Central and Eastern European (CEE) countries may be justified in returning to one-pillar pension systems, but they must also consider the risks of the “inverting pyramid”, where future benefits are inversely linked to life expectancy, the World Bank has warned. In the wake of the financial crisis, several countries in the CEE region – including Hungary, Poland and Lithuania – sparked controversy after abandoning their multi-pillar approaches to pensions and reverting to state pension-only systems.As the World Bank acted as midwife for the multi-pillar pension systems of several countries in the region, IPE asked Anita Schwarz, lead economist for the Human Development Group of the World Bank’s Europe and Central Asia Region, for her thoughts on these recent developments. Schwarz took pains to emphasise that countries had “options” to revisit the mechanisms they used to address pension adequacy. She said many CEE governments’ initial plan had been to bridge the medium-term impact of transferring some of the pension contributions into a second pillar through privatisation.However, “it proved difficult for successive governments to secure a sufficient stream of non-debt revenues to finance the costs of the reform”, particularly after 2008, when automatic stabilisers boosted spending to mitigate the impact of the global financial crisis.“As a result,” Schwarz said, “some of these countries chose to roll back their pension reforms.”She stressed that the World Bank was “not wedded” to a single mechanism for addressing pension adequacy or sustainability in the face of ongoing demographic changes. “But we do think it is important for countries to have a plan going forward on how they will address these demographic challenges,” she said.To help countries “think through” some of these important policy issues, the World Bank will be publishing a report in February entitled ‘The Inverting Pyramid’.The title refers to the way benefits are calculated in Poland and other CEE countries, where future benefits are inversely linked to life expectancy.“That is, as life expectancy increases, the monthly benefit for successive cohorts will be reduced,” Schwarz said.Citing research by the World Bank and other sources, she estimated that average pension benefits would fall from about 50% of the average wage today to around 25-30% in future.One of the questions facing CEE countries and many others, Schwarz said, is “whether such a level of benefit can be considered adequate and socially acceptable for future retirees”.Raising the retirement age is one of the solutions to the problem, she said, but “how high are countries willing to let retirement ages go?”
The figures include private sector employee pension institutions such as pension insurers and pension funds and foundations, but not former local government pension fund Keva or the State Pension Fund (VER).Meanwhile, Sweden’s AP6, Finland’s Ilmarinen and Norway’s Storebrand have all invested in Norwegian business software and services company Visma through co-investments, as the company broadens its shareholder base.Visma said that, under its new shareholder structure, KKR would reduce its stake to 31.3% from 76%, Hg Capital would sell its 16% stake but re-invest with a new fund bringing its ownership to 31.3%, and Cinven would come in as a new investor with 31.3%.Remaining shares will be held by Visma’s management.Several Nordic investors will co-invest with the private equity partners, including Ilmarinen and Storebrand.AP6, Sweden’s sixth AP pension buffer fund, said it was investing via Hg Capital’s Fund VII, buying an ownership stake of around 1.6% in Visma.The pension fund said: “AP6’s investment is in line with the strategy of investing primarily along with other industrial and financial partners.”AP6, which only invests in private equity, declined to say how much the deal was worth.But it did say the business was valued at NOK21bn (€2.6bn), which would suggest the investment cost around NOK300m.In other news, AMF Fastigheter, the real estate arm of Swedish pension fund AMF, said it had sold its last remaining Gothenburg property as it sharpened its focus on Stockholm’s property market.AMF Fastigheter said it sold office property Gårda 13:6, located in the Gårda area of Sweden’s second city, for around SEK950m (€105m) to Niam.It said this was the last property it still owned in Gothenburg, and that its real estate ownership would now be concentrated in the Stockholm region.Fredrik Ronvall, head of transactions at AMF Real Estate, said: “Instead of building up our own administrative organisation in Gothenburg, we have now decided to focus our investments on the Stockholm region.”He said Stockholm was one of Europe’s fastest growing cities and the pension fund expected it to develop strongly in the future. “One of AMF’s main driving forces is to revitalise and develop Stockholm, and we are doing this in close cooperation with the Stockholm city council and other property owners,” Ronvall said. Finnish employee pension institutions saw their solvency levels rise in the first three months of this year, even though the investment returns they generated in the period had been lower than a year before.Data published by the Financial Supervisory Authority (FIN-FSA) showed the solvency ratio for employee pension institutions averaged 29.1% in the first quarter, up from 28.4% at the end of December. The risk-based solvency position also strengthened to 2.2 from 2.1 over the same period, the authority said, adding that the rise in the average risk level of investment portfolios had come to a halt.Returns on investment for the institutions, however, stood at an average of 1.6% in the first quarter, compared with 2.6% at the same time last year, said FIN-FSA.
Jetta Klijnsma, state secretary for the Dutch Ministry for Social Affairs, has indicated she supports the industry-wide pension fund for temporary workers (StiPP) in chasing employers to pay contributions for all workers under mandatory pension arrangements.Fielding questions from Christian Democrat MP Pieter Omtzigt, she said the pension fund ran the risk that employees with unpaid employer’s contributions would still be entitled to a pension.Klijnsma argued this would come at the expense of the pension rights of the other participants.Omtzigt had asked her to look into the StiPP case, after she had given her opinion about Shell concluding a new pension plan without the approval of its workers council, as well as on the way the €50bn metal scheme PMT set up the elections for pensioners on its board. According to the MP, there is an intensive debate within the temporary workers sector about the sphere of action of the mandatory pension fund, caused by an “inflexible approach and the scheme stretching its scope to the maximum”.“The pension fund is sending out many retrospective charges and does not hesitate taking legal action,” Omtzigt said.However, in the opinion of the state secretary, StiPP sticks to the rules.She pointed out that employers that reject mandatory affiliation with the pension fund could ask the court to look into individual cases.In 2013, a local court in Amsterdam ruled that Care4Care, an employment agency for temporary care workers, was not subject to mandatory participation with StiPP.One of the arguments was that workers “are subject to the same rules that apply to consultants or people who are temporarily employed to implement certain practices or protocols, or to implement changes or change ingrained behaviour”.Last April, the corporate appeal college turned down another exemption request, as the employer involved could not prove that his own pension plan would deliver at least the same result as the StiPP scheme.
Pension funds in the UK are becoming increasingly active in factoring in stewardship when they select investment managers or consultants, according to the National Association of Pension Funds (NAPF).In a recent survey, the association also found that 94% of pension funds did recognise they had stewardship responsibilities.Will Pomroy, the NAPF’s corporate governance policy lead, said: “A decade on from our first engagement survey, there is now clear recognition environmental, social and governance risks can have a material impact on pension fund investments.”These matters have to be managed through ongoing engagement with companies and the exercising of voting rights, he said. He added that recognition by the funds had been translated into the selection of asset managers.Back in 2004, when the association carried out the first engagement survey, the NAPF said just one-third of responding schemes considered stewardship activity when selecting investment managers or consultants.That proportion has now grown to 80%.“From one-third to 80% considering the stewardship approaches of asset managers in a decade is a real step-change, with significant implications,” said Pomroy.When asked how they screened asset managers, 60% of pension funds said they actively questioned prospective managers about their stewardship approach, according to the poll. The survey also showed that, once they had selected their managers, pension funds were increasingly vigilant of their managers’ stewardship activities.The survey also showed they were spending more time reviewing reporting, giving more attention to the votes cast and asking more questions more regularly.However, there were also signs more could be done, the NAPF said, as only 53% of pension fund respondents said they felt institutional investors played an active-enough role as stewards of investee companies over the past year. Apart from this, only 55% said they believed engagement with investee companies had added value to their fund, or prevented loss of value. The survey took in responses from 50 pension funds among the NAPF’s membership, with combined assets under management of £419bn (€530bn).
UK local authority schemes have appointed eight law firms to a new nationwide framework agreement, allowing councils to reduce the cost of tendering exercises.The new framework agreement, launched by Norfolk County Council in June last year, was supported by the administering authorities for the Lothian and Environment Agency pension funds and the schemes for Buckinghamshire, Dorset, Suffolk and London boroughs of Croydon and Hackney.It is the latest in a number of national local government pension scheme (LGPS) frameworks, including ones for custodian and investment consultancy services, aimed at reducing the cost of the tender process.Burges Salmon, DLA Piper, Eversheds, Osborne Clarke, Pinsent Masons, Squire Patton Boggs, Towers & Hamlins and Wragge Lawrence Graham were included in a framework covering all potential areas of legal advice for funds in England and Wales, while Pinsent Masons and Burness Paull were appointed to the framework for Scottish schemes. Additionally, Maclay Murray and Spens and Sacker & Partners joined six others in being appointed to an investment services framework, with further agreements for legal advice on benefits administration and governance in both legal jurisdictions.In other news, Pinsent Masons has also been named legal advisor to the £800m (€1bn) Unite Pension Scheme, created following the merger of the schemes run by the Transport and General Workers’ Union and Amicus, until 2007 one of the UK’s largest unions.
Second-quarter returns of 1.8% for VER, Finland’s state pension fund, have brought its half-yearly results into positive territory – 0.9% – after first-quarter returns of -0.8%, according to preliminary figures. This takes VER’s annualised rate of return over the five years to the end of June to 5.8%, and 4.6% per annum over the 10 years to the same date.At 30 June, VER’s portfolio stood at €17.9bn, compared with €17.6bn at 31 March and €17.9bn at the end of 2015.The biggest component in the portfolio – liquid fixed income – returned 3.7% over the six months, compared with 0.2% for calendar 2015. Liquid fixed income accounted for 46.3% of VER’s portfolio as at the end of June 2016.A further 1.2% is in other fixed income investments, including private credit, which returned 1% over the six months.The other main asset class, listed equities (41% allocation), performed substantially under its 2015 level, making -2.4% over the first half of 2016, compared with 10.3% for calendar 2015.But private equity – the standout performer of 2015, with an 18.6% return – maintained positive results, with a 4.5% gain over the first half of 2016.Private equity forms part of a 2.2% ‘other equities’ allocation. Risk limits set by the Ministry of Finance provide that fixed income investments must account for at least 35% of VER’s investment portfolio, while equity investments may not exceed 55%.Timo Viherkenttä, chief executive at VER, said: “The return on investments was barely in the black, mainly due to the fixed income instruments. Investments in emerging markets, in particular, generated healthy returns.”He added: “Stock markets had not fully recovered by June from the sharp fall experienced in early winter, as well as the new blow delivered by the EU referendum in the UK.“Subsequently, share prices have exceeded the levels at the beginning of the year in many markets.”He warned that historically low interest rates and US stock prices at record highs were reason to prepare for modest returns, as well as setbacks, in the future.In June, VER’s board of directors adopted a strategy that provides a more detailed description of the scheme’s objectives and outlines the policies designed to achieve them.By law, VER must be grown until its assets cover 25% of the Finnish state’s pension liabilities.The objective is now to achieve this by the end of 2033.The funding ratio in 2015 was 19%.The target return needed to reach the newly established objective will be applied for the first time in preparing the 2017 investment plan.
The FD reported that the €67bn metal scheme PMT saw opportunities for co-operation between Invest-NL and the existing Dutch Investment Institution (NLII), an initiative of 12 institutional investors.PMT added that, through providing venture capital, NL-Invest could provide significant help to startup companies.Jan Willem van Oostveen, investments manager at the €185bn healthcare scheme PFZW, emphasised the importance of sufficient investment propositions that meet the criteria of large pension funds in terms of scale and risk profile.“NL-Invest could be the initiator for these projects,” he said.The government said it would offer entrepreneurs risk-bearing capital, guarantees, export credit insurance, and international finance programmes.Invest-NL is also developing large social projects both locally and abroad.The government said that it also expected the vehicle to attract funding from institutional investors as well as European funds and programmes.Invest-NL will enter a joint venture with FMO, the Dutch finance company for developing countries, and will also co-operate with export credit insurer Atradius Dutch State Business. Several large Dutch pension funds have responded positively to the launch of a €2.5bn government-backed fund focusing on social projects and venture capital.Invest-NL – jointly launched by the ministries for Foreign Affairs, Finance, and Foreign Trade & Development Co-operation – is to focus on energy, sustainability, mobility, food, and digitalisation, according to Dutch financial news daily Het Financieele Dagblad (FD). It will launch next year.The €382bn civil service scheme ABP said the project demonstrated an acceptance from the Dutch government that investment in such areas had been hampered by a poor ability to translate ideas into viable propositions.ABP said it would closely monitor developments involving the investment fund.
Source: David HoltThe Bank of EnglandOn 16 June, my former colleagues in the Bank of England underlined the link between climate risks and financial stability, detailing two pillars of their approach to climate-related risks. The first is engagement with firms that may be directly affected. The second is supporting an orderly market transition and thus boosting the UK financial system’s resilience.So we have the FSB, the EU, and prudential regulators taking action. Governments are working on national climate plans. The transition away from fossil fuels will create real business opportunities as some businesses shrink and others grow. And it will create real financial risks, including those from unexpected political decisions and policy twists.The Cambridge Institute for Sustainability Leadership, where I am vice-chair of its Banking Environment Initiative, is helping banks and insurance companies understand the possible scenarios involved, and manage the ‘transition risks’ involved as we move away from fossil fuels to a low-carbon economy. Regulation, whether around climate disclosure or risk management, is inevitable. Financial firms would do well to get on the front foot, ensuring they understand the issues involved, and assigning responsibilities to chief risk officers and the appropriate business heads. They need to be talking to their regulators to ensure both sides appreciate what is at stake.Taking commercial advantage of this agenda will require wisdom and bravery. Predictions and risk management based on historical data are likely to be uninformative for climatic changes and the resultant policy adjustments, which have no modern precedent.The physical impacts of climate change may be less extreme than scientists fear, and the economic consequences may be less dramatic. But if 2008 taught us anything, it is that the improbable and unprecedented can happen. But new risks are emerging around climate change that are poorly understood, hard to manage and, at the extreme, pose threats to the financial system not unlike those we faced in 2008.This may seem overblown, especially for an issue that many people assert to be long-term and slow moving. But the climate is clearly changing, and will not do so smoothly.Either the planet will suffer some catastrophic changes in climate or dramatic policies will have to be adopted to change the growth path to one in which we emit a lot less carbon – probably net-zero or less. If policy does not react early enough, both outcomes are likely. Arguing about the cause, or the costs, will just delay the inevitable policy action and make the consequences worse.“In all of these scenarios, banks, insurance companies, and large institutional investors could find themselves facing existence-threatening losses.”It is not difficult to imagine scenarios in which climate change directly causes a financial crisis. A major flooding event or series of hurricanes could overwhelm the ability of insurance markets to absorb the resulting losses. Growing evidence of rising sea levels or widespread droughts could force policymakers and regulators into drastic action. Financial markets could suddenly re-price the risk posed by affected companies – such as the fossil fuel sector – leading to rapid collapses in the value of entire industrial sectors. (Not convinced? Take a look at the recent performance of the US coal sector.)In all of these scenarios, banks, insurance companies, and large institutional investors could find themselves facing existence-threatening losses. If ‘systemically important’ institutions face insolvency, we’d have another financial crisis on our hands.Governments have promised to act to limit global warming. It is not known precisely how yet – although it is pretty clear that current policies won’t get them (or us) anywhere near the 2015 Paris commitment to limit warming to no more than 2° Celsius above pre-industrial levels.Market participants succeed or fail by making guesses: for example, about the state of the economy or of individual enterprises. But they have never been great at pricing political or policy risk – it can be unpredictable, sometimes capricious, and often binary. No current government can tie the hands of a future government. Taxes and subsidies can be varied at will. Even constitutions can be rewritten or bypassed. Disclosure will be the first step: the recommendations from the Financial Stability Board (FSB) Task Force on Climate-related Disclosures will get endorsed in many locations, even if US president Donald Trump breaks the G20 consensus. Article 173 of the French Energy Transition Law, which requires investors to report on how they manage their climate risks, is getting close attention in other jurisdictions.Fiduciary duty means that, where there are material financial risks to beneficiaries, those risks cannot be ignored by boards or money managers. The authorities in a range of countries will want to make sure that is clear to all concerned. Prudential regulators are already taking steps in many countries to ensure that the potential financial risks from climate change are properly managed by financial firms.The European Commission has set up a special experts group as part of the Capital Markets Union project to advise on sustainable finance. I am privileged to be a member. Our group is charged with advising the Commission on how to integrate sustainability considerations into EU financial market practices and regulation. Tail risks have an unfortunate habit of becoming reality. That was one of the clearest lessons of the 2008 financial crisis – an event that I lived through and had to deal with, as a senior figure in the Bank of England’s markets department.“New risks are emerging around climate change that… pose threats to the financial system not unlike those we faced in 2008.”When the improbable actually happened, ‘safe’ AAA-rated assets became junk, liquid markets dried up, the trust that oiled the financial system evaporated and we had to take the most extraordinary measures in response.The financial sector is all about risk. Taking it. Avoiding it. Monitoring, measuring, and limiting it. And, crucially, making money from it. Paul Fisher is a former deputy head of the UK’s Prudential Regulatory Authority and a former member of the Bank of England’s interest rate-setting Monetary Policy Committee.
It said the former section would be transferred to a full individual DC, while the latter would remain unchanged.According to Bierlaagh, tthe €480m of accrued DB rights would be transferred to the APF and housed in an individual section.The remaining €5m of individual DC capital is to be transferred to the PPI. Bierlaagh said he couldn’t provide details of this section either, “as this had been arranged by the employer”. Unisys could not be contacted by the time of publication.Bierlaagh said the employer and the pension fund had agreed that SPUN would become a closed scheme as of 1 July, and accrual into the PPI would begin as of this date.He added that SPUN aimed to complete the transfer to the APF before 1 January.Currently, asset management for SPUN’s DB plan is carried out by MN, while NN Investment Partners is the asset manager for its DC commitments. Syntrus Achmea Pensioenbeheer is the fund’s administration provider.Clarifying its decision to liquidate, the board said that, as a consequence of further ageing of its population and the lack of newcomers, it expected to generate insufficient returns in the future to afford rising costs of the increasing number of pensioners.It argued that, despite last year’s investment return of 9.5%, its financial set up had become “too vulnerable”. It also raised concerns over whether it would be able to keep finding qualified board members.At year-end, the Unisys scheme had 2,670 participants in total, of whom 1,310 were pensioners and 244 were employees. Last May, the scheme’s funding stood at 105.7%.Because of the relatively high number of older participants and pensioners, SPUN already followed a defensive investment policy, which comes at the expense of pensions accrual for its younger participants.In 2015, its annual premium income was just 1% of its assets. Administration costs per participant rose to €544 last year.SPUN said the employer had provided a budget to cover administration costs for the next six months, after which time the closed pension fund would not receive any further contributions.The scheme’s accountability body (VO) has already advised positively about the planned transition. SPUN, the €485m Dutch pension fund of IT firm Unisys, has announced its intention to liquidate after placing the largest part of its assets with a general pension fund (APF).It will transfer the remainder of its assets to a low-cost defined contribution (DC) vehicle – known as PPI – where future pensions accrual is to take place for all its participants.Geert Bierlaagh, the pension fund’s director, said that negotiations with the APF had not been completed yet so he couldn’t provide more details.The Unisys scheme operates two pension plans: a hybrid of both defined benefit (DB) and individual DC for staff that had been employed before 1 September 2012, and an individual DC scheme for workers that joined after that date.
The contract is for four years, with renewal possible of up to two years.“We expect the custodian bank to improve its services on an ongoing basis throughout the term of the agreement with ATP to match changes in market standards, products and best practices for the global custody and collateral management industry and we expect the global custodian to be willing to set new standards and support ATP’s goals,” the pension fund said.ATP envisaged inviting six candidates to join its final shortlist.The pension fund said the Danish version of the draft global custody agreement would be the legally binding version, and though the tender may be prepared in English, the agreement itself must be in Danish.When it awarded the role to Northern Trust in April 2013, ATP cited as decisive the bank’s ability to deliver a tailored custody and collateral management solution which backed the pension fund’s aim of achieving maximum operational efficiency consistently.The deadline for receipt of tenders or requests to participate is 15 January 2019, at 1pm local time. Denmark’s largest pension fund is searching for a global custodian for its DKK779bn (€104.3bn) asset portfolio.ATP – one of the biggest pension investors in Europe – will appoint a custodian on a 4-6 year contract from October 2019, when the agreement with current custodian Northern Trust expires.The statutory pension fund has put out a tender via Oslo-based Mercell Sourcing Services, which is handling the process.ATP’s tender notice included a DKK1bn credit facility, which it says is contained as an option in the contract.