Pension funds can pose systemic risk through outsourced activities, lawyer argues

first_img“However, if a state were to nationalise the second pillar, I wonder whether that would not pose a systemic risk.”He also cited the tendency at large pension funds – particularly Dutch ones – to outsource the management of their assets to external asset managers and custodians.“If one of those entities were to collapse, this would have some significant consequences on the proper functioning of the internal market,” he said.Van Meerten said the European Commission should therefore step up efforts to better regulate asset managers working on behalf of pension funds.According to him, Brussels should make sure the revised IORP Directive not only regulates pension funds’ governance and reporting activities but also their commercial activities.“You can argue that the pension fund itself is not a commercial entity, but it’s a different thing for asset managers,” he added.“Therefore, if you regulate the commercial activity of the pension fund through the IORP Directive, you recognise that the commercial activity is the responsibility of the pension fund itself.”In a previous discussion with IPE, Brussels-based lobbying group PensionsEurope argued that pension funds were unlikely to collapse.It claimed that pension funds were “merely users of markets”, not part of them, and as such posed no systemic risk. The revised IORP Directive must do more to regulate pension funds’ outsourced activities, as third parties such as custodians or asset managers running the whole of schemes’ assets are not immune from bankruptcy risk, one lawyer has claimed.Speaking with IPE, Hans van Meerten, lawyer at Clifford Chance in the Netherlands, conceded small pension funds would be unlikely to pose a systemic risk to financial markets were they to collapse.But he argued that larger pension funds could represent more risk due to the management of their huge assets, which they mostly outsource to commercial parties.“Pension funds and their representatives currently claim that, in the event of underfunding, they could easily reduce the pension benefits paid to their members and put in place some protection mechanisms to avoid going bankrupt,” Van Meerten said.last_img read more

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DB schemes still keen on insourcing, private equity – State Street

first_imgMore than one-third of the interviewed schemes are in deficit (37%), and 3% of those believe it will take them more than 20 years to close this.Meanwhile, alternative assets continue to draw pension funds, according to the survey, with nearly half (48%) of respondents planning to increase their exposure to private equity over the next year.This is partly motivated by the pursuit of returns and partly by tail-risk diversification.More information about the survey and its results will be forthcoming in the new year.Last year’s survey was carried out by the Economist Intelligence Unit. A strong trend toward greater internal management is among the key findings of a global survey of defined benefit (DB) pension funds carried out for State Street Global Services.Conducted by Longitude Research, the manager’s 2015 ‘Asset Owner Survey’ shows that half of the 400 respondents planned to increase their internal risk and investment teams – by 48% and 45%, respectively – over the next three years.The move toward greater internal management is not restricted to the larger players, with funds having as little as £4bn (€5.5bn) in assets also understood to be embracing insourcing.  However, the survey also revealed a desire to partner more with asset managers.last_img read more

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UK roundup: PLSA, USS, PPF index, PIC

first_imgFTSE 350 companies should publish more information about culture and working practices, according to a letter sent by the Pensions and Lifetime Savings Association (PLSA).The association argued that better disclosure of the makeup of workforces and company policies “can have a material effect on a company’s performance over the long term”.The letter has the backing of pensions minister Richard Harrington, the Universities Superannuation Scheme (USS) and Newton Investment Management.Elizabeth Fernando, head of equities at USS Investment Management, said: “A company’s workforce is a key driver of its long-term performance and productivity, so good information on corporate culture and working practices is valuable to us as long-term investors.” The PLSA published a “toolkit” titled ‘Understanding the worth of the workforce’ in July giving pension funds guidelines on the information they should be getting from companies in which they invest.Elsewhere, UK pension funds’ aggregate funding position improved during October to 81.4%, according to the latest Pension Protection Fund index.The 5,945 pensions in the index had a collective shortfall of £328.9bn (€369.2bn) at the end of last month, down by more than 21% from September’s figure.However, the deficit is still more than £100bn higher than at the same point last year.One fund on a more secure footing is the ICI Specialty Chemicals Pension Fund, which has secured a £140m buy-in with Pension Insurance Corporation.The transaction is the third conducted by the pension and covers all pensioners not insured with the previous two deals, which took place in 2015.Chairman of trustees Alan Bates said the fund’s de-risking strategy “allowed us to complete this transaction despite the current uncertainty in the markets”.The £650m pension is separate from its much larger sister fund, the £10bn ICI Pension Fund, which has also undertaken a series of buy-ins over the past three years.In other news, the UK government has been urged to consider abandoning guarantees for the state pension by a group of MPs.The Work and Pensions Committee said the government should abandon the so-called ‘triple-lock’ for the payment in an effort to address “intergenerational unfairness”.Frank Field, chair of the committee, warned that “the working young … face the daunting challenge of getting on in an economy skewed against them”.The triple lock guarantees pensioners an increase of 2.5%, the inflation rate or the average earnings growth rate – whichever is higher.The Work and Pensions Committee instead suggested a “smoothed earnings link” to keep increases at least in line with inflation, and a lower limit for payments linked to average earnings.last_img read more

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Prudential and Aviva strike first longevity reinsurance deal

first_imgAviva Life and Pensions UK has transferred the longevity risk associated with £1bn (€1.1bn) of pension liabilities to the Prudential Insurance Company of America.Prudential is a seasoned insurer of longevity risks but this is its first deal with Aviva’s UK life and pensions arm. Prudential Retirement, part of US-based Prudential Financial, is the Prudential unit that entered into the agreement with Aviva.In a statement announcing the transaction, the companies spoke of “a new reinsurance partnership”.William McCloskey, head of international transactions for longevity reinsurance at Prudential, said Aviva had become a “premier” pension insurance provider over the last several years. The deal is the latest to hit a buoyant de-risking market in the UK.“Market activity in 2018 is building toward a very strong second half,” said Amy Kessler, head of longevity risk transfer at Prudential.“Rising rates and equities, combined with lower-than-expected longevity improvements, mean that pension schemes are very well funded and that de-risking is more affordable than ever.”Enhanced capacity of insurers is also said to be playing a role.Aviva and Prudential noted that their transaction followed at least 10 other deals for more than $1bn (€862m) during the last 12 months.“Collectively,” they said in a statement, “these UK longevity reinsurance and longevity swap agreements signify a noticeable market surge, driven by pension schemes eager to capitalise on their improved funded status, and take risk off the table.”According to Aon , the underlying bulk annuity market experienced its busiest first half-year ever between January and June this year, and 2018 as a whole was shaping up to become a record year.Last month Hymans Robertson reported that the combined value of buy-ins and buyouts so far this year had exceeded the value for the whole year in each year up until 2013.Sizeable recent de-risking deals include a £1.3bn pensioner buy-in for Siemens, a £850m buyout for PA Consulting, and a £2bn longevity swap for National Grid.last_img read more

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Kingman review proposes replacing FRC with new, stronger regulator

first_imgCaroline Escott, PLSAThe UK’s pension fund association expressed “hope” that the measures proposed in the Kingman Review would “help ensure that a new body can work better towards the interests of investors”.Caroline Escott, policy lead for investment and stewardship at the Pensions and Lifetime Savings Association, said: “Although we believe that the Stewardship Code was a significant step forward, we support moves to ensure the code helps schemes tell how well their asset manager is doing on stewardship.“We welcome the review’s recognition that the FRC needs to develop deeper relationships with the investor community, but think that a key step in doing so would be to ensure that the FRC, or its successor body, employs more staff with investor practitioner experience and expertise.”Chris Cummings, chief executive of the Investment Association, said asset managers would “welcome the clarity of responsibilities” the proposed new regulatory body would bring and that investors were “strongly” supportive of the recommendation that corporate and audit quality reviews be published.“We look forward to more details on the proposed overhaul of the Stewardship Code,” he added. “Investors will want the new body to have a cultural-bias towards stewardship to signal the importance of investors fulfilling their responsibilities.”Audit market faces reform after CMA study The Kingman Review made 83 recommendations in total, including putting the new organisation in charge of regulating major audit firms, ending self-regulation through trade associations, and for reviews of audit quality and corporate reporting to be made public. The Financial Reporting Council (FRC) should be scrapped and replaced with an independent statutory regulator with “the interests of consumers of financial information, not producers” at its heart, an independent review of the body has recommended.The new body should be accountable to parliament, have clarity of purpose and mission, new leadership, and new powers, according to the review led by John Kingman, chairman of Legal & General.Business secretary Greg Clark, who asked Kingman to lead the review of the FRC, said the government would “take forward the recommendations set out in the review to replace the FRC with a new independent statutory regulator with stronger powers”.Several stakeholders – most notably the Local Authority Pension Fund Forum and former MEP Sharon Bowles – have been calling for the FRC to be abolished for some time.  The UK’s audit regulator needs to be replaced with a stronger watchdog, says John KingmanThe review also advocated a “fundamental shift in approach” to the UK’s Stewardship Code – currently overseen by the FRC – saying that “serious consideration should be given to its abolition” if in its upcoming revised form it could not focus on “outcomes and effectiveness” rather than policy statements.The new regulator also needed to engage at more senior level in a much wider and deeper dialogue with UK investors, both fund managers and representatives of end-investors.The review also recommended that regulation of the actuarial profession should move to the Prudential Regulation Authority.The FRC is currently the regulator for auditors, accountants and actuaries, sharing this responsibility with the relevant professional membership bodies. It is also the body responsible for setting the UK’s corporate governance and stewardship codes. A new version of the former was published in July, while the FRC was due to present a new stewardship code for public consultation before the end of the year.Kingsman’s criticismsKingman said that although some of the FRC’s critics overstated their case, he had “sympathy with the view that the FRC has tended, overall, to take too consensual an approach to its work”.“The FRC’s approach to its own governance has also not been consistent with either its public importance, or its role in championing governance in the corporate world,” he added.Elsewhere in the report, the FRC was likened to “a rather ramshackle house” that was just about “serviceable, up to a point, but it leaks and creaks, sometimes badly”.“The inhabitants of the house have sought to patch and mend,” the review report continued. “But in the end, the house is built on weak foundations. It is time to build a new house.”Investor reactions The release of the Kingman review coincided with the UK’s competition watchdog today launching a consultation on proposals for “robust reform” of the audit market to address a shortfall in audit quality.The Competition and Markets Authority (CMA) has proposed legislation to: split audit from consulting services; introduce measures to substantially increase the accountability of those chairing audit committees in firms, and impose a ‘joint audit’ regime giving firms outside the four dominant providers a role in auditing the UK’s biggest companies.CMA chief executive Andrea Coscelli said: “We have moved fast to come up with a comprehensive package of proposals for legislation, which we will now consult on.“Successful reform of the audit market will require legislation, in combination with planned improvements to regulation as recommended by Sir John Kingman.”The CMA launched a study on the audit market in October.Auditor procurementSeparate to his review of the FRC, Kingman was also asked by the business secretary to consider whether there was any case for changing way in which audits were currently procured, particularly for major companies of public interest.In a letter to Clark, Kingman said there was a case for “radical change” in relation to who appoints company auditors, but that for reasons including firm investor opposition, he would advise the government to consider more “modest and focused approaches”.The radical change Kingman had sketched out involved company auditors being appointed by the FRC successor body instead of by the company’s board, with shareholders to be given the same right of veto on this appointment as they currently had on a board’s proposed auditor appointment.The Kingman review report can be found here.last_img read more

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Poor Q4 leads to 3.2% 2018 loss for Spanish pension funds

first_imgSeparate figures from Mercer’s Pension Investment Performance Service (PIPS) showed that pension fund returns averaged a 3.8% loss for calendar 2018. The PIPS survey covered a large sample of pension funds, most of them occupational schemes.Since there is no segmentation among corporate pension funds in Spain, it is difficult to compare the performance of these funds on a homogeneous basis. Mercer produces the only risk/return comparison among corporate pension funds in Spain.According to Bellavista, almost all corporate pension funds incurred losses for 2018, with not even the most conservative able to escape. Spanish occupational pension funds lost 3.2% over the course of 2018 largely because of markedly poor performance in the final quarter of the year, according to the country’s Investment and Pension Fund Association (Inverco).The return compared with a gain of 0.7% for the 12 months to end-September 2018, and a positive 3.2% for calendar 2017.The 2018 figure brought the average annualised returns for Spanish occupational funds to 0.9% for the three years to end-2018, and 2.5% for the five-year period.“This negative performance in Q4 was especially marked in December 2018,” said Xavier Bellavista, principal at Mercer. “It is the worst since the 2008 financial crisis. Then, the median return for corporate pension funds in Spain was [negative] 10.3%, but no other year since then has shown a negative return.” Madrid, SpainHe said: “Comparing the change in shape of the risk/return profile of corporate pension funds between September and December 2018 leads to interesting results. As of September, funds with higher long-term allocations to equity or with a higher diversification and exposure to non-euro assets were still getting positive returns, while as of December 2018, the picture had changed completely because of the negative performance of equity markets during Q4, especially in December.”In the last quarter of the year, Bellavista said, the level of volatility in the markets increased significantly.“This increased the risk level of the funds as well,” he continued. “As opposed to September, those with higher allocations to equity suffered and their performance deteriorated, by around 8 [percentage points] – from positive returns of about 2% for the 12 months to September, to [negative] 6% for December.”Asset allocationInverco’s figures showed that, for Spanish pension funds as a whole, the fixed income component rose slightly to 47.8% of portfolios, while equities fell slightly to 32.4%.Spanish government bonds still made up the biggest single component of pension fund portfolios at 23%, with a 14.4% allocation to domestic corporate bonds. The average allocation to domestic securities at end-December was 53.9% of portfolios.According to the PIPS survey, the total fixed income allocation was 53%, split between 37% in euro assets and 16% non-euro assets. Equity assets remained stable at around 35%, with an almost 50-50 split between euro and non-euro assets.Inverco said that, at the end of September, total assets under management for the Spanish occupational pensions sector stood at €34bn, a fall of 5.3% over the past year. The number of participants in the occupational system fell slightly, to just under 2m.last_img read more

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Netherlands roundup: More funds seek consolidation opportunities

first_imgThe Dutch pension fund of US chemicals giant Chemours plans to transfer its pension rights for its participants to a general pension fund (APF) and an insurer.The €1bn scheme had previously decided that it wanted to move its pensions provision after following affiliated company DePont Nederland outsourced pensions for its 400 employees to Belgium.At 2018-end, Pensioenfonds Chemours had 3,400 participants, 500 of whom were workers. This was down from 900 before DuPont staff were transferred.Since the pension fund closed its average salary plan to new entrants in 2013, new employees have accrued defined contribution (DC) pensions. Low-cost DC vehicle Be Frank has been Chemours’ provider since 1 January, although the transfer of assets has yet to be completed. According to Frans Dorsten, the scheme’s chair, the decision to transfer employees’ pensions to an APF was based on the fact that this participant group had almost been fully compensated for inflation.However, deferred members and pensioners, whose pension rights were to be outsourced to an insurer, had incurred significant indexation in arrears as different rules applied to them, Dorsten said.Placing their pension rights with an insurer would make it easier to compensate for the indexation shortfall, the chairman said.Last March, the funding level of Pensioenfonds Chemours stood at 125%.Dorsten said that the transfer of the pension assets was scheduled for this year. He added that the board was still in discussions with all parties involved, and was still waiting for quotes.The scheme’s current pensions provider is Inadmin RiskCo, while asset management has been outsourced to BlackRock and Pimco.L&G’s pension fund eyes liquidationScildon, the €60m Dutch pension fund of financial services giant Legal & General (L&G), is to liquidate if its sponsor forces through a plan to switch to a DC plan.On its website, the scheme said it wouldn’t have a future if the employer picked another provider for DC arrangements.The pension fund’s accountability body has responded positively to the sponsor’s plan.According to the board, the employer wanted to make a decision in May and would to consult the scheme’s 180 active participants in June.At the end of March, the pension fund’s coverage ratio stood at 112.2%.last_img read more

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EIOPA turns to external researchers for help with big questions

first_imgEurope’s insurance and pensions regulator is turning to external experts to come up with ideas and research to help it tackle a range of questions about topics such as investment allocations and liquidity stress testing.The European Insurance and Occupational Pensions Authority (EIOPA) announced the call for research proposals on Monday, saying it was aimed at addressing open questions related to five topics with a special emphasis on policy angles.The Frankfurt-based authority said: “The ongoing policy and regulatory debates related to the European financial system have been increasingly focused on beyond banking topics including insurance and pension sectors.“Many questions which need to be addressed require both appropriate theoretical foundations as well as deep empirical analysis,” it said. The topics for which it wants research proposals are:Investment allocations of insurers and pension funds;Liquidity stress testing in the insurance sector;Early warning systems in insurance;Systemic relevance of insurance sector and its interlinkages with financial and real sectors;Economic valuation of insurers’ liabilities; best estimate and risk margin.A firstA spokeswoman for EIOPA told IPE this was the first time the regulator had launched such a call, and that it was a response to growing importance of insurance and pension sectors in the overall financial system.“This growing importance reinforces the need to fully develop a both theoretical and empirical foundation for risk assessment methodologies to be used for the sectors,” she said.The authority was taking this new step, she said, “in order to leverage the expertise and capacity of external researchers to further enhance a methodological framework available in EIOPA to be able to timely and properly monitor and assess all risks in the insurance and pension sector and address relevant pending research questions”.While the global research community did a lot of research – both theoretical and empirical – in the area of banking, she said significantly less had been done on insurance and pensions.“We see many topics where more theoretical foundations could be developed to address all ongoing and emerging issues,” she said, adding that this was particularly true for the area of financial stability where micro and macro topics came together and broad expertise covering finance and economics was needed.  All interested researchers with a solid academic background currently working for academic institutions or public authorities are being invited to participate, with each research team having to consist of at least one expert from EIOPA.The deadline for proposals is 15 December.In its recently-published global financial stability report, the International Monetary Fund (IMF) warned that lower-for-longer yields may prompt institutional investors to seek riskier and more illiquid investments to reach targeted returns.“This increased risk-taking may lead to a further buildup of vulnerabilities among investment funds, pension funds, and life insurers,” it said.Low yields promoted greater portfolio similarities among investment funds, the IMF wrote, adding that this may amplify market sell-offs if there were an adverse shock.“The need to satisfy contingent calls arising from pension funds’ illiquid investments could constrain the traditional role they play in stabilising markets during periods of stress,” it said.last_img read more

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ESG roundup: EU benchmarks, disclosure regs get final rubber stamp

first_imgTwo of the three regulations making up the legislative part of the European Commission’s sustainable finance action plan will be officially published later this month after the EU Council today adopted the texts in question.The step is purely procedural, because the political agreement on the regulatory proposals was reached earlier this year: February in the case of the now-finalised regulation to create new categories of climate-related benchmarks and require sustainability-related disclosures for all benchmarks, and March in the case of the regulation introducing disclosure obligations for institutional investors relating to environmental and social matters.Today’s announcement by the body of EU member states comes after index provider MSCI announced it had created provisional climate indices designed to meet minimum standards for the two new EU climate benchmark categories: EU Climate Transition Benchmarks and EU Paris-aligned Benchmarks.The final requirements for the benchmark types are not yet known, but the index provider said it had decided to launch the provisional indices in order to help clients evaluate and test them. Requirements for the two new types of EU climate benchmarks will be set out in delegated acts to be adopted by the European Commission following public consultation.As for the disclosure regulation, the European supervisory authorities have been tasked to come up with more detailed rules and are aiming to consult on these next month or early next year.PensionsEurope and other financial industry associations recently raised concerns about the application timeline for the new EU sustainable investment disclosure rules, which the Commission dismissed.GPIF adds green bond partnershipJapan’s Government Pension Investment Fund (GPIF) has partnered with the European Bank for Reconstruction and Development (EBRD) to promote green and social bonds.The move comes on the heels of a decision by the world’s largest pension fund to forge a similar initiative with the African Development Bank (AfDB) four weeks ago.GPIF described the partnerships as central to its strategy to promote environmental, social and governance integration into fixed income investment.Of the partnership with EBRD, Hiro Mizuno, GPIF’s executive managing director and chief investment officer, said the fund required its asset managers to integrate ESG into their investment processes from analysis through to the investment decision.“We regard the purchase of green, social and sustainability bonds as one of the direct methods of ESG integration in fixed income investment,” he said.Mizuno added that GPIF wanted to make green, social and sustainability bonds mainstream investment products, in order to ensure sustainable performance of the pension reserve fund for all generations.EBRD’s green bonds and social bonds are issued in alignment with the Green Bond Principles and Social Bond Principles. These are administered by the International Capital Market Association (ICMA).Paulo Sousa, EBRD’s acting vice president and chief financial officer, said: “Japan is a key and significant founding shareholder of the EBRD, whose mandate explicitly requires investments in environmentally sound and sustainable development, as well as in small and medium-sized enterprises.”Sousa said such investments were the focus of projects underpinning EBRD’s issuance of green bonds and social bonds.Akinwumi Ayodeji Adesina, AfDB’s president, described the arrangement as a “landmark strategic partnership”.He said it would help catalyse investment capital, create more sustainable investments and help the bank achieve its ‘High 5’ priorities to fast-track Africa’s development.Earlier this year GPIF launched its green and social bond partnerships with the Nordic Investment Bank (NIB) and the Asian Development Bank (ADB).last_img read more

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The house that earned more than double the average Aussie worker

first_imgSOLD 45 Dover St Hawthorne sold for $1.15 millionTHIS Brisbane house earned its owners almost two and a half times the average annual salary in just 16 months.Located in the sought-after suburb of Hawthorne, the three bedroom Queenslander at 45 Dover St recently sold for $1.15 million – $200,000 more than the vendors paid for it in 2017.The average weekly salary was $1586.20 in May this year, according to the ABS – or $82,482 a year, albeit the majority of workers earn far less.Place Bulimba agent Tammy Dale said the house had attracted multiple offers before being snapped up by an interstate buyer in Hobart.“We sold this house to the vendors in 2017 and are pleased to have gotten such a good result just 16 months later,” she said.“They did no work to it all, other than doing a few garden beds.“There were multiple offers on it and the winning buyer was willing to pay more for it.“It is a good result in just a year and half with no real work done on it.”Property records show that the house has been a consistent profit-maker, selling for an unimaginable $392,500 in 2006 and $802,500 in 2011 before being sold for $950,000 in February 2017 to the vendor and then $1.15 million to its new Hobart-based owner.More from newsParks and wildlife the new lust-haves post coronavirus16 hours agoNoosa’s best beachfront penthouse is about to hit the market16 hours agoIt was also originally listed for offers over $1.05 million before selling $100,000 over that, and was only on the market for 23 days.The house sold for just under the median house sales price for Hawthorne – $1.55 million.And it is easy to see why the buyer fell in love with this Hawthorne honey, especially given that it was just 9C in the Tasmanian capital at the time of writing.Chance to buy your own resortThe charming Queenslander is framed by a white picket fence. A path leads to a spacious covered porch.Inside the front door is an open plan dining, kitchen and lounge featuring high ceilings, polished original timber flooring and VJ walls.The kitchen features stainless steel appliances, stone benchtops and custom cabinetry with an abundance of storage.Also on the upper level is the master bedroom with built-in robes, ensuite, private access to the outdoor verandah and a gorgeous bay window. Two other bedrooms and a main bathroom complete the upper floor.Downstairs, there is a multipurpose room or fourth bedroom with direct access to the outdoor patio.Brisbane’s north dominates list of suburbs tipped for capital growthMs Dale said the Hawthorne market overall was “doing well’, with a house around the corner selling for $1.35 million.“There is lots of interstate interest at the moment,” she said. “These new owners are moving up to Brisbane (from Hobart).”last_img read more

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