Germany’s Social and Finance Ministries are collecting data on the use of occupational pensions in small and medium-sized enterprises (SMEs), as well as the impact of tax incentives in the second-pillar system.A team from the college at Paderborn under Frank Wallau is to present the results from research into SMEs by mid-November.Commissioned by the Social Ministry (BMAS), the academics are to look into obstacles encountered in this “important segment” for the German industry when it comes to setting up a pension fun.At the same time, the Finance Ministry has begun conducting research into how tax incentives are influencing the second pillar, particularly pension fund contributions. Christian Luft, head of the BMAS pension department, told delegates at the annual conference of the German pension fund association (aba) that the surveys would form the basis of measures to increase the use of occupational pension schemes.He said he was against “heavy” measures such as a mandatory regime or opting-out, both for employees as well as for employers.The latter opting-out model had been mooted during the recent election campaign.He also argued that a mandatory system should be only “a measure of last resort”, as it would interfere with the voluntary character of the system in which employers are using occupational pensions partly to motivate their employees.He also said opting out would do nothing to bring more occupational pension schemes into the SME landscape, as those companies might again opt out of the system due to greater administrative costs.Luft said he would rather opt for “smaller steps than big-bang solutions, as those are always stirring up dust”.He said the ministries were looking to improve information on occupational pensions among employees.He also confirmed they were “peeking across the borders” into countries like Sweden for new ideas.“But, for better information, we will also need more data and regular information from all schemes,” he said.
In other news, Mercer has been appointed as the preferred master trust by the UK’s Advanced Procurement for Universities and Colleges (APUC) for over 200 higher education institutions that it represents.Created under a framework agreement, APUC’s deal will allow educational institutions to use Mercer’s defined contribution (DC) master trust without needing to conduct separate tender exercises.The offering is auto-enrolment ready, and APUC said it will save the education institutions time, effort and cost, and avoid the enrolment of staff into several different DC schemes through their careers.Emma Nicholson, Special Projects Manager at APUC, said: “The assessors felt it would offer the [education] sector competitive, high-quality pension provision, robust independent governance and value for money. The new arrangement has been designed to offer a flexible solution.”Mercer’s lead of UK DC solutions, Roger Breeden, added: “Through our robust governance structure, overseen by the independent trustee, we are confident this will be the plan of choice for the higher and further education sector.” The French supplementary public-sector pension scheme, ERAFP, is seeking to invest €400m in US dollar-denominated corporate debt.The €16bn fund said that the tender would act as a framework agreement, with one manager likely to be seeded with capital while two others are appointed ‘substitutes’.In a statement, the scheme added: “The portfolios will principally be invested in US dollar-denominated bonds of corporate issuers located in OECD countries, with the exception of bonds issued or guaranteed by a sovereign state or a local authority.”It said that the €400m allocation should only be seen as indicative of the investment potential over a three-year period, with the contract running for up to five years.
“The responsibility for Norway’s participation in international economic sanctions rests with the Ministry of Foreign Affairs,” he said. Norway is not a member of the EU, but is in the European Economic Area (EEA) by dint of its membership of the European Free Trade Association (EFTA). EFTA members adopt almost all EU legislation related to the single market. Frode Andersen, spokesman for the Ministry of Foreign Affairs, said the ministry would “carefully consider new restrictive measures from the EU and consult the Parliament as necessary”.He added: “It’s important the restrictive measures we support have the broadest possible base.”The European Commission and the European External Action Service (EEAS) are due today to present proposals on action to be taken following the downing of flight MH17 over Ukraine, following a request by the European Council. The council had already agreed on 16 July to target Russia with a new set of six restrictive measures, saying they regretted Russia and the separatists in Ukraine had not taken the steps set out in a previous council conclusion. The proposals will concern action including access to capital markets, defence, dual-use goods and sensitive technologies, including in the energy sector, according to the EU. With around NOK47.7bn invested in Russia through both equity and bond markets, according to figures for the end of 2013 – NOK22.1bn in equities and NOK25.5bn in fixed income – the GPFG is a big investor in the country, even though in percentage terms its exposure is less significant.Line Aaltvedt, spokeswoman for NBIM, said: “We are observing the situation in Russia.” She added that the investment manager did not give comments on divestment. According to the pension fund’s 2013 report, equity investments in Russia amounted to 0.7% of overall equity assets of NOK2.3trn at the end of 2013. Exposure to the Russian rouble in the fixed income portfolio stood at 1.3% of net fixed income assets of NOK1.9trn. It its first-quarter report, the fund said it had made a loss of 9.7% on its NOK24.3bn of Russian government bond holdings in the three-month period. Geopolitical uncertainty had led to the weakening of the rouble, and the central bank of Russia had raised its rates in an effort to stem the decline, it said in the report. Norway’s Government Pension Fund Global (GPFG) – the world’s third largest sovereign wealth fund – could divest its Russian holdings if the Norwegian government decides to support investment restrictions against the country in the wake of the air disaster in Ukraine. The former oil fund currently has around NOK5.5trn (€657bn) in assets. Runar Malkenes, spokesman for the Norwegian Ministry of Finance, said: “If the oil fund’s investments become affected by economic sanctions against Russia that Norway supports, NBIM (Norges Bank Investment Management), as the operational manager of the fund, will need to make the necessary adjustments to accommodate the new situation.” He stressed the fund was a financial investor, and its investments were not a foreign policy tool.
A UK NGO has called on institutional investors including Aviva Investors, Standard Life Investments and the Church of England to demand that oil company Soco International abandon a project underway at a UNESCO World Heritage site.Anti-corruption activist Global Witness also asked investors to commission an independent inquiry into London-listed Soco’s activities in the Democratic Republic of the Congo (DRC), after releasing a report presenting evidence that the FTSE 250 company had engaged in illegal activities as part of its oil exploration project in Virunga National Park.The report by Global Witness alleged that the company had made “illicit payments” and appeared to have “paid off” rebel forces while benefitting from the “fear and violence fostered by government security forces in eastern Congo”.Nat Dyer of Global Witness said in a statement: “Soco is threatening Africa’s oldest national park through an oil project marred by bribery, intimidation and violence. “Pension funds and other investors must demand that Soco quits Virunga for good and that it accounts for its actions,” he added.The NGO said its findings were based on “undercover recordings” gathered in the DRC “as part of an investigation by UK filmmakers, which have been reviewed by Global Witness.”Large institutional investors in Soco include Aviva Investors, Standard Life Investments and the Church of England Pension Board, who all told IPE they had been engaging with the firm.The British Airways pension schemes and several UK local authority funds – including those for the London borough of Islington, councils in Lincolnshire and Nottinghamshire and the West Midlands, West Yorkshire and South Yorkshire funds – also hold stakes.European investors include PDN, the Dutch pension fund for employees of life sciences firm DSM, and previously the Norwegian Government Pension Fund Global.However, Global Witness reported that Norges Bank Investment Management (NBIM) sold its stake in Soco in 2013, “partly because of concerns about the company’s operations in Virunga”.At the end of 2012, NBIM disclosed holdings in Soco worth NOK119m (€16.1m). The company was no longer listed in its 2013 year-end portfolio breakdown.Stephanie Maier, head of responsible investment strategy & research at Aviva Investors said that her firm had been engaging with Soco over its activities in the World Heritage site and said the activities were placing it at “serious risk” of failing Soco’s stated aim of a “responsible approach to oil and gas exploration and production”.Maier added that these concerns led to Aviva Investors commissioning an independent report into the firm’s activities in DRC, which set out a number of proposals in regard to board structure, remuneration and other environmental, social and governance (ESG) changes.She highlighted the firm’s public commitment to no longer “undertake or commission” any further exploratory drilling in Virunga, or any other World Heritage-listed site.“We consider both the spirit and the letter of the commitment to be a very positive step forward,” Maier said.“However, continue to engage with Soco regarding respect for the integrity of the World Heritage site boundaries and the full set of recommendations we outlined.”Soco released the announcement that it would stop drilling in Virunga jointly with the World Wildlife Fund (WWF) earlier this year. The park is is home to a quarter of the world’s 880 remaining mountain gorillas.The announcement followed a WWF complaint with the OECD about Soco’s Virunga project.A spokesperson for Standard Life Investments said that it had ongoing engagements with Soco on a number of issues, inlcuidng its activities in Virunga. “We continue to engage with the company and encourage best environmental, social and governance practices.”A spokesman for the Church of England Pensions Board meanwhile thanked Global Witness for publicising Soco’s acitivies.“Following the WWF’s complaint to the UK National Contact Point in 2013, we commenced a process of engagement with Soco about the environmental and social issues associated with their operations in the DRC,” he added. “Despite this complaint now having been abandoned, and Soco having clarified its position, we continue to engage.”However, according to Global Witness, the company’s behaviour following the announcement suggested that it remained committed to the exploration project.“Soco has also been at pains to tell investors and the Congolese authorities that its agreement with WWF did not signal the company was withdrawing from Virunga,” the NGO said.Addressing the claims contained within the NGO’s report, Maier said: “We have read with interest the Global Witness report and have raised with Soco the allegations within the report as part of our ongoing engagement.”She said that Aviva Investors was engaging over human rights and corruption risk and was anticipating a “positive response”, which it would then review.Soco maintained that Global Witness had not allowed it prior sight of the report, although the document cited exchanges between Soco and the NGO.A spokesperson for Soco told IPE: “Soco did send a letter to Global Witness on 4 June in response to allegations put to them, but [the company] was not provided a copy of the report itself until it was made publicly available.”The company had previously released a statement saying it was “aware” of the report.“As stated in our comprehensive letter to Global Witness of 4 June, we requested that Global Witness provide Soco with any evidence they had to support their allegations, since any breach of our code of business conduct and ethics would lead to immediate action by Soco,” it said at the time.“However, despite Global Witness calling on Soco to investigate these allegations, Global Witness itself has refused and continues to refuse to provide any evidence to the company to support their allegations.”
Explaining the fall, Per Klitgård, chief executive at Danica Pension, said: “In 2013, we entered into some extraordinarily large agreements in both Norway and Sweden.“Contributions rose strongly because of this at 26% last year, and so this year we are seeing a fall in contributions in both countries.”The rise in contributions within Denmark was mainly due to Danica Pension’s cooperation with its parent Danske Bank, with contributions coming in via this channel rising by 25% to DKK3.3bn in the first three quarters.The rise in pre-tax profit was partly due to the fact Danica Pension had been able to book the whole risk allowance for all four interest rate groups because of the positive investment result in its traditional with-profits pensions business.The fall in market interest rates over the first nine months contributed to profits on bond investments, which had particularly benefited customers with traditional pensions, Danica said.The return on traditional pensions rose to 10% between January and September this year, from a loss of 0.1% in the same period last year.Group total assets rose to DKK353bn at the end of September from DKK324bn at the same point in 2013. Danica Pension, the pensions arm of Danske Bank, has reported a 7% increase in pension contributions within its Danish business in the first nine months of this year, but a fall in contributions garnered in other Nordic countries.Posting its group financial results for January to September, the commercial pensions provider said its pre-tax profit had more than doubled in the period to DKK1.42bn (€191m) from DKK606m in the same period last year.Contributions within Denmark rose to DKK14.8bn in the nine-month period, from DKK13.9bn a year earlier, while overall contributions climbed only slightly to DKK20.3bn from DKK20bn.Meanwhile, contributions in foreign business fell to DKK5.6bn from DKK6.1bn – with Swedish contributions totalling DKK4.3bn and those in Norway coming to DKK1.3bn.
Denmark’s ATP has no contingency plan to resort to should the krone’s peg to the euro fail to hold, despite market turmoil, as it has “full and firm confidence” the country’s central bank will win the battle. ATP’s chief executive Carsten Stendevad told IPE: “We have full and firm confidence in the peg – it is the centre point of the Danish economic policy, and it has been for several decades.”The DKK823bn (€110.5bn) statutory pension fund had no contingency plans ready for the eventuality that the Danish krone’s peg to the euro could break, he said.“We all have an interest in the peg holding,” he said. “Thankfully, we have a central bank with a clear mandate, instruments at its disposal and a strong will to maintain our 30-year policy.” The Danish central bank said this week it had spent DKK106bn intervening in the currency markets in January – a record high since Denmark first pegged its currency to the euro.The Danish currency has been pushed higher on the foreign exchanges particularly since the European Central Bank (ECB) announced a fortnight ago it would start large-scale quantitative easing (QE) to boost economic growth in the euro-zone.At the end of last week, the Danish Ministry of Finance decided to stop bond issuance until further notice, at the central bank’s recommendation, in a bid to limit the inflow of foreign exchange.However, Stendevad said the current market situation was very challenging for ATP.“We have absolute-return targets that are quite ambitious, and it’s a uphill battle,” he said.Yields on 30-year Danish government bonds fell last year to around 1.4% from about 2.7% at the start of the year.“Bond yields have fallen, and we are in the business of providing guaranteed pension incomes, so, when interest rates drop, it becomes much harder to provide these future incomes,” Stendevad said.The pension fund produced a return of 23% in 2014 including DKK132bn from its huge hedge portfolio and around DKK6bn in its smaller return-seeking portfolio, he said.“What that story doesn’t tell is that our liabilities have increased dramatically, so that return was needed just so we could meet those,” he said.“The story continues in 2015, when it has become even more difficult to meet our liabilities. But, thankfully, we have our hedge portfolio, which protects our annuities.”ATP has weathered the difficult market situation well though, he said, and is overfunded with a solvency ratio of 115%.“Despite the massive falls in interest rates, that shows our guarantees are very well protected,” he said, adding that the institution had even increased pensions by 1.5% for 2015.Over the last 4-5 years, the return-seeking portfolio has changed significantly, he said, particularly regarding its investment in property and infrastructure.“The purpose is to produce a return that enables us to increase pensions,” he said.
Aegon AM, Principles for Responsible Investment, Pension Insurance Corporation, PriceWaterhouseCoopers, UKSIF, Advent International, LGIM, Barclays, DeloitteAegon AM – Natalie Beinisch has joined the responsible investment team at Aegon Asset Management as engagement manager. She is to focus on developing and expanding the global engagement programme, engaging with companies in which Aegon invests as well as with the broader base of Aegon’s stakeholders. Previously, Beinisch has led the Academic network at the Principles for Responsible Investment (PRI) in London. She has also researched transnational risk regulation and lectured at the University of Amsterdam. Pension Insurance Corporation – Roger Marshall has joined the board of Pension Insurance Corporation as a non-executive director and chair of the company’s audit committee. He worked at PriceWaterhouseCoopers for nearly 40 years, where he was most recently lead partner for major FTSE 100 companies, across several sectors. UKSIF – John Jarrett, Melissa McDonald and Alexia Zavos have been appointed directors to the board of the UK Sustainable Investment and Finance Association (UKSIF). Jarrett is currently deputy head of FTSE Russell ESG, while McDonald is global head of equity product and responsible investment at HSBC Global Asset Management. Zavos is head of responsible investment at Cazenove Capital. The association said the latest appointments brought the number of women on its board to five, alongside three men. Advent International – Jean-François Cirelli has been taken on by Advent International as an independent senior adviser. He is a former vice-chairman and president of GDF Suez, the French multinational electric utility recently renamed Engie. Before that, he was chairman and chief executive at Gaz de France. Legal & General Investment Management – Katharine Photiou has been appointed to the new role of head of workplace DC – product & proposition. She will report to Aaron Meder, head of investments at LGIM. She joins from Barclays, where she was head of workplace savings. Before that, she was at Mercer and Friends Provident.Deloitte – Marian Elliott has been appointed head of trustee advisory services in London. She is a scheme actuary with more than 13 years’ experience.
The European Systemic Risk Board does not yet understand the impact the International Accounting Standards Board’s (IASB) new financial instruments accounting rules will have on financial stability, its chairman Mario Draghi has confirmed.In a 29 February letter addressed to the European Parliament’s Committee on Economic and Monetary Affairs (ECON), the European Central Bank (ECB) chairman wrote: “While I appreciate the ECON committee wishes to receive a reaction from the [ESRB] at an early stage, I would like to signal that, although several member institutions of the ESRB have already taken a public stance on the issues you raise, the ESRB has not yet assessed the impact of the new accounting standards on the financial sector as a whole.”Draghi explained that this was down to the “poor quality of the data available and uncertainty as to whether – and if so how – capital regulation might change in the light of the new accounting rules”.The letter continues: “It should be noted that the time endorsement of IFRS 9 is a necessary condition for entities to make significant progress on its implementation. This may in turn result in the more reliable data needed for this project. “Indeed, there are significant interplays between accounting and regulation, and the ESRB is interested in how these might impact on financial stability – for example, in terms of pro-cyclicality of impairment and measurement requirements and the broader effects of fair value accounting.”Draghi concluded: “Given the need to fully understand the macroprudential implications, consider factual developments, including progress made on implementation, and involve the ESRB membership in a necessarily ample discussion, the ESRB may therefore respond to the ECON committee in the course of 2017.”The IASB has been working on International Financial Reporting Standard 9 (IFRS 9) since 2009 in a bid to replace its existing financial-instruments accounting standard.If the EU endorses the standard, it would apply to accounting periods beginning on or after 1 January 2018.The new standard would be used extensively by systemically vital banks and insurance companies as the basis for their financial-asset accounting.There is a concern among IFRS-sceptic MEPs that the European Commission has succumbed to lobbying by banks and the wider accounting establishment.In a speech to the 2011 IFRS annual conference in Zurich in July, IASB chairman Hans Hoogervorst said: “The endorsement of IFRS by Europe has been extremely important for IFRS. We still have a small problem now with IFRS 9.“There are many people who now think they should adopt it quickly because it gives a little bit more leeway in terms of the Greek government bonds.”Meanwhile, the European Union’s adviser on accounting matters, the European Financial Reporting Advisory Group, has already recommended the EU adopt IFRS 9.That endorsement has met stiff resistance from some quarters.In September, the UK’s Local Authority Pension Fund Forum argued that EFRAG misapplied EU law in its endorsement advice on IFRS 9.In December, both the LAPFF and the EFRAG wrote to the EU’s internal market commissioner, Jonathan Hill, to clarify their position on IFRS 9.Both insisted they were in the right.On 8 January, the ECON committee wrote to Draghi and set out the Parliament’s concerns about IFRS 9.The committee wrote: “Given the importance of this new financial reporting standard, [ECON] is concerned about this lack of reliable quantitative data and assessment.“The impact of the introduction of IFRS 9 on financial stability in general, and on the amount of loan loss provisioning and banks’ regulatory capital in particular, is of concern to the committee.”The committee also invited the ESRB to comment on the impact of fair value measurement – plus any wider use of fair value under IFRS 9 – in relation to its macro-economic impact.In a bid to break the impasse, the European Commission invited academics from the Mannheim Business School to assess whether IFRS 9 satisfied the EU endorsement framework.Professors Jannis Bischof and Holger Daske responded: “We observe that prudential supervisors from Europe did not express significant concerns about the impact of IFRS 9 on financial stability and, when assessing the standard in its entirety, we do not foresee such an adverse impact.”They concluded: “Ultimately, it is a purely political decision how to weight these different costs and benefits of different parties. Overall, we still conclude IFRS 9 is likely to be conducive to the European public good, not at least because it is a better standard than its widely criticised predecessor IAS 39.”
Falling coverage ratios could force Dutch pension funds to increase their fixed income allocations to reduce risk, according to AXA Investment Managers.Speaking at a recent conference organised by IPE sister publication Pensioen Pro, Hanneke Veringa, country manager AXA IM, noted that fixed income investments had risen sharply between 2007 and 2011 but remained unchanged since then.She said interest rates posed the largest risk for pension funds, “as a movement of a single percentage point has a 10-percentage-point effect on a scheme’s funding on average”.In her opinion, the sector has focused too much on cost-cutting and simplifying arrangements in recent past years rather than creating a safety net for sharply dropping funding ratios. She said pension funds should visualise their risk management through a “risk grid”, showing the relationship between funding and the securities in their investment portfolios.“Make clear what the chances are so that coverage drops within a year by 5 percentage points to less than 95%, and decide how the asset allocation should be adjusted to avoid the pain barrier,” she said.Veringa said the outlook for risk-bearing investments was “not promising” over the next 18 months, with only credit scoring a plus, and the expectations for government bonds being the worst.“Currently, AXA is replacing government bonds with credit,” she said.In her view, Dutch pension funds should review their estimates for future returns and develop scenarios based on long-term low interest rates, “as everything is to change”.Also speaking at the conference, Canadian pensions expert Keith Ambachtsheer recommended splitting pension funds into an accrual scheme and a benefits plan, which, respectively, should focus on generating returns for active participants and offering security to pensioners.“The elements of accrual and benefits combined in the current schemes are contradictory, and are the reason why both active participants and pensioners are dissatisfied,” he said.In Ambachtsheer’s opinion, the accrual scheme should invest predominantly in equity, whereas the payment one should aim at investments that match liabilities, adding that over-50s should gradually move from the accrual fund to the benefits scheme.Ambachtsheer also said the 70% replacement ratio of the average salary – a common aim of Dutch pension funds – could be lowered, “as several studies in Canada have suggested 50% is often sufficient to continue the desired life style”.He added: “A much lower target accrual would make pensions much more affordable. Key is finding the percentage that matches a pension fund’s target group.”
She adds that its ability to access data, through mandatory disclosure from sponsors and trustees, is “inflexible” at times.“It could be useful to consider whether a more flexible information-gathering power, along with a general duty on parties to cooperate with the regulator, would improve the efficiency and effectiveness of our information gathering,” she writes.Titcomb’s call for TPR to be involved in M&A activity seemed to fall short of mandating that such deals receive approval from the regulator before they can proceed.Stressing the “vital role” of M&A activity to the UK economy, Titcomb said such transactions were time-sensitive.However, she did propose that TPR be privy to future discussions of M&A activity where the pension fund is a significant debtor due to its funding level.“We can see a case for a more targeted solution such as imposing a requirement to involve TPR in certain circumstances – for example, where there is significant underfunding, and/or the transaction puts the security of the scheme at risk,” she writes. “Further work would be needed to determine how such a requirement could work in practice, in particular on where the onus for notifying TPR might lie.”Titcomb also questions whether trustee boards should be given the power to be the “first line of defence” and able to request further information from corporate sponsors in the event of a merger.The UK has previously considered giving trustees an increased role in scrutinising merger deals, consulting on the matter in 2012. The UK’s pensions regulator has asked for greater powers in the wake of the collapse of BHS, suggesting it should be involved in merger and acquisition (M&A) talks where a pension scheme is significantly underfunded.Lesley Titcomb, chief executive of the Pensions Regulator (TPR), also raised the possibility of the watchdog’s having to grant pre-clearance to certain M&A activity.She conceded, however, that any such deals were usually time sensitive, and that pursuing such an approach would have “significant” resource and budget implications.Writing to Frank Field – the Labour party chair of the work and pensions select committee, which is investigating the collapse of BHS and the impact on its pension funds – Titcomb argues that access to information is crucial to the regulator’s work.