The amendment, put forward by Lord Browne and Baronness Drake, both Labour peers, and Lord Turner, a cross-bencher and former chair of the Pensions Commission, compels ministers to lay regulations restricting charges before Parliament before the end of April 2015.This follows recent statements from the shadow government, which called on prime minister David Cameron to ensure the charge cap was implemented, to protect savers.The sudden ramp-up in pressure over charges in auto-enrolment schemes comes after the current pensions minister, Steve Webb, announced a postponement of the cap by one year.Originally, the government began consulting on capping charges in late 2013, with expected implementation of a cap – of between 75 and 100 basis points – by April 2014.However, the minister admitted the cap was too complex, and that enforcing it from April would be unfair to those currently going through auto-enrolment.In response to this, opposition party members berated the government, accusing it of bowing to lobbying by the insurance industry.Labour pensions spokesmen Gregg McClymont said the move was characteristic of the government, and questioned its commitment to implementing a cap in the future.Minister Steve Webb has consistently denied cancelling the cap altogether, and said one would be implemented by April 2015 at the latest.However, with political parties gearing up for a general election in May 2015, doubts remain over how much the Department for Work & Pensions can get through Parliament before it is dismissed.It is unclear whether the amendment will remain in the Bill before its ascent into law by the summer.The coalition government also control the second chamber, meaning the amendment could get voted down before its final publication.In addition to the political debate, analysis from the government showed current charges within DC schemes are higher than previous estimates, with some falling above proposed capped levels. Members of the UK opposition party have increased pressure on the government after it postponed the implementation of a cap on charges, by tabling amendments to pensions legislation passing through Parliament.The Pensions Bill, which is currently passing through the UK House of Lords, Parliament’s second chamber, is expected to become law by the summer.Within it lies the legislative perimeter allowing the government to impose a cap on charges for defined contribution (DC) auto-enrolment schemes.However, after the government backed down on imposing a cap by April 2014, the opposition party, which has long supported a cap on charges, tabled an amendment forcing action by ministers.
At every conference, there is an elephant in the room, a subject not directly addressed by speakers, but discussed between delegates over coffee, lunch and dinner. The risks inherent in liability-driven investing (LDI) are that subject at this year’s National Association of Pension Funds (NAPF) Investment Conference.Speaking off record, one delegate, the trustee of a super mature defined benefit (DB) scheme, points out that, if interest rates rise by 100 basis points, the LDI programme he helped design would need to post more collateral in cash or Gilts. “Both areas drag on performance in a portfolio where we are already allocating more than I like to fixed income,” he says.Another delegate, also off record, wonders if LDI has distorted asset allocation out of reasonable form. “Should we have so much of our assets in bonds and an overlay that does not in absolute terms produce any returns for our members, or should we put more in equities?” he asks.The background to this is widely predicted rises in interest rates. Keynote speaker Roger Bootle, chairman of consultancy Capital Economics, predicts a rise by the end of next year. That this is of only 25bps, from 0.5% to 0.75%, is easy to lose sight of. The conventional wisdom is that a tightening of monetary supply must push up interest rates with a negative impact on Gilt and investment-grade corporate bonds, exactly those assets now held by UK pension funds as a key component of their LDI strategies. Events in the Ukraine, even the forthcoming Scottish independence referendum, have also reminded delegates that non-economic political and systemic risks lurk constantly just beyond the firelight, threatening to intrude without warning. “What would happen to our LDI programme if interest rates were forced up by say 200 or 300 basis points?” asks another delegate. “I am sure our consultants will have run those numbers, but I don’t recall them telling us the result.”Of course, no one is suggesting LDI is about to be superseded by a new set approach to managing interest and inflation rate risk. “But there may be some re-engineering on a scheme-specific basis,” concedes Gurjit Dehl, vice-president at Redington. “And we are looking to find alternatives to Gilts and investment-grade corporate bonds.”The market is rendering these too expensive for all but the best-funded pension schemes. Instead, there is a hunt for ‘new’ combinations of less liquid assets offering an illiquidity premium to hard-pressed trustees. Some of this is visible at conference events – private equity, farmland, direct lending, small-cap equities, emerging debt, infrastructure and more. We can expect these to be combined in asset portfolios designed to reduce the cost of LDI.Meanwhile, a debate is developing over the correlation between short and long-term interest rates. The price of LDI hedges is, after all, dependent on long-term rates. Short-term rates can rise sharply without affecting long-term ones, point out LDI providers. But many, not least Bootle, foresee a rise in long-term rates and a return of higher inflation rates, which will reduce the real cost of Gilt redemption. If this happens, the cost of LDI will rise, but, for many trustees, there is no alternative.
Dutch lawmakers have raised concerns over the wide discretion granted to the European Commission in designing a universal pension statement.The Pension Benefit Statement (PBS), proposed as part of the revised IORP Directive, would limited disclosures on accrued benefits to two pages, with the exact shape of the statement to be set out in a “delegated act” – allowing the Commission to set regulation without input from the European Parliament. However, there has been some debate as to how the Dutch government should seek to remove the provision allowing for the use of the delegated act to set the PBS.According to the Dutch Cabinet, negotiation is the best way. However, in the opinion of Pieter Omtzigt, MP for the Christian Democrats (CDA), the Cabinet should vote against the delegated act in Brussels.He has tabled a motion asking the Cabinet to oppose the proposed revision of the IORP Directive.“Once a directive has been established, allowing the EC to independently set rules, it will bypass the national parliament, the European Parliament and the European Council,” he said.“These bodies can only assess this, or try to revoke this, retrospectively. In practice, this never happens.”But Jetta Klijnsma, state secretary for Social Affairs, has advised against Omtzigt’s motion.She said voting in favour or against would make sense only if there were a concrete proposal.However, she emphasised that the Dutch position was “of course aimed at scrapping the delegated act”, or watering it down enough to prevent infringements on national authority.Klijnsma, responding to a motion tabled by Barry Madlener, MP for the freedom party PVV, vowed to negotiate “very hard” to streamline the Commission’s detailed proposals for governance and communications.Madlener has called on the Cabinet to get the directive “off the table”, arguing that the outcome of the European elections, with a number of “anti-Europe” parties making gains, had “dramatically” improved the Dutch position.Another contentious issue – the introduction of capital requirements on investment – is no longer part of the current IORP proposal, and outgoing EU commissioner Michel Barnier has left this problem to his successor.However, it is widely expected that the incoming internal markets commissioner will once again emphasise the introduction of capital requirements for IORPs, despite the draft law pledging not to introduce “additional funding requirements beyond those foreseen” in the Directive.In the opinion of pensions lawyer Eric Bergamin, the capital requirements would match the Commission’s policy for creating a level playing field with other industries, such as the insurance industry.Hans van Meerten, fellow pensions lawyer at Clifford Chance, also expects the proposals will be postponed rather than abolished.The Commission’s proposals for capital requirements are expected by mid-2015 at the earliest.The European Insurance and Occupational Pensions Authority has said it will consult on the matter towards the end of 2014.
Total assets fell back to £1,273.6bn by the end of April from £1,282.5bn a month before, and total liabilities fell to £1,515.9bn from £1,575.2bn.Schemes in deficit still outnumber those in surplus by more than three to one, with 4,820 schemes shown to be in deficit against 1,237 in surplus.However, over the month, 175 schemes moved from deficit into surplus, the data showed.The PPF said the 3.8% fall in liabilities during April reflected increases in nominal as well as index-linked Gilt yields, pointing out equity markets and Gilt yields were the main drivers of funding levels.Yields on 15-year Gilts rose by 26 basis points in April, while those on the equivalent index-linked paper rose by 3 basis points.Even though the FTSE All-Share index climbed by 2.6% during the month, pension fund assets fell by 0.7% because share-price rises were more than offset by falls in bond prices, the PPF said.The PPF 7800 index shows the estimated funding positions of schemes on a section 179 basis, which represents the premium that would have to be paid to an insurer to take on the payments the PPF would make if the scheme went insolvent. Funding levels at defined benefit (DB) pension schemes in the UK increased last month as yields on government bonds climbed slightly and share-price rises boosted asset levels, according to data from the Pension Protection Fund (PPF).The pensions lifeboat reported that its PPF 7800 index, which includes all 6,057 DB schemes covered by the PPF, showed an aggregate deficit of £242.3bn (€335.7bn) at the end of April, down from the £292.6bn seen at the end of the previous month.The funding ratio rose to 84% from 81.4% over the month but was still well shy of the 96.6% funding level seen in April 2014.In that month, the aggregate deficit had been well below the latest reported level, at just £40.8bn, according to the PPF data.
VNV, a union representing pilots in the Netherlands, is to appeal a recent court ruling that Dutch airline KLM is not obligated to offset a funding shortfall at its pension fund for pilots.It said it would seek to force the airline to honour its previous agreement, which would have allowed the union to grant full indexation, although the VNV said it was also “fully engaged” in talks with the company.In summary proceedings brought by the VNV, the Amsterdam court ruled that KLM’s additional pensions contribution – estimated at €600m by the airline – was sufficiently large for it to cancel its shortfall agreement.The court also ruled that the agreement, terminated unilaterally by KLM, had not fallen under a binding collective labour agreement between the employer and union. Meanwhile, KLM’s pilot pension fund – the €8.2bn Pensioenfonds Vliegend Personeel KLM – is preparing its own legal case against the airline for unilaterally terminating the agreement.And in a separate case, cabin staff union VNC issued a summons against KLM and its pension fund for cabin staff for having agreed a new pension contract “at odds” with a prior agreement between the airline and unions.According to the VNC, KLM also unilaterally decided to abandon an existing agreement that the airline would plug funding gaps.KLM insists it agreed with unions that shortfalls would be filled by “natural recovery” – i.e. returns on investment.The Pensioenfonds Cabinepersoneel KLM said it would implement the contract – concluded between the airline and the scheme – that failed to provide for a recovery contribution from the company.Annette Groeneveld, chair at the VNC, said the union would demand that KLM and the pension fund produce in court the documents on which they had based the new contract.She said the union and airline were discussing a potential switch from defined-benefit arrangements to collective defined contribution but that no agreement had been reached on an increased employer contribution as compensation.“When the introduction of the financial assessment framework interrupted the negotiations, we did agree that its rules would be incorporated into the contract, but the ‘natural recovery’ was not part of this deal,” Groeneveld said.She estimated that KLM would have to pay €34m extra annually to plug the funding gap over a 10-year period, adding that the employer had paid recovery contributions over 2014 and 2015.KLM and the cabin-staff pension fund, which returned 0.5% last year, declined to comment.The scheme’s funding stood at 101.8% as of the end of August; its required coverage level is 128%.
Pension liabilities of German companies listed in the DAX index rose to a “historic high” of €396bn at the end of 2016, according to Mercer.The figure compares to €361bn in 2015, an increase of 9.7%.Mercer analysts looked at 20 annual reports covering almost 80% of pension liabilities in the index.This increase is only visible on the companies’ books, as some of their pension plans are unfunded and there is no obligation to hold reserves up to the level of liabilities. Interest rates hit a low in September last year, which especially hurt company accounts with a financial year ending in that month.This was particularly hard on ThyssenKrupp which had to calculate its liabilities with a 1.3% discount rate (“Rechnungszins”). The development could be significant in any possible negotiations with Tata Steel on a takeover.Siemens and Infineon – which also have financial years ending in September – had to lower their discount rate to 1%.Overall the lower rate applied to DAX liabilities led to actuarial losses amounting to around €44bn.“But these losses do not affect the annual results as they have to be listed separately with no effect on earnings,” explained Thomas Hagemann, chief actuary at Mercer Germany.Falling interest rates helped German DAX companies’ bond portfolios create more return, as did favourable equity market developments.Pension assets as calculated under IFRS increased from €236bn to €251bn. Therefore, the average funding level remained almost the same, only dropping slightly from 65% to 63%.According to Carl-Heinrich Kehr, principal and investment expert at Mercer Germany, broad diversification helped last year: “High yield bonds profited in their annual return of 14.8% from the fact that there were fewer defaults than expected.”He emphasised the contribution of emerging market debt (10.2%) and equities (14.9%) – especially compared to European equities (4.5%) – in the wake of Brexit.
However, the company is currently locked in heated negotiations with unions about the future structure of the scheme. Royal Mail estimates that it will have exhausted its surplus by next year. It plans to close the defined benefit scheme to future accrual from 31 March 2018, but its restructuring plans have been opposed by unions.Hogg was earlier this month elected as the new chair of the Pensions and Lifetime Savings Association’s defined benefit council.At National Grid, Hogg will work with CIO Rob Schreur, who has overseen the scheme since joining in 2015 from Philips Pensioenfonds in the Netherlands. The company sold its in-house pension scheme asset manager, Aerion, to Legal & General Investment Management in the same year.National Grid declined to comment. Royal Mail Pension Plan chief executive Chris Hogg is to leave the defined benefit scheme, IPE has learned.He is set to take over as chief executive of the £16.6bn (€18.2bn) National Grid UK Pension Scheme, according to sources familiar with the situation.Hogg joined the £9.8bn Royal Mail scheme in 2009 as head of funding, overseeing the transition from state ownership to privatisation. This involved the government taking on roughly £40bn of liabilities and £28bn of assets in 2012.Following the transfer, and with Hogg as CEO, the scheme retained responsibility for benefits accrued after 31 March 2012. It held £9.8bn in assets at the end of March this year, putting it in surplus – its funding ratio was the best in the FTSE 100 at the end of June, according to consultancy LCP.
Australian asset owners and some of Europe’s largest institutional investors have put their names to a statement supporting better disclosure of non-financial information.The statement seeks to counter an increasingly common narrative that investors do not care about information that may not appear explicitly financially relevant, despite frequent calls for better disclosure of such information.“We have made this statement to help companies understand that, if they deliver relevant and useful information, we will use it,” the statement reads.Signatories include Aberdeen Standard Investments, Hermes, Martin Currie, NN, and PGGM, plus Australian pension funds Cbus Super and VicSuper. The statement was brokered by the International Integrated Reporting Council, which seeks to improve reporting in the public and private sectors.The full statement is available here.Rise in corporates pricing carbon The number of companies using an internal carbon price in their business plans has grown eight-fold in the last four years, according to CDP, a research firm.However, CDP said it found that up to 800 companies might be vulnerable to the effects of carbon pricing regulation, as they disclosed that they were not using an internal carbon price. As of this year, over 40 national and 25 regional governments have put a price on carbon, the non-profit environmental disclosure platform said. This covered about 15% of global greenhouse emissions.CDP’s research found that only 15% of companies using an internal carbon price to stress test their investments said they thought prices would rise in the future. This might concern some investors, CDP said.Mark Lewis, head of European utilities equity research at Barclays, said: “The key question for investors should be: how can we know that companies are actually factoring environmental risk into their mainstream business strategies?“Pricing carbon should play a vital role in helping companies do this – the price level, while important, is not the only key aspect. There needs to be more transparency as to how a company actually uses the price and whether it is seen as an important part of business decision-making and forecasting.”Lewis is a member of the Task Force on Climate-related Financial Disclosures, the body created under the auspices of the Financial Stability Board on instruction from the G20. PRI’s US first, SDG argumentsBloomberg has become the first US-domiciled corporate retirement plan sponsor to join the UN’s Principles for Responsible Investment (PRI).It said one of the main reasons for joining the organisation was “to enable its employees to proactively integrate ESG-themed funds into their own retirement investment strategies”.“This is really exciting – not many companies offer ESG-themed funds, as of yet, to their employees through their corporate retirement plans,” said Cathy Bolz, head of global benefits at Bloomberg.“By signing, we are saying that we think the investment world has matured to the point where organisations like ours can think about integrating ESG issues into their investment policy considerations.”In its capacity as a service provider, Bloomberg has been a PRI signatory since 2009.Separately, the PRI and PwC have produced a report on why institutional investors should become more engaged with the UN’s Sustainable Development Goals (SDGs).The report presents five overarching reasons for this, including that the SDGs represent the “most pressing environmental, social and economic issues and as such serve as a list of the material ESG factors that should be considered as part of an investor’s fiduciary duty”.The report can be found here.European Commission SDG ‘platform’The European Commission has appointed 30 members to a new high-level multi-stakeholder platform to support and advise the Commission on delivering the SDGs at the EU level. Christian Thimann, who is chair of the High-Level Expert Group on Sustainable Finance, is one of the members of the SDG group. The other members can be found here. Candriam’s SRI investment academyCandriam Investors Group has launched an online training platform for ”sustainable and responsible investing” (SRI). The Candriam Academy aims to raise awareness, promote education and improve knowledge of financial intermediaries on the topic of SRI.Although conceived with intermediaries in mind, the platform is free and open to all. The academy has received accreditation by the Chartered Institute of Securities and Investment and is requesting further local accreditations.
The coverage ratio of Dutch pension funds increased by at least eight percentage points on average last year, in particular thanks to improving equity markets, according to Mercer and Aon Hewitt.Mercer saw the schemes’ funding rise by one percentage point to 107% on average during December. Aon Hewitt, which applies slightly different criteria, found that coverage had last month remained unchanged, at 106%.Aon noted that the funding level at the end of 2017 exceeded the required minimum of 104.3% and said it expected that only a few pension funds had closed the year with a funding shortfall.This compares favourably with the situation at the end of 2016. Then, coverage of Dutch pension funds was 98% on average, after funding had just jumped thanks to improving equity markets and rising interest rates in the wake of the election of Donald Trump as US president. At the time, it was expected that no more than 10 pension funds would have to start cutting pension rights in 2017.As schemes are allowed to spread out necessary discounts, cuts were expected to be limited to a maximum of 1% last year.Commenting on 2017, Mercer said that worldwide developed market equities had risen 0.7% without a 50% currency hedge in December, and 1% in case schemes had applied such a hedge. It added that equities in emerging markets had gained 2.9%.The rise in the swap rate hardly contributed to a drop in liabilities, as the ultimate forward rate fell from 2.9% to 2.6% last yearAon HewittListed property and commodities yielded 0.8% and 2.3%, respectively, last month, while euro-denominated government bonds and credit had lost 0.8% and 0.3%, respectively, according to Mercer.Aon indicated that equity investments without currency hedging had generated 10% over last year.It said the US dollar had depreciated 14% relative to the euro.Property portfolios lost more than 2% on average last year, according to Aon, which added that fixed income portfolios had remained largely at the same level.During December, the 30-year swap rate – the main criterion for discounting pension funds’ liabilities – dropped marginally to 1.50%. At the end of 2016, the rate stood at 1.23%.Aon Hewitt noted that the rise of the swap rate had hardly contributed to a drop in liabilities, as the ultimate forward rate (UFR) had fallen from 2.9% to 2.6% last year. The UFR is part of the discount mechanism for Dutch pension funds’ liabilities. “As a result of this reduction, pension funds must apply higher liabilities for long durations, which has cancelled out the effect of decreased liabilities for the short durations,” the consultancy said.The UFR allows pension funds to apply higher interest rates than the market rate for long-term liabilities. However, the difference between the market rate and the UFR has decreased significantly.Mercer noted that pension funds’ liabilities had risen 0.1% on balance last month, following an increase in short-term interest rates and a slight drop in long-term rates.Edward Krijgsman, senior investment consultant at Mercer, explained that pension funds’ liabilities are more susceptible to long-term interest rates, whereas regular government bonds and credit are more affected by short-term rate developments.
SPF, which took the initiative to restart the merger talks, said the agreement could significantly contribute to its mission, vision and strategy, as well as retaining the connection with the public transport sector.It also cited improved options for cost reduction, board continuity and expertise as well as innovation of products and services.The railways scheme had already improved its sustainability by simplifying its pension plan and asset management policy. It had also moved IT to the cloud for cost and security reasons.SPOV made clear that it needed to grow in order to keep costs down and efficiently implement its pension arrangements. Back on track: SPF and SPOV have agreed to a merger after talks in 2016 collapsedAccording to the pension funds, final decisions on the merger will be made in the autumn of this year, with the merged scheme expected to become operational at the end of 2019. The integration of SPF Beheer was scheduled to be completed at the end of 2020.The pension funds – which have 104,000 members and 93 employers between them – said they wanted to integrate SPF Beheer into the new organisation. They said they were currently working with the provider to improve efficiency and the security of its IT services.SPOV said that the project management of the latter would be outsourced, while the fiduciary arrangements at SPF Beheer would also be improved.At year-end, funding of SPF and SPOV stood at 115.1% and 109,1%, respectively, which enabled them to grant their participants and pensioners inflation-linked payments of 0.64% and 0.14%, respectively.SPF’s investment portfolio lost 0.8% in 2018, while SPOV lost 0.7%.SPF reported administration costs per participant of €118, and spent 39bps on asset management and 6bps on transactions.SPOV said its costs per participant amounted to €142, after negotiations with SPF Beheer resulted in a €24-per-person discount.Its asset management and transaction costs were 43bps and 7bps, respectively. Dutch railways pension fund SPF and public transport scheme SPOV have agreed to merge, creating a €21bn sector scheme.The pension funds planned to integrate their shared asset manager and administrator SPF Beheer in the deal, they indicated in their annual reports for 2018.Earlier merger talks between SPF and SPOV collapsed in 2016 after the schemes concluded that a merger would not provide sufficient benefits for their participants.The €3.9bn SPOV, being the smaller partner, in particular feared that it would lose its identity and questioned the quality and continuity of service provision by SPF Beheer.