Ilmarinen hopes to benefit from Finland’s underdeveloped infrastructure market as it shifts its investment strategy towards greater exposure to real assets and private equity, according to its CIO.The €31bn mutual pension insurer’s deputy chief executive and CIO Timo Ritakallio told IPE that, as part of the shift in strategy by 2020, it would also be considering a larger number of infrastructure co-investments.He noted that Ilmarinen had already acted as co-investor in a motorway under construction in Finland.The financial details of the €425m E18 road project, from Kotka to Koskenkylä, were agreed in late 2011, and the project is jointly owned by Ilmarinen and Meridiam Infrastructure. “I see us making more of these infrastructure investments,” he said, “not only to invest into infrastructure funds, but also to make co-investments with other infrastructure funds.”Asked about the possibility of investing in public private partnerships (PPPs) in Nordic neighbour Denmark following a report on PPPs by five of the country’s larger pension funds, he said it was “possible” and pointed towards its success with the E18.Ritakallio was positive about the opportunities for infrastructure investment in Ilmarinen’s domestic market.“In Finland, we see a lot of opportunities to make infrastructure investments,” he said.“The reason is that the whole market is still underdeveloped, and, therefore, we see opportunities to be had here.”The CIO has told IPE the shift in asset allocation will see the mutual lower its domestic equity exposure to as little as 20% by the end of the decade.For more on Ilmarinen’s investment approach, see the November issue of IPE
Senior European economist Magdalena Polan, the report’s author, said: “However, the impact on long-term fiscal sustainability will be small. Together with the asset transfer, the government will take on the associated pension liability. So, while net debt will decline, gross liabilities will not change, although their average maturity will be extended (as most people in the private pillar are more years from retirement than the average duration of government bonds).”The new law bans the OFEs, which held 22% of long-term Polish government bonds, from further investment in this asset class.The report notes that the share held by non-resident investors will rise from 33% to around 42%, while commercial banks will become the biggest investors. “With non-resident investors and banks preferring shorter maturities, the average duration of Polish bonds may fall, especially if government debt managers are price sensitive,” writes Polan.Market valuations may not necessarily fall, but Hungary’s experience following its appropriation of second pillar assets points to a potential fall in liquidity, she says. The report adds: “An elimination of the largest local player, combined with a significantly higher relative share of non-resident investors, will make the Polish bond market even more sensitive to changes in global risk sentiment (our earlier research suggests Polish rates have a fairly high sensitivity to changes in global risk sentiment), with potential repercussions for Zloty and FX reserves volatility.”The impact on the equity market depends on how many people stay in the second pillar, and future fund investment strategies.Given that the OFEs have to invest 75% of their assets in equities in 2014 and have few alternatives, the report estimates that, even if only if 50% remain the second pillar, the funds could invest roughly the same amount as in 2013.In the longer term, lower inflows and the growing impact of the ‘zipper’ will force the funds to liquidate equity holdings to raise the necessary cash.Regulatory changes allowing the funds to invest more in foreign assets poses a further threat to the Polish stock market.Polish equities used to benefit from the so-called ‘pension’ premium created by a steady inflow and investment rules confining the OFEs to domestic investment.Lower inflows, concludes Polan, will reduce this premium. Poland’s pension changes may generate some fiscal relief, but that will come at the expense of reduced bond market liquidity and equity price uncertainty, according to a recent economics comment from Goldman Sachs Global Macro Research.The transfer of 51.5% of second-pillar pension fund (OFE) portfolios, including all Polish government bonds, to the first pillar will reduce public debt by 8-9% of GDP, additionally lowering debt service costs.Further inflows will come from those workers who elect or default to putting all future contributions into the first pillar when the system becomes voluntary.Finally, under the ‘zipper’ rule, the fund assets of those members with 10 years or less before retirement will transfer incrementally each year to the first pillar, generating an extra 0.3% of GDP in state revenue.
The Swiss government is set to examine how the lowering of the pension fund conversion rate will impact future retirement income, tendering for firms to conduct a survey on the issue alongside research on the impact of changes to the international accounting standards.As part of its ’Altersvorsorge 2020’ reform proposals, the Swiss government has proposed to lower the minimum conversion rate from the current 6.8% to 6% to ensure long-term sustainability of the second pillar.At the time, the proposal was welcomed by many industry representatives. During the consultation phase for the draft legislation, only the Swiss actuarial society expressed concern that the 6% rate remained too high.The government is convinced that an adjustment to 6% will ensure no transfer of money from active members to retirees, with the study tasked with establishing the effects and losses for pensioners from a cut in the conversion rate. The tender for the study specifies that the final report on the findings has to be issued by the end of November, ahead of the Swiss parliament being presented with the draft legislation for the ’Altersvorsorge 2020’ reform by year end.The legislation will also include proposals on how to best compensate future pensioners for the negative effects from the cut in the conversion rate, scheduled to occur gradually once the reform is implemented.Simultaneously, the Swiss government is also tendering a study into how IAS 19 affects Swiss pension plans. The study will place a particular emphasis on companies which have abandoned the international standard in favour of Swiss GAAP FER.Based on a pool of companies, the studywill also look into how the revision of IAS19 in 2013 affected pension plans and whether any adjustments were made.According to the tender possible changes to the pension plans could have included a switch from DB to DC, introduction of life-cycle style choices known as “1e”-plans, additional financial payments from sponsors, de-risking or a different risk management approach.The final report on the findings is to be presented by the end of November.
Tesco plans to close its defined benefit pension fund to new accrual in an attempt to strengthen its balance sheet.The retailer, one of the UK’s leading supermarkets, has suffered financially in recent months after it revealed in October that an accounting error resulted in profits being overstated.In an announcement to the London Stock Exchange, the company said it would launch a consultation to close the fund, which reported a deficit of £2.6bn (€3.3bn) in its most recent annual report, to “all colleagues”.Following a valuation in May, it will launch the consultation in June, aiming to implement all changes by February 2016, the company said in a presentation made to shareholders. A spokesman was not immediately able to say whether it would set up a new pension scheme, potentially a defined contribution (DC) arrangement.It currently enrols its workforce into the DB fund, and, as one of the largest UK employers, was one of the first made to comply with automatic enrolment upon its launch.It is one of the few remaining large employers to still offer DB benefits, alongside fellow supermarket chain Morrisons.In an interview with IPE last year, Steven Daniels, CIO of in-house asset manager Tesco Pension Investments, said the fund would see its cashflows remain positive for a significant amount of time, even if it closed immediately.The £8bn career-average scheme had more than 335,000 members last year, with 200,000 actives and only 45,000 pensioners.For more on Tesco Pension Investments, see IPE’s interview with Stephen Daniels
However, in their cases, ESMA reached “no definitive view” due to “concerns related to competition, regulatory issues and a lack of sufficient evidence to properly assess the relevant criteria”.In a data-sheet published in mid-June by the European Commission, Guernsey was listed, out of 30 jurisdictions, as the “non-cooperative” tax jurisdiction most frequently identified by EU member states. Guernsey protested.Less than two weeks later, ESMA recommended to the EU institutions that passporting be extended to the Channel Islands jurisdiction. Neither jurisdiction is part of the UK – hence, both are outside the EU. The Alternative Investment Management Association (AIMA), while generally welcoming ESMA’s position, said the passport should be granted to all the main asset management and fund jurisdictions.The association approved ESMA’s intention to assess other non-EU countries, including the Cayman Islands, Canada and Australia.AIMA also cheered ESMA’s willingness to refine its assessment of Hong Kong, Singapore and the US, although it noted that those countries had not yet received a positive recommendation that the passport would be extended to them.The association urged ESMA to complete this process as soon as possible. The Jersey Financial Services Commission states that, as “next steps”, the European Commission will adopt a relevant delegated act within three months.However, the Jersey body noted that the EU institutions, including the European Parliament, might wish to consider waiting until ESMA has delivered positive advice on a sufficient number of non-EU countries before introducing the passport.This would be to avoid any adverse market impact that a decision to extend the passport to only a few non-EU countries might have.Among the list of the top 30 non-cooperative tax jurisdiction listed in the report issued by the European commission is the Cayman Islands jurisdiction.Elsewhere, it is accused of not publishing data on the ultimate beneficial owners of companies incorporated there. Hedge funds have welcomed a decision by the European Securities and Markets Authority (ESMA) to grant passport facilities for trading to Jersey and Guernsey, the British Crown dependencies in the Channel Islands.ESMA also noted that Switzerland could be included as an approved jurisdiction under a “delegated act” under the Alternative Investment Fund Managers Directive.This would be subject to Switzerland’s removal of remaining obstacles with the enactment of pending legislation.Other jurisdictions – namely Hong Kong, Singapore and the US – had also been under consideration.
He assigned a new mission to the CDC, however, saying he wanted the institution to implement France’s “transition écologique et energetique” – the country’s shift to a more environmentally sustainable societal and economic system. He said this was particularly important in light of the climate change agreement reached in Paris in December.The president flagged a possible name change to capture this new priority, suggesting that in future it should perhaps be called Caisse des Dépôts et du Developpement Durable [sustainable development].To fulfil this new ambition, CDC should free up €3bn of additional investment capacity by 2017, Hollande said. The idea is for this to happen by way of a more active management of the CDC’s holdings, he added, which will release capital that can be funnelled toward new investments supporting sustainable development and green growth.The state will contribute to this by way of reducing charges on Caisse des Depot’s results over the coming years.Hollande set out two major priorities for the deployment of the new resources: housing and green growth. Half should go toward social housing in the form of loans of at least 20 years at 0% interest and the rest to finance the renovation, particularly thermal, of public buildings.These funds will allow an additional €8bn to be raised, while the state and the CDC will jointly set up a property company with €750m in capital, he added.Another mission, Hollande said, was for the CDC to manage the new French social security system, specifically the occupational social security scheme. Caisse des Dépôts, France’s state-owned public interest financial institution, should become the orchestrator of the country’s transition to a greener economy and consider changing its name in connection with this “mission”, president François Hollande has said.The remarks were made as part of a wide-ranging speech during a ceremony marking the bicentenary of Caisse des Dépôts et Consignations (CDC).Hollande said the CDC should continue its “traditional missions” of financing infrastructure and supporting business but on a broader scale. This is why Agence Francaise de Developpement (AFD), the country’s international development agency, will be integrated into the CDC, he said.
Around two-thirds (66%) of those surveyed said it was becoming more challenging to achieve growth in the current market environment. European respondents were most concerned about regulations governing liquidity risk: some 40% ranked it as one of their top three threats to growth.State Street said to meet this “profound, secular change”, institutional investors needed to adapt to “compete at scale, align technology with ambition, and cultivate the power of asset intelligence”. State Street described asset intelligence as a combination of digitised operating models, new data expertise, and analytical insights to deliver on firms’ investment objectives and risk management needs.“The transformation hitting the investment industry is endangering incumbents’ existing business models and threatening the industry’s future growth potential,” the research paper said. “The industry response must be a radical one. Incumbents should be prepared to reshape their business models if they want to compete a decade from now.”The study found that asset managers were under pressure to respond to investor demands for more global diversification and better pricing. More than 80% of industry respondents said asset managers would need wide-ranging investment and distribution capabilities to meet investors’ demands. State Street reported that 61% were actively broadening their offerings.Some 71% of asset managers expected more consolidation of smaller pension funds over the next five years, while 76% said the rise of passive management will drive more active managers to consolidate.Asset managers also felt they needed to expand distribution and reduce fees over the next five years to attract investors.A quarter of asset owners and insurers surveyed said they would make their biggest portfolio allocation increase to emerging market equities over the next five years. For real estate this figure was 15%, and 15% said this would be the case for infrastructure assets.For pension funds faced with demographic shifts, funding pressures, and challenges meeting aggressive return targets, the right technology and talent strategies would be crucial to success over the next five years, the report said. Institutional investors should be prepared to make radical changes to their business models if they are to remain competitive amid volatile markets and gloomy long-term growth prospects, according to a new study by State Street.“[Investors] should be prepared to reshape their business models if they want to compete a decade from now.”The survey of 507 global asset managers and asset owners found that a majority of institutional investors did not believe they had the right strategy, operating model or technological infrastructure in place to deal with the challenges posed by an uncertain economic and investment outlook, tightening regulation, and more sophisticated investor demand.“This is especially alarming as the research reveals investors plan to move towards increasingly complex portfolios in their search for better risk-adjusted return,” State Street said in the report, A New Climate for Growth.
The chief investment officer of London CIV, the asset pool for the capital’s 32 public pension funds, has left the organisation.A spokesman for London Councils confirmed his departure and said it was effective 4 January.Julian Pendock’s departure comes after organisation’s chief executive, Hugh Grover, stepped down in early November. At IPE’s annual conference at the end of the November, Grover said the London CIV was struggling with a lack of vision clarity after asset pooling became mandatory for its members.Mark Hyde Harrison was hired as the asset pool’s interim chief executive to replace Grover. London CIV was the first fully authorised and regulated fund management company to be set up by a local government entity, according to its website.London CIV has £5.6bn (€6.3bn) of assets under management currently, but has said it aimed to grow its assets to “more than £20bn”, based on the assets currently run by its 32 member pension funds.In his two-year tenure, Pendock oversaw the creation of 10 investment funds owned by the CIV and run by asset managers including Baillie Gifford, Allianz, Ruffer and Newton. An 11th fund, run by Henderson, is yet to be launched.Six other local government pension scheme asset pools are in the process of becoming operational in time to meet an April government deadline. The Local Pensions Partnership, another collaboration of UK public pension funds, is already up and running.Pendock joined London CIV in August 2015 from the pension fund for the London Borough of Brent where he was investment and pensions officer.He had previously worked in the private sector, co-founding an investment boutique, Senhouse Capital, in 2007. Before that he worked for Bedlam Asset Management, Jardine Fleming – now part of JPMorgan – and BZW.
The €3.4bn pension fund of Dutch technical research institute TNO plans to increase its private equity investments from 4.4% to 7.5% of its portfolio during the next two to three years.In its annual report for 2017, it said it had appointed several new managers to achieve this goal, which would involve annual investments of approximately €80m.Hans de Ruiter, the scheme’s chief investment officer, said that the new investments – through Gilde, Vector and Strategic Value Partners – would be largely funded by the proceeds of existing private equity holdings.He added that the pension fund had hired consultancy Wilshire to select, monitor and report on unlisted equity investments. Last year, the scheme’s private equity holdings lost 3.8%, but in 2016 the allocation returned almost 13%.The Pensioenfonds TNO said that it had reduced its exposure to US high yield bonds by 1.5 percentage points, in favour of local currency emerging market debt.The company scheme also cut European equity from 10.4% to 5.8% of its portfolio, in favour of US and emerging markets equities.It appointed Robeco and Quoniam as smart beta managers for a new 8.8% allocation to worldwide equity investments, which would come at the expense of regional holdings.TNO also added listed property as a new asset class, aiming for a 2% allocation in line with its existing holdings of unlisted real estate.The pension fund reported an overall result of 3.6% for 2017, including a 1.2% profit from its currency and interest rate hedges.Its equity holdings – 24.2% of the portfolio – delivered 9.8%, while its property portfolio produced 4.4%.Fixed income (67.2% of TNO’s investments) had generated 0.8%, with emerging market debt gaining 3.4% US high-yield bonds lost 4%. The scheme’s exposure to residential mortgages gained 4.7%.The pension fund had an overlay for its emerging market equity investments, targeting 25% of best-in-class companies ranked on environmental, social and corporate governance criteria. It said it planned to extend this overlay to developed markets stock.By the end of 2017 the TNO scheme had already excluded 10 countries under UN sanctions as well as 45 firms from its investment universe, including manufacturers of controversial arms and companies that derived more than 5% of their turnover from tobacco.It said that, after running several scenarios for its own future, it saw enough reasons to continue as an independent pension fund, citing the current input of the social partners in the pension plan, its controls on costs and its service level. TNO said it had decided against merging with a sector scheme or joining a general pension fund.The Pensioenfonds TNO reported administration costs of €308 per participant. It spent 0.78% in total on asset management and transactions.At June-end, its coverage ratio stood at 114.8%. The scheme has 4,260 employees, 6,320 deferred participants and 5,355 pensioners.
The five largest Dutch pension funds reported above-average returns for 2019, despite low or even negative results for the last quarter.The €466bn civil service scheme ABP posted an annual return of 16.8% – in particular thanks to a 27.4% gain on its equity holdings – and generated 1.5% since September.Private equity, commodities and infrastructure yielded 22.3%, 16.5% and 13.3%, respectively.Hedge funds and property contributed with returns of 7.1% and 18.4%, respectively, while ABP’s combined interest and inflation hedge added 1.7 percentage points. However, it lost 1.4% on its currency cover. Highest returnThe €238bn healthcare pension fund PFZW’s quarterly return was flat. But with an annual return of 18.8%, it reported the best result of the five largest schemes.However, its liabilities rose by no less than 17.7%, mainly due to falling interest rates.Although the pension fund lost 4.2% on government bonds in the last quarter, it achieved a result of 6.3% for the entire year.Equity and listed property generated 23.9% and 20.2%, respectively, in 2019, and yielded 6.7% and 1.2%, respectively, in the fourth quarter.Commodities yielded 26.1% during the entire year, and 12.6% since September.Metal schemesBoth the metal schemes PMT (€84.7bn) and PME (€55bn) posted annual results of 18.1%, despite losing 2.3% and 0.8%, respectively, in the last quarter.PMT lost 8.6% on its liabilities portfolio comprising 46% of its entire assets.Equity, high yield investments and real estate yielded 23.4%, 12.7% and 14% in 2019.Due to rising interest rates and consequent effect on its fixed income holdings, BpfBouw, the €66.2bn scheme for the building sector, saw its assets drop by €360m in the last quarter. PMT and PME reported a similar loss.The building scheme lost 0.4% in the past three months, but returned 17.6% for the full year.With returns of 26.7%, 11.8% and 16%, respectively, equity, property and alternatives were the main contributors.UnderfundedFour of the five largest schemes closed the year with coverage ratios ranging from 95.8% (ABP) to 97.6% (PMT), which would classify the schemes as underfunded under the financial assessment framework (FTK).However, social affairs’ minister Wouter Koolmees has decided to reduce the minimum required funding level from 104.3% to 90% for 2020, pending the review of the pensions agreement.Both Corien Wortmann, chair of ABP, and Peter Borgdorff, director of PFZW, highlighted the importance of designing new pensions arrangements.They said their minimum funding must be raised to the official level of 104.3% in order to avoid rights cuts in 2021.Wortmann added that ABP also expected interest rates to remain low in the coming years, and for returns to be no more than 4% on average.“Crazy”Benne van Popta, PMT’s employer chair, said he expected 2020 to become a “difficult year because of developments on the financial markets as well as new regulation”.Jos Brocken, the scheme’s employee chair, also emphasised the need for quick pensions reform.He said continuous looming rights cuts, as a result of a fluctuating coverage ratio despite high returns, were driving PMT’s participants “crazy”.