Dutch, German companies taking good care of UK pension funds – study

first_imgUK defined benefit (DB) pension funds with sponsors based in Germany and the Netherlands are significantly better funded than the average for the UK’s largest listed companies, new research has shown.The research, conducted by consultants Barnett Waddingham, looked at the funding for DB schemes in FTSE 350 firms, picking out the 33 with German or Dutch sponsors.It showed that five of the 14 Dutch schemes ran accounting surpluses, a relative anomaly for FTSE 350 schemes in recent years, with an average funding level of 96%.This is a full 9 percentage points higher than the FTSE 350 average. Nine of the 19 German schemes also ran surpluses, with the average funding level 11 percentage points higher than the average, reaching 98%.However, the research also showed some of the companies operating with a high indirect exposure to equities.Some of the DB schemes forced their sponsors’ exposure to equity volatility to breach 100% of s‎hareholder value.This was the case for three German companies, and two based in the Netherlands.As a result, fluctuations in the valuation of scheme equity holdings could have a larger impact on the sponsor’s balance sheet than its own commercial activities.The German firms also pay significantly above the average in deficit contributions compared with a company’s profit.Parent firms listed on the DAX put in an average of 1.7% of revenues to tackle scheme deficits, which Barnett Waddingham said would see them removed within five years.This compares with 0.9% for Dutch employers, which would require a further three years to see deficits gone, against an average contribution of 1.1% for FTSE 350 firms overall.Malcolm Rochowski, consultant at Barnett Waddingham, and who led the research, said that while the schemes were run in the same manner, a better funding level was certainly prevalent.“What is surprising, even though the funding levels are above average, it did not translate into a reduced contribution pattern,” he said.“This could be cultural, given the Netherlands’ requirement for schemes to be fully funded, so the firm feels compelled to contribute when funding levels drop below 100%.”The Continental countries also outperformed the FTSE average with regards to contributions to pension schemes, as a percentage of staff costs.With an average of 7.7%, the FTSE 350 fell well below the 15% seen by German parents and 13% by the Dutch.However, in both situations, Barnett Waddingham highlighted the variance among individual firms, with contributions starting at below 5%, and rising to 40% for German companies and 35% for Dutch firms.last_img read more

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FTK to require Dutch schemes to increase buffers by 5 percentage points [updated]

first_imgIn the new FTK, according to sources, pension funds will be allowed to even out funding shortfalls over a 10-year period.For example, a scheme with a 10% shortfall, that applies a rights cut of 1% in the first year, would be exempt from further discounts if the coverage ratio improved sufficiently.News daily De Telegraaf reported that, in addition to tighter rules for existing nominal arrangements, the new FTK will also introduce rules for pension funds that want to place all risk with the participants.Pensions expert Theo Kocken confirmed that the new FTK is to focus on nominal arrangements, which are more flexible towards recovery from downward shocks, but more strict on adding pension rights following a windfall.He said he was convinced the effect of the new indexation rules would be neutral for both younger and older workers.Another reliable source told IPN the new FTK would only allow indexation if a scheme’s funding was more than 110%, and that indexation would also depend on a pension fund’s population.Kocken concluded that the current concept was the “best possible and maximum achievable” within the current pensions system.However, in his opinion, an essentially different pensions contract, with clear ownership rights, would be needed for the longer term.Initially, Klijnsma recommended an FTK consisting of two different pension contracts: a nominal one with tighter rules and a contract under real terms.However, following widespread criticism from the sector – which warned of overly complicated arrangements and problems with merging existing nominal and new real pension rights – the state secretary said she would draw up new proposals focusing on a hybrid contract.However, her latest thinking on the FTK suggests a continuation of nominal pension plans.If the Cabinet approves, the concept FTK would be put to the Council of State – the highest legal authority – for advice, before it is tabled in Parliament.The advice process could take up to six weeks, potentially leaving only six weeks for reading in Parliament before the summer recess.The new FTK is scheduled to go into effect on 1 January 2015, but many players in the industry have questioned the feasibility of such a tight deadline.The introduction of a new FTK has already been postponed by one year. Dutch pension funds, under the new financial assessment framework (FTK), will have to increase their financial buffers by 5 percentage points to 26.6% of assets, according to leaked details on the proposals. A number of industry sources close have confirmed to IPE sister publication IPNederland that the FTK proposals of Jetta Klijnsma, state secretary for Social Affairs, are to be discussed by the Cabinet today.They also confirmed that the new proposals would focus on nominal arrangements, and said the new FTK would allow pension funds to continue to base contributions on expected returns.The chief reason cited for this break from previous drafts of the FTK was the fact it would enable a decrease in contributions, including employer costs. The Dutch state, being the largest employer, has a significant interest in lower premiums.last_img read more

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Santander fund may lower investment risk as deficit declines by half

first_imgSantander’s UK group pension scheme is reducing its funding deficit faster than planned and is now in a position where it could even lower its level of investment risk, according to the company’s pensions chief.Reporting its financial figures for the six months to the end of June, Santander UK said the accounting deficit of the over £8bn (€10bn) Santander UK Group Pension Scheme had narrowed by £381m in the period.This was partly driven by positive asset returns but also the result of a £218m net gain arising from scheme changes to limit future defined benefit pension entitlements, it said.The net DB obligation — or funding deficit — was stated at £173m, down from £554m at the end of December 2013. Antony Barker, director of pensions at Santander UK, said: “Our target returns have fallen and the funding level at risk has declined.“We don’t need to take as much investment risk now, and we should still be able to deliver on the initial plan,” he said.However, the trustee funding deficit differed from the net DB obligation stated in the corporate accounts because of the type of bonds used to calculate it, he pointed out.Since 2012, when Barker joined Santander and the pension scheme — which was consolidated out of six legacy schemes — the trustee funding deficit had now narrowed to between £900m and £1bn, from around £1.2bn two years ago, he said.Back then, a 10-year strategy was put in place to get the scheme to a fully-funded position, which included a target return of 6.25% over the period.Since the scheme was now slightly ahead of its plan, the return needed to stick to that timescale had dropped to between 5.5% and 5.75%, Barker said.“Investment performance has been consistently delivering,” he said, adding that the pension fund had made some significant gains on property in the last 12 months, having benefited from quick wins on some of these investments in terms of early sales.The hedging strategy had also done well to control sources of volatility, facilitating the use of return-seeking assets, and private debt investment — which the fund has invested in for some time — had also contributed well to investment results, he said.Looking ahead, Barker said the investment team would largely continue its current strategy which would include finding misplaced assets to invest in.“We will probably be placing about £1bn in real estate and illiquid assets,” he said, given that public markets appeared to be highly valued and there expectations of rising interest rates were prevalent. In its interim report, Santander UK also said the latest triennial trustee funding valuation at 31 March 2013 had been agreed and after this, an updated schedule of deficit funding contributions had been agreed with the scheme trustee.last_img read more

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APG sets out to categorise participants’ personality types

first_img“This way, we take the motivation and needs of participants into account.”The personalities are based on five patterns found with respect to eight value sets. ‘Passive enjoyers’, for example, are very focused on their direct environment and are largely indifferent to the concept of solidarity.In their opinion, pensions are abstract – they do not think about them – and they feel they must pay much now for probably very little later.They think in terms of “we are entitled to a proper pension”, but usually ignore information from their pension fund.For this group, according to ABP, pensions information must be personalised, providing steps for concrete action and ramping up the sense of urgency.Communications should not include extensive explanations of figures, too many options or references to legislation or politics.The other personality groups include the ‘realistic and ambitious’, ‘disappointed dutifuls’, ‘happy-go-lucky developers’ and ‘rational entrepreneurs’.APG will look into how insights gained from behaviour, demographics and pension personalities can be combined, and where pension funds can apply them most effectively.Joyce Vonken of APG’s market intelligence unit said: “After having read the profile [of a given participant], it will be easier to recognise the personality during a phone call.“The same often applies to letters. One person needs a short and simple answer, the other wants to be provided with exact data and additional sources of information.”Vonken added: “When we write a newsletter that extensively addresses a pension fund’s investment policy, we can take into account which personality is interested in the subject through the tone of voice.”But the aim is not to test all participants for their personality, according to Hendriks.“Looking at their behaviour helps us to improve recognising our customers,” she said.“This way, personality can contribute to relevant and personal communication, in addition to segmentation for behaviour and age.”At the moment, people of different ages and genders already receive different communication.“The communication must be interesting,” Hendriks said.”If you sent everybody the same message, it is likely that people, after having found a couple of times that a pension fund’s mail is not relevant, will start throwing away everything.”Therefore, our clients no longer want uniform mass communication, but target-specific messages.” APG, provider of the €334bn Dutch civil service scheme ABP, has categorised its participants’ personalities in a bid to fine-tune its communications.In cooperation with market research bureau Motivaction, APG has designed a classification system for five pension personalities – including ‘disappointed dutifuls’, ‘happy-go-lucky developers’ and ‘rational entrepreneurs’ – with individual standards, interests and attitudes towards the pensions system and the notion of solidarity, as well as their level of knowledge.Strategic marketing manager Sylvia Hendriks said the aim was to tailor APG’s approach to each group.“We don’t want to push people into boxes – we want to use the insights about these personalities to increase the impact of communication,” she said.last_img read more

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European insurance company tenders green bond mandate

first_imgAn undisclosed insurance company based in Europe has tendered a $50m (€47.2m) global green bond mandate using IPE Quest.According to search QN-2138, the client is seeking “high-level ESG analysis”, with a bottom-up focus.It is also aiming to invest through a pooled vehicle.Applicants for the active mandate should have at least $100m in assets under management (AUM) in the asset class itself and $10bn in AUM as a company. Although fund managers should measure performance against the Green Bond Index, there is no minimum or maximum expected level of tracking error.Applicants should have a minimum track record of three years.Interested parties should state performance, gross of fees, to the end of September.The deadline for applications is 11 December.The IPE news team is unable to answer any further questions about IPE Quest tender notices to protect the interests of clients conducting the search. To obtain information directly from IPE Quest, please contact Jayna Vishram on +44 (0) 20 3465 9330 or email jayna.vishram@ipe-quest.com.last_img read more

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M&G and Prudential to create £330bn asset manager

first_imgUK insurance giant Prudential plans to combine its two main businesses to create a £332bn (€367.8bn) asset manager, the company announced today.In a notice to the stock exchange this morning, the company said it wanted to merge Prudential UK & Europe – which manages with-profits funds and other savings accounts – with M&G, its wholly-owned asset management arm.The new company, M&G Prudential, would be “better positioned to develop and fund joint product propositions and to build new digital service and distribution”, Prudential said.“The new entity will combine M&G’s active investment expertise with Prudential UK & Europe’s capabilities in volatility-adjusted savings and liability-driven investment to provide more choice for customers across both brands through retail, institutional and direct channels,” the company said. The merger would create one of the 50 biggest asset managers in the world, based on data from IPE’s 2017 Top 400 Asset Managers report.M&G has offices in 12 European countries as well as the UK, and offers funds across multiple asset classes including fixed income, equity, real estate, and multi-asset.Initial costs of the merger were estimated by Prudential at £250m, with roughly £145m annual savings expected by 2022.John Foley, currently chief executive of Prudential UK & Europe, will take on the same role for the new entity, with M&G CEO Anne Richards becoming one of two deputies alongside Clare Bousfield, currently CEO for insurance for Prudential UK & Europe.More details regarding the merger would be presented at Prudential plc’s investor conference on 16 November, the company said.Mike Wells, Prudential group chief executive, said: “In recent years, we have seen a convergence in the investments and savings markets with customers across all geographies and demographics demanding more comprehensive solutions to their financial needs.“Bringing together these two high-quality businesses, while transitioning to a capital-light model, will enable M&G Prudential to increase its growth prospects by providing better outcomes for our millions of customers and in turn generate strong returns for our shareholders.”It marks the UK’s third major asset management merger in the past 12 months, and comes as the sector faces increasing cost and regulatory pressures. US group Janus Capital’s merger with Henderson Global Investors completed earlier this year, while Standard Life and Aberdeen Asset Management are due to complete their merger next week.last_img read more

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Credit benchmarks too sensitive to interest rates, investors warn

first_img“Sticking to a benchmark mostly only makes the regulator feel better or the board which thinks this is the safer investment decision.”Gerald Moritz, founder and managing director of Moritz Consulting, agreed that benchmark duration was “too high”.The consultant warned: “I am not sure all Pensionskassen are fully aware of the risks in their fixed-income portfolios – and most of their members certainly do not fully understand these risks.”Moritz emphasised the continued importance of diversification “especially in credit risk management and duration”.“One problem will certainly arise from the ECB trying to put bought bonds back onto the market,” Moritz added.He noted that “in 2017, most pension funds were highly active in their asset allocation” and also in managing credit risks.“Sticking to a benchmark mostly only makes the regulator feel better or the board which thinks this is the safer investment decision.” Günther Schiendl, VBVAt the €6.8bn Valida Pension, Austria’s second largest Pensionskasse, head of asset management Arnd Münker said he expected the ECB to prepare for the first interest rate increase in 2019 and “stop buying bonds in September 2018”.“We already significantly reduced the risk from a change in interest rates in our portfolio by lowering exposure to euro government bonds and increasing the share of emerging market bonds,” said Münker.At the VBV, diversification into emerging market local currency debt brought the average overall duration in the fixed income/credit segment to around three years.“For the euro and the dollar interest rate sensitivity in that part of the portfolio, we have taken duration down to almost zero,” Schiendl added.For Schiendl products like risk-parity funds “only offer false security” as they can suffer extreme losses in some market phases – like the 10% drawdown in February. There is currently a mismatch between off-the-shelf benchmarks for credit portfolios and the actual duration required by a long-term investor like an Austrian Pensionskasse in fixed-income portfolios, according to experts.On average the standard benchmark duration is at least five years, but investors need shorter duration to reduce their portfolios’ sensitivity to interest rates. The European Central Bank (ECB) is expected to begin raising interest rates next year, after it finishes tapering bond purchases later in 2018.“The duration of the fixed income benchmarks currently does not match the market environment,” Günther Schiendl, CIO at the €6.9bn VBV Pensionskasse, told IPE. “We are absolute return investors as we have to achieve around 6% annually to match our liabilities target return.last_img read more

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PRI to commission research on ‘sustainable pension systems’

first_imgThe Principles for Responsible Investment (PRI) is commissioning research on the extent to which the structure, policy and regulation of pension systems influence pension funds’ and providers’ ability to adopt responsible investment practices and allocate capital to sustainable economic activities.The organisation said these aspects were currently not being considered by policymakers and the pension industry in the design of pension systems, but that its working assumption was that they had significant influence.In a request for proposal (RFP) document, the PRI said it wanted to commission an organisation to examine the pension systems in Australia, the UK and the US.The resulting report should include a review of the structure of each system and a “stakeholder chain analysis”, as well as a country-by-country analysis of barriers to responsible investment within investment practice, market structure, and policy and regulation. Speaking on a panel at the PRI’s annual conference last week, Will Martindale, director of policy and research at the organisation, referred to fragmented pension systems with “a long tail” and low provider switching rates as examples of barriers to responsible investment by asset owners. Will Martindale, PRI“But mostly we find that once you get to ESG you don’t go back,” he added.In referring to “sustainable pension systems” the PRI was not referring to pension adequacy or the economic sustainability of a pension system, the RFP document stated.“When we talk about sustainable pension systems we mean (1) the adoption of responsible investment approaches by pension fund boards and managers and (2) the allocation of capital to sustainable economic activities which contribute to prosperous and inclusive societies for current and future generations,” the PRI said.According to the RFP, the research project should consider second pillar and personal pensions, although the Future Fund – Australia’s sovereign wealth fund – was within the scope of the research.The PRI noted that, in the US and the UK, auto-enrolment had led to a sharp increase in the number of people saving for retirement as well as a surge in the number of pension schemes. At the same time, the UK was taking steps to consolidate private workplace pension assets through multi-employer defined contribution master trusts and defined benefit superfunds.In Australia, the superannuation system had focused on consolidating schemes.The deadline for applications to carry out the research is 30 September. According to the PRI’s timeline the final report would be delivered to the PRI in March next year. It has budgeted £30,000 (€33,567) for the research.The request for proposal can be found here.last_img read more

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Church’s new valuation methodology brings deficit reduction

first_imgThe £1.8bn (€2.1bn) Church of England Funded Pensions Scheme (CEFPS) has announced a significantly reduced funding deficit of £50m, compared with £236m at the last valuation, after changing its valuation method for liabilities.The funding position has improved further since the valuation was completed.The scheme previously used the “gilts plus” method, basing the discount rate for future pension payments on the yield from gilts plus a margin representing factors such as asset outperformance and the need for prudence.It has now switched to the asset-led funding method, basing the discount rate on the long-term return from its portfolio less a prudent “haircut”. The non-contributory defined benefit (DB) scheme provides funded benefits for service by Church of England clergy from 1 January 1998. Still open to new members, it has more than 20,000 participants, of whom around one-half are retired.Benefits relating to service before 1998 are paid by the Church Commissioners.The scheme is included in the £2.4bn portfolio of the Church of England Pensions Board (CEPB), which runs assets on behalf of three church pension schemes.At the end of 2018, around 87% of CEFPS assets were in a return-seeking pool, with the remaining in a liability-driven portfolio, including UK government bonds.The pension scheme’s return-seeking pool delivered a 7.9% pa return for the 15 years to 31 December 2018.At that date, the asset allocation of the return-seeking strategy was 65% invested in public equities (with a long-term target allocation of 35%), 11.4% in property, 10.1% in infrastructure equity and 4.9% in private loans.There was also a small amount in private equity (with a long-term target of 7%) and 3.6% in emerging market debt.However, illiquid assets will form a large part of the portfolio (around 65%) in five years’ time.“The change in discount rate has been highly transformatory to the funding levels of the CEFPS, as higher discount rates have lowered the valuation of liabilities”Pierre Jameson, chief investment officer for CEPBAaron Punwani, partner at LCP and scheme actuary to the CEFPS, said the CEFPS was in an unusual position, as a large scheme that is open to new members and with a policy of investing a higher proportion of its assets in long-dated illiquid investments and less in gilts than the typical scheme.Punwani said: “This lends itself to using the asset-led funding method, whereby the investment return assumptions are driven from the yields on the investments the scheme expects to hold over the long term, rather than purely from gilt yields. This closer alignment between the investment strategy and the actuarial valuation should result in a more stable funding position over time.”Pierre Jameson, chief investment officer for CEPB, said: “The change in discount rate has been highly transformatory to the funding levels of the CEFPS, as higher discount rates have lowered the valuation of liabilities.”Contributions on behalf of members are made by the fund’s “supporters” (the Church’s dioceses and the Church Commissioners for England).Following a consultation with supporters, contribution levels will be held at 39.9%, instead of rising to 50% had the valuation methodology remained unchanged. The deficit is expected to be cleared by 2023.Jameson said: “The supporters are very much in favour of the change in valuation methodology because it provides a significant dampening of volatility.”He added: “We feel this is a ground-breaking innovation for the pensions industry but it has always been within the guidance of the regulator, who has been consulted throughout the valuation process. Many UK DB schemes are now in run-off, but because we still have new money coming in, it is appropriate for us.”last_img read more

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Outgoing Norway SWF chief lauds political grit in choppy markets

first_imgIt is the latest in a series of four 100-plus page historic management reviews the central bank arm has published this year, coinciding with the end of Slyngstad’s 12-year tenure as CEO.The GPFG, known in Norway as the oil fund because it invests the country’s petroleum wealth, produced its highest annual return to date in 2009, in the early days of Slyngstad’s leadership, when it generated 25.6%.This came just after the global financial crisis, when the fund ended 2008 with a 23.3% loss.The SWF performed strongly after the financial crisis not least because NBIM was a huge buyer of stocks between June 2007 and early 2009, as it implemented the government-mandated increase in its equities allocation to 60% from 40%.Slyngstad said in the report that the fund’s investment strategy over the years had been reflected in the choice of a benchmark index and a mandate requirement to follow this index closely.“Important changes have, to the extent possible, been expressed as adjustments to the benchmark index,” he said.Slyngstad, who is now taking on a new job at NBIM, said it had been important for the fund to be managed close to the index because of the need for public accountability. Yngve Slyngstad“The index has ensured that the mandate is clear and the measurement of results beyond reproach,” he said.“The preference has also been for liquid investments that can be represented by an index,” Slyngstad said, adding that the choice and evolution of the benchmark index had been ”rooted in long-term viability rather than any market view or circumstance”.Under Slyngstad’s leadership, NBIM has made various recommendations to the Finance Ministry for its mandate to be changed to allow more unlisted investment and active management.In the new review, Lise Lindbäck, NBIM’s global head of investment advice, said that while the fund’s benchmark index alone had defined its investment strategy for a long time, NBIM’s assignment was now broader.“In some areas, the fund’s investments are compelled to deviate from the Norges Bank Investment Management benchmark index,” she said.NBIM also invested in assets that were not suited to benchmark inclusion and made other adjustments to meet specific mandate requirements, she said.“These decisions have a minor impact on the fund’s total return compared to the choices made in the design of the benchmark index, but they are still important with a fund of this size,” Lindbäck said.The GPFG currently has NOK10.3trn (€963bn) in total assets.Looking for IPE’s latest magazine? Read the digital edition here. Looking back at the history of Norway’s sovereign wealth fund, outgoing chief executive officer Yngve Slyngstad has praised Norwegian politicians for making courageous decisions and toughing out market swings without changing course.Introducing a new report by Norges Bank Investment Management (NBIM) on the history of the Government Pension Fund Global (GPFG) and its management strategy, he said: “The Ministry of Finance and Norway’s politicians deserve credit for bold decisions at an early stage and for sticking to the course in challenging market conditions.”Slyngstad – who was replaced as NBIM’s CEO a week ago by Nicolai Tangen – said that as a savings vehicle for future generations, the fund had a very long investment horizon, which had been reflected in the debate and the choices made over the years.“Strategic decisions early on continue to play an important role,” he said in the report entitled “Investing with a mandate”.last_img read more

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