“Is it right that the French working for a multinational company should be expected to live five years longer than their neighbours in Germany?” the consultancy asked.It calculated that, if companies used mortality calculations more akin to France, for example, FTSE 100 companies with employees in Germany, the US and Japan would see liabilities 10% higher than currently stated.“This could equate to an additional tens of billions on the balance sheets of the FTSE Global 100 companies,” LCP said.Calling for companies to take a global perspective on mortality assumptions, LCP conceded revisions to accounting standard IAS 19 were moving in that direction.Phil Cuddeford, a partner at LCP, said the results should be eyebrow-raising for finance directors in global FTSE companies.“Companies need to take a global perspective and seek to standardise their assumptions,” he said. “Otherwise, they may find that balance sheet liabilities have become unsustainable.“Whilst the variance in local approaches makes this a challenge, the explicit IAS 19 requirement to disclose material assumptions such as this is helping to focus minds on the issue.”The research also provided insight into public views across the world on who was to blame for a poor retirement.Across Continental Europe, 47% lay blame at the feet of the government, with only 7% blaming their employer and 42% taking personal responsbility.Those blaming their employer rose to 14% in the US, where half took personal responsibility, while 27% blamed the government.However, in the UK, those taking personal reasonability rose to 75%.Only a fraction (1%) blamed their employer for a poor retirement, and a fifth the government.LCP partner Alex Waite said: “These results highlight how important employee perceptions are. The main action for companies is to ensure they manage these perceptions.” A more global, consistent approach to mortality assumptions will help global employers avoid defined benefit (DB) liability surprises on their balance sheet, research shows.LCP said FTSE 100 companies with employees in different countries were potentially underestimating pensions liabilities, and thus were failing to show the true effects on their balance sheet.The consultancy found that, between France and Germany, Europe’s largest economies, mortality assumptions among the population differed by as much as five years.France, along side Australia, currently has life expectancy pegged at just over 88 years, almost two years more than the UK and Spain, and more than two years than Belgium, the Netherlands and Switzerland.
“This problem doesn’t exist in the case of a net annuity plan or if somebody saves for a pension privately.“In addition, under the Treasury’s scheme, the purchase of an annuity at the retirement date is mandatory. However, the interest rates are very low, and could remain low for a long period.“Because employees can only save 10% of their income of more than €100,000 in a DC scheme, a surplus income of €20,000 would generate an annual tax advantage of no more than €24.“This amount will also be reduced by costs of the product that needs to be purchased, ultimately.”He concluded that people who invest their surplus income themselves can achieve better returns, as they can keep saving after the retirement date, nor are they bound by lifecycle arrangements.“This usually generates extra returns of 1.2%,” he said. Burggraaf further noted that pension funds would have to set up separate and extensive administration for net schemes, which would be needed for only a limited number of participants. “Moreover, it is still unclear whether pension funds will be exempt from VAT for their administration costs,” he said.He estimated that approximately 350,000 workers were liable for net pensions saving, but said the market would be no larger than €3.5m. “As far as we know, only a couple of insurers, including Aegon, offer arrangements for net pension saving, probably because of the limited cashflow that is expected,” he said. Mercer has criticised the Dutch Treasury’s scheme for net pension arrangements on salaries of more than €100,000, describing the proposals as unattractive and overly complex. Speaking at a recent Mercer seminar in the Netherlands, Tim Burggraaf, a partner at the consultancy responsible for business development, said: “The rules are unattractive for participants and too complicated to implement for providers.”The Treasury issued the rules for net pensions saving as a means of offsetting Parliament’s earlier decision to cap tax-friendly pensions accrual on a salary of €100,000.“A very negative part of the scheme is that the net saved pension rights expire if a participant has no partner and dies before retirement age,” Burggraaf said.
“The former board blindly followed its asset manager and pensions provider Syntrus Achmea,” he said.The pension fund’s supervisory council (RvT) agreed that the scheme still lacked a balancing power.It recommended the pension fund appoint a “fully independent” external adviser and suggested the scheme might need to re-assess its future viability.Since 2013, the scheme has applied 9% in overall rights cuts.Stroot said the VO preferred a merger with another pension fund, but he acknowledged that its current low funding made it a relatively unattractive partner.The former board has been largely replaced, including former chairman Piet Duijndam, who stepped down – partly at the VO’s request, according to Stroot.The new board, chaired by Ronald Heijn, has launched an extensive recovery plan, focusing on governance, risk management and checks and balances.Heijn said the scheme would assess its viability annually and stressed that the needs of participants would take precedence over its continuing independence.He also said a third rights discount was “not yet on the cards”, as the new financial assessment framework (nFTK) allowed pension funds to smooth out cuts over a 10-year period.Duijndam, the former chairman, dismissed the VO’s criticisms as being “one-sided”.He pointed out that, 10 years ago, when interest rates were 3%, the board had unanimously decided against applying an interest hedge, “as a further rate decrease was deemed highly unlikely”.“When rates started to drop,” he said, “we still refrained from hedging, as the cost would have come at the expense of returns. With the wisdom of hindsight, the board would have taken different decisions.” The accountability body (VO) of the €700m pension fund for Dutch dental technicians has blamed the scheme’s low coverage ratio on the “indecisiveness” of former board members. In the pension fund’s 2014 annual report, the VO said the previous board’s dithering over the implementation of a strategic interest hedge caused its funding to drop below 94%.VO chairman Guus Stroot said: “The combined effect of rights cuts and missed indexation means participants have lost 30% of pensions accrual.”He added that communication between the VO and the former board had been “very difficult”, and claimed that any countervailing power on the board had been “totally absent”.
Bulk annuity activity by UK pension schemes is likely to pick up after a relatively slow start to the year that instead saw strong deal flow driven by insurers’ appetite to re-insure risk, according to consultancy Aon Hewitt.Bulk annuity transactions worth around £2.7bn (€4.6bn) were placed in the first half of 2016, compared with £4.4bn in the same period in 2015, it said.This is partly because new auctions need to develop after “a lot” of business was placed in the last quarter of 2015, according to the consultancy.However, it noted that the second half of the year has got off to a strong start in the risk settlement market, citing deals such as buy-ins by ICI and Pilkington pension schemes and a longevity swap by the UK’s electricity sector pension fund. Like other market participants, it said that bulk annuity pricing is favourable for pension schemes.Still, it noted that in the first half of the year much of the risk settlement deal flow in the first half of the year has been from the insurance market rather than from high levels of activity from pension schemes directly.According to Aon Hewitt, this insurer-driven business involved longevity reinsurance deals and back-book of annuity business.The latter is where insurers purchase blocks of in-force annuities as some insurers decide they would prefer to shed their exposure to annuities in light of the Solvency II framework.Including deals involving company pension schemes, a total of around £12.1bn of bulk policies were transacted in the first half of the year, according to the consultancy.It said that there remains “substantial” market capacity for pension schemes to transfer risk despite the back-book, and that the hope is that the exit from the UK bulk annuity market by Prudential “will not impact heavily on pricing”.Looking ahead to 10 years from now, consultancy Hymans Robertson last week said that the bulk annuity market is set to experience a “capacity crunch”.
SPB, the €1.4bn sector scheme for private security in the Netherlands, will replace Syntrus Achmea Pensioenbeheer as its provider with TKP Pensioen next year.The scheme said TKP, a subsidiary of insurer Aegon, was more advanced in collecting digital data from its affiliated employers than its current provider.The industry-wide schemes for IT (TrueBlue) and butchers (Slagers) also recently left Syntrus Achmea.Peter Priester, executive board member at SPB, said: “TKP offers more interaction with the employers, such as a monthly feedback about the provided details. “This is important because there are many mutations in our business, which is comparable with the temporary employment sector.”The security scheme had already pro forma cancelled its contract with Syntrus in 2015.“At the time,” Priester said, “we had questions about the continuity of Achmea’s service for industry-wide pension funds, following its decision to focus on the new general pension fund (APF) of its subsidiary Centraal Beheer.”He added that SPB, with the assistance of pensions adviser Sprenkels & Verschuren, had concluded that TKP was the most suitable provider because of its experience with digital processes.Earlier this year, the €533m scheme for the wheel and tyre sector (Banden en Wielen) parted ways with Syntrus Achmea Pensioenbeheer, soon after the €2.1bn pension fund for the confectionary industry (Zoetwaren) also opted for another provider.In addition, Towers Watson cancelled its contract with Syntrus Achmea, claiming the provider had failed to set up a participant portal for its low-cost DC vehicle (PPI) in time.Syntrus Achmea Pensioenbeheer argued that it had set up a new system allowing for less exceptions, with Centraal Beheer APF as its first user.Marco Simmers, spokesman for Syntrus Achmea, said: “We are discussing the pension plan with our customers while explaining the options to migrate to our new system.“We are aware some clients would opt for moving to another provider as a result of our strategic choice. Although we do regret this, it is part and parcel of entrepreneurship.”Syntrus Achmea is the provider for approximately 50 pension funds.
Investors should pay more attention to money-weighted returns than time-weighted returns, according to the chair of the 300 Club, an industry think-tank.Stefan Dunatov, CIO of Coal Pension Trustees, said the shift in focus more towards “wealth” rather than just percentage gains would improve investor understanding of how to achieve investment objectives and the risks involved.In a new paper – “Using wealth, not returns, to set objectives and measure success” – Dunatov argued that it was the level of wealth, rather than returns, that will determine how well investors with present or future liabilities will achieve their goals.“While that level of wealth is dependent on investment returns, focussing too much on those returns may lead to objectives not being achieved,” he said. “The path those returns take is also a key consideration.” For any specific average return over several years, Dunatov argued, there was a multitude of different paths that could have led to that same average return – which can result in very different outcomes for an investor’s fund.“For example, one path might be that returns are poor to begin with. On another, returns are strong to begin with,” Dunatov explained. “Although the average returns are the same across both scenarios, the total wealth they each generate is quite different because of the effects of compounding.”The paper highlighted the importance of this factor on funds in either the accumulation or spending phase.For a fund wanting to build a pot of assets over a five-year period, for example, and with regular contributions, a 50% return in year five would preferable to a 50% return in year one, because the large uplift at the end of the investment period would be on a larger pot of assets. “For those wanting to draw down assets, the reverse is true,” the CIO wrote.Dunatov told IPE: “We are not advocating taking away time-weighted returns, but if you accept that wealth targets are important, you should consider adding wealth-weighted returns to your arsenal.“Besides return figures, a pension fund report could also show the projected portfolio values which it might need in specific future years in order to achieve its objectives. But adding money-weighted returns is not a trivial issue because it is not the way the industry thinks.”The 300 Club is a group of pension professionals from North America and Europe established to challenge traditional industry thinking, and includes current and former pension fund CIOs, asset management leaders, and consultants. Dunatov was named chair last year.
Baillie Gifford & Co52,857Manager TwentyFour AM9,175Manager Deutsche Asset Management230,789Manager Unigestion14,968Manager Union Investment63,812Manager Hermes Investment Management33,423Manager The unbundling of research costs under MiFID II could be “a very important accelerator” of long-term investing, according to Kempen Capital Management’s chief investment officer.“There is overwhelming evidence that a long-term focus creates more value”Lars Dijkstra, KempenLars Dijkstra, whose investment teams oversee more than £45bn (€50bn) in assets, told IPE that the new rules would add to the growing trend of asset managers bringing research capabilities in-house.Kempen earlier this year announced that it would pay for investment research from its own balance sheet rather than pass the cost on to clients, a move subsequently followed by a majority of asset managers. First State Investments11,282Manager Amundi309,169Client* HSBC Global AM90,636Manager Janus Henderson Investors40,997Manager UBS Asset Management169,643Manager Insight IM537,983Manager JP Morgan Asset Management131,707Manager Goldman Sachs AM223,210Manager Invesco34,004Manager AXA Investment Managers125,466Manager Robeco Group80,105Manager Northern Trust AM67,379Manager Vanguard Asset Management61,837Manager T Rowe Price11,759Manager APG443,194in discussions CompanyAUM (€m)Who pays? Newton Investment Management43,719Manager “If you look at the active management industry, as an industry we don’t add value,” he said. “There is pressure on the buy side from passives to deliver value. In my view that means you have to focus on long-term, highly active, high-engagement portfolios. Probably 80-90% of sell-side research doesn’t qualify for that, which means you have to do the research yourself.”While investment banks and other research providers are scrambling to price their offerings for a MiFID II market, Dijkstra argued that the provision of research would become a question of quality rather than price in the years ahead.“There is overwhelming evidence that a long-term focus creates more value,” he said. The shift towards long-term investing “has been going on for the last 10 years, but MiFID could be a very important accelerator”, he added.Analysts that focus only on the last quarter or the next quarter would get less attention, Dijkstra said, as more investors engaged with companies on a long-term basis.The CIO added: “Most of the dialogue we want to have with companies we can do on our own. We want to have our own long-term relationship with companies. In general we would ask different questions than those relating to the next or last quarter.”Dijkstra’s comments reflected a report published this week by Aviva Investors calling for significant reform of sell-side research provision.The UK asset manager argued it needed to be “rational and commercial” for providers to consider long-term sustainability issues as well as short-term financial performance. It called for clients and regulators to take steps to encourage this change.“If the buy-side makes it clear that it expects, needs and values a far greater focus on long-term sustainable research, then practice and habit will change and the sell-side will respond,” Aviva Investors said.“It is a clear way for sell-side analysts to differentiate themselves from peers and offers a degree of protection in a fiercely competitive environment. It would align the research with the needs of long asset managers to invest over the long-term and deliver long-term performance.”Aviva’s full report, Investment Research: Time for a Brave New World?, is available here .How asset managers have movedIPE is tracking asset managers’ decisions on the unbundling of MiFID II research costs based on our annual list of the Top 120 European institutional managers.So far, 37 managers have declared their intentions, with just two planning to charge clients directly. Amundi is reviewing its plans to charge clients, while Fidelity intends to overhaul its equity fund fee structure globally.A spokesman for APG, the asset manager for Dutch civil servants’ pension scheme ABP, said the firm was in discussions with its clients but no decision had yet been reached.For updates/queries relating to this list, please contact [email protected] .Last updated: 6 October 2017 Franklin Templeton Investments19,440Manager Fidelity International23,281Client Legal & General IM792,950Manager Allianz Global Investors91,402Manager Aviva Investors42,856Manager Aberdeen Standard Investments393,759Manager BlackRock911,955Manager Notes: AUM figures relate to European institutional assets only, and are expressed in euros. Data from IPE’s Top 400 asset management survey, correct to 31 December 2016.* Under review; no final decision Record Currency Management48,552Manager BlueBay Asset Management18,565Manager Russell Investments24,922Manager NN Investment Partners36,382Manager J O Hambro Capital Management14,773Manager Schroders139,634Manager Kempen Capital Management32,274Manager Barings25,894Manager CBRE Global Investors41,000Manager
Zurich was planning to further develop its presence in the bespoke de-risking market, Wenzerul added. The insurer has previously focused on small and mid-sized UK pension schemes, insuring the longevity risk of some £1.5bn of liabilities across six transactions in less than two years. Zurich’s first longevity swap with a UK pension scheme was in 2016.A significant proportion of the longevity risk for the National Grid transaction was reinsured with Canada Life Insurance. Aon was lead transaction adviser.Martin Bird, senior partner and head of risk settlement at Aon, said Zurich’s entry into the large scale longevity risk transfer market was good news for the wider market. According to Bird, notable features of the deal with National Grid included the creation of a streamlined framework suitable for use within the Electricity Supply Pension Scheme – of which the National Grid Electricity Group is a part. He added that the price was attractive, “reflecting a period of significant price correction in the longevity reinsurance market”. “The transaction also demonstrates the opportunities currently available to pension schemes to hedge longevity risk cost-effectively via a structure under which the scheme retains control of and flexibility over its investment strategy,” Bird said. The National Grid Electricity Group is one of 23 separate units in the Electricity Supply Pension Scheme. The sponsor is National Grid Electricity Transmission plc, part of National Grid plc. National Grid has completed a longevity swap with Zurich to cover more than £2bn (€2.3bn) of liabilities linked to around 6,000 pensioners.The deal was Zurich’s first “bespoke intermediated longevity swap” and its largest to date, according to Greg Wenzerul, head of longevity risk transfer at the insurer.The transaction covered around two-thirds of the pension liabilities of the National Grid Electricity Group, said Andrew Bonfield, finance director at the UK electricity and gas transmission company.“This demonstrates our ongoing commitment to the security of our pension arrangements, and represents a significant step in our long-term strategy to manage down the level of pensions risk for National Grid shareholders and electricity consumers,” he added.
The FNV, the largest trade union in the Netherlands, has started preparing for a possible collapse of negotiations for pensions reform.During an “action meeting” in Utrecht on Wednesday, Tuur Elzinga, the FNV’s representative for pensions, said there was “no guarantee that the union could achieve its reasonable goal at short notice”.He added that the FNV may need to prepare for a “hot autumn and maybe a hot winter”.The event – attended by a couple of hundred union members – focused on possible industrial action, which could also include “legal procedures” and “bureaucratic blockades”. The meeting came in the wake of the FNV reiterating its demand for a higher discount rate for liabilities as a condition for a nominal collective “target” pension, as was still being discussed by employers and unions within the Social and Economic Council (SER).However, financial regulator DNB and social affairs minister Wouter Koolmees have rejected this demand, arguing that the risk-free interest rate should be applied for defined benefit plans. Wouter KoolmeesThis week, Koolmees reiterated his view that “a prudent approach was very sensible, and that returns had to be achieved first before they can be paid out in benefits”.At the meeting, Elzinga made clear that he saw no contradiction between industrial action and negotiating, pointing out that the union “must raise the pressure and subsequently cash in”.The FNV has argued that, in a new pensions system centred around a collective target contract, the current risk-free discount rate for liabilities should be raised, as pension funds would no longer have to guarantee future pensions. Tuur Elzinga, FNVIt also contended that, without a higher discount rate, contributions would have to increase by 25% or, alternatively, pensions accrual would have to be reduced by 20%.Several Dutch pensions experts have criticised the rigid approach of DNB and the minister, with Dick Sluimers, former CEO of APG, urging them to seek a compromise.However, the unions also want to slow down the rise of the retirement age for the state pension AOW, which is set to increase to 67 in 2021.They have also called for more leeway for early retirement arrangements as well as mandatory pensions accrual for self-employed (zzp’ers) in industry-wide pension funds.
Dominion Energy made changes after having been put on LGIM’s exclusion list last yearThe asset manager said the average scores of all sectors covered by its ‘Climate Impact Pledge’ had improved, with those sectors under most public scrutiny – such as oil and gas – making “great strides in disclosures and targets”.The pledge was introduced in 2016 and involves LGIM assessing and scoring more than 80 of the world’s largest companies across six sectors identified as key to meeting global climate change goals.If, after engaging with the companies, LGIM considers they do not meet minimum standards, they are put on an exclusion candidate list. Within the £5bn (€5.6bn) Future World index funds, LGIM then divests from those companies deemed as failing to demonstrate sufficient action, and votes against the re-election of their chairs across all other funds where it has voting rights.The Future World funds include the default option for HSBC’s UK defined contribution pension scheme.In addition to holding companies to account with a “clear escalation model”, LGIM’s approach also involves a “name and fame” strategy for sector leaders.“We can’t demonise sectors, we need leaders in every sector,” said Omi.She added that, in some cases, divestment or a vote against a company was the trigger for them to start engaging with the manager. Omi said investors were putting more pressure on companies in relation to change, but there was still “a little bit of a gap between talk and action”.“A lot of people are talking about climate change, but are they really forcing companies to change their disclosure, behaviour, actions and so forth?” she said.LGIM was advocating that investors start to “have a similar voice” and take “tangible action” following conversations with companies, Omi added. Speaking to journalists yesterday, Meryam Omi, head of sustainability and responsible investment strategy at the €1.1trn asset manager, said it believed in engagement, but “we’re not having a dialogue forever, because this is a massive problem that requires urgent action”. LGIM’s Climate Impact Pledge The UK’s largest asset manager has said its climate change “engagement with consequences” programme has had positive results, but it will continue to press companies “to meet this era-defining challenge”.Legal & General Investment Management (LGIM) added five new companies to its exclusion/vote against list this year, including oil giant ExxonMobil and MetLife, a US insurer that LGIM said “has not responded to our attempts to engage and has scored poorly across most categories of assessment”.MetLife Investment Management, a top 50 global asset manager according to IPE’s Top 400 survey, is part of MetLife.LGIM said that in 2018 it voted against and divested from eight companies within its Future World fund range. Since then it has engaged with all eight of them and reinstated two: Occidental Petroleum and Dominion Energy.