to stay longer in the labour
The scores produced were dependent
market and pension systems must also provide protection for
on three different criteria: sustainability,
those who are unable to remain in the labour market long
integrity and adequacy. Based on these
enough to build up sufficient pension entitlements.
factors, Denmark scored the highest
EU commissioner for employment, social affairs, skills
mark for sustainability, Finland for
and labour mobility Marianne Thyssen said: “Recent pension
integrity and Australia for adequacy.
reforms have focused on ensuring pensions for a much larger
Mercer senior partner and author of
older population without destabilising public finances.
the report David Knox said
“This can only be achieved if the great majority of people
implementing the right reform to
are offered enough opportunities to keep on working until
improve pension systems and provide
they reach the regular retirement age that is set to rise across
financial security in retirement “has
the EU. Our priority must be to invest enough in people’s
never been more critical for both
skills and health to enable them to use such opportunities.
individuals and societies”.
We also need solidarity with those who cannot and may
“The MMGPI is an important
need to rely on unemployment or invalidity benefits before
reference for policy makers around the
reaching the retirement age.”
07
Country
News
t
Irish pension fund levy to end in 2015
he Irish pension fund levy will not
continue into 2016, Irish Minister
of Finance Michael Noonan has
IAPF wArns government to 'work hArd' to restore the
announced.
dAmAge done to sAvers' conFIdence by the levy
In the Budget 2015, Noonan said the
pension levy was no longer needed. The
written by: natalie tuck
levy was introduced in 2011, shortly
after Noonan took office, to finance the
reduced rate of VAT and other measures
in the jobs initiative, which was
proposed to kick-start the Irish economy.
Noonan had previously said the
reduction in VAT for tourism services to
9 per cent could not have been achieved
if it were not for the pension levy.
“The pension fund levy has done its
job and is no longer needed to fund the
9 per cent VAT rate because it is more
than made up by increased activity
and employment," he said.
"I can confirm
“So I can confirm that the
remaining pension fund
the remaining
levy of 0.15 per cent
pension fund levy of
introduced for 2014
the government trying to encourage more people
and 2015 will
to save for retirement. The government will have
0.15 per cent introduced for
end this year and
to work hard to restore confidence in pension
2014 and 2015 will end this
not apply in 2016.
savings to recover some of this damage,” he said.
year and not apply
The original 0.6 per cent
Moriarty’s comments come amid research
levy ended in 2014."
finding
that almost half of the Irish population,
in 2016"
Initially the levy was set at a
43 per cent, have no pension of their own or
rate of 0.6 per cent a year on the
spousal pension.
value of pension assets. However, this
A survey by Friends First revealed that although household
was increased to 0.75 per cent in 2014
finances have improved for two in five households, it has
and reduced to 0.15 per cent in 2015.
not been reflected in the uptake of private pensions. Private
It was originally meant to end at the
pension ownership remains at 46 per cent of adults.
close of 2014 but was extended.
Furthermore, 44 per cent of those without a private
Irish Pension Fund Association chief
pension are planning on living off the state pension alone
executive Jerry Moriarty said the IAPF
in retirement.
welcomes the scrapping of the pensions
Despite this, the research showed that almost eight in
levy but said the “damage” caused by
10 respondents were not confident of having sufficient
it is likely to last for some time.
income in retirement.
“Over €2.3bn was removed by the
Friends First pensions and investments director Simon
government from pension savings over
Hoffman said the postponement of financial planning for
the four years of its existence. It has
the future is still a concern.
reduced people's savings and in some
“We have an ageing population and the number set to
cases pensions in payment. This was
rely on the state pension as their sole retirement is around
at a time when most pension funds
the 890,000 mark.
are underfunded, with DB schemes
“This will put a huge strain on the state in the coming
struggling to deal with deficits and
years as those without a private pension may struggle
DC savings not sufficient to provide
financially in their retirement and will be depending
for a comfortable retirement.
on a pension that is less than the current minimum wage,”
“It was also at complete odds with
he said.
08
Country
News
Draft Greek Budget includes further pension cuts
the drAFt budget hAs hInted At cuts to tAxes And exPense cuts For PensIon Funds
written by: lauren weymouth
t
he draft Greek Budget for 2016, which was submitted
in parliament on 5 October, includes more cuts to
Greek pensions.
According to news source Tovima, the Budget includes
additional taxes and expense cuts for pension funds,
which will subsequently result in further cuts to the
pension system for savers.
Fiscal targets revised by the Minister of Finances Euclid
Tsakalotos now mean the government is aiming for a
€418m deficit (0.24 per cent of GDP) for the general
government budget in 2015, while in 2016 the draft calls
for a €894m primary surplus (0.5 per cent of GDP).
The government is now set to focus its intervention on
tax policy and social insurance due to a 1.3 per cent chance
of recession and 25.8 per cent unemployment rates for 2016.
The interventions in social insurance will thus focus on
gradually increasing the retirement age and penalties for
early retirements.
Like most countries in Europe, the Greek government
has increased the retirement
age for its citizens. It is
expected the retirement age
will increase from 62 to 67 by
2022, but this increase will not
apply to those already receiving
a pension by June 2015.
In addition, Minister of Labour Georgios Katrougalos
announced in July people will no longer be able to take
their pensions early, except for those with exemptions
relating to unhealthy professions and parents with
disabled children.
The draft also includes provisions to increase pensioner
contributions for healthcare and changes so that lump sum
payments are made so the sustainability of each pension
fund is maintained.
In August, as part of the deal to secure the third bailout
pensions were cut by as much as €50 and were backdated to July.
Lufthansa cabin crew reject airline's retirement proposals
An Agreement Is yet to be reAched between luFthAnsA And unIons rePresentIng Its emPloyees
written by: natalie tuck
t
alks between Lufthansa
and UFO, the union
representing airline staff,
have failed to reach an
agreement.
The airline has proposed
an offer that would allow
cabin crew to retire at 55
but with a significantly reduced pension. Employees
would need to work until 65 in order to obtain the full
pension, Reuters has reported.
As part of this cabin crew would receive a one-off
payment of €2,000 each and those who have been with
the company since at least 2012 would get a pay rise of
1.7 per cent in 2016 and 2017.
The company said the low interest rates mean it can no
longer afford the pension scheme, which cost it €3.6bn
last year and allowed workers to retire at 55.
Earlier this year the company reported a pension deficit
increase of almost €3bn as a result of pension liabilities
rising by 41.2 per cent over the first quarter of 2015.
During the first three months to March this year,
pension obligations went up after the low interest rate
environment forced the airline to cut its discount rate by
almost 1 per cent.
Liabilities rose by 41.2 per cent, which compares to
December when a discount rate of 2.6 per cent was still
applied after the rate was cut to 1.7 per cent.
However, UFO head Nicoley Baublies, which
represents around 19,000 flight attendants, said the offer
had “failed completely” and did not include important
points on job security.
"We will not continue negotiations. Another extension
is not going to help," he said in a video response posted
on the internet. He said UFO still needed to analyse
Lufthansa's offer in detail before deciding how to proceed.
09
International
News
News in brief
■ The Japanese government
pension investment fund is
planning to start buying into
high-yielding overseas junk bonds
to boost investment performance.
according to the Asian Review,
the world’s largest public pension
fund is set to announce its choice
of companies for managing the
investment. around 20 financial
institutions are expected to make
the list.
■ The Indian retirement system
has been ranked last in the global
pension index, according to mercer.
india’s index value fell from 43.5
in 2014 to 40.3 in 2015, primarily
because of a recent review
conducted by the economic
intelligence unit that showed
a material reduction in its
household savings rates.
■ the Canada Pension Plan
Investment Board (CPPIB) has
opened its first investment office
in india. this is the fund’s seventh
office abroad. the cppib plans
to double india weightage over
the next eight years. according
to the business standard, india
investments are currently 1 per
cent of its global assets and over
the next seven-eight years it could
be doubled to 2 per cent.
■ five New York City union
pension systems have announced
plans to invest around $150m
in affordable housing in the city,
the afl-cio housing investment
trust has said. according to
People’s World, the money is
being sent to the hit to create
$1bn in total investment in the
housing in all five boroughs.
union labour is set to build the
housing in an economically
targeted investment programme.
10
California pensions to divest from coal
public pension funds are forced to divest from fossil fuels
Written by: lauren Weymouth
c
alifornian governor Jerry Brown has signed a new bill
forcing two of the largest public pension funds in the
US to divest from any company profiting from fossil fuels.
The new law will affect the California Public Employees’
Retirement System and the California State Teachers
Retirement System, which have $58m and $6.7m respectively.
According to The American Interest, California State Assembly assistant leader
Kevin de León pitched the measure to push for more secure and environmentally
friendly investments.
“Coal is a losing bet for California retirees and it’s also incredibly harmful to our
health and the health of our environment,” he said in a statement.
Following the announcement, 350.org executive director May Boeve said this
is a “big win” for the movement, demonstrating the “growing strength” of
divestment campaigns around the world.
“California’s step today gives us major momentum, and ramps up pressure on
state and local leaders in New York, Massachusetts, and across the US to follow
suit—and begin pulling their money out of climate destruction too,” she said.
The move comes at a time when pension funds are being increasingly pushed to
help combat climate change by pulling out of investments that hinder it in anyway.
Momentum has been kicking off around the world, notably across Europe.
China to allow state pension fund to
invest in stocks by 2016
govt confirms it is Working hard to reach 2016 goal
Written by: lauren Weymouth
c
hina’s plans to allow its state pension fund to invest in stocks could
happen as early as 2016, government officials have said.
According to the Global Times, experts have said the move would lay
a solid foundation for the long-term stability of the domestic stock markets.
Ministry of Human Resources and Social Security spokesman Li Zhong
said these funds are now being held by provinces, cities and counties and
it is important they be aggregated at the provincial level before any such
investment could be carried out.
However, the MOHRSS and the Ministry of Finance are reportedly
drawing up a procedure for this process now.
“We’ll make the best use of our time and work toward the goal of
implementing pension fund investment in 2016,” Li said.
Plans to allow pension funds to move into the stock market have been
intiated by the Chinese government to help increase share prices after they
fell by almost 30 per cent since June.
Pension funds were previously only allowed to invest in treasury bonds and
bank deposits, but had almost 3.5trn yuan in assets at the end of last year.
Pensions
Diary
Diary dates 2015/16
The latest events occurring across the European pensions space
IrIsh pensIon awards 2015
25 November 2015
The Shelbourne
Dublin, Ireland
pensIons age awards 2016
25 February 2016
London Marriott Hotel
Grosvenor Square, London
pLsa Investment conference
9-11 March 2016
EICC
Edinburgh, Scotland
Now in its fourth year, the Irish
Pension Awards, in association with
European Pensions, aim to give
recognition to those pension funds
and providers who have proved their
excellence, professionalism and
dedication to maintaining high
standards of Irish pension provision.
The event will honour the best serving
pension funds, investment firms,
consultancies and pension providers.
europeanpensions.net/irishawards
The Pensions Age Awards, which are
now in their third successful year, aim
to reward both the pension schemes
and the pension providers across the
UK that have proved themselves
worthy of recognition in these
increasingly challenging economic
times. The awards will take place at
London’s prestigious Marriott Hotel on
Grosvenor Square and are free to
enter.
pensionsage.com/pa/awards
Formerly the NAPF Investment
Conference, this will explore the UK’s
relationship with the rest of Europe,
and other issues to bring some clarity
and certainty as to how schemes can
best manage their short-term
pressures whilst also being
responsible long-term investors
delivering what their scheme
members want and need. Over 900
professionals are set to attend.
plsa.co.uk
Not to miss...
Iapf annUaL governance conference
3 December 2015
Dublin Castle, Dublin, Ireland
www.iapf.ie/events
eUropean pensIons awards 2016
23 June 2016
Grosvenor House Hotel, Park Lane, London
aon 2016 pensIon conference
10 February 2016
London
www.aon.com
barnett waddIngham Investment conference
27 January 2016
London
www.barnett-waddingham.co.uk
If you have any European pensions events to promote, please contact lauren.weymouth@europeanpensions.net
11
Irish Pensions Awards 2015
As a feeling of optimism returns to the Irish pensions market, the Irish Pensions Awards, now in
their fourth year, aim to give recognition to those pension funds and providers who have proved
their excellence, professionalism and dedication to maintaining high standards of Irish pension
provision over the past year. Congratulations to this year’s ﬁnalists and best of luck.
Join us on 25 November 2015 to see the winners exclusively announced.
Irish Pensions Awards 2015 – Shortlist
Irish Pension Scheme of the Year
• Bank of Ireland
• Construction Executive Retirement Savings (CERS)
• Oracle
Pension Trustee Board of the Year
• Capita
• Construction Executive Retirement Savings (CERS)
Best Use of Risk Management
• Bank of Ireland
• Construction Workers Pension Scheme (CWPS)
Best Communication Strategy
• Bank of Ireland
• Construction Workers Pension Scheme (CWPS)
Pensions Consultancy of the Year
• ITC Consulting
• LCP Ireland
• Opportune Trust
Property Manager of the Year
• BCP Asset Management
• Irish Life Investment Managers
Investment Manager of the Year
• Ashmore Group
• BCP
• Goldman Sachs Asset Management
• Morgan Stanley Investment Management
• Russell Investments
• Setanta Asset Management
Equities Manager of the Year
• AB
• Ashmore Group
• Kleinwort Benson Investors
• MFS
• Setanta Asset Management
• Vontobel Asset Management
Alternatives Investment Manager of the Year
• Friends First
Law Firm of the Year
To be announced on the evening
BOOK YOUR TABLE NOW: www.europeanpensions.net/irishawards
BOOK YOUR TABLE
4th Annual Irish Pensions Awards 2015
25 NOVEMBER 2015 The 5* Shelbourne, Dublin
Fixed Income Manager of the Year
• Ashmore Group
• Morgan Stanley Investment Management
• Pioneer Investments
Pension Scheme Administrator of the Year
• Allied Pensions Trustees
• Independent Trustee Company
• Irish Life Corporate Business
• New Ireland Assurance Corporate Pensions Department
Communication Award
• Allied Pensions Trustees
• Willis
Pensions Innovation Award
• Aviva Life and Pensions Ireland
• Bank of Ireland
• BMO Global Asset Management
• LCP Ireland
• New Ireland Assurance
• Willis
Passive Manager of the Year
• Legal & General Investment Management
Risk Management Provider of the Year
• BMO Global Asset Management
Infrastructure Manager of the Year
• To be announced on the evening
Emerging Markets Manager of the Year
• To be announced on the evening
Pensions Technology Provider of the Year
• Exaxe
• Willis
Independent Trustee Firm of the Year
• Harvest Trustees
Irish Pensions Personality of the Year
• Jim Connolly, Head of Pensions, Standard Life
• Paul Kenny, The Pensions Ombudsman
• Fiona Thornton, Chairman of the Retirement
Planning Council of Ireland and Consultant
at Eversheds
Gold sponsors
Independent Retail Pension Broker/
Pensions IFA of the Year
• City Life Wealth Advisors
• Financial Architects
• Harvest Financial Services
• Investwise
• Opportune Trust
Find out more: www.europeanpensions.net/irishawards
For the latest news and updates follow us
@AwardsIrish #IrishPensionsAwards
In association with
European Pensions
Pensions
Appointments
People on the
move...
The latest news and moves
from people within the
European pensions industry
14
If you have any appointments to
announce please contact natalie.
tuck@europeanpensions.net
BrUno montAnAri
Omnes Capital has appointed Bruno
Montanari as partner within the
venture capital team, focusing on
the life sciences sector. He began his
career in 1999 in investment banking
at Deutsche Bank, followed by Merrill
Lynch, before moving into venture
capital at CDP Capital Technology
Ventures and then Atlas Venture.
He joined Omnes Capital in 2010 and
is currently a board member at several
companies, including arGEN-X.
Agnès BelAisch
Edmond de Rothschild Asset
Management has appointed
Agnès Belaisch as head of its
sovereign debt team. She was
previously in charge of economic
and market analysis at the
European Stability Mechanism
(ESM), the eurozone’s bailout fund
based in Luxembourg. Before that,
she was in charge of emerging
market strategy at Threadneedle
Asset Management in London.
Frédéric JAnBon
BNP Paribas has announced
the appointment of Frédéric
Janbon as CEO of BNP Paribas
Investment Partners. He succeeds
Phillipe Marchessaux, who
will support and advise him
during a transition period
before taking on, at his request,
another project, within the BNP
Paribas Group. Janbon also has
over 25 years’ experience in
financial markets.
esther nAss-FetzmAnn
Schroders has announced the
appointment of Esther Nass-Fetzmann
in its multi-asset investments and
portfolio solutions (MAPS) business.
She will focus on strategy for Europe
and joins from BlackRock where she
spent the past 10 years in senior
positions. She was most recently the
director and head of UK iShares ETF
sales to asset managers and hedge
funds. Furthermore, Nass-Fetzmann will
be based in Schroders’ office in London.
Frédéric messein
SIX Swiss Exchange has
announced the appointment
of Frédéric Messein as head of
SIX corporate bonds. He will be
responsible for overseeing the
roll-out of the new credit trading
platform, and is based in Zurich.
Prior to this, Messein was global
head of fixed income and
foreign exchange product
management and content
strategy for Thomson Reuters.
Pensions
Appointments
Angelo nAtAle
Hermes Investment
Management has announced
the appointment of Angelo
Natale as director, business
development, Italy. In this new
role, Natale will be responsible
for building a client franchise
across institutional and wholesale
investors in the Italian market.
He will oversee the firm’s regional
development and also its asset
raising targets.
lAUrent chevAllier
Gottex Fund Management Holdings,
an independent global asset
management group, has appointed
Laurent Chevallier as a senior member
of its portfolio management team.
He joins Gottex with more than 16
years of experience in the analysis and
management of alternative investment
strategies and started trading S&P 500
futures in 1998 for a $1 billion plus
hedge fund where he then became
director of hedge fund research.
Ugo sAnsone
Allfunds Bank has appointed
Ugo Sansone to head its
business in Luxembourg in
order to help drive the firm’s
international expansion. Sansone
is a well-known industry figure
within Luxembourg, where he
has been an active stakeholder
across the investment fund
sector. Sansone has spent
his entire career at Intesa
Sanpaolo Group.
hUiB vAessen
GeoPhy, a commercial property
intelligence company, has
announced that Huib Vaessen has
joined its management team as
chief product officer (CPO) as of
1 October 2015. Furthermore,
Vaessen was senior portfolio
manager for real estate securities
at Kempen Capital Management
until starting at GeoPhy, previously
having worked as an analyst at
the same company.
mUstAPhA BoUherAoUA
Invesco Asset Management has
announced that Mustapha Bouheraoua
is joining Invesco’s institutional team
as head of institutional sales for France.
In his new position, Bouheraoua will
be reporting to Colin Fitzgerald,
head of institutional business EMEA.
Bouheraoua joins from Schroders
France where he was head of
institutional business for France and
North Africa. Bouheraoua had started
his financial career at BNP Paribas.
hAzel mcneilAge
Northern Trust Asset
Management has named
Hazel McNeilage as managing
director for Europe, Middle East
and Africa (EMEA), in line with
its continuing focus on building
relationships with institutional
clients across the region.
McNeilage holds responsibility
for institutional business
development and relationship
management across the region.
15
Industry
Column
Europe Economics
An effective substitute
europe economics’ Andrew lilico AnAlyses the benefits of investing in
oil- And gAs-relAted stocks when other Assets Are fAlling in vAlue
“
A pension fund
mAnAger thAt
excluded fossil
fuel stocks
from the fund’s
portfolio
would hAve
to choose
between tAking
20 per cent
more risk to
Achieve the
sAme return
16
Don’t put all your eggs into one basket” is
one of the most basic principles of balanced
portfolio management.
By investing in a range of assets, a fund
manager can try to make sure that when some
assets are falling in value that will be offset by
others rising at the same time, reducing the risk
of losing money overall through such
diversification. To do that, of course, one needs
to be able to invest in assets that will tend to
do well when others are doing badly. One
important set of such ‘counter-cyclical’
investments are oil- and gas-related stocks.
When oil prices go up, inflation tends to rise
and the non-oil economy tends to grow a bit
slower. So if, for example, a fund manager
has invested in inflation-sensitive bonds, their
value may drop when oil prices go up because
inflation is expected to rise.
However, when oil prices are rising, oil-related
stocks will tend to go up in price. So a fund
manager could buy some oil-related stocks to
offset the risk rising oil prices would present
to investments in inflation-sensitive assets or
indeed, just to the economy in general.
Excluding oil stocks from a portfolio would
mean not being able to offset risks in this way.
But can the impact of oil-related stocks be
duplicated using other assets? It may seem
intuitively likely that it cannot, but it is not
absolutely obvious from theory alone. There
is a campaign at present for various fund
managers to ‘divest’ themselves of fossil fuelrelated assets. Those advocating this claim that
doing so will help to combat fossil-fuel-related
climate change.
My team at Europe Economics estimated
the impacts on UK investment risks and returns
of eschewing fossil fuel stocks. The theory of
efficient diversification was set out in the late
1950s by Harry Markowitz - work which won
him the Nobel Prize for Economics in 1990.
We used Markowitz’ portfolio theory to
construct the set of most risk-return efficient
portfolios from Bloomberg data for the period
2002 on. Someone investing £100,000 in
a pension pot tracking the stock market
(so, at the average risk and return) in 2002
would have had about £280,000 in 2014.
We identified all those stocks, in the list the
fossilfreeindexes.com website recommends
investors avoid, that are in the London FTSE
All-Share Index. We then used Markowitz’s
theory to construct the most risk-return efficient
set of portfolios that excluded fossil fuels.
What we found was that the diversification
benefits of fossil fuels cannot be duplicated
with other assets. A pension fund manager that
excluded fossil fuel stocks from the fund’s
portfolio would have to choose between taking
20 per cent more risk to achieve the same
return. So, whereas our £100,000 2002 pension
fund investment that tracked the stock market
would have been worth £280,000 in 2014, if
that same investment had avoiding fossil fuels
but borne the same risk it would have been
worth only £260,000 - a loss of more than 7 per
cent over the period. Even at a low 4 per cent
rate, the £280,000 pension pot would yield an
£11,200 a year pension, against £10,400 for the
£260,000 pension pot. If someone had that kind
of private pension, they would therefore
be losing £800 a year by having divested fossil
fuel stocks.
As we have said, some investors may believe
this cost is worth the objective of contributing
to the campaign against climate change (though
that would still leave open the question of
whether this was the best way to spend that
money). But no-one should pretend that pension
funds can divest themselves of fossil fuels
without a material cost to their beneficiaries. ■
Written by Andrew Lilico, executive director
of Europe Economics and lead author of
Costs to Investors of Boycotting Fossil Fuels,
commissioned by the Independent Petroleum
Association of America
Investment
Shocks
investment
Out of the blue
The world’s financial markets were rocked recently by the
Volkswagen scandal and the crashing of the Chinese stock
market. Peter Carvill explores what funds should do in the
wake of such events
WR IT TEN BY P e T e r C ar vill, a fre e lanC e j o ur na l i s T
T
he Volkswagen scandal
emanating from Germany hit
hard and fast in September,
sending seismic waves around the
world. It was discovered by the US
Environmental Protection Agency
that the German car giant had
intentionally been rigging software
in its vehicles to bypass emissions
regulating, and that actual emissions
from the cars had been up to 40
times higher than legally allowed.
Shock events
The immediate cost—both human
and financial—to Volkswagen was
quick and severe. Group CEO
Martin Winterkorn tried to maintain
his position in the company but
had to resign in the week after the
scandal broke. At the same time,
the car giant said it was putting
aside €6.5 billion to deal with
the aftermath. A few weeks later,
it announced that it was recalling
8.5 million of the 11 million
cars affected.
The immediate and long-term
financial costs to Volkswagen have
yet to be accurately tabulated or
finalised. But they are predicted to
run into the billion; according to a
report in the UK’s The Telegraph
newspaper, analysts from UBS and
Societe Generale placed the
costs of settlements to regulators
and private consumers, legal fees,
recalls, and buybacks at €35 billion
and €32 billion. Analysts on
Trefis offered a figure of €34.5
billion for the cost of government
fines and settlements, private
settlements, recalls, and loss of
sales. According to the BBC,
the fine from the Environmental
Protection Agency alone could
top €18 billion.
Volkswagen’s share price was
predictably hammered by the
scandal. Before the story broke,
its shares had been trading at €165.
They immediately fell to €92,
before rallying slightly to €105.
Scandals such as this are, to an
extent, idiosyncratic. They do not
follow a market cycle, but come
seemingly from nowhere. And
while many people had money
invested in Volkswagen, it is not
the only or last company to go
through such troubles.
Keith Guthrie is the chief
investment officer at Cardano,
while Cato Stonex is a founding
partner at THS Partners. Independent
of each other, they draw parallels
17
Investment
Shocks
The VaST and ReCOndiTe
quanTiTy Of hOw muCh
The final SCandal will
COST The COmpany may
puT penSiOn fundS
wiTh inVeSTmenTS in
VOlkSwagen inTO a bind
18
between the issues engulfing
Volkswagen and the legal
troubles that assailed BP in
2010 following the collapse
of Deepwater Horizon.
“What people are trying to
quantify,” says Guthrie, “is
how big an impact could all
the regulatory penalties be on
the company? Getting a
handle on that is difficult.
There are tests cases such as with BP
and with what has happened with
banks in recent years. You should
expect that regulators will go after
them in a big way around the world,
and there will be substantial costs to
that. The regulators will not want to
put the company out of business as
politicians do not want to be
responsible for job losses. But they
will extract penalties.”
Stonex offers another perspective.
He says that Volkswagen being
subject to US legal action is the
most unknowable quantity. “The
worst case scenario,” he says,
“is that the company is going to
have to buy back all of these cars.
In that case, it’s an existential level
of cost.”
Response
The vast and recondite quantity of
how much the final scandal will cost
the company may put pension funds
with investments in Volkswagen into
a bind. How should a fund handle
their investments when something
like this happens?
Stonex draws a line between a
business going through a normal
cycle, and a scandal like
Volkswagen’s that has come out of
the blue. If the downturn is part of a
normal cycle, he says, the best
course of action is to try and live
through it. In the type of situations
that Volkswagen now finds itself in,
the reactions of investors and the
course they should take begins to get
more complex.
“There are three quality checks we
go through,” says Stonex. “We look
at the solidity of the balance sheet,
the substantial competitive
advantage, and the quality of the
management. If any of those is not
what you’ve expected, such as lots
of debts that have been kept hidden,
a new competitor that has breached
that advantage, or the management
has not behaved as you would
expect, you have to re-examine the
investment and rethink.”
Stonex adds that in his experience,
high volatility is the price paid for
the equity risk premium, and has to
be accepted as such, even if it does
at points cause the value of your
portfolio to decline by 30 per cent.
“These are temporary,” he says, “but
they don’t feel good at the time.”
The Volkswagen scandal was
unprecedented, but not without
precedents. Stonex says that if THS
Partners had had investments in the
now-disgraced car company, the fact
that it was not a cyclical waning of
the industry would have sounded
alarm bells. “We would have been
very much affected,” he says, “by
the fact that this was not a cycle
moving against them or some
Investment
Shocks
temporary and external impact. This
was an own goal. They did this to
themselves. I think that their
credibility—even though not
everyone was involved—reflects
very badly on their culture. We
would feel that the management
would have to change and we would
have concluded that the potential
downside is such—and this is rarely
the case—that we would have to exit
the investment because of the threat
of US legal action.”
macro concerns
While the VW scandal is huge and
may spread further, Guthrie sees
little cause for concern, calling it
‘idiosyncratic’. He points instead to
huge shifts in the macroeconomic
system such as the meltdown on the
Chinese stock market in August. The
phrases he uses to describe that are
“macro” and “lots to worry about”.
The meltdown in China—dubbed
‘Black Monday’—saw trillions of
dollars wiped off the global financial
markets. That was set in motion by a
selling frenzy, itself prompted by the
loss of the country’s stock market
contracting by $3.2 trillion due to
concerns about slow growth. Despite
the injection of $200 billion by the
government to stop the crisis, the fall
continued.
Guthrie says that while questions
could be asked of the entire motor
industry, the China crash points to
more ‘systemic risk’. “That’s
where,” he says, “there is a risk
that can cause a reaction in another
part of the economy. The situation
in China is much more like that.
That’s the type of risk we spend
time trying to figure out. There
are clear linkages through all the
commodities suppliers to China.
There’s a clear ripple effect if
China is slowing down.”
Guthrie draws a parallel between
China’s ‘Black Monday’ and the US
equity market, which went through
similar troubles in October 2014
amid a large sell-off. “That happened
relatively rapidly,” Guthrie says.
“People see that and ask questions—
‘Is there something I’m missing?
Has something happened that should
have change my probabilities of the
world? Is there a risk of another
recession’?”
Stonex agrees that China may be
a bigger problem than Volkswagen,
saying that the worries there are
more medium-term than those
hitting the beleaguered German car
manufacturer. Volkswagen, he says,
is more of an individual problem.
knock-on effects
However, the troubles of
Volkswagen may affect more than
the beleaguered manufacturer.
Following the headlines, stock in
fellow companies BMW and
Daimler fell 10 per cent and 13 per
cent, respectively. This was despite
neither company being implicated
in the wilful manipulation of
emissions data.
“I think there’s an assumption,”
says Stonex, “that if there’s an
engineer at one of the companies
that has worked out how to game the
testing process, that they may be
others that have tried to do so. It’s a
case of people thinking it’s not
isolated. I don’t know
whether it is or not but
people may have drawn
the conclusion.”
The question then, as
with everything in
investing, is less about
what has happened than
how it could affect
everything else. ■
while queSTiOnS
COuld be aSked Of
The enTiRe mOTOR
induSTRy, The China
CRaSh pOinTS TO mORe
‘SySTemiC RiSk’
19
CONGRATULATIONS TO OUR WINNERS
T
he inaugural Pensioni & Welfare
in handing out 23 sought-after trophies
their members, and are dedicated to
Italia Awards took place in
to the deserving winners.
meeting those needs in everything that
September at a glittering gala event
The Italian pensions space, like many
they do.
in Milan, playing host to hundreds of
others in Europe, is going through a
Italy’s pensions and investment elite
period of dramatic change and pension
consultants and other key providers
who gathered at the elegant hotel
fund managers, consultants, asset
were rewarded for their performance,
Melia Milano to celebrate the industry’s
managers as well as service providers
understanding of the market and use of
success.
each have their own challenges to
innovation.
Following this, the asset managers,
The awards, which were founded
overcome. The European Pensions team
by European Pensions, were launched
hopes these awards will go some way
culminated in the presentation of
with the aim of recognising the hard
towards recognising and rewarding
arguably the most desirable award
work and dedication of those working
the efforts of those working so hard in
of the evening, the Personality of the
in the Italian pensions, investment and
order to meet the ever-growing needs
Year, which went to Renzo Guffanti,
benefits sector in Italy, with over 20
of their members and clients, against a
president of the CNPADC (Cassa
pension funds and provider firms going
backdrop of increasing longevity and
Nazionale di Previdenza e Assistenza
home with coveted trophies on the
economic uncertainty.
Dottori Commercialisti).
night.
Antonio Ornano, Italian celebrity and
Then last but not least, the evening
First up were the pension fund
Congratulations to all of those who
categories that aimed to give
went home with trophies on the night
television personality, brought a touch
recognition to the funds who, with
and many thanks from the European
of comedy to the evening and did a
their entries, not only displayed
Pensions team to the judges and
fantastic job of hosting the awards. He
excellence and superiority in the way
sponsors who helped make the event
was joined on stage by the judges and
they manage their funds, but also boast
such a resounding success. We look
sponsors of the event who assisted him
a real understanding of the needs of
forward to seeing you all next year.
SAVE THE DATE:
6th October 2016 - Pensioni & Welfare Italia Awards 2016, Meliá Milano
For more details on the awards, please visit www.europeanpensions.net/italiaawards
or contact Francesca.Fabrizi@europeanpensions.net (editorial) or
Alessandra.Atria@perspectivepublishing.com (commercial)
WITH THANKS TO OUR SPONSORS
Gold Sponsors
In association with
European Pensions
The 2015 categories and winners
Open Pension Fund of the Year
Property Manager of the Year
Innovation Award of the Year
Società Reale Mutua di Assicurazioni
Antirion SGR SpA
MangustaRisk
Closed Pension Fund of the Year
Alternatives Investment Manager of the Year
Pensions Consultancy of the Year
Fondo Pensione Eurofer
Amber Capital Italia SGR SpA
Olivieri & Associati - Consulenza Attuariale
Individual Pension Fund of the Year
Global Balanced Manager of the Year
e Finanziaria
Genertellife SpA
Candriam
Best Healthcare & Benefits Provider of the Year
Pre-1993 Pension Fund of the Year
Administrator of the Year
Previmedical SpA
Fondo Pensione Previbank
Previnet Outsourcing Solutions
Best Employee Benefits Plan of the Year
Innovative Pension Fund of the Year
IT Firm of the Year
UniC.A.
PrevAer Fondo Pensione
Previnet Outsourcing Solutions
Pensioni & Welfare Italia Personality of the Year
Best Communication by a Pension Fund Award
Insurance Broker of the Year
Renzo Guffanti, Presidente, Dottore
AXA Italia
Europa Benefits srl
Commercialista, Cassa Nazionale
Asset Manager of the Year
Custodian of the Year
di Previdenza e Assistenza Dottori
Allianz Global Investors
Societe Generale Securities Services SpA
Commercialisti (CNPADC)
Equities Manager of the Year
Communication Award
Columbia Threadneedle Investments
Associazione Previnforma
Fixed Income Manager of the Year
Risk Management Firm of the Year
Franklin Templeton Italia SIM SpA
StatPro Italia
Conferenza 2016
Le Nuove Sfide
15 Giugno 2016
Hotel Meliá Milano
Via Masaccio 19, Milano 20149,
italia
La Conferenza Pensioni & Welfare Italia: Le Nuove Sfide esaminerà le principali
sfide della gestione di un fondo pensione in Italia nell'ambiente di oggi ed offrirà
ai fondi pensione, consulenti e gestori di investimento un’informazione aggiornata
ed una guida per aiutarli a gestire i loro fondi pensione al meglio.
Sito web disponibile a breve
Per informazione sulla possibilità di sponsorizzazione
all’evento 2016, si prega di contattare:
Alessandra Atria
Senior Sales Executive
+44 (0)20 7562 2438
alessandra.atria@europeanpensions.net
a
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Country
Spotlight
country spotlight
i ta ly
A battle ahead
David Adams explores the need for Italy to reduce reliance on the first pillar and grow
the second, while navigating the tricky arena of intergenerational fairness
WRIT TEN BY DaviD aDams, a freelance journalist
strategies, which may improve
returns. But other recent changes
have included increases in taxation
on those returns; and the
controversial opening of a three-year
window during which individuals
can access the Trattamento di fine
Rapporto (TFR), a severance pay
fund that all Italian employers
have to provide.
T
he past two decades have been
almost as eventful for the
Italian pensions system as they
have for Italian politics. The country
has sworn in a new prime minister
12 times in the past 20 years; and
there have also been at least nine
significant reforms to the pensions
system. Some were aimed at making
the system’s first pillar more
sustainable; some at encouraging
growth of the second pillar. But even
after all of those reforms the latest
issue of the Melbourne Mercer
Global Pension Index, published in
October 2015, gives Italy an index
rating of 50.9, meaning it just
scrapes into an overall ‘C’ grade,
the category for pensions systems
with “some good features, but also
... major risks and/or shortcomings
that should be addressed”.
Whether recent reforms have
helped the sustainability and
adequacy of the system as a whole
is debateable. They have included
greater flexibility for second pillar
pension schemes’ investment
First pillar reform
Italy still spends 16 per cent of
GDP on state pension provision,
a greater proportion than any other
country in Europe except Greece,
but thanks to a series of reforms
the first pillar system is now mainly
contribution-based. Previously it was
a defined benefit final salary scheme
that could provide replacement ratios
of 75 per cent. In 2011 the then
labour minister Elsa Fonero
famously wept as she announced
reforms that converted the first
pillar into a notional defined
contribution system (in reality it is
pay as you go); and increased the
state retirement age to 66, with full
state pensions payable after 42 years
of contributions.
“If you look at it from the angle
of the employee all the reforms will
make retirement income smaller than
it used to be,” says Candriam Risk
global head of client relations for
Europe and the Middle East, Renato
Guerriero. “But when you had a first
pillar guaranteeing 80 to 90 per cent
23
Country
Spotlight
of your final salary, not considering
contributions you have made, this
kind of system was not responsible
and was unfair.”
Although these changes have
made the first pillar more
sustainable, the current system
creates intergenerational conflict,
says the European Association of
Paritarian Institutions (AEIP)
director, Francesco Briganti. “Future
pensions will be lower for younger,
active workers who have to pay
contributions of around 30 per cent
of gross salary [but] will never see
the same pension income as current
pensioners,” he explains. There is
also the problem of older people
working for longer and thus
preventing younger workers from
advancing along a career path.
Aon Hewitt Consulting managing
director in Italy, Claudio Pinna, has
sympathy for older workers who
ITALY STILL SPENDS
16 PER CENT OF GDP ON
STATE PENSION PROVISION,
A GREATER PROPORTION
THAN ANY OTHER
COUNTRY IN EUROPE
lose jobs in their 50s then find it
difficult either to get another job or
to retire, but he is unimpressed by
proposals from left-wing politicians
and trade unions that more people
should be able to access their
pension pots earlier. “We already
have a very high public pension
expense and if you introduce this
proposal these expenses will
increase immediately,” he points out.
Expanding the second pillar
Instead, the answers to the
demographic and financial
24
challenges facing the pensions
system surely lie in further
expansion of the second pillar.
“In a few years the ratio between
active workers who pay contributions
to social security and retired people
will decrease dramatically, so the
current level of pension is not
sustainable forever,” says Mercer’s
retirement leader and principal for
Italy Roberto Veronico. “There is
a strong need [for] complementary
pensions.”
At first glance it seems strange
that only about 25 per cent of
private sector employees have joined
a second pillar scheme, particularly
as they have generally performed
well to date. A ministerial degree
of 2014 has also given second pillar
pension funds more flexibility in
their investment strategies. Previnet
senior manager, pension fund
services and international clients,
Martino Braico, thinks this is
important. “Basically, funds can
invest in whatever they want – so
long as their investments match
their approved policies,” he says.
But you don’t need to look far
to start finding reasons for low
take-up. One is the very high
contributions taken out of salaries
for first pillar pensions – around
30 per cent of gross salary, meaning
most workers have little left over
to save elsewhere. Another is that
the second pillar uses an ‘exempt,
taxed, taxed’ (ETT) approach, rather
than the EET arrangement used in
most second pillar systems. And
even the ‘E’ element, contributions,
are exempt from tax only up to
around €5,000 per year.
New rules
Italy’s 2015 ‘stability law’, which
increased taxes on pension fund
investment returns, has also been
unhelpful. The nominal rise was
from 11 to 20 per cent, but this
masks the fact that returns on
Country
Spotlight
IN A FEW YEARS THE RATIO BETWEEN
ACTIVE WORKERS WHO PAY CONTRIBUTIONS
TO SOCIAL SECURITY AND RETIRED PEOPLE
WILL DECREASE DRAMATICALLY
investments in for Italian and some
foreign government bonds are now
taxed at 12.5 per cent. That means
returns on most portfolios are taxed
at between 12 and 17 per cent – but
it also encourages funds to invest
in assets that will probably deliver
lower returns than would higher
risk investments.
Briganti is also concerned that the
forthcoming EU financial transactions
tax will also apply to second pillar
pension schemes, depressing
investment returns further.
The existence of the TFR may
also be a factor in some workers’
unwillingness to use the second
pillar. It is calculated at 6.9 per
cent of annual salary, with additions
for inflation, and is usually paid
as a lump sum. If accumulated
throughout a whole career it can
provide a pension of about 15 per
cent of final salary. But it is unlikely
to provide anything like the same
returns as a second pillar pension.
Following the passage of the
stability law and until June 2018,
workers can access TFR funds on
a monthly basis. If a large number
of Italian workers chose to do this
it would undermine second pillar
pensions. Fortunately, notes Briganti,
few employees are doing this at
present, because they value the TFR
as a long-term investment.
Unfortunately the potential value
offered by a second pillar pension is
not yet widely understood.
In 2007 the Italian government
briefly ran a scheme reminiscent of
auto-enrolment in the UK, with
workers enrolled in second pillar
schemes unless they actively chose
to opt out. Take-up was low, due to
some of the factors listed above.
But some industry observers now
wonder if a more active drive to
push workers into the second pillar
would be useful. “If I were in the
government I would try to push
more people into occupational
pensions, because having your risk
spread across two pillars, or even
three, is very sound from a financial
point of view,” says Guerriero.
Another measure that was under
consideration for a while was the
introduction of full portability of
capital between second and third
pillar pensions. “So a worker could
ask his employer to move his
contribution to a third pillar product
and ask a previous pension fund to
move his capital to a new third pillar
product,” Briganti explains. But he
is concerned that private pensions
providers would be able to spend
more on marketing than would the
second pillar schemes, which
could lead to workers joining an
inappropriate scheme. “I am not
sure this measure would really help
pensioners,” he says.
Whatever the next 12 Italian prime
ministers decide to do with the
pensions system they will face
demographic challenges, says
Briganti. “Active workers are paying
twice: high contributions to the first
pillar, taxes on investment returns
and then maybe they will pay
indirectly through the financial
transactions tax,” he points out.
“All the burden is on the younger
generation; not enough contributions
are made by the older generation.”
He wants better incentives to save
in the second pillar and reduced
contributions to the first pillar. If
such measures are not taken, he
suggests, the next 20 years will
certainly see more clamour for
further reform, amid increasing
intergenerational strife. ■
25
Case
Study
Case study: Fondenergia
David Adams speaks to Fondenergia director Alessandro Stori,
an Italian pension fund for workers in the energy sector currently
managing €1.8 billion of assets for over 40,000 members
Which have been the most
significant of the changes made
to the Italian pensions system
in recent years?
We had nine reforms in 20 years,
but the most important is the last
major one in 2011, under Monti/
Fonero, the reforms for the first
pillar. Under this reform the
retirement age was increased,
which means that now our
retirement age is one of the highest
in Europe. This is having some
positive results from the point of
view of sustainability. But on the
other hand, people now have to
work for longer than they did
before. There is an argument
that you could have some more
flexibility in the retirement age,
so you could leave your job one
or two years before the retirement
age, with your pension reduced
by 1 per cent or 2 per cent for
each year.
What other helpful changes have
the government introduced to
help encourage more Italian
workers to save for retirement?
Workers can now check on the social
security website to see the estimate
of their future pension. This was a
change that was talked about in the
very first reform 20 years ago, when it
was said that this service would be
available ‘in a few months’. So we
needed to wait 20 years for this!
26
Which of these changes are
creating problems for Italian
pension funds and Italian
workers seeking to save for
retirement? Would your
organisation like to see any
of these changes reversed?
At the end of 2014 the government
increased the taxation rate for
pension fund returns from
11 per cent to as much as 20 per
cent, depending on the composition
of your portfolio. We would like
to see a reverse of this change –
but we know it is not easy and
so is not something we are likely
to see soon.
Are there any other reforms
or alterations to the Italian
pensions system that your
organisation would like to see?
What many people are asking
themselves is, should we go
towards a compulsory second
pillar system? This is a question
with a difficult answer. Some
second pillar funds never reach
a sustainable participation rate.
Part of the reason is the nature of
Italian industry, with many small
companies where there is no help
from trade unions to encourage
people to join a pension scheme.
We need some kind of mixed system
in which small companies should
be, not forced, but given a better
incentives to help their workers to
join the second pillar.
One thing that would help
would be to simplify some of
the rules that make it harder to
administer the schemes and
make it difficult to explain to
potential members how the
scheme works. For example, we
have three different systems of
taxation on contributions to the
second pillar: one that applies to
members who have joined before
2000, another for those who joined
between 2001 and 2006; and finally
a much simpler method that applies
from 2007 onwards. We want
simplification of this system.
To these changes I would add, on
the investment side, some changes
in the regulation, to give funds the
ability to invest directly in alternative
investments, perhaps with some
pooling with other pension funds.
The main thing we miss is
a big publicity campaign by the
government to convince Italian
workers that second pillar pensions
are a good thing for them. We have
had one campaign, in 2007 and
that’s it. When you watch TV you
can see promotion of almost
everything else sponsored by the
government, but you don’t see
anything around the second pillar
system. We need to convince Italian
workers that it is a good idea to
do more than rely on the first pillar
to pay a retirement income. ■
European Pensions
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European
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Pensions
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Investment:
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Interview:
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02/11/2015
10:19:55
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Regulation
MiFID II
R E G U L AT I O N
The meaning of MiFID II
Michael Hufton explains just what MiFID II means and why it matters
WR IT T E N BY MicHae l Hufton, f o und er a nd Ma nag i ng d i r ec to r, i ng ag e i r
M
iFID II is the most maligned
and misunderstood piece of
legislation to come out of
the European Union since the ban on
curved bananas. Much of the financial
establishment would have us believe
that MiFID is a bank-bashing measure
that crimps competitiveness and will
cost jobs. It is nothing of the sort.
MiFID II is all about consumer
protection and it should result in
substantially better retirement
outcomes for millions of people
across the EU28 by reducing cost.
Grandiose claims. Let me explain.
Work by Towers Watson has
shown that, for the average pension
fund, transaction costs borne by the
fund can amount to more than all
other costs combined. Compression
in average investment management
fees, largely the result of growth of
passive funds, exacerbates the
problem – it means transaction costs
account for an increasing proportion
of the total cost burden. Point being
if fund trustees want to improve
returns to end clients, a laser focus
on cost pass-through can be at least
as important as attention to
management fees.
Payment for ‘service’
What is striking is that whilst
trustees understand this, few put
formal policies in place to manage
dealing commissions incurred on
their behalf by the fund managers
they employ. Managing dealing
commissions downwards can have
a significant impact on fund costs
28
and performance.
A typical institutional execution
only commission rate would be of
the order of 5-6 bps, with some
funds still paying rates in the region
of 8-10 bps. Yet via direct market
access (DMA) and other efficient
execution technologies the real
cost of best execution is more like
1-3bps. It’s a significant difference
– with the gap often described as
payment for ‘service’. But what
exactly is this service?
The cost of research is already
stripped out from these numbers.
The UK’s Financial Conduct
Authority (FCA) estimated that in
2012, of a total £3 billion of client
money spent on dealing commissions
in the UK market, £500 million of
that went on corporate access –
arranging meetings between
investment managers and the
executive management teams of
quoted companies.
Meeting with the management
teams of investee companies is a key
part of the investment process for
many managers, but using client
funded commissions to pay for that
corporate access was banned by the
FCA in June 2014. Fund
management houses have removed
corporate access from their broker
voting criteria – but there is precious
little evidence of change to market
practice in this area.
Over 90 per cent of corporate
access remains intermediated by
an investment bank, but it is now
provided to clients ‘for free’.
Yet at a system level, there is little
evidence of commissions paid
falling. Companies are not paying
for these meetings either - corporate
broking in the UK market is a free
service for all but the smallest
companies. So if neither institutions
nor corporates are paying, who is?
It would seem likely that corporate
access is the ‘service’ being paid for
within fatter than necessary execution
rates – or alternatively it’s embedded
within research spend. This UK
analysis is equally applicable to
other jurisdictions and has formed a
core part of the European Securities
and Markets Authority (ESMA)’s
MiFID II proposals.
Research is another matter entirely
– and is typically commission
funded, either bundled or via a
commission sharing agreement
(CSA). In the UK, corporate access
explicitly does not qualify as
research, so cannot be bundled with
and paid for along with research
service – precisely what happens in
much of the rest of the world. The
language the FCA uses to describe
this is “an overpayment for eligible
service in order to remunerate an
ineligible service”.
Changing behaviour
Regulation could change behaviour
in two ways. Final, detailed rules for
MiFID II are not yet out – but under
ESMA’s final technical proposal to
the commission, corporate access
would be treated as an inducement.
Europe would be going further than
Regulation
MiFID II
the UK rules. It would mean access
is not commission eligible and has to
be separately priced on a standalone
basis. It could not be provided or
accepted ‘for free’ - or bundled
within execution or research spend.
Secondly, the FCA’s Wholesale
Competition Review is investigating
bundling and price transparency in
corporate and investment banking.
This report, due to be released at
the turn of the year, could influence
the provision of ‘free’ service on
the other side of the same coin –
to the corporate.
A forced unbundling of
corporate access from both
research and execution could
prove material in helping
investment managers reduce
what they pay in dealing
commission. But whatever the
final outcome from MiFID,
pension fund trustees should
have policies in place regarding
dealing commissions incurred to
their funds by third party
investment managers. What rates are
being paid? Are those rates as low as
they could be? How is the manager
paying for research and corporate
access and how are those payments
being determined?
Provision of ‘free’ corporate
broking services to corporates is
a similar distortion, remunerated via
transaction fees, which in many
cases appear to be inflated.
Ultimately all these costs are borne
by the end investor. Being aware
of them and managing them
downwards has to be a good thing.
Underlying issues
It is worth stepping back a bit to
consider the underlying problems.
Low interest rates mean we are in
a low return environment. Simply
put, in a 7 per cent interest rate
environment, losing 0.5 per cent
in frictional costs along the way
doesn’t seem too bad. But in a 0.5
per cent world it’s a major problem.
Work by the London Business
School has shown that over the
lifetime of a pension, reducing charges
by 1 per cent would result in a 38
per cent higher income in retirement
for the individual. So costs matter a
lot in ensuring adequate retirement
provision. View this in the context of
chronic, systemic pension
underfunding - and the urgent need
for new, efficient, low-cost solutions
comes clearly into focus.
MIFID II Is all aboUT
ConsUMer ProTeCTIon
anD IT shoUlD resUlT In
sUbsTanTIally beTTer
reTIreMenT oUTCoMes
For MIllIons oF PeoPle
aCross The eU28
In his September 2015 report to
the Treasury, Edi Truell, chairman
of the London Pension Funds
Authority, highlighted an unfunded
pension deficit at the UK’s National
Health Service (NHS) of £500
billion, equivalent to a third of
the entire UK national debt, and
recommended the NHS increase its
annual contributions to the scheme
from £5.7 billion pa, 14 per cent of
total annual payroll cost, to £32
billion pa, equivalent to 75 per cent
of the annual wage bill. The Bank of
England increased the cash contribution to its pension scheme in
2014/15 to 50.4 per cent of payroll.
Again on Towers Watson numbers,
average contributions to pension
funds are around 10 per cent of wages.
Since the crisis we have seen
a systemic transfer of risk in
retirement provision the world over
from institutions to individuals as
sponsored, defined benefit schemes
have closed and defined contribution
has become the norm.
Furthermore, one of the most
important results of changes to
pension legislation is that
people are likely to hold their
funds for much longer periods.
Removal of the requirement
to purchase an annuity can
extend the lifespan of the
average person’s pension fund
to 50 years or more. This means
an even greater need to focus
on cost - as small amounts
compounded over such long
time periods have a huge impact.
Putting this in context, for the UK as
a whole, the FCA estimates that over
a 30 year period, every 1 basis point
improvement in trading costs could
represent an additional £37.5 billion
in client returns.
This is why it is a matter for
regulators, because this is an issue
where the impact will be felt by
millions of individuals in retirement.
It should be a focus of attention for
us all. Pension underfunding is an
acute problem and drives an
immediate need for change to drive
cost out of the system. Modern
technology enables that change by
providing new, efficient, low cost
solutions – and new regulation will
overcome inertia and vested interest
to mandate that change.
This is how we will avoid the
banana skins which, left unchecked,
have the potential to become the
next financial crisis. ■
29
Investing in
Property
investment
A stable footing
Andrew Williams analyses the reasons why European pension funds are
increasingly turning their attention towards property and what areas within
the asset class are being closely examined
WRIT T E N BY A n dre W W i l l i Am s, f r eel Ance j o ur nA l i s t
A
n increasing number of
pension funds across
Europe are choosing to
devote a greater share of their
investment portfolios to property.
So, what is the role of property
within European pension fund
portfolios? Why are European
pension funds increasingly turning
towards property investments
and what areas of investment
are UK and European pension
funds turning to within the property
asset class?
Attractive returns
According to LaSalle Investment
Management international director,
global research & strategy, Robin
Goodchild, unlevered property
provides attractive income returns
and diversification benefits within
a multi-asset class portfolio. In those
portfolios where part of the assets
are expressly selected to match
liabilities, he says that property
is usually assigned to what he
describes as the growth assets
but, in the UK at least, low risk
properties let on long leases with
inflation-linked rent increases can
be included within the liability
matching assets.
Meanwhile, although he believes
that most schemes tend to focus on
the income and diversification
elements of property, Legal &
General Property research director
30
UnlEvErEd propErty
providEs AttrActivE
incomE rEtUrns And
divErsificAtion bEnEfits
within A mUlti-AssEt
clAss portfolio
Rob Martin argues that a key
advantage of the asset class is that
net income from property is highly
stable, providing schemes with
a very predictable cash flow.
“The yield itself is also relatively
high compared to most competing
asset classes. As schemes move
towards the decumulation phase,
we believe this cashflow element of
property will become increasingly
important for pension fund investors.
Property also has the potential to
provide growth and hedge inflation
through the long-term increase in
rents and the ability to add value
through asset management,” he says.
In view of the fact that
diversification is a key factor for
many schemes, Martin also believes
that the direct ownership of property
has in most market conditions
provided a very effective means of
diversifying wider equity and fixed
income holdings and smoothing
overall portfolio returns.
“Set against this, property is
a management intensive asset
class, which adds cost as well
as complexity. The lot sizes are
relatively large and take more time
to buy and sell than liquid equity
or fixed income. Furthermore,
the costs of buying and selling
are relatively high and hence
investments are most appropriately
made with an expected five to
10 year or longer holding period,”
he adds.
That said, he still highlights
the fact that European pension
funds are increasingly turning
towards property investments
because they recognise that it
can provide attractive risk-adjusted
returns, especially at a time when
the returns from sovereign bonds
are so low. Moreover, he says
that pension funds are learning
how to earn the illiquidity premium
property offers.
Investing in
Property
“It is the income characteristics
that we see motivating many
schemes. With yields on a range
of income-oriented investments
having been depressed by a low
interest rate environment, pension
funds are searching for alternative
assets that can provide relatively
higher but still consistent levels of
yield,” he adds.
Elsewhere, John Forbes, who
led the PwC real estate practice
for over 25 years, and who is now
an independent consultant advising
real estate investment managers,
investors and others in the real estate
industry, points out that property is
an attractive asset class for pension
funds in an environment where
attractive returns are hard to find.
“For defined benefit pension
schemes and traditional life
products, real estate provides
an element of liability matching
and an attractive income. There
are a variety of ways of investing
in property, directly and indirectly.
The underlying asset can provide
a reliable long-term income stream
and an element of liability matching.
Indirect investment via funds or real
estate investment trusts (Reitss) is
a trade off between performance,
volatility, liquidity and risk - [but]
returns are attractive relative to fixed
income,” he says.
Areas of investment
This perspective was first laid out in
the 2012 report for the Association
of Real Estate Funds, Unlisted funds,
lessons from the crisis - which
identified the fact that investing in
real estate often entails a trade off
propErty is An AttrActivE
AssEt clAss for pEnsion
fUnds in An EnvironmEnt
whErE AttrActivE rEtUrns
ArE hArd to find
between a variety of factors,
including risk, volatility and
performance. A key finding was that
many pension funds were investing
in open-ended real estate funds ‘not
because they wanted the liquidity
traditionally associated with openended vehicles, but because they did
not want to be tied into the fixed
timetable of closed-ended vehicles’ leading many managers of openended funds, with the support of
institutional investors, to place
restrictions on liquidity.
“At the same time, defined
contribution pension schemes are
becoming increasingly important.
Many of these schemes need greater
liquidity so there is an opportunity to
create innovative fund structures to
meet their needs. The growth in
number and scale of listed Real
Estate Investment Trusts (Reits) has
also helped,” Forbes adds.
In his view, there are a further
two other areas of significant
innovation in the property space.
The first is that fact that pension
funds are increasingly looking to
get greater exposure to real estate
as an asset class through lending,
“either directly or more usually
through debt funds”. The second
is the fact that the definition of
real estate itself is also expanding with the greatest area of growth
currently in investment in alternative
real estate, residential, student
accommodation and healthcare
“due to the pressure of capital in
more mainstream assets”.
Goodchild agrees that, although
most pension fund property
portfolios comprise office and
retail buildings, they are also
increasingly looking at other
property types, such as logistics
warehouses and industrial estates,
student accommodation, hotels and
healthcare assets.
“In the UK, pension funds are
also starting to invest in mainstream
31
Investing in
Property
residential ‘build-to-rent’ projects,”
he adds.
Martin reports that Legal &
General Property is also witnessing
investors becoming “more
sophisticated with their property
investments.” Whereas historically
schemes may have focused purely
on a diversified exposure to
property, he reveals there is now
a greater understanding that as
property is such a diverse asset
class, there are “many different
grades” of assets and fund strategy
that can be used to achieve different
objectives.
“For pension funds, the most
obvious example of this is the
interest in long-income funds. These
are funds designed specifically to
meet the needs of liability matching
investors - the income from the
assets is secured by long-term leases
to investment grade covenants,
typically with terms that link the
income to inflation, and hence
provide a very effective solution for
schemes who need both high income
security but also a hedge to
inflation,” he adds.
32
indirEct invEstmEnt viA
fUnds or rEAl EstAtE
invEstmEnt trUsts (rEits)
is A trAdE off bEtwEEn
pErformAncE, volAtility,
liqUidity And risk
variation
In terms of the exact ways in which
European pension funds investing in
the asset class, Forbes explains there
is a “massive variation” - with some
choosing direct investment and other
getting involved via funds or Reits,
equity or debt.
Meanwhile, Martin stresses that
investment choice “very much
depends on the size of scheme and
its own objectives for a real estate
allocation”.
“Large schemes with a desire to
take a very active role in shaping
their exposures may still choose to
own a segregated portfolio of assets.
Our experience is that the majority
of schemes will focus on pooled
vehicles to achieve both
diversification and a lower level of
management intensity,” he says.
“A strategy that a number of
schemes are adopting is to mix
holdings in pooled funds investing
directly in property with allocations
to listed property companies (i.e.
Reits). This blends a link to the
underlying asset class through direct
property with the greater liquidity
that is provided by a listed
exposure,” he adds.
Finally, Goodchild points out that
the bulk of European pension funds’
money is invested in low risk, income
producing assets held either directly
or through units in unlisted funds.
“A small portion is invested in
higher risk, value-add and
opportunistic funds which offer
capital growth rather than regular
income. Most Dutch and some Swiss
pension funds have significant
holdings in public real estate
globally, accessing tax-efficient
Reits around the world. However,
most other pension funds focus on
property solely in private markets,”
he says. ■
Investing in
Commodities
investment
A tricky pick
Whilst commodities remain an important asset class within many pension fund portfolios,
Lynn Strongin Dodds examines why some investors are sitting on the sideline in this space
WRIT T E N BY Lyn n S tr ong i n D o D D S, A Fr EEL A n CE J o U r nA L i S t
C
urrent environment
The halcyon days of the
super cycle are long gone
and commodities have seemingly
become the pariahs of the investment
world. The UK and the Dutch, two
of Europe’s largest investors in the
sector, have already scaled back or
withdrew and they are unlikely to
venture back anytime soon.
However, fund managers still
believe this asset class has an
important role to play.
“There are three main reasons
why pension funds in Europe and
other countries put the asset class
into a portfolio – diversification,
inflation hedge and price
Commodities hAve
seemingly beCome
the pAriAhs of the
investment World
appreciation, although this has
not been bourne out over the past
three years,” J.P. Morgan Asset
Management global head of
pensions advisory & solutions
Tony Gould states.
“Inflation also may not seem
like a big issue but pension funds
in Europe have their liabilities
linked to inflation and there is
a desire to hold real assets such as
commodities.”
It is easy though to see why
investors are wary. The rout started
two to three years ago due to a
classic imbalance of supply and
demand. A main driver has been
China’s painful transformation from
the world’s factory to a consumerled economy that has translated into
less dependency on resources.
However, the country’s sluggish
growth rate has sent a shiver down
the collective spine with its latest
6.9 per cent GDP figure – the
weakest since the financial crisis propelling prices into another
tailspin in October.
33
Investing in
Commodities
Bloomberg commodity index,
a broad basket of 22 commodity
futures, slid 0.7 per cent on the
news with oil and base metals
being the biggest casualties. Brent,
the international crude benchmark,
dropped as much as 3 per cent back
below $50 a barrel, while copper
and aluminium lost 1 per cent
and 1.5 per cent to $5,201 a tonne
and $1,554 a tonne respectively.
shale gas and opec
The other ongoing theme is the shale
gas revolution and the Organisation
of Petroleum Exporting Countries’
(Opec), decision to keep the taps
open. The policy is beginning to
bite with US supply now forecast
to average 13.8m b/d in 2015 and
14m b/d in 2016, revised downwards
by 100,000 b/d and 200,000 b/d
respectively. However, although
there might be some bankruptcies
on the horizon, several shale gas
operators have responded by making
their operations more efficient,
renegotiating contracts with service
companies and, most significantly,
cutting production costs and
spending on new wells.
“Many shale gas producers
are still making money,”
Russell Investments director
Nick Spencer says.
“They are adjusting production
based on prices and focusing on
the better quality fields which
so can withstand prices between
$45 and $50 b/d.”
As for agriculture, the big question
mark is over the impact of the El
Niño weather phenomenon that
occurs when winds in the equatorial
Pacific slow down or reverse
direction. This causes ocean
temperatures to rise over a vast area,
which in turn can significantly
disturb weather patterns around the
world. Government forecasters in
the US and Australia have recently
warned that El Niño could be the
severest in nearly two decades,
triggering a spike in prices in several
agricultural sectors such as sugar,
dairy, palm oil and what.
Given the backdrop, it is not
surprising that many investors
are sitting on the sidelines.
Second guessing the bottom as
well as the weather is always
a tricky exercise and views are
divided over allocations.
“We believe that commodities
are an important strategic asset and
a complement to other real assets
such as infrastructure and real
estate,” Spencer comments.
“However, while we see value,
we still see more potential risks on
the downside and our multi-asset
growth strategies have an almost
zero weighting in commodities.”
JLT Employee Benefits senior
investment consultant Aniket
Bhaduri adds: “It would be
adventurous to predict the price.
A prudent approach would be to wait
for important events to play out and
for any green shoots to appear. We
would not recommend going back
into the sector at this time.”
selectivity and strategy
For those that do venture forth,
selectivity is the mantra and many
advocate an active approach to
capturing the returns. The theory is
that benchmarks may offer a broad
exposure but specialist managers
can identify individual commodity
exposure plus extract returns through
playing the contango and
backwardation curve.
“Active management should make
a big difference in commodities
investing as anticipation of supply/
demand fundamentals successfully
can insulate from price shocks,”
Old Mutual Asset Management
head of international business
Oliver Lebleu says.
“More conservative investors will
given the bACkdrop, it is not
surprising thAt mAny investors
Are sitting on the sidelines
34
Investing in
Commodities
given the high volAtility
of Commodity indiCes,
Asset AlloCAtion is
typiCAlly betWeen
2 to 5 per Cent
probably opt for investing via
bonds or equities exposed to the
sector, whilst more speculative
investors will perhaps choose
direct exposure.”
Goldman Sachs Asset
Management managing director
Kathleen Hughes also notes that
European pension funds typically
access commodities through indices
and the futures. Few schemes have
exposure to physical commodities
or use equities, although the
correlation over the longer-term is
high (typically in excess of 80 per
cent). There are though periods of
high drift and these usually occur
when commodity exposure is most
beneficial. However, in some
jurisdictions investing in
commodities and/or derivatives is
restricted and equities may be used
as a proxy. Given the high volatility
of commodity indices, asset
allocation is typically between 2 to
5 per cent with ‘less sophisticated’
plans in the zero per cent to 2 per
cent range, she adds.
GSAM is a proponent of the
active school and invests without
being tied to a particular benchmark.
“There are relative value
opportunities as well as directional
market opportunities that an active
manager can make use of,” Hughes
analyses.
“It is not an easy field as
information evaluation works
differently than in equity markets
and standard risk management
approaches don’t capture the tail
risk of many commodity markets
appropriately but with experience
active commodity investing may
lead to similarly uncorrelated
returns to traditional asset classes
while volatility can be calibrated
to investors’ preferences to less or
even just half of that of passive/
index investing.”
Fulcrum Asset Management
director of research, commodities
Fiona Boal adds: “If there is
anything that we have learnt in the
last five to six years is that to fully
reap the rewards of commodities you
need a long-time horizon and active
approach. I think index investing is
dead. People are sophisticated when
looking at equities and fixed income
and I think they have also moved
away from the benchmarks when
investing in commodities.”
Fulcrum uses carry strategies as
part of its wider premia approaches
in its commodity fund to execute
trades with calendar spreads acting
as signals across energy, agriculture
or metals. Spreads can be just the
mechanical process of maintaining a
long or short position through a roll
period when the front month or spot
contract goes off the board or putting
on a position designed to benefit
from a change in the differential.
“We take it back to the underlying
activity in the physical markets,”
Boal says. “For example, if the
future curve is in contango, we can
reap profits through short positions
in the commodity future and rolling
it forward.”
Columbia Threadneedle, on
the other hand, is looking more
tactically across the spectrum
because of the higher than expected
market turbulence, according to
EMEA head of commodities
David Donora.
“Opec’s behaviour is making
the oil price so much more
volatile and that bleeds into other
commodities. The lower oil price
is having huge ripples across the
global economy and it will take
a bit of time for that to feed through
to the consumer. At the moment we
are more short term in response to
market conditions and are looking
at where the opportunities are.”
This has translated into an
overweight position in sugar and
coffee due to strong fundamentals
and overall underweight in base
metals. However, Donora is more
bullish on the long-term prospects
of copper because of an improved
supply outlook, despite the
slowdown in demand from China
and increased supply in the last
couple of years. Significant cuts in
production, most notably by mining
giant Glencore, is expected to help
restore the balance. ■
35
IORP II Directive
Interview
INTERVIEW
Solving Europe’s
pension puzzle
As lead negotiator on
the IORP II Directive,
Irish MEP Brian Hayes
has said Europe faces
a “demographic crisis”,
which is why it is
necessary to update
the current directive
for future generations.
Natalie Tuck speaks to
him about his proposals
for the new directive and
what needs to be done
to solve Europe’s pension
problems
WR IT TEN BY Natalie tuck
You have said there is a
“demographic crisis” in Europe,
can you explain your concerns
regarding this and why there
is a need to update pension
legislation?
At the moment we have about four
people working for every one
pensioner. If things remain the
same and there is no further
change in structure or demography
it could become two to one within
a period of 40 years. It’s really
important that we recognise Europe
is getting older and we’ve got to
make provision for people as they
get older.
Secondly, there’s enormous
pressure on pillar one pensions
state pensions) because governments
are in deficit across the European
Union. Long term, we’ve got to
encourage people to save and
occupational pensions are a crucial
element of that. They’re not the
only element and it would be
wrong to pretend that the pension
problems Europe faces will be
resolved simply by IORP II, that’s
not the case.
As lead negotiator on the IORP II
Directive you have made several
proposals as to what the new
directive should include, can you
tell us what these are? And how
they will help to ensure better
pension provision for Europe?
Most importantly there should be
no-one-size-fits-all approach.We
need to recognise that there are six
or seven countries that have very
36
established IORPs in place; nothing
should happen that might affect
those countries in a negative way,
that’s very important for me.
Secondly, I want to formally
and legislatively recognise the
importance of pensioners as a social
instrument. It is a very unique thing
we have in Europe, employers and
employees sitting down as trustees
to work on a scheme. It’s not a
normal financial instrument, it’s
a social instrument.
The third big issue that I’ve taken
up is the question of solvency. I do
not believe that IORPs should be
considered as part of Solvency II.
I think that’s crucial because IORPs
are not insurance products. I don’t
think it would be fair to pensioners,
beneficiaries and members. I think
where deficits emerge it is better
that those deficits are plugged over
a period of years with the growing
economy and economies of scale
rather than simply by adding more
costs. I’ve taken that out and it’s not
going to remerge.
Fourthly, I have a lot of proposals
on the cross-border IORPs. I think
we need to see more cross-border
IORPs. I’m very optimistic that we
can increase the number from 84 at
the moment, which has been in place
since the first directive. IORP I has
not been successful in establishing
a proper cross-border market and
I think there are real barriers there.
Therefore, I have proposed we
should tweak the proposal on being
fully funded, at the moment crossborder IORPs have to be fully
funded throughout. I’m having
discussions with different shadow
rapporteurs about that issue and the
Commission to see if we can
produce a balanced approach that
would recognise risk and opportunity
at the same time.
I also think having to have two
authorisations on transfers of crossborder IORPs is a real barrier as
IORP II Directive
Interview
well, so have proposed that only one
should be needed.
I have also stripped out a lot of the
Commission’s proposals on the
members’ benefits statement. There
was too much detail, I’ve made it a
general principles approach because
we already have some really high
standards across Europe when it
comes to the pension benefits
statement. I’ve also taken out some
of the delegated acts that were
originally there for EIOPA, thereby
ensuring that we’re clear about what
we agree as co-legislators when we
agree it.
You would like to ensure
individual member states’
pension systems are respected
whilst applying EU standards to
domestic systems. How can this
be done smoothly and without
conflict?
I think it is about recognising where
a domestic system is in place and
doing well and not disturbing it. I
think what I’ve said on Solvency II,
on stripping out the pension benefits
statement, and what I’ve said in
terms of recognising the social
instruments behind IORPs is an
example of an acceptance of a
no-size-fits-all approach. I think if
people read the report they will
come to that conclusion.
What has been the response from
the European Parliament on your
proposals?
I’m in the middle of discussions.
We expect the report will read before
the ECON committee in December
for consideration in terms of a vote.
Between now and December, I am in
discussions with the shadow
rapporteurs. I’m sitting and listening
to the views of my colleagues on
how we can improve the report. I
have a very open mind about how
we can do that and I’m confident
that we can have a good outcome.
During an ECON meeting you
said you did not want the new
IORP Directive to be a
‘bureaucratic nightmare’ for
pension funds. How are you
going to ensure this doesn’t
happen?
I have made it clear that we should
have a general principles approach
rather than a very prescriptive
approach. I’ve also been clear to
make sure that there would be no
extra cost to pension schemes as a
consequence of IORP II. I think that
would be a disaster quite frankly.
We’re trying to get people to save
and to make sure more people save
within pension schemes and we
encourage more occupational
pension schemes. I think I’ve tried to
reflect that principle in my thinking.
I THINk IT IS AbOUT
RECOgNISINg WHERE A
DOMESTIC SYSTEM IS IN
PlACE AND DOINg WEll AND
NOT DISTURbINg IT
You said that the IORP II Directive
cannot solve all of Europe’s
‘outstanding pension problem
difficulties’, what further steps
could be taken to solve these
problems?
I think we need to ally our long-term
investment strategy now with
pension provision. I mean the
Commission’s European long-term
investment funds (ELTIF) proposal
that is now in place is a wonderful
opportunity to get long-term
investment going in Europe. There’s
also the developments on the Capital
Markets Union (CMU). We need to
be able to ally pension needs with
those long-term investment needs in
Europe.
I’m also interested in the potential
proposals that may come from the
Commission on Pan-European
Pensions (PEPs), which would be
a third pillar private pension scheme
based in a 29th regime operation,
where people would pay into a
European-wide pension scheme.
I think that has the potential to
really revolutionise pension cover
provision, especially in eastern and
central Europe or the Mediterranean
where the level of occupational
pensions is very small.
What are your thoughts on
EIOPA’s proposal of the holistic
balance sheet?
I’m not in favour of it because I
think it’s going to lead to more cost
and while I’m very conscious of the
work that EIOPA do, I think we need
to have a realistic debate. A lot of
these pension schemes are predicated
on growth into the future. I know
that the low interest or no interest
environment, which provides very
little yield, is really challenging for
those pension schemes. I think the
holistic balance sheet is really
Solvency II by the back door. I think
it would undermine a lot of the
progress that we’re trying to make.
The pensions stress test was also
launched earlier this year, which
received criticism from the
industry. Do you think it has
been worthwhile?
EIOPA has a job to do and I respect
its work and we’re likely to see
next year a further examination
of stress tests. I think these are
worthwhile exercises as it’s
important we highlight where
schemes are in deficit and where
issues need to be resolved. We’ve
got to solve those problems by
having better regulation, by having
more cross-border IORPs and better
economies of scale rather than by
imposing more costs. ■
37
Management
Relationships
t
hings haven’t been going too
well for the Keva pension
fund in recent times.
At the start October the Finnish
fund - which provides pensions for
local government, the Evangelical
Lutheran Church of Finland and
Kela, the country’s social insurance
institution - announced that its CEO
had resigned.
Jukka Männistö’s resignation letter
cited a crisis of confidence between
himself and Keva’s board. It was
handed in almost two years on from
when his predecessor, Merja Ailus,
presented her own notice following
a fringe benefits and personal
expenses scandal.
The fallout from Ailus’ abruptlyended tenure resulted in Finland
putting new governance rules in
place at the start of this year. These
focused on openness and clear
governance guidelines in relation
to financial transactions involving
individual board members.
Männistö’s walkout is unlikely to
provoke a similar response, but it
has acted as a reminder of the
various conflicts of interests that
those running pension funds across
Europe have to occasionally
confront, and overcome.
Even in countries with pension
systems as tightly run as in the
Netherlands and Germany, discord
may be starting to find its way
into board meetings on a more
regular basis.
Seeds of discontent
KAS Bank pension fund trustee
Tamis Stuker says that it has been
highly unusual to have strong
disagreement leading to resignations
within Dutch funds up until now.
Traditionally, he says, the
governance model followed in the
country has favoured parity with half
the board members appointed by the
employer and half by employees.
“By law I am obliged to consider
38
scheme management
Balance of power
With heightened funding concerns, tensions could be set to
rise across European pension boards as traditional power
bases are challenged, finds Marek Handzel
WR IT TE N BY Ma r ek H a nd z el, a f r eel a nce j o ur na l i s t
the benefits of decisions for all
stakeholders, including the sponsors,
retirees, active members and even
the Dutch National Bank; every
possible interest group you can
think of.
“That combination doesn’t really
give you a whole lot of leeway to
favour one group over the other. “
What’s more, Dutch funding
and investment and funding
discussions usually take a very
prescriptive route.
“Financing is fairly
straightforward as there is a set of
rules that you have to adhere to.
You can discuss the amounts and
how you exactly follow the rules,
Management
Relationships
but that’s more about the details.”
Nevertheless, as Stuker points
out, the increasing burden of
retirement provision can lead to
more serious disputes, particularly
when employers decide to terminate
their DB agreement with the pension
fund. “When that happens you have
to set up an extra buffer to make
sure that you are able to pay all the
benefits that you need to. So you
do need money to keep operations
going for a while even though the
fund is closed.”
This has not gone unnoticed by
the country’s regulator, DNB. In
February of this year, it issued
guidance on how funds should
spot conflicts of interest and take
measures to ensure that their
decision-making was “balanced
and transparent”.
Across the border in Germany,
a similar trend could creep in, as
Stuker’s colleague, Frank Vogel,
explains. The sales managing
director for KAS Bank says that
pension liabilities have come into
focus at companies who offer
pension benefits, as they have
become much more closely linked
to actual pension assets.
“Funding levels in this sector
lie on average between 50-60 per
cent,” he says. “The unfunded
side on the balance sheet is
causing more headaches and one
factor is the decreasing discount
rate which has a huge impact on
those liabilities.
“Set at 5.04 per cent in 2012 it
is now expected to be around
3.8 per cent in 2015, based on
Bundesbank assumptions, and could
be as low as 1.23 per cent by the
year 2024. This decrease could lead
ThE incrEaSing BurDEn of rETirEmEnT proviSion
can lEaD To morE SEriouS DiSpuTES
to a doubling of pension liabilities
on the balance sheet. This will
certainly be a burden that has
a huge impact on those companies
and will lead to tension.”
Germany may be able to ride
through some of the pressure
hoisted on board dynamics however,
thanks to a certain prevailing
attitude and the structure of its
corporate pension boards. Pension
boards are always made up of the
corporate sponsor’s employees
and many Germans are reluctant
to bite the hand that feeds them,
says Vogel.
Further alleviation is also
provided through the popularity
of direct insurance retirement
saving plans and Pensionskasse,
says Lutz Hoheisel, a partner
with law firm Squire Patton
Boggs in Frankfurt. These heavily
regulated vehicles, with their
ultra-conservative investment
strategies and ring-fenced
governance structures, don’t
allow for any conflicts of interest
to creep into proceedings.
Drawing battle lines
Where heads have clashed more
frequently has been in the UK.
Broadstone actuarial director
John Broome Saunders says that
heated discussions have always
existed within the country’s huge
DB sector. Nowadays though, the
nature of conflicts has changed
somewhat.
In the past, he says, one classic
issue would be that of a finance
director acting as a trustee and
having a strong influence on the
direction of funding discussions
to the possible detriment of scheme
members. Today, however, the
mirror opposite can be true.
“Often if you don’t have
professional trustees, then the lay
trustees are either receiving, or
expect to receive pensions from the
39
Management
Relationships
ThErE arE SiTuaTionS
WhErE ThE EmploYEr
DoESn’T fEEl aBlE or
Willing To puT ThE monEY
in ThE plan ThaT ThE
TruSTEES fEEl iS nEcESSarY
scheme in the future. And therefore
you do tend to find that there is
potential for conflict there,”
says Saunders.
Choosing which inflation index
to calculate benefit increases is
a standard acid test. CPI, the
measure now used to calculate the
state pension by the UK government,
has historically always been less
generous than the RPI index. Many
trustees therefore opt for the old RPI
index, which can only mostly be
explained by self-interest.
Other scenarios where trustees
and sponsors can clash is over
de-risking. Plans to buy out schemes
are often driven by trustees, says
Saunders, but their motives need
to be questioned.
“Is it being driven by trustees
because they see it as the best way
to secure their benefits? Or is it
trustees wanting it because they
think it’s the best thing for the
scheme as a whole? If it’s the
former, then that’s questionable.
It’s the employer who should be
ultimately making those decisions.”
In the UK, however, the
relationship between trustees,
pension managers and sponsors
can be one where the latter find
that they are walking on eggshells.
Trustees, as Saunders underlines,
40
have the ability to wind up a
scheme. This nuclear option, as
he calls it, is an incredibly powerful
weapon in their negotiating armoury.
“Just to threaten to use it is
enough to scare quite a lot of
employers,” he says.
Although trustees can threaten
Armageddon, ultimately however,
unlike some of its continental
neighbours, there is an arbitrator
that UK schemes can turn to.
“There are situations where the
employer doesn’t feel able or willing
to put the money in the plan that the
trustees feel is necessary and in
those circumstances you wouldn’t
normally see a trustee board
resigning, that doesn’t happen,”
Squire Patton Boggs partner Judith
Donnelly says.
“Instead, they would refer the
issue to The Pensions Regulator
and then the regulator would
impose its own funding plan.”
Across the Irish Sea, trustees
now have similar, if not stronger,
levels of power to those of their
UK colleagues.
Two cases in the last couple
of years, involving the Element
Six and Omega Pharma pension
schemes, have cemented trustees’
influence in Ireland.
The first case saw the schemes’
trustees battle off a challenge
from members who claimed
a breach of trust and conflict of
interest in the trustees’ acceptance
of a funding plan.
The second found in favour of the
trustees of the Omega Pharma DB
scheme in their claim for deficit
contributions against the scheme’s
employers. After having to go all
the way to the Court of Appeal,
the trustees succeeded in obtaining
€2,439,194 to plug a deficit gap.
Both results mean that it would
take a bold employer to challenge
trustee funding decisions, and a very
confident membership to confront
the scheme’s financial guardians. ■
Pensions
Administration
ADMIN
Robots versus humans
Nick Martindale explores the need for a balance between automation and human
intervention within pensions administration
WRIT T E N BY N ick Ma r T i Nda l e, f r eel a Nce j o ur N a l i s T
T
echnology is becoming an
increasingly important part
of the pensions landscape,
both in terms of engaging members
and in the behind-the-scenes
administration functions that are
required for any scheme to run
effectively.
The need for technology
“The technology underpins the
quality of the administration and
the member experience,” says the
UK’s Pensions Administration
Standards Association (PASA)
board member Michele HironsWood. “Good technology not
only maintains high levels of data
integrity through data validation
but also allows for sophisticated
automation and process
management, which are key
enablers to member self-service
functionality.”
Indeed, the level of automation
that can be achieved without
manual intervention is becoming
a core consideration for trustees
when looking for a provider, adds
fellow PASA board member
Geraldine Brassett. “In an ideal
world a straightforward case
should flow through from employer
to member without ever being
touched by an administrator,”
she contends.
The recent pensions freedoms
reforms in the UK have only served
to make this more important, says
adds Premier head of administration
services Dan Taylor. “Trustees
need to be evaluating whether
providers’ systems are flexible
enough to handle a more complex
administrative landscape of defined
contribution de-accumulation
options such as UFPLS and
drawdown,” he says. “They
should also be making sure that
platforms have full end-to-end
straight-through-processing
solutions to reduce risk and delays
in members’ investment options
being implemented.”
41
Pensions
Administration
Providing a balance
Yet this does not mean the role of
the administrator is redundant, or
that technology is the only factor
that should be considered when
selecting a partner. “To only focus
on the technology would be to
ignore a very large part of what
makes a client/provider relationship
successful – the culture and the
people in each organisation,” says
Mercer UK retirement administration
business leader Rich Tuff. “A well
matched partnership will help ensure
a shared vision and delivery of what
makes an outstanding service. This
is very much a ‘people business’
and a focus on only one facet could
prove expensive in the long run.”
Profund Solutions managing
director Malcolm Johnson believes
technology is there to help, rather
than replace, the traditional
administrator, freeing them up to
focus on higher-value activities.
“With the constant pressure on
administrators to undertake more
complex tasks at higher volumes,
the value that automation can
bring to support the role of the
administrator has never been
more important,” he says.
“Low-volume, high-complexity
tasks such as transfer value
calculations, which were typically
undertaken by the actuary or by
spreadsheet, have become highvolume and more complex tasks,
as members look to understand the
value of their pension benefits.
Having such calculations automated
within the administration system
itself can not only save the trustees
money in actuarial fees, but allows
administrators to provide a faster
and more efficient service to
members,” Johnson adds.
Alongside this, many providers
and schemes will be required to
administer defined benefit (DB)
schemes for many years to come,
adds Brassett. “The need for
42
administrators with strong technical
DB knowledge will remain,”
she says.
“In addition, while many DB
schemes have undertaken extensive
data cleaning, the guarantees and
grandfathered benefits that still
feature in many designs mean that,
in some cases, automating
calculations is not cost-effective
and cases will continue to need
to be processed manually,”
Brassett explains.
To only Focus on The
Technology would be To
ignoRe a veRy laRge PaRT
oF whaT makes a clienT/
PRovideR RelaTionshiP
successFul - The culTuRe
and The PeoPle in each
oRganisaTion
The human touch
There is, however, a shift away
from the ‘all-round’ administrator,
she says, and a trend towards
providers training individuals to
support particular schemes where
there is less automation or a different
model to standard provisions.
There are other factors, too, which
need to be considered when
selecting a provider. “Of equal, if
not greater, importance is the level
and quality of resourcing, so how
many administrators are allocated
to a contract and what type of
professional training and support
they receive,” suggests Taylor.
“Even in the most technologically
advanced service you still need good
quality people turning the handle
and being on hand to answer
increasingly technical member
enquiries.”
Brassett points out that trustees are
now expected to become much more
involved in the governance of
administration, so administrators
need to be able to respond rapidly
and effectively.
“Trustees are increasingly asking
for information on disaster recovery
and business continuity so it is
important to ensure that these
aspects are robust at the outset,”
she says.
Full potential
When it comes to technology,
trustees also need to be sure they
are getting the full functionality they
are shown in any sales presentation,
warns Veratta business development
manager Tom Nimmo, including
checking the ability of the
administrators to use this. “Even
market-leading systems will only
be effective if they are used correctly
and to their full potential,” he says.
“Something to look out for is
ensuring that system automations
such as member benefit calculations
and letter production will be
implemented for the scheme.
The criticality of using systems
properly means that administrators
are as important as ever.”
The longevity of the system is
another factor that should be taken
into account, adds Trafalgar House
Pensions Administration business
operations manager Phil Claridge.
“Questions should be asked around
the technology on which the
administration platform is based,
how flexible and futureproof it is,
the support and upgrade structure,
how easy it is to automate and
what access can be made
available to members,” he says.
“The member access aspect in
particular is becoming more
important, particularly in the DC
space. The more members can do
themselves, the less strain there is on
providers and the more cost-effective
the service can be.”
Pensions
Administration
Just how well schemes are using
their budgets to get the right
administrator is open to debate.
“There are still huge opportunities
for improvement in the
marketplace,” says Taylor. “We
regularly see schemes that are being
overcharged and underserved by
their administrators. Trustees are
reluctant to change as they see the
process as too complex, too high
risk and too much work. This
reluctance has ultimately resulted in
falling standards across the market.”
Tuff, meanwhile, points out that
many third-party administrators
(TPA) spend millions of pounds
each year on system development,
but also stresses the need for them
to invest in their own staff and in
member-facing applications.
“Demonstrating commitment to the
TPA market should include training
and development spend as well
as technology spend,” he says.
“Creating a workforce of ‘button
pressers’ benefits no one, and
an experienced, knowledgeable
workforce will provide a far
superior service to clients and
members alike.”
The pension sector as a whole
also has room for improvement,
particularly when compared to its
sister banking industry, contends
Claridge. “While the banking
industry has long since
moved to an online
self-service
model, the
majority of pension schemes still
don’t have a member website,” he
points out. “This needn’t be a huge
expense for pension schemes as
many modern administration
platforms should provide some
level of online access as standard.”
Often, it is the schemes
themselves rather than the
administrators that are the issue,
says Nimmo. He identifies two
issues as particular problems in
preventing schemes from fulfilling
the administrative needs of their
members: poor quality data and
the need for system migration
and calculation automation.
“There is normally a significant
cost associated with these exercises
and it can be offputting for many
pension schemes,” he says.
“However, adopting a modern
administration system can rapidly
offset the initial set-up costs so it’s
something that all pension schemes
should consider at regular intervals.”
Ultimately, trustees will have
to find the right balance
between ensuring their
administrator has
the latest
technology, in a form that allows
it to benefit from any future
improvements, with the other
elements that are so important to
the overall success of a scheme’s
operation. Taylor, though, sounds
a note of caution. “Trustees
will undoubtedly spend more
time looking at the platforms
administrators use as they
underpin cost, risk and member
service options,” he says.
But they need to be cautious
and not be seduced by state-ofthe-art online platforms that
distract from an erratic, poorquality core service. Trustees
also need to engage with their
members to better understand
what they actually want and
need, instead of pursing digital
engagement strategies with
memberships that would prefer
more traditional communication
channels.” ■
43
Capital Markets
Union
r e g u l at i o n
Adding
complexity
David Shearer explores the Capital Markets Union, securitisation and the impact on pensions
WR IT TEN BY Dav iD She are r, par tn e r at g lo b a l l eg a l p r ac t i ce, no r to n r o S e F ul b r i g h t
t
he securitisation regulation
announced as part of the EU’s
Capital Markets Union
package is intended to assist in its
overall aim of achieving higher
levels of economic growth.
Securitisation, in this context,
means the repackaging of an
exposure or pool of exposures into
debt obligations that are repaid from
the proceeds of back exposures and
are tranched into different layers of
credit risk. However, it threatens to
become a patchwork of competing
and possibly overlapping regulatory
bodies with investors still subject to
regulation by their sectoral regulators.
Who will regulate the originators,
sponsors, original lenders and issuers
is as yet less clear. For issuers who
are not currently regulated as an
institutional occupational pension
fund (IORP), bank, insurer, Ucits, or
alternative investment fund
(e.g. a manufacturing concern that
wishes to securitise its receivables
or a property company that wishes
to securitise its rental income), it is
left to member states to designate
one or more competent authorities
to regulate them. The exact basis
on which such designation is to
take place is left to the relevant
member states – it would be
unfortunate if one of the results
was multiple regulators seeking
to claim jurisdiction in relation to
the same issuers.
44
What does this mean for pensions?
IORP investors may need to
familiarise themselves with the
requirements of a range of different
regulators of securitisation issuers,
bearing in mind that some may
apply the rules differently to others.
They may also need to be alert to
situations where an IORP regulator
takes a different view to the
regulator of an issuer.
Unless the relevant competent
authorities adopt a safe harbour
regime in relation to differing
opinions between regulators, certain
IORP investors may need to follow
the approach approved by more
conservative of the regulators. One
potential concern to IORP investors
will be whether the determination by
a competent authority in a different
jurisdiction to the IROPs that there
has been a breach of the regulation
will also cause the relevant
securitisation to be deemed to be in
breach in the IORP’s jurisdiction as
well, with potential implications for
the ability to continue to hold that
securitisation or for the solvency
capital treatment of that securitisation.
It is slightly too early to say
whether, as intended, the regulation
will consistently regulate all
securitisations where the issuer or
investor is in Europe. Each EU
jurisdiction is to appoint competent
authorities to act as regulators of
investors and issuers within their
jurisdiction.
The degree of extra-territoriality
applying in respect of the
securitisation regulation is only
likely to become clearer once the
relevant sanctions regimes have been
published. This will demonstrate the
degree to which a non-EU located
issuer will be expected to comply
with the issuer obligations under the
securitisation regulation.
The exclusion of non-EU issuers
from the European securitisation
market (were this to be the effect of
the securitisation regulation) would
not necessarily be positive for the
European issuers – some investors
might choose not to allocate funds to
the asset class if they felt it was not
sufficiently liquid and trading
non-EU bonds when European
issuance is quiet would be one way
of maintaining liquidity and critical
mass during quiet periods in Europe.
Due diligence
The due diligence requirements
previously applying to banks under
the capital requirements regulation
will now apply to IORPs. In
addition, with the introduction of
positive requirements for issuers, all
investors (including IORPs) will be
required to verify the satisfaction of
those positive issuer obligations by
the issuer. Thus various, quite
detailed transaction structuring and
documentation requirements that are
Capital Markets
Union
supposed to be the responsibility
of the issuer to implement will
nevertheless be the responsibility
of investors to double check.
This suggests that the decision
making process around investments
in securitisations will be time
consuming and potentially costly.
IORPs are going to have to ensure
they have sufficiently documented
(and observed) processes in place to
ensure that any securitisation they
invest in meets all the requirements
imposed, not only on the occupational
pension fund, but also the issuer.
It is maybe too early to say that
the securitisation regulation amounts
to a charter for lawyers and advisers
who will scrutinise securitisation
documentation on behalf of IORPs
and report back to them on compliance
with the various regulatory
requirements, but it does not seem
an altogether unlikely outcome.
What the penalty will be for IORP
investors that fail to comply with
such due diligence requirements is
not yet clear. The draft prudential
requirements directive published
concurrently with the securitisation
regulation only applies to credit
institutions and investment firms.
However, a second directive on
the activities and supervision of
IORPs is expected later this year,
which may aim to impose a new
solvency capital regime. It may be
indicative that the penalty for banks
or investment banks that fail to
comply with the due diligence
requirement will be, for a first
offence, a risk weight increase of at
least 250 per cent (capped at 1,250
per cent) of the risk weight otherwise
applied to the offending position.
Such capital requirement increase
is to be greater for each subsequent
breach, with no upper limit (and no
‘slate wiping’ provision – a breach
occurring 50 years after the previous
breach would, in principle, still
attract a higher penalty than the
previous one). Whether a similar
regime will be adopted IORPs
remains to be seen.
Simple, transparent and
standardised (STS) securitisation
The securitisation regulation
creates a new category of STS
securitisation. In fact it creates two
such categories of STS securitisation,
one for non-asset backed commercial
paper (ABCP) and the other for
ABCP securitisations. The intent is
that the two should be broadly
similar, but recognise the structural
differences between the two types
of securitisation.
The requirements include that the
underlying exposures be homogenous
in type, performing, to borrowers
with good credit and be full recourse
to the borrowers. The securitisation
is to be clearly documented, selfliquidating, any interest rate or
currency mismatches be hedged and
the portfolio not actively managed.
There are also requirements, novel
in Europe, for the provision of static
and dynamic pool data and cash flow
models. For ABCP, there are
restrictions on the maturity
mismatches (underlying assets not to
have a maturity of more than two
years) and requirements for sponsor
liquidity support.
While it may become clearer
during the implementation phase, it
is not entirely clear that any issuer
will be able to comply with the
hedging requirements.
While securitisation swaps
do not need to be cleared, the
collateralisation requirements for
OTC derivatives have not been
disapplied by the securitisation
regulation.
There is only a reference in the
recitals to an ‘appropriate level’ of
collateralisation being required,
bearing in mind the secured nature
of the swap obligations. This appears
to have been drafted completely
disregarding that in a properly
structured securitisation there
will be no assets available for
collateralisation at all.
Banks and investment banks will
receive, subject to meeting the
requirements of the prudential
regulation, better regulatory capital
treatment for STS securitisations
than for non-STS securitisations.
What regulatory benefit there will
be to occupational pension funds for
investing in STS rather than non-STS
securitisations remains to be seen.
The future of securitisation for
pension funds
Should IORPs expect to be
inundated with new securitisation
papers following the adoption of
the securitisation regulation?
Sadly, the answer is probably not.
Issuers, previously unregulated in
this market, will now have to come
to grips with their newly regulated
status. Likewise, the regulators will
need to get to grips with the market
and their role in it.
The scope of the securitisation
market in Europe is also likely to
be circumscribed by this regulation,
making it impossible to create
securitisations that fall outside the
scope of chapter two (which is
currently possible if you can find an
investor who is not bound by the
capital requirement regulatory risk
retention rules and willing to buy it).
The pre-securitisation regulation
position in this regard is arguably, in
a market dominated by institutional
investors, the appropriate balance
between compliance and freedom
of contract. This regulation, sadly,
puts regulation and stasis ahead of
dynamism and free movement of
capital. It also doesn’t offer investors
any real protections not in existence
prior to the GFC, while offering
plenty of new disincentives to
issuers and it will likely be
increasing compliance costs for all
involved in the market. ■
45
Pension fund
Costs
SCHEME MANAGEMENT
A question of cost
Edmund Tirbutt assesses levels of cost in the European
pension fund space and whether schemes will place
greater importance in this area in the near future
WR IT TEN BY E dmun d TirbuT T, A FrE E LAnCE J O ur nA L i S T
C
ost control, as in any area of
business, remains a significant
issue for European pension
funds but major improvements have
been made in this respect during the
last decade. The main drivers have
been tighter regulation, technological
advance, an increasingly competitive
marketplace and an awareness of
the need to pull out all the stops to
tackle deficits.
Cost efficiency
Cardano head of innovation Stefan
Lundbergh observes a big emphasis
on cost efficiency in both the
Netherlands and the UK, where he
is primarily involved in advising
occupational pension funds, and also
46
in Sweden – where he lives.
“A lot of unhealthy business
practices have been exposed and
dealt with via regulation, and the
industry is much more healthy than
10 years ago,” he says. “We are not
noticing any trends for costs to
increase. In fact it’s the other way
around as people are becoming
much more cost aware.”
Punter Southall head of
international Julia Whittle also
believes that, if anything, costs have
been getting better rather than worse,
and points to greater transparency
being evident in quotes she receives.
“When we get quotes from
providers in different countries they
tend to be much clearer about the
costs involved than before,” she
comments. “So we don’t have to go
back and ask further questions.”
Aegon investment director Nick
Dixon observes that around 10 years
ago the annual management charge
on a good passive fund used to be
around 50 basis points and that it is
now seven or eight basis points,
whilst during the same period the
charge for an actively managed fund
has reduced from around 165 basis
points to around 80. The provider’s
fee – covering plan administration –
has also reduced from around 60 to
65 basis points to around 35 whilst
the cost of advice has also fallen, but
by a far more modest margin.
Dixon says: “Fees have been more
resilient but typically they have
shifted from an up-front fee and
commission to an ongoing charge
and, overall have come down a bit.
I am not aware of pension costs
generally going up in any European
countries but they may seem to be
higher to some people because
inflation is lower. If you are now
getting gross returns of 3 per cent
and costs of 1 per cent then costs of
one-third of returns may look worse
than in past years when annual
returns were 8 per cent or 9 per cent
and costs could well have been
around 2 per cent.”
In Ireland, Trustee Decisions
managing director James Kavanagh
can negotiate annual management
charges down to around 40 basis
points for active funds.
“I think, certainly since the
late 1990s, independent trustees
have been more proficient in
understanding charges,” he states.
“Fifteen years ago it was a
different world but we are now in
a new paradigm and we know that
if we have scale we can drive
managers down. Charges in Ireland
are quite high for individual
pensions but not for group ones.”
Interestingly, however, statistical
Pension fund
Costs
research by the OECD has found
that, even for individual pensions,
costs either decreased or stayed the
same in most European countries
between 2004 and 2014. There was a
slight increase in Switzerland but the
only significant increase occurred in
Poland, and this can be explained by
the recent major changes to the
country’s private pensions systems.
Improvements
Nevertheless, many commentators
who testify to a downward trend in
pension costs tend to qualify their
statements by pointing out that there
still remains room for improvement.
Whittle says: “There is still some
way to go and we can’t afford to get
complacent.
“I think that some sort of European
directive on costs would be useful,
but there is nothing in the pipeline.”
According to the OECD’s
financial affairs division private
pensions analyst Stephanie Payet,
some countries can still do better
than they are doing currently.
“Estonia, Spain, Poland, Slovakia,
Slovenia and the Czech Republic
still have charges well above average,
she explains.”
Indeed, Novarca CEO and founder
Marcel Staub believes that costs will
become such an issue with European
pension funds that in five years’ time
people won’t touch investments if
they don’t understand the costs in
the same way that they haven’t been
prepared to invest where they
haven’t understood the risks since
the 2008 financial crisis.
He says: “There is a general
change in environment in which
people are starting to think about
costs. You only get a good
performing asset if the relationship
between return, risk and cost is
healthy, and I feel that if you don’t
have full transparency in these three
areas you shouldn’t be taking an
investment decision. A lot of the
yOU ONLy GET A GOOD
PERFORMING ASSET IF THE
RELATIONSHIP BETWEEN
RETURN, RISK AND COST
IS HEALTHy
reason that European pension funds
don’t get the right relationship
between the three is that costs are
not transparent.”
Transparency
Staub acknowledges that regulation
has the single biggest impact on
transparency and that transparency
has the single biggest influence on
cost, meaning that pension funds in
some countries have a head start. For
example, private equity funds have
to show degrees of transparency to
Swiss pension funds that they don’t
have to do anywhere else. Similarly,
although ‘bundled brokerage’ –
which sees research fees being
embedded in brokerage – is not
actually illegal anywhere, it is
perceived as bad practice in both the
Switzerland and the UK.
But his main message to European
pension funds in all different
regulatory regimes is “not to close
your eyes”. In particular, he feels
many are guilty of false economies
and need to spend more on resources
to save costs in the long run.
He continues: “A lot of pension
funds are understaffed and should
man up. For example in Switzerland
very few pension funds have a
Bloomberg Terminal but virtually
every asset manager in the world has
one. The whole issue about cost is
having good information and
understanding it but most pension
funds run on a very small budget
and they may think that spending
$2,000 a month for a Bloomberg
desk is too expensive, even though
they may be spending hundreds
of thousands of dollars a month
on asset management fees.
“Most investment funds have
a choice of share prices, and
Bloomberg can tell you about these
and about whether you are getting
a good rate from your bank. We’ve
seen hedge fund of funds structures
where the costs have eaten up the
entire investment after six or seven
years but in many cases the pension
funds hadn’t even noticed because
the overall return was still good.”
Dr. Ashby Monk, executive and
research director at the Global Projects
Center, Stanford University, agrees
that if European pension funds knew
what they were paying for they
might choose to do things differently.
“A lot of fees are not being
supervised in a rigorous manner and
so there is a complacency amongst
big asset managers,” he says.
“If we really dug in and explained
to European pension funds the
difference between gross and net
returns they would really get onto
it. Most people view the bits they
save from fees and costs as being
irrelevant but there are huge benefits
in understanding them.
“There is no standard market price
in private markets, which are a bit
like secondhand car sales. But
Sweden is more efficient than most
other European countries because
they are very professional, and the
Netherlands and Denmark are also
good at cost control.”
Monk even goes so far as to
suggest that remuneration for
external advisers should rise in line
with investment performance
because at the moment it’s hard to
understand why some advisers are
earning their fees. This certainly
seems revolutionary but if Staub’s
predictions about the importance that
pension funds will attach to costs in
five years’ time prove true it is not
hard to see it happening. ■
47
Pension
Talk
In their own
words...
Industry personalities’
comments on the hot
topics aﬀecting the
European pensions
space
On the Irish pension
fund levy not continuing
into 2016
“The pension fund levy
has done its job and
is no longer needed
to fund the 9 per cent
VaT rate because it is
more than made up by
increased activity and
employment.
So i can confirm that
the remaining pension
fund levy of 0.15 per
cent introduced for
2014 and 2015 will end
this year and not apply
in 2016. The original
0.6 per cent levy ended
in 2014.”
irish Minister for finance
Michael noonan
48
On the need for Italian pension reform
“if you look at it from the angle of the employee all the
reforms will make retirement income smaller than it used
to be. But when you had a first pillar guaranteeing 80 to 90
per cent of your final salary, not considering contributions
you have made, this kind of system was not responsible
and was unfair.
“if i were in the government i would try to push more
people into occupational pensions, because having your
risk spread across two pillars, or even three, is very sound
from a financial point of view.”
candriam risk global head of client relations for europe and
the Middle east renato Guerriero
franceSco BriGanTi
european association of Paritarian institutions (aeiP) director
“Active workers are paying twice: high contributions to the first pillar, taxes
on investment returns and then maybe they will pay indirectly through the
financial transactions tax. All the burden is on the younger generation; not
enough contributions are made by the older generation.”
roBerTo Veronico
Mercer’s retirement leader and principal for italy
“In a few years the ratio between active workers who pay contributions to
social security and retired people will decrease dramatically, so the current
level of pension is not sustainable forever. There is a strong need for
complementary pensions.”
Pension
Talk
On the need for a balance within administration between
automation and human intervention
“The technology
Dan Taylor
Premier head of administration services
“Trustees need to be evaluating whether providers’
administration and the member
systems are flexible enough to handle a more
experience. Good technology not only
complex administrative landscape of defined
contribution de-accumulation options such as
maintains high levels of data integrity
UFPLS and drawdown. They should also be making
through data validation but also allows
sure that platforms have full end-to-end straightthrough-processing solutions to reduce risk and
for sophisticated automation and process
delays in members’ investment options being
management, which are key enablers to
implemented.”
underpins the quality of the
member self-service functionality.”
rich Tuff
Mercer uK retirement administration business leader
“To only focus on the technology would be to ignore a
very large part of what makes a client/provider relationship
successful – the culture and the people in each organisation.
A well matched partnership will help ensure a shared vision and
delivery of what makes an outstanding service. This is very much
a ‘people business’ and a focus on only one facet could prove
expensive in the long run.”
Pensions administration Standards
association (PaSa) board member
Michele hirons-Wood
On how to manage investment shocks, such as the Volkswagen scandal and the crashing
of the Chinese stock markets
“There are three quality checks we go
through. We look at the solidity of the
balance sheet, the substantial competitive
advantage, and the quality of the
management. if any of those is not what
you’ve expected, such as lots of debts that
have been kept hidden, a new competitor
that has breached that advantage, or the
management has not behaved as you
would expect, you have to re-examine the
investment and rethink.”
KeiTh GuThrie
cardano chief investment officer
“The China crash points to more ‘systemic risk’.
That’s where there is a risk that can cause a
reaction in another part of the economy. The
situation in China is much more like that. That’s
the type of risk we spend time trying to figure
out. There are clear linkages through all the
commodities suppliers to China. There’s a clear
ripple effect if China is slowing down.”
ThS Partners founding partner cato Stonex
49
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