The UK government has responded to a consultation on making technical changes to the rules governing auto-enrolment.The Department for Work & Pensions (DWP) was consulting on whether to exempt certain individuals from auto-enrolment after pressure from the industry over technical difficulties.In its response, the government has concluded workers, where auto-enrolment would breach their protected tax status, may be excluded, but only if highlighted by the employee beforehand.The department said it would construct viable options to exclude those who had given notice of retirement, but said it needed to consider further the practical implications of excluding those leaving employment. It ruled out, despite industry lobbying, exclusion for those with serious ill health, those working for a UK employer but living abroad and new starters, temporary or casual staff.It also concluded it inappropriate to exclude employees on the basis on employer size or sector.In another issue, the DWP has gone against general industry consultation in removing the protected status of defined benefit (DB) schemes, which belong to former public industries but have since been privatised.As contracting out ends in the wake of the new state pension structure, the option to allow DB schemes to change the level of benefits for members, to manage the extra cost burden associated with the end of contracting out, is available to all schemes, except these former public schemes.Despite the National Association of Pension Funds’ call for all funds and members to be treated equally, the government said it must stand by the promises made to former state workers at the time of privatisation.Finally, in its monthly update, The Pensions Regulator, has announced that almost 2.9m people had undergone auto-enrolment by the end of January 2014.They join the 7.8m people who were already members by the time their employer staged.However, the watchdog admitted that more than 3.6m employees had been left out of the flagship pension project since it began in 2012.The latest estimates have employee opt-out levels at around 10%.
“The differing characteristics across member states of the pensions sector argued for a strong national dimension to decision-making,” the report says.“The use of the single market competence as the legal basis for the IORP Directive raises questions of subsidiarity, as pensions policy is a matter for member sStates.“The argument used in justification, that harmonisation will help foster more cross-border schemes, ignores the possibility there is little demand for cross-border schemes.”It also expressed concern the Commission had, on occasion, produced proposals after warnings from its own Impact Assessment Board that these were “inadequate”.The Board, set up in 2006 to scrutinise the European executive’s work, gave the IORP Directive proposal a “negative” rating, the government said.“The Impact Assessment Board performs an important role, helping to ensure Commission impact assessments are of high quality so the evidence base for proposals can be relied upon,” the report says. “The opinions of the Board should be carefully considered, with reservations about impact assessments properly and transparently addressed before proposals are made.“Producing proposals without a robust impact assessment risks undermining confidence in the ability of EU institutions to develop effective, proportionate, evidence-based legislation.”Launched in 2012, the review was announced as an “audit of what the EU does have … affects the UK”, and is likely to inform the UK Conservative Party’s attempts to renegotiate aspects of EU jurisdiction should it continue in government after next May’s election.,WebsitesWe are not responsible for the content of external sitesLink to UK government’s report the single market The UK government has criticised the European Commission’s approach to pension reform, noting that it pushed ahead with a revised IORP Directive despite concerns certain proposals were considered inadequate.Publishing a balance of competences for regulation relating to the single market’s financial services, it also questioned whether the Commission should be allowed to push ahead with the IORP Directive, given that matters of pension regulation were for member states to decide.The report echoed views previously voiced by the National Association of Pension Funds (NAPF).It repeatedly cited the organisation as a source and noted there had so far been little evidence of a desire to create a cross-border pensions market requiring greater harmonisation of rules.
The International Accounting Standards Board (IASB) is to review the IAS 19 employee benefits to consider the “infinite variations” provided by defined benefit (DB) and defined contribution (DC) hybrid schemes.The organisation will also re-visit issues that have arisen in the determination of a high-quality corporate bond yield used in pension fund discount rates.In a provocative speech at the National Association of Pension Funds (NAPF) Investment Conference in Edinburgh, chairman of the IASB Hans Hoogervorst said that, while he could understand pension funds’ view that accounting standards relied too much on fair value and failed to account for long-term perspectives, he nevertheless disagreed.He said pension funds were best served by accounting policies that reflected the economic reality as accurately as possible. This, he said, should allow funds to resolve funding issues, rather than allow problems to fester.Hoogervorst said the revisions to the IAS 19 standard brought in 2013 needed to bed in, but he added that hybrid systems being used by companies did not neatly fit in either the DB or DC sections of the regulations.“Pension schemes are being transformed in a very rapid fashion,” he said.“Hybrid schemes may be more affordable to companies, [but they] can have infinite variations, from the extremes of DB and DC, with differing degrees and forms of risk-sharing.“The somewhat binary approach of IAS 19 struggles to deal with this new, infinitely variable pension landscape.”Hoogervorst said the organisation was to begin a research project to develop accounting standards for all scheme types, using input from its insurance accounting standards.“It also makes sense to consider other issues that have arisen in practice, such as the problems of determining the high-quality bond yield,” he said.The research project, for which the IASB requested input from pension funds, could take several years, he said, as the organisation monitors the impact of its 2013 revisions.Hoogervorst said the current IAS 19 standard now reflected the funding position in company pension schemes more accurately.But he conceded that removing the criteria where actuarial fluctuations affected the profit and loss of a company meant some firms would now leave deficits to fester.“Should companies really be paying dividends when big pension deficits continue to eat away at their balance sheets?” he asked.“Arguably, the discipline of profit or loss would lead to more timely action.”In January, the IASB approved two revisions to the IAS 19 standard to account for surpluses on sponsor balance sheets and current service costs.Read Stephen Bouvier’s briefing on the amendments made to pension fund accounting standards during 2014
Figures from the Pension Protection Fund (PPF) show that the scale of deficits in private sector UK defined benefit (DB) pension schemes has decreased for the second month running, but only very marginally.The aggregate deficit for 6,057 schemes – calculated on their ability to provide PPF-level benefits – fell by £1bn (€1.4bn) to £241.3bn over May.The previous month, the schemes’ funding improved by £50bn as the level of deficits fell from £292.6bn to £242.3bn, after a spike in March.Deficits had been gradually rising throughout the year until the last two months’ improvement, driven mainly by falling UK Gilt yields, with asset increases failing to offset the damage. In May, aggregate assets in the schemes rose by 0.6% to £1.28trn, outstripping liabilities’ 0.4% rise after yields fell by 1 basis point.Liabilities for the schemes now stand at £1.52trn.In other news, Ensign Pensions is to launch a new defined contribution (DC) master trust that will be open to all companies in the maritime sector.Ensign Pensions is the consulting business owned by the Merchant Navy Officers Pension Fund and Merchant Navy Ratings Pension Fund.The current DC scheme for the maritime sector, the Merchant Navy Officers Pension Plan (MNOPP), has also agreed to wind up and merge its 1,500 members into the new scheme.The new Ensign Retirement Plan (ERP) will offer members access to the flexibilities brought in by the government this April, while having minimum required contribution rates above the statutory levels.The ERP will hand over the day-to-day management and investment to BlackRock, which will also be responsible for providing the DC flexibilities.Ensign said the fee levels would remain “competitive” and the annual charge for the default investment fund well below the 75-basis-point cap imposed by the UK government.Andrew Waring, appointed chief executive, said he wanted to the industry-wide fund to become a benchmark for multi-employer DC schemes in the UK.A consultation over the winding up of the MNOPP with its current employers has begun, with the trustees expected to have completed this by August.
Denmark’s ATP has said the very high returns it won on Danish equities were not due to short-term tactical investing but the result of thinking long-term and picking companies with global sales.Carsten Stendevad, chief executive at ATP, which runs the Nordic country’s giant supplementary labour-market fund, told IPE: “The Danish portfolio did better than the market, but that’s not how we evaluate it.”He said ATP was a long-term investor and that, while it had clearly adjusted the size of its positions in the home stock market, the outperformance was not a result of short-term tactical positioning.“This is a result of a fairly patient, long-term investment strategy,” he said. He said ATP did not have a desire to be exposed to the Danish equity index but had rather picked companies that fit well into its global portfolio.“Most of them are very global in their exposure, and the vast majority of their revenues are global,” he said.ATP’s annual report revealed its equity risk class produced an overall return in 2015 of DKK11.4bn (€1.5bn) on a portfolio of assets that began the year with a value of DKK57.5bn, which equates to a 19.8% return.By the end of the year, the portfolio had grown to DKK74.4bn.Within this class, listed Danish shares produced a return of 48.1% compared with growth in the main Danish stock index of around 30%.Private equity, which made up more than half of the risk class at the beginning of 2015, generated an 11.4% return, and listed foreign shares returned 3.4%.Stendevad said the unusually high return from Danish shares had come on the back of 30% returns in 2013 and nearly 50% returns in 2014.“So we’ve had three stellar years in Danish equities, and we’ve made DKK17bn on the back of Danish equities,” he said.The pension fund rebalanced these holdings in the meantime, however, selling around DKK10bn of them and re-deploying the proceeds elsewhere in its investment mix, he said, adding that this process would continue.Asked whether, looking ahead, he was moderately bullish on equities in general, Stendevad pointed to the fund’s allocation position.“If you look at our current risk allocation, we are overweight equities and underweight rates and slightly underweight inflation,” he said.“That is the best representation of our view, and that reflects our view of the market.”Property, which falls within ATP’s inflation risk class, produced 8.9% in return, while the return implied by the absolute figures for infrastructure was 19.4%. In absolute terms, the property portfolio grew to DKK34.6bn at the end of 2015 from DKK31.3bn at the end of the year before, and made a return of DKK2.7bn.While equities, inflation and credit produced positive returns for ATP in 2015, the other two risk classes – interest rates and commodities – made losses.Commodities made a loss of around one-third, or DKK1.5bn, in the year.ATP said it reduced its risk exposure to oil by just under 60% at the start of the second half, before oil prices fell markedly.It also cut risk in commodities by increasing diversification – by buying industrial metals and gold, for example.Stendevad said commodities were simply an asset class ATP had included in its overall investment mix since 2006, and that it would continue to have in the new portfolio approach based on risk factors that it has now introduced.He said the asset type was necessary because it would be needed strategically in inflationary environments or those with geopolitical risk.“There will be many years when our commodities may not really do much in our portfolio, but in those economic scenarios that we had in mind when we put it into our portfolio, in those scenarios, it will have a very important risk-diversification aspect,” Stendevad said.
The vehicle will be governed by a regulatory regime compliant with the EU Institutions for Occupational Retirement Provision (IORP) Directive.The details about the new vehicles, which are also being referred to as pension funds “à la française” – will be set out in a separate ministerial order.A draft of this is being discussed by the industry, IPE understands.A spokeswoman for the French finance ministry confirmed to IPE that the final ministerial order was due to be published in the first half [corrected from first quarter] of 2017.The idea behind the FRPS is to allow insurers to shift supplementary pensions into the new legal entity, freeing them from capital requirements under Solvency II.These are seen as favouring sovereign bonds to the detriment of return-seeking assets and economic growth, which the Sapin II law seeks to boost.The government has previously said that some €130bn worth of assets would be eligible for the transfer to FRPS vehicles.In France, the bulk of pension provision is on a pay-as-you-go basis, and, outside of that, pension provision is typically insurance-based.ERAFP, which runs the mandatory supplementary pension scheme for civil servants, sees itself as France’s only pension fund. A French law providing for IORP-compliant pension vehicles in the country has been promulgated, and the decree creating the pension funds is due to be out in the first quarter of 2017.Sapin II, as the law is colloquially referred to – named after the French finance and economy minister Michel Sapin – was officially published on 10 December, having been adopted in the country’s parliament on 8 November.A draft of the law was presented at the end of March.The omnibus legislation includes an article – Article 114 – providing for the creation of a new type of legal entity for pension provision, a “fonds de retraite professionelle supplémentaire” (FRPS).
The changes have significantly reduced the fund’s overall carbon footprint, the Guardians said. NZ Super’s chief investment officer, Matt Whineray, added that internal research had shown that carbon exposure was highly concentrated in a relatively small group of companies.“By targeting this group, we have been able to significantly reduce the fund’s carbon footprint while retaining the diversification benefits of passive investment,” he said.“Our initial focus has been on the passive portfolio, as the largest part of the fund and one in which reducing carbon exposure is relatively straightforward. Our next priority is to reduce carbon exposure in our active investment strategies.” As part of its overall climate change strategy, NZ Super has engaged with portfolio companies to promote better risk management, and has aimed to identify new investment opportunities from the global transition to a low-carbon economy.“Reducing the fund’s exposure to carbon is a commercial decision based on long-term risk to our portfolio as a whole,” Whineray said. “Companies have the opportunity to re-enter the portfolio in the future, if they improve their management of climate risk.”Whineray added that financial markets were underpricing climate change risk over the fund’s long investment timeframe. Reducing exposure to carbon emissions and reserves was a “low-cost insurance policy”, he added.Erste excludes BMW and Daimler on cartel allegationsAustria’s Erste Asset Management has excluded German car manufacturers BMW and Daimler from its investment universe for its line of “responsible” funds due to suspicion they may have been colluding on technical standards and other matters.The cartel allegations, made in the media and being investigated by regulators, also concern Audi, Porsche and Volkswagen, but the Austrian asset manager had already excluded these because of the diesel emissions scandal.“The secret agreements among German car manufacturers, which had started in the 1990s according to media reports, represent ground zero of the diesel emissions scandal,” said Erste in a statement today.Walter Hatak, research analyst and member of the sustainability team at Erste AM, added: “As pioneer and market leader, the German automotive sector bears a huge responsibility. But instead of free competition for the development of the cleanest and most efficient car, it seems backroom deals were made, geared towards stifling this very competition.Making sense of carbon regulation patchworkTrucost, part of S&P Dow Jones Indices, has launched a carbon pricing tool for companies that is intended to help them assess exposure to evolving regional carbon pricing mechanisms.The tool is based on a database that Trucost has built of current carbon regulations, emissions trading schemes, fuel and other taxes, and potential future carbon pricing scenarios designed to achieve the goal of keeping global warming to a maximum of 2°C above pre-industrial temperatures, as per the Paris Agreement.Libby Bernick, global head of corporate business at Trucost, said: “Companies are trying to make sense of the pace at which legislators in different countries, states and cities are implementing carbon regulations.“Because these regulations could drive up the cost of fossil-fuel-based energy and carbon-intensive raw materials, increasing operating costs and reducing profit margins, companies need robust data and analytics to help inform financial decisions over investments in energy efficiency, low-carbon innovation and renewable energy.” New Zealand’s sovereign wealth fund, NZ Super, has allocated 40% of its portfolio to low-carbon strategies following a NZD950m (€588.6m) transaction.The NZD35bn fund aims to reduce its carbon emission intensity by at least 20% by 2020, and lower its carbon reserves exposure by at least 40% in the same period.As at 30 June 2017, the fund’s total carbon emissions intensity was 19.6% lower than when it began its transition, the fund said earlier this week. Its exposure to carbon reserves was 21.5% lower.The Guardians of NZ Super – who oversee the management of the portfolio – said the move to a low carbon strategy meant the fund was more resilient to climate change investment risks, such as stranded assets.
Baillie Gifford & Co52,857Manager Another added: “The research should be part of the daily job of the asset manager.”Pension funds have largely been absent from the debate about MiFID II and research costs, with the focus so far being on whether investment managers will pass them on to investors or cover them internally. The deadline for MiFID II implementation is January 3.Barings is the most recent major asset manager to have publicly announced its decision. Yesterday it said it would absorb external investment research costs for the $288bn (€240bn) firm’s global equity, multi-asset and fixed-income portfolios.In announcing its decision, Barings said it had been expanding its in-house research capabilities over the past several years, thereby reducing its third-party research costs. It planned to continue expanding its proprietary research capabilities in the coming years in response to client needs.In total, 34 of Europe’s biggest asset managers have so far declared or advised how they will comply with unbundling rules, according to IPE research.Record Currency Management told IPE it had made the decision to absorb the costs of any research, and not pass it onto clients.A spokesperson for Northern Trust Asset Management said that in the EMEA and APAC regions it does not currently use client’s commission for investment research and has no intention of changing that model.CBRE Global Investors, meanwhile, told IPE it rarely receives investment research from third parties.“Research typically received by CBRE Global Investors will be from our in-house research team,” said a spokesperson. “In such cases, we will absorb the costs ourselves and will not pass it on to clients.”Germany’s Union Investment recently announced it, too, would take onto its books the costs of external research, veering away from the position it had previously indicated it would take.Alexander Schindler, the executive board member responsible for international institutional business at Union, told IPE there was a “clear move” in Germany for asset managers not to charge clients.Increasing the use of internal research and alternatives such as big data and analytics would follow from such a decision, he said, as well as changing research providers more frequently. Unigestion14,968Manager CBRE Global Investors41,000Manager Deutsche Asset Management230,789Manager T Rowe Price11,759Manager Aviva Investors42,856Manager Union Investment63,812Manager Insight IM537,983Manager NN Investment Partners36,382Manager AXA Investment Managers125,466Manager More than eight in 10 pension funds think asset managers should pay for the cost of independent investment research under MiFID II rules, according to a poll conducted by IPE.The remainder said managers should calculate the cost of the research at a flat rate and pass this on.The pension funds were polled as part of IPE’s October focus group survey – see IPE’s upcoming October magazine for more.One pension fund said: “We are totally against passing research costs to our scheme.” Amundi309,169Client Aberdeen Standard Investments393,759Manager BlueBay Asset Management18,565Manager Northern Trust AM67,379Manager Invesco34,004Manager Janus Henderson Investors40,997Manager JP Morgan Asset Management131,707Manager Record Currency Management48,552Manager UBS Asset Management169,643Manager Hermes Investment Management33,423Manager Kempen Capital Management32,274Manager Vanguard Asset Management61,837Manager Company2017 AUM (€m)Who pays? Notes: AUM figures based on institutional assets, taken from IPE’s Top 400 asset management survey, correct to 31 December 2016. MiFID II decisions sourced from company releases and public reports as of 20 September 2017.Email [email protected] with any updates for the table. Robeco Group80,105Manager J O Hambro Capital Management14,773Manager Russell Investments24,922Manager Schroders139,634Manager Franklin Templeton Investments19,440Manager Newton Investment Management43,719Manager Barings25,894Manager TwentyFour AM9,175Manager BlackRock911,955Manager First State Investments11,282Manager Legal & General IM792,950Manager Allianz Global Investors91,402Manager
Source: Christian Hyldahl, CEO, ATPWithin this, the hedging portfolio – which is invested in bond-like instruments designed to protect the pension guarantees ATP gives – shrank to DKK650.8bn from DKK658.8bn, and the investment portfolio grew to DKK117.7bn from DKK100.4bn.ATP, which uses a risk-factor approach to manage its investment portfolio, produces results that are not easily comparable to other pension funds because it is able to operate in a hedge fund-like manner, effectively borrowing from its huge hedging portfolio to generate return for the investment portfolio.Within ATP’s investment portfolio, private equity produced a return of DKK5.3bn, listed international equities contributed DKK4.9bn and Danish listed equities returned DKK4.2bn, the fund said.During 2017, ATP reduced its risk allocation to the equity ‘factor’ to 44% at the end of the year, from 50% at the end of 2016. It increased exposure to both inflation and interest-rate factors, to 15% and 31% respectively, from 9% and 25%.Hyldahl told IPE these changes had been made in order to achieve a more balanced portfolio.In 2018, ATP plans to focus on real estate acquisitions and its environmental, social and governance (ESG) policy, he said.“We are putting a lot of focus on generating good returns and continuing to add to the portfolio,” Hyldahl said. “If we find good real estate assets that can be a good investment for us over the long-term, then we will go for them, and we are also working on integrating ESG into our operation, both as an asset owner, and also by monitoring all kinds of risks in the portfolio.”The pension fund also announced its supervisory board had ramped up ATP’s long-term performance target to 11%, from 7%, to bolster the aim of maintaining the purchasing power of its pensions.This meant the target return for 2018 was equivalent to DKK12.9bn.Hyldahl said the new target was achievable over the long term but there were likely to be some individual years when it would not be reached.Of the profit the pension fund made on its investment portfolio, DKK1bn was transferred to its guarantees as a result of increased life expectancy, and DKK6.4bn went to members in the form of a 1% increase in their bonus.This led to a net profit for the year of DKK17.3bn, up from 2016’s loss of DKK649m.Although ATP said its hedging strategy was successful in 2017, with its hedging portfolio making a profit of DKK1.5bn before the effect of the break in its yield curve, the fund said hedging had resulted in a DKK1.5bn loss overall.The yield curve break refers to guarantees extending beyond 40 years being valued at a fixed rate of 3%, as opposed to shorter guarantees which are valued at market rates. On these longer guarantees, when the market rate is lower than 3% ATP takes a loss, but when it is higher, it gains. “The strong performance is due to positive contributions from virtually all asset classes, which has made it possible to increase pensions for all members, while also being able to build up our bonus potential by DKK17.3bn.”ATP’s total assets increased to DKK768.6bn at the end of 2017, from DKK759.2bn the previous year. Denmark’s largest pension fund ATP generated its best investment return for many years in 2017, with a gain of 29.5%.This translated to a DKK29.5bn (€3.96bn) gain for on its investment portfolio.The return relates to assets in ATP’s investment portfolio, which consists of the pension fund’s bonus potential – only around a seventh of its total assets. The gain was driven mainly by strong returns on equities, the pension fund said.Christian Hyldahl, ATP’s chief executive, said: “We achieved an exceptionally solid return in 2017 and generated the best investment return in many years.
Credit: Kristina KasputieneThey echoed a Ministry report that said it could not be ruled out that today’s petroleum producers might also be tomorrow’s most important producers of renewable energy.“By keeping oil and gas companies in the investment universe, the Ministry will make it possible for the fund to continue to be invested in these companies,” Slyngstad and Olsen wrote.They said this would be relevant first and foremost when it came to the fund’s environment-related mandates.NBIM also said that alternative energy stocks could be kept in the GPFG’s benchmark index even if it eventually removes oil and gas producers and distributors.The initial proposal to remove oil and gas stocks included cutting alternative energy providers due to the way its benchmark index classifies companies.At the moment, oil and gas stocks in the index are split into three sectors: oil and gas producers, oil services and distribution, and alternative energy.The manager found that – as opposed to the first two sectors – for alternative energy companies, there was no relationship between oil prices and returns relative to the broad equity market.“The Ministry could therefore consider retaining companies classified by FTSE as alternative energy companies in both the benchmark index and the investment universe,” NBIM said in the letter. Norway’s giant sovereign wealth fund could keep oil and gas stocks in its investment universe despite its manager previously recommending cutting NOK300bn (€31bn) of oil and gas equities.Norges Bank Investment Management (NBIM), which manages the NOK8.4trn Government Pension Fund Global (GPFG), had made the recommendation in November in a bid to reduce the Norwegian government’s overall financial exposure to oil and gas.However, responding at the end of April to a request from the Norwegian Finance Ministry for more information, Øystein Olsen, chairman of Norges Bank, and Yngve Slyngstad, chief executive of NBIM, wrote: “We have not assessed the impact of the advice in our letter of 14 November 2017 against other instruments that might be used to reduce the vulnerability of the Norwegian economy to a permanent drop in oil prices.”Slyngstad and Olsen raised the possibility that even though Norway’s wealth could be less vulnerable to permanent changes in oil prices were the fund not invested in oil and gas stocks, the government could use “other instruments” to achieve the same end. However, such an assessment fell outside Norges Bank’s role. In addition, index providers’ classification of individual companies did not necessarily capture the full breadth of their activities, the pair said. For example, a firm classified as an integrated oil and gas company could in fact do much more business in alternative energy than a pure alternative energy company.