The Dutch Pensions Federation has called on the government to postpone the implementation of planned changes to the pensions system by another year.It said it was concerned ongoing delays in decision-making over the system’s review would pose “great risks” for its proper implementation.The federation was responding to stalled negotiations between the governing coalition parties – the VVD and the PvdA – and the opposition party regarding government plans to reduce tax-facilitated pensions accrual from 2.25% to 1.75% a year.The measure was meant to save €3bn for the national budget, but the opposition – which has a blocking majority in the Senate – fears younger workers will be unable to accrue sufficient pension rights. On 13 December, on national radio, Gerard Riemen, director at the Pensions Federation, said: “We should have had clarity for two months already, as the implementation of changes in pension arrangements usually takes a year.”Postponing the update of the pensions system would also entail a second delay for the new financial assessment framework (FTK), including the new pensions contract.Last year, Jetta Klijnsma, state secretary at the Ministry for Social Affairs, postponed the introduction of the reviewed FTK by a year to 1 January 2015.At the time, both the €293bn civil service scheme ABP and the €134bn healthcare pension fund PFZW, as well as the Pensions Federation, expressed their disappointment, citing uncertainty over the sustainability of the pensions contract, which had already been a subject of debate for four years.The government’s proposals for the new FTK have not yet been published, as a result of the decision to develop a single hybrid pensions contract – rather than a nominal version, as well as one under real terms – following a consultation with the pensions sector.
Alfred Slager, professor of pension fund management at TiasNimbas Business School at Tilburg University in the Netherlands, has set out an eight-point checklist for institutional investors considering a factor-based approach to portfolio management or investments in smart beta.Factor investing takes into account risks that stretch across different asset classes – from economic growth and political uncertainty to credit, duration, size, value, volatility and illiquidity – to achieve more robust portfolio diversification and to refine exposure to factors with desirable risk/return characteristics.Slager – presenting the findings of a study into European pension funds’ awareness of and approaches to factor investing at a 31 January seminar organised for clients by Robeco in Rotterdam – laid out the advantages in terms of better diversification, improved benchmarking of active managers and more cost-effective exploitation of systematic market risks, but emphasised the governance challenges that face investors trying to adopt these new methods.“There is a lot of interest in these processes but also a lot of uncertainty about how to embed them into the portfolio,” he told the delegates, which included many leading Dutch and Belgian pension funds. “If factor investing is so compelling, how come every pension fund isn’t doing it? What are the barriers and challenges?” Slager reported three basic ways in which investors were implementing some of the ideas behind factor investing.The first approach involves leaving the portfolio as it is, with the fund using the additional insights about exposures and diversification.The second identifies existing factors tilts and corrects them to some extent to introduce a more desirable mix of factors.The third approach aims to create a portfolio that is unconstrained and fully factor-optimised.“Today, pensions funds that have taken any steps at all have usually taken steps one and two, and dream about step three,” he said.But Slager’s survey of the latest pension fund annual reports revealed almost no mention of factors or factor investing, suggesting that even many of those investors pursuing these ideas do so without fully considering the theoretical framework, or struggle to communicate that framework to trustees and members.“Trustees have pointed out to me that the level of abstraction we are dealing with is one hurdle,” explained Slager. “It is difficult enough trying to describe what equities and bonds do in their portfolio; if we move up a level and begin to describe term risk, volatility risk and so on, that is a considerable challenge under a governance structure that requires much greater transparency and communication that it has in the past.”This is important, Slager added, because investors need to establish their beliefs about whether individual factor risks are rewarded over time, how long it can take for those risks to be rewarded, how well the resulting risk/return characteristics fit with their own particular objectives and constraints, and how best to benchmark performance.Many of these points are still the subject of academic debate, and can be significantly affected by real-world investing constraints such as transaction costs or restrictions on short selling.“The fact many of these factors appear to have statistical persistence over time is all very well, but, to communicate properly with clients, we also have to know what realistic expectations we can have about these factors, how reliable they are and, most importantly, whether we have a persuasive economic story that makes sense for them,” Slager said.Even once these investment beliefs are agreed and communicated to members, factor investing introduces a range of potentially complex active investment decisions, and investors need to consider where in their governance structure those decisions should be taken and monitored.“We therefore tried to condense our findings from discussing these issues with pension funds into a checklist that would be helpful once an investor has decided to use factors in its model,” said Slager.His checklist had eight points:Treat factor investing as an investment belief and an investment paradigm, rather than merely a techniqueEducate stakeholders to a full understanding of factor investingEstablish common definitions for the terminology used with trustees and membersFocus on appropriate benchmark constructionRegularly review the economic rationale for chosen factorsBe consistent in implementationRecognise that these are active choices that require an active stanceDecide early on how static or dynamic allocations to factors will be
The European Central Bank’s (ECB) decision to reduce deposit rates and extend its quantitative easing programme is likely to have a limited impact on the average Dutch pension fund’s coverage ratio, consultancies have said.In the wake of the ECB’s announcement, the 30-year swap rate – Dutch schemes’ most important criterion for discounting liabilities – increased from 1.48% to approximately 1.6%.At the same time, however, equity markets fell, with the AEX and the Stoxx 50 losing 1.6% and 1.8%, respectively.Dennis van Ek, an actuary at Mercer, said: “The short-term effects on pension funds’ coverage are positive because of the rate increase, but they are negative following dropping equity markets.” He said Dutch pension funds with small interest-risk hedges and limited equity holdings could expect a modest funding improvement.Schemes with extensive interest hedges and relatively large stock portfolios, however, are likely to have the “opposite perspective”, he said.On balance, Mercer believes the rate increase’s impact on Dutch pension funds’ coverage ratios will slightly exceed that of falling equity markets.Neither did Geert-Jan Troost, an investment consultant at Towers Watson, expect Dutch schemes’ coverage ratios to be affected significantly.But Troost noted that those pension funds recently reducing their interest hedges – permitted by regulator DNB as a one-off opportunity to increase their risk profiles – were now at an advantage.Corine van Egmond, ALM consultant at Aon Hewitt, highlighted that the effect of the ECB’s measures would depend on where pension funds’ stock holdings were concentrated.“The funding of a scheme with a relatively large stake in the US will be less affected, as equity markets over there have been relatively stable,” she said.“On the other hand, the rate increase will have a negative impact on euro-denominated government bonds, which will affect the funding of schemes with an extensive fixed income portfolio.”Mercer concluded that the ECB aimed to keep interest rates low for at least the next year.“Pension funds should, therefore, not expect their funding to improve as a consequence of rising interest rates,” Van Ek said.
A European parliamentarian has spoken of the “pretty big row” brewing over European Commission attempts to designate IORPs as ‘financial services providers’, after the language was roundly rejected by both main committees scrutinising the revised IORP Directive.Thomas Mann, a German centre-right MEP and member of the Employment and Social Affairs Committee (EMPL), nevertheless said he was hopeful parliamentarians would get to vote on a finalised version of the Directive before the summer recess, predicting the law would be finalised by June at the latest.Speaking at the annual conference of the German pension fund association, aba, Mann said he hoped the work done by the EMPL committee and the Economic and Monetary Affairs Committee (ECON), of which IORP II rapporteur Brian Hayes is a member, would not be in vain once the trialogue negotiations between the Parliament, European Commission and member states concluded.Mann was upbeat on the trialogue negotiations despite conceding there was still appetite on the part of the Commission to use delegated acts to finalise aspects of IORP II – an approach rejected by EMPL and ECON due to the risk, as Mann saw it, of the acts being used as a “Trojan horse” to introduce capital requirements for pension funds. He also alluded to a “pretty big row” over the definition of ‘pension funds’, with attempts to re-insert the Commission’s preferred language branding them ‘financial service providers’.Mann explained that retaining language referring to funds as institutions with a social purpose – backed by member states and, to a lesser extent, Parliament – was very important.“ECON chose a slightly vaguer phrase, and I know some have a hard time living with the wording,” the MEP said of the final version of Hayes’s report, stressing the need for compromise.Hayes’s final report replaced a reference to IORPs as ‘financial service providers’ with one noting they “[served], first and foremost, a social purpose”.The MEP nonetheless seemed hopeful a finalised version of the Directive could be put to vote during the European Parliament’s plenary session in May.He added: “I hope that, by the end, we’ll be able to say the effort, all the detailed negotiations, were worth it.”
However, the complaints are likely to relate to individuals rather than the conduct of specific accountancy firms or actuarial consultancies, as the FRC has previously named companies under investigation.The statement did not specify which of the company’s three pension funds were affected by the work undertaken by those under investigation, nor did it specify what area of work by the professionals was being queried.TPR has long been in discussions with the threadmaking company.In February, the firm announced it would be retaining $505m (£342m) to address funding shortfalls within the Brunel, Staveley and Coats UK pension schemes.In its most recent half-yearly report, published 28 July, Coats says it has yet to settle its talks with TPR but re-emphasises its intention to address funding shortfalls with the $505m retained within the company.The company’s half-yearly report adds: “There are active discussions as to the support structure provided by the parent group cash and the level of annual deficit recovery payments.“If a settlement cannot be reached, and the investigation process continues, Coats believes any hearing is unlikely before the fourth quarter of 2016 at the earliest.”It notes that only once a settlement with TPR is reached will the regulator withdraw its Warning Notice, first issued in early 2014. The Financial Reporting Council (FRC), the UK regulator of the accountancy trade, is investigating an unnamed number of accountants and actuaries employed to work for the pension schemes of Guinness Peat Group.The allegations, which relate to schemes sponsored by the company now trading as Coats Group, concern eight years of conduct from 2004 onwards, according to a statement by the FRC.“The decision to investigate,” the FRC said, “follows a referral from the Institute and Faculty of Actuaries regarding matters arising from the Pension Regulator’s (TPR) own ongoing investigation into the group’s pension scheme arrangements.”A spokesman declined to specify the number of individuals involved and said it did not disclose names of individuals while under investigation.
Nødgaard’s counterpart on the trustee board of the Healthcare Professionals’ Pension Fund (Pensionskassen for Sundhedsfaglige) will be Henriette Schütze, CFO of the Nordic Tankers group.In their new board roles, Nødgaard and Schütze will also become chairs on their respective pension funds’ audit committees, PKA said.Meanwhile, Nathali Degn, chairman of DL, the trade union group for Danish medical secretaries, has been appointed as a member of the supervisory board of the third PKA pension fund, the Pension Fund for Nurses and Medical Secretaries (Pensionskassen for Sygeplejersker og Lægesekretærer). PKA, the Danish labour-market pensions provider, has named the former director of the Danish Financial Supervisory Authority (FSA) to one of its supervisory boards.Ulrik Nødgaard has been appointed as a new supervisory board member for the Social Workers and Social Education Practitioners’ Pension Fund (Pensionskassen for Socialrådgivere og Socialpædagoger), one of the three social and healthcare sector pension funds PKA runs.Nødgaard is currently director of Finans Danmark, the new trade association for the banking sector, formed in December.The FSA told pension providers and life insurers in Denmark four years ago that they must have at least two special expert members on their supervisory boards, with skills in insurance, investment and accounting.
Legal & General Investment Management – Mark Johnson will join the fund management group in September as head of institutional client management. He moves from BlackRock following a 19-year career with the world’s largest asset manager. Most recently he was head of closed-end funds, and has also led the UK sales team for BlackRock’s exchange-traded fund arm iShares. Johnson replaces Chris DeMarco, who moved to Legal & General Retirement earlier this year to lead its pension risk transfer business.Actiam – The €55bn Dutch asset manager Actiam has appointed Arnold Gast as its new chief investment officer as of 1 June. Gast has been active in the investment sector for almost 20 years. Gast joins from Delta Lloyd Asset Management, where he had been tasked with setting up the investment office. He has also been head of credit and co-head of fixed income as well as a portfolio manager at Delta Lloyd.In addition, for the past four years, Gast was a board member of the European Private Placement Association as well as chairman of the Investor Advisory Board at the Delta Lloyd Mezzanine Fund. Prior to this, Gast worked at ABN Amro Asset Management. Actiam’s executive team now comprises Hans van Houwelingen (CEO), John Shen (chief risk officer), Arnold Gast (CIO) and Dudley Keiller (chief transformation officer).BNY Mellon Investment Management – The asset management giant has hired Chris Harmer as head of consultant relations, chiefly responsible for BNY Mellon’s interactions with consultants in the UK and Europe. He joins from Columbia Threadneedle Investments where he was consultant relations director for EMEA.Gresham House – The UK-based alternative investment manager has hired Michael Hart as head of distribution, a newly created role. He was previously global head of business development at Amundi Alternative Investments, and held a similar role for Aberdeen Asset Management’s alternatives business before that.Gresham House has stepped up its activity this year following a major investment in the firm by the Berkshire Pension Fund. It bought Hazel Capital, a “new energy” infrastructure manager, last month, and plans to launch a British Strategic Investment Fund later this year.State Street – The financial services group has named David Pagliaro head of State Street Global Exchange for EMEA. Global Exchange is the company’s data analytics and services business. He most recently worked for S&P Capital IQ for nine years, holding several roles including global head of S&P credit solutions. Pagliaro replaces James Lowry, who will return to the US in July to lead Global Exchange for North America, State Street said in a statement.The Investment Association – A former adviser to UK chancellor Philip Hammond has joined the Investment Association as a consultant. Graham Hook – who worked with Hammond in the UK’s departments for transport and defence, as well as the Foreign Office and latterly HM Treasury – is now the asset management trade body’s interim head of government affairs until September, according to his LinkedIn profile.Sumitomo Mitsui Trust Group – Japan’s largest asset management group has transferred two long-term senior staff to its London office in a bid to increase its distribution outside of Japan. Akimichi Oi has become director of the company’s Investment Management Department, while Kota Murakami is now director of global business development. Oi joined the firm in 2001, and was most recently head of global client relations, based in Tokyo. Murakami joined in 1990 and was most recently head of the investment management group in Hong Kong. Janus Henderson Investors, Legal & General Investment Management, Actiam, Delta Lloyd Asset Management, BNY Mellon Investment Management, Columbia Threadneedle, Gresham House, State Street, Investment AssociationJanus Henderson Investors – The newly merged asset management group has announced the new structure of its institutional team for Europe, the Middle East, and Africa (EMEA), bringing together existing distribution staff from both Janus and Henderson. Jennifer Ockwell has become head of UK institutional – she held a similar role at Henderson Global Investors prior to the merger with Janus, which completed last month. She is also a trustee of Henderson’s staff pension scheme.Sylvain Agar is now head of EMEA ex-UK institutional. He was previously head of financial institutions for Janus, covering the UK and Europe. Both Ockwell and Agar report to Nick Adams, head of EMEA institutional. Agar’s team will be hiring “in the coming months”, Janus Henderson Investors said in a statement.In addition, Mark Fulwood has been named head of UK business development – he was previously director of institutional business for Henderson – while Anil Shenoy is now head of UK institutional clients. He was previously also a director of institutional business at Henderson. Both report to Jennifer Ockwell.
Since 1996, Van der Heiden made several important contributions to dossiers on additional pensions. At the ministry of Social Affairs, she headed projects such as making changes to the pensions and saving funds act (PSW) aimed at modernising supervision as well as the abolishment of early retirement schemes (VUT).In 2006, Van der Heiden was appointed deputy director and policy head at the Association for Industry-wide Pension Funds (VB).She continued in these positions at the Pensions Federation, which was created through the merger of VB, the Foundation for Company Pension Funds (OPF) and the Union of Occupational Pension Funds (UvB) in 2010. Leny van der HeidenAccording to Gerard Riemen, the Pension Federation’s director, Leny van der Heiden had put in a lot of effort when setting up the federation’s office in such a way that all staff of the different “blood groups” would feel comfortable.“She believed in the usefulness and necessity of the merger between the sector bodies and has contributed greatly to setting up the new organisation,” he said.Riemen, who had also worked at Social Affairs before he joined the Pensions Federation, said that Van der Heiden had shown a “large dose of common sense, courage and perseverance, had dared to ask questions and was also willing to bear responsibility.“She gave her advice without being hampered with fear for authority. This was appreciated, as her opinion was always valuable.”Until 2016, Leny van der Heiden was a member of the executive board of the Pensions Federation. In this role, she could make use of her expertise and experience from practice to the industry’s association.She was a member of the supervisory board (RvT) of BPL Pensioen, the €16.3bn pension fund for the agricultural sector, since 2014. Leny van der Heiden, one of the architects of the Netherlands’ Pensions Federation, has died.She passed away last week, after a long illness, at the age of 61.Since 2012, Van der Heiden was head of board matters at SPF Beheer, the pensions provider for the €16bn railways scheme SPF and the €3.8bn public transport pension fund SPOV.Prior to this, she played an important role in advocating the interests of pension funds as well as in establishing the Pensions Federation, the Netherlands’ influential trade body for pension funds.
According to a recent survey by Mallowstreet, 90% of its UK institutional investor respondents are either retaining existing allocations to emerging markets (EM) or increasing them. Only 2.5% are decreasing, and 7.5% still have no allocations.What should these investors be looking for, both in terms of investment opportunities and the underlying factors driving them? What is apparent is that is just sticking to market capitalisation indices as benchmarks is likely to be misguided for a number of reasons.MSCI recently announced the inclusion of Chinese A-shares in its indices, adding 222 shares to its Emerging Markets and ACWI benchmarks from June 2018. Longer term, if China continues to liberalise the A-shares market and MSCI is to fully include them, China’s weight in the MSCI Emerging Markets index could rise to 40.8% from 28%.As the index provider says, institutional investors who have not examined how A-shares might fit into their portfolios should not underestimate the work involved in preparing, creating and maintaining such an allocation. Would A-shares inclusion alter emerging markets’ role in asset allocation? What is China’s role in emerging market equity allocation? MSCI also states that a sensible starting point would be to revisit the role of emerging markets in the policy asset allocation, including how China fits into that sub-asset class. Investors considering EM equity investments have to first decide whether to adopt an active or a passive approach. The obvious attraction of passive investment is cost, but the problem with market-cap-weighted indices is that the better a stock does, the greater the weighting, so they have a pro-momentum and anti-value bias. In addition, investors sticking closely to cap-weighted market indices are getting little exposure to the grand themes driving EM growth – the increasing spending power of middle-income consumers and the favourable demographics of younger populations.Alternative approaches such as fundamental indices conceptually get round this problem but end up introducing new issues of even more pronounced sector skews: two-thirds of the index universe is composed of financial, energy and basic materials companies, while one company (Petrobras) accounts for 9% of the total market cap. Petrobras is very volatile and subject to political interference, as are many other large companies such as Samsung.Valuation dispersions are much higher in EM – and that means greater opportunities for active management. If investing in EM equities benefits from active management, then the logical conclusion is that investors should seriously consider investing in emerging market private equity. It represents a more active approach to investment than listed equities.Accessing attractive but widely dispersed EM private equity opportunities is a challenge for investors – funds-of-funds provide one accessible solution.Pension funds are still very wary of investing in EM private equity, but risks are misperceived and much lower than imagined. The opportunity set is very large. Until the 1800s, China and India represented more than 50% of global economic output and, by 2030, five of the 10 largest economies will be EM, according to the US Department of Agriculture.Four key economic segments – food and agriculture, cities, energy and materials, and healthcare – could create a few hundred million new jobs by this point, and almost 90% of them would be in EM. The optionality value of such investing is high, while the opportunity costs are low.At a time in which valuations of private equity investments in the US and Europe are very high, shifting to EM at much lower valuations does seem to make sense.
Rises in Italy’s retirement age were established by the so-called ‘Fornero’ law in 2011, named after the then-labour and welfare minister Elsa Fornero. The law dramatically changed state pension provision and limited pension expenditure, but has been heavily criticised since. It was instrumental in building confidence among foreign investors that Italy would not default on its sovereign debt. Since its introduction, however, opposition parties have promised to scrap the law.Italy currently spends the equivalent of 16% of its GDP on pension payments every year. It is the highest spender on pensions in the European Union after Greece, and pensions are the largest item of expenditure on Italy’s balance sheet.Silvia Dall’Angelo, senior economist at Hermes Investment Management, said: “The sustainability of Italian debt is very narrow. Debt is at 132% of GDP, the second largest figure in the EU after Greece. The only way to sustain this is to run a primary surplus. The country cannot afford the luxury of diverging from its commitment to keep public expenditure tight.”She added: “The sustainability of debt dynamics relies crucially on containing expenditure on state pensions. It would be quite irresponsible to raise expenditure, yet anti-establishment parties who claim to be ‘fresh’ forces seem to rely on the old bad habit of promising unhealthy expenditure rises.”According to some estimates, halting the planned retirement age increases would cost the country €140bn in total by the year 2040. A recent study from the Italy’s finance ministry found that pension expenditure would rise to 17% of GDP when the country’s generation of baby boomers retired, while EU estimates put the figure at 20%.“All this means there isn’t much leeway to raise pension expenditure further,” added Dall’Angelo.Right-wing parties expected to form a coalition next year have made various pledges to improve pension benefits. The Northern League has promised to scrap the Fornero law, while Silvio Berlusconi’s Forza Italia party has pledged to raise base pension benefits to €1,000 per month.Meanwhile, a provision contained in the expenditure law allows workers nearing retirement to withdraw all their defined contribution pension savings. Previous attempts have been made to allow workers easier access to private pension savings in order to encourage take up of private pension plans.However, the measure under discussion would spell the “end of complementary pensions”, according to a scathing article by Alberto Brambilla, chairman of Itinerari Previdenziali, a pension think-tank. Italy’s parliament in session in 2015Credit: Presidenza della Repubblica Italian lawmakers are debating changes to state pensions that could undo the efforts made to stabilise the country’s public finances at the peak of the euro-zone debt crisis.With a general election taking place in the first half of next year, political parties are promising to lower the state pension age and increase pension benefits. Such promises, if maintained, would mean higher public spending that could put Italy’s debt dynamics back in the danger zone, according to experts.Last week the Italian Senate voted in favour of a measure to exclude workers in certain sectors from planned rises in retirement age, which reaches 67 years in 2019. The measure would exclude 10% of employees due to retire in 2019, including 14,600 workers in 15 different sectors such as nurses, teachers and employees of the building sector.The provision is contained in the 2018 ‘legge di bilancio’, the law that sets the items and limits of government expenditure for the coming year. The law has passed to the Chamber of Deputies, the Italian parliament’s lower house.