Of the four models proposed as a way of increasing certainty for DC members, the DWP said it would consult on a money-back guarantee system, the possibility of investment guarantees, a retirement income insurance model and a retirement income builder, based around systems in place in Continental Europe.“This model is similar in structure to the Dutch General Practitioners’ pension fund (SPH) and the mandatory ATP scheme in Denmark,” the paper notes.Under the model, contributions would be split between a return-seeking pool and one buying deferred annuities.The paper adds: “As a result, the individual has a degree of pre-retirement certainty over their retirement income and can always see some benefit for each additional year of contributions, as the guaranteed element increases.”The department notes that, for both the ATP-inspired approach and a CDC model, scale and “sufficient” inflow of new members will be key.“Given that we believe CDC schemes offer an alternative approach to risk sharing and have the potential to offer more certain outcomes than individual DC, we propose to explore further the changes to the legal framework that would be required to enable them to operate in the UK,” the paper says.It also concedes that, while some types of CDC could already be possible in the current regulatory environment, others may require the creation of a new regulatory vehicle.“Besides setting out the regulatory vehicle for these schemes, we will need to consider whether the framework should include other requirements to enable them to provide the high levels of governance that would be needed to protect member interests,” it continues.“For example,” the paper adds, “there may be a case for a more formal approval arrangement on set-up, possibly by requiring schemes to obtain a licence from a regulator, as well as being subject to regulatory oversight of their funding levels.”The proposals received a mixed response from industry, with Hymans Robertson noting that existing models already allowed for risk-sharing, which employers had failed to pursue.John Walbaum, partner at the consultany, added: “Employers have invested heavily in DC in recent years and are unlikely to return to defined benefit unless they are compelled to do so.”The National Association of Pension Funds was more positive in its assessment, with chief executive Joanne Segars saying the DA proposals heralded a major step towards the creation of sustainable DB and innovative DC.“They will help create a framework to enable the development of a genuine mixed economy of pension provision, where employers are free to provide pensions that are right for them and their employees,” she said.However, Segars also said that the timing of any DA legislation would be “critical” to allow employers sufficient time before the end of opting out in 2016, and warned that DA would not be of interest to all quarters.Barnett Waddingham partner Danny Wilding seconded Segars’s concerns about the looming end of contracting out.He added: ”If firms are to be able to offer one of the structures discussed in the consultation, then real priority needs to be placed on making sure the legal framework is in place.”Cardano’s head of innovation Stefan Lundbergh said it was important any collective model treat individuals fairly.“There is no single perfect solution, but the consultation shows there are models that work,” he said.He said the firm preferred the retirement income builder model, on which it provided the DWP with modeling.The consultation closes 19 December.,WebsitesWe are not responsible for the content of external sitesLink to DWP consultation ‘Reshaping workplace pensions for future generations’ The UK could look to develop collective risk-sharing models inspired by the Dutch collective defined contribution (CDC) or the Danish ATP model, according to the Department for Work & Pensions (DWP).Launching a six-week consultation on the shape of defined ambition (DA) in the UK, pensions minister Steve Webb said the time was “ripe for innovation” and called on the industry to “reshape pensions for the future”.The consultation paper also laid out a number of potential approaches to allow for greater risk-sharing and proposed several new defined benefit (DB) models, including a core DB with a flexible additional payout in the form of either conditional indexation or an additional payment.In allowing for greater risk-sharing among defined contribution (DC) funds, the department seemed inspired by both the Dutch and the Danish systems, noting their dominance of the Melbourne Mercer Global Pensions Index.
The Philips scheme has divided its assets into a return portfolio and a liability-matching portfolio of fixed income investments in order to finance its liabilities, including a long-term inflation target of 2%.Its return portfolio – consisting of equity, property, emerging market bonds and high-yield credit – is meant to bolster the pension fund’s financial buffers, finance its longevity risk and account for excess inflation.Last year, the liability-matching portfolio returned 13.6%, while the return portfolio returned 11.4%.Philips Pensioenfonds’ 106% coverage ratio is now 2 percentage points over the minimum required level, but 1 percentage point short of its required financial buffer.The pension fund said it would only consider granting indexation once its coverage exceeded 107%.The Philips scheme has 14,130 active participants, 59,275 pensioners and 32,900 deferred members. The €14.7bn Dutch pension fund of electronics giant Philips saw its coverage ratio increase to 106% over the third quarter on the back of a 0.6% return on investments and a widening discount rate.It said the 3.6% result on its 30% return portfolio more than offset the 0.7% quarterly loss reported over the same period on its 70% liability-matching portfolio.The pension fund attributed the performance of its return portfolio in particular to rising equity markets and indirect property holdings, which represent 52% and 15%, respectively, of the portfolio.However, it also noted that the 3.6% return still underperformed its benchmark by 0.3 percentage points, due mainly to poorly performing emerging market bonds, which make up 11% of the portfolio.
In those years, increased competition and capital requirements in the pensions sector will place heavier demands on pension players’ IT service and advice offerings, he said.This pressure will, in turn, lead to increased consolidation in the industry, he predicted.Back in June, state enterprise DONG Energy switched to PFA as the pension provider for 5,000 of its employees. Another big business win came in October from environmental firm Haldor Topsøe, with a pensions deal covering 1,500 staff, according to PFA’s annual report.PFA’s group pre-tax profit was DKK306m in 2013, down from DKK860m.The difference between the years narrowed after tax, at DKK225m for 2013 against DKK392m the year before.The pension fund explained the decline in profits by saying it had not been possible to recognise the entire operational risk premium in 2013’s figures.Customer capital (KundeKapital) – the funds that PFA, as a mutually owned company, has available for customer distribution – rose DKK1.7bn, or 9%, to DKK20.7bn.Reporting investment returns, PFA said unit-linked pension products produced 9.6%, down from 12.6% in 2012.For traditional with-profits plans, however, PFA said it produced a loss of 0.9% but added that this was supplemented with returns on customer capital, bringing it up to 2.9%.PFA said a large part of traditional plan savings were invested in bonds and interest-rate hedging to back the guaranteed benefits. The return was marked by rising interest rates in 2013 and therefore falling bond prices, even though this was offset by reductions in the present value of future obligations, it said.Costs rose to DKK852 per customer in 2013 from DKK812 the year before, while solvency coverage rose to 240% from 210%. Business volumes at Denmark’s biggest commercial pension fund PFA surged last year, with pension contributions rising 15% to DKK25.6bn (€3.4bn).Releasing its 2013 annual report, the pension fund said the growth came both from existing customers as well as several new corporate clients.Group total assets under management rose by DKK48bn to DKK417bn by the end of 2013.Henrik Heideby, chief executive and head of the PFA Group, said: “We expect PFA to grow substantially in the coming years.”
The investors include the UK Local Authority Pension Fund Forum (LAPFF); church investors, such as the Church Commissioners for England and the Central Finance Board of the Methodist Church; and other European pension funds, including Ilmarinen and Swedish buffer funds AP2, AP3 and AP4.A letter sent to shareholders by Shell said: “The board has given consideration to the resolution and has decided to recommend that shareholders support the resolution at the AGM.”The letter, from JJ Traynor, executive vice-president of investor relations, said Shell would report on:Ongoing operational emissions managementAsset portfolio resilience to post-2035 scenariosLow-carbon energy research and development and investment strategiesStrategic key performance indicators and executive incentivesPublic policy interventionsShell will provide additional reporting in 2015, in advance of full reporting in response to the resolution in 2016, in the most appropriate annually updated report or website location, which will include its sustainability reporting and its emissions reporting website.Kieran Quinn, chair of both the LAPFF and Greater Manchester Pension Fund, said: “This development from Shell is a clear example of the effectiveness of shareholder engagement backed by investor commitment. Universal owners taking an active approach to long-term risk, sustainability and carbon-management issues has benefits both for our beneficiaries and for our underlying investments.”Edward Mason, head of responsible investment for the Church Commissioners for England, said: “This shows what an important role shareholders can play in promoting business adaptation to the transition to a low-carbon economy. More widely, it demonstrates the benefit of corporate engagement and the constructive outcomes it can achieve.”Howard Sherman, head of corporate governance and product development at MSCI, said: “This is a remarkable and potentially historic development from a corporate governance perspective. It’s quite rare for a board to recommend in favour of a shareholder proposal, let alone one with such potential impact on the rest of the industry.” Sherman added: “When I started working in this field in 1986, it was rare to even see a shareholder proposal concerning environmental issues. The few that made it on to the ballot would receive at best 2-3% of the vote. This development shows just how fast climate change has emerged as a key corporate governance issue for many companies.” A similar resolution has also been filed by the coalition for BP’s AGM on 16 April.Have a look at IPE magazine’s excellent ESG report on carbon risk Investors in Royal Dutch Shell have welcomed the decision by the company’s board of directors to back a resolution on climate change at its annual general meeting in May.The special resolution – ‘Strategic resilience for 2035 and beyond’ – amplified by a supporting statement, calls for routine annual reporting from 2016 to include further information about certain activities related to climate change, including ongoing operational emissions management, asset portfolio resilience to the International Energy Agency’s scenarios, and public policy positions relating to climate change.It has been filed by Aiming for A, a coalition of more than 50 institutional investors with portfolios totalling £160bn (€209bn), and led by CCLA Investment Management, the specialist church and charity fund manager.Its name is taken from the highest rating (A) of CDP (formerly the Carbon Disclosure Project), an NGO that rates the performance of global companies on climate change.
The MEP steering the updated IORP Directive through the European Parliament has said there is no support for reviving solvency requirements within the legislation.Brian Hayes, an Irish MEP in the centre-right European People’s Party (EPP), was speaking at an Economic and Monetary Affairs committee hearing on the IORP Directive.The parliamentarian is expected to submit his report on the Directive before the summer, but in speaking to fellow MEPs, said reinstating the issue of solvency for pension schemes had no support.Hayes also said the requirement for cross-border schemes to be fully funded would need to be “seriously looked at”, should the EU strive for more than the 86 funds created since the original IORP Directive. Questions around solvency requirements were also raised by MEPs during the session with Hayes and industry representatives, including PensionsEurope chairman Joanne Segars, Clifford Chance pensions lawyer Hans van Meerten and aba chief executive Klaus Stiefermann.Hayes said the Commission and parliamentarians should be “unapologetic” for using the IORP Directive to create a “gold standard” of pensions regulation across the European Union, but stressed he was in favour of leaving implementation to member states.He said: “Rather than seeing this piece of legislation as an imposition, we really should [be] unapologetic in looking for a gold standard of protection across the board.“If we [allow member state implementation] we will not cut across the excellent provisions currently in place, but ensure for other countries and schemes joining, that the standard is in place.”Hayes also said he has seen broad support for the Directive across both the Union and the industry, and said the updates and consolidation of the legislation was “good house keeping”.“Colleagues have alluded to the solvency requirements, but the fact is the issue is off the agenda and there is no support for putting it back on,” he said.“It is crucially important there is a need for this legislation consolidation and a need to get this right.”Responding to questions from MEPs, Hans van Meerten of Clifford Chance, said while Solvency II for pension funds was not necessary, capital requirement harmonisation was required to prevent regulatory arbitratge between member states.He cited examples of Dutch pension funds shifting their location to Belgium in order to work under a less onerous regulatory and capital intensive system, something considered by DuPont de Nemours, Aon, ExxonMobil and Johnson & Johnson.Van Meerten said capital requirements would be forced upon schemes in one form or another so it was better to have these universally applied through the Directive, where the industry could assist in designing them.He also said given the wide legal view on cross-border funds, the Directive should use a ‘level of solidarity’ mechanism to determine if a scheme is truly cross-border or simply being use for regulatory arbitrage.Hayes, who was appointed as rapporteur in January, previously said the new Directive should not “unpick” the current pensions systems in Europe and would not be rushed.
“We invest, for example in US aircraft manufacturer Boeing and in US firm Honeywell, which produce climate systems but are, however, also involved in nuclear arms,” he said. He pointed out that ABP followed the Dutch government’s policy, based on the Treaty on the Non-Proliferation of Nuclear Weapons, which allows five countries, including the US, to have nuclear weapons. Speaking on a recent radio programme, ABP chair Corien Wortmann-Kool rejected PAX’s analysis, highlighting that Boeing also invested in sustainable flying.She also pointed out, however, that companies such as Boeing and Honeywell would have to apply for continued investment by ABP, as part of the review of the pension fund’s entire portfolio for sustainability. Earlier this year, ABP excluded Indian companies Walchandnagar and Larsen & Toubro from investment, divesting from the latter firm, as they were involved in the manufacturing of nuclear weapons for India.In the opinion of PAX, an entire company should be excluded from investment, even if only a small part of operations is involved in the manufacture of nuclear arms, and argued that Dutch pension funds should divest from Finmeccanica, Raytheon, Airbus, BAE Systems and Safran.According to the pressure group, among Dutch institutional investors, Aegon and ING currently have the highest exposures to nuclear weapons, at €695m and €409m, respectively. Pressure group PAX has claimed that ABP, the €345bn pension fund for Dutch civil servants, still has nearly €1bn invested in companies involved in some capacity with the making of nuclear weapons.The organisation, formerly known as Pax Christi, said ABP’s holdings were “indefensible”, as a survey in 2014 commissioned by television programme Een Vandaag suggested more than 60% of ABP’s participants had “issues” with such investments.Apart from ABP, the Shell Pensioenfonds was the only remaining Dutch scheme with a stake (€53m) in companies involved in the development, manufacture, trade or maintenance of nuclear arms or parts. A spokesman for ABP stressed that the pension fund’s exposure to nuclear weapons had not been deliberate.
New rules on derivative transactions coming into effect this year raise further concerns about market liquidity, according to EDHEC-Risk Institute.The research institute published a study analysing the forthcoming framework for calculating initial margin (IM) and variation margin (VM) on transactions involving non-cleared over-the-counter (OTC) derivatives.The study highlights how the new requirements on collateral to be put aside as IM on non-cleared OTC derivative transactions may put a further squeeze on much-needed liquidity in high-quality assets, such as government bonds and high-grade corporate bonds.Dominic O’Kane, an affiliate professor of finance at EDHEC Business School and author of the study, said: “There’s a question mark over how much collateral is out there compared with what is going to be required. “And since there will soon be other requirements coming in from bank capital rules, which will also require additional collateral to be held, the question is, is this going to put a strain on liquidity and availability assets?”The new framework, which will be in force from September, is based on the recommendations of the Working Group on Margin Requirements (WGMR), formed by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO).The WGMR has been developing the framework since 2009 as a response to the bankruptcy of Lehman Brothers, the bailout of AIG and the federal takeover of Fannie Mae and Freddie Mac, all of which had large exposure to OTC derivatives.The new set of rules requires counterparties in non-cleared transactions to hold IM collateral to protect each party from the risk of the other defaulting.Since the transactions involved are not cleared by central counterparties, such as Swapclear, the IM collateral has to be held in third-party accounts and cannot be used for other purposes.“Because the principle of the WGMR is that the defaulter pays,” O’Kane added, “the IM collateral has to be held in such a way that it cannot be touched by either counterparty to a derivative transaction until a counterparty defaults, and only then is the non-defaulting part allowed to use the collateral they hold.“At the same time, the non-defaulting counterparty must receive back the IM collateral that was held by the defaulting counterparty.“This means the collateral assets cannot be re-hypothecated or reused for funding, repo or other purposes. And therefore these assets are effectively frozen out of the financial system, reducing the amounts of high-quality collateral available.”O’Kane continued: “Despite reports from the European Central Bank (ECB) that the amount of available collateral is significant, there is a concern the new WGMR framework will have an impact on liquidity.“In the limit, the demand for high-quality collateral could create a shortage that might push up the prices of certain market instruments.”The majority of traditional OTC derivative transactions, such as interest rate swaps (IRS) and some swaptions, are already being cleared thanks to the introduction of the European Market Infrastructure Regulation (EMIR), which requires standard derivative products to be cleared by central counterparty clearing houses (CCPs).From August next year, the exemption for European pension funds from central clearing will also be lifted, which means they will have to start putting IM collateral aside for traditional OTC derivative products, potentially putting further pressure on the system.While EMIR applies to the larger part of the OTC derivatives market, the non-OTC derivatives market, to which the WGMR framework applies, accounts for a large amount of assets.A 2013 quantitative impact study (QIS) by the Bank for International Settlements (BIS) on this market shows that the total amount of IM to be allocated would be more than €500bn.This number assumes a threshold for posting IM of €50m, and netting across asset classes. The EDHEC study also focuses on the proposed model for calculating of IM and VM brought forward by the International Swaps and Derivatives Association (ISDA), which is currently being finalised, and may be adopted as the universal model under the WGMR framework.O’Kane said: “The ISDA model appears to be quite straightforward to implement and should be able to calculate the IM quickly, which is important, as IM needs to be posted regularly.“The model appears to have enough sophistication to capture the various risks, which is important due to the less standard nature of the non-cleared OTC derivatives market.“These risks are linked to correlation and volatility that some of the simpler products do not have, so there is a need for a more sophisticated modelling framework.”He added: “Having a market-wide model is extremely useful, as it enhances transparency and reduces the likelihood of costly and time-consuming disputes between counterparties”.
Members of Icelandic pension funds Sameinaði and Stafir have approved the proposed merger of the two funds at extraordinary general meetings late last week, and the merged pension fund has been named Birta – the Icelandic word for ‘light’.The new fund held its inaugural meeting straight after the EGMs of Sameinaði and Stafir – which had been held in two halves of a divided conference room at the Grand Hotel in Reykjavik – at which it named the members of its 10-person supervisory board. Negotiations on the merger of Sameinaði and Stafir began in early May, and the boards of the two pension funds decided to go ahead formally with plans to join forces at the end of June.They said they believed the merger would result in a stronger organisation that had more expertise and more robust asset and risk management, as well as lower operating costs and improved services for the benefit of members.Among the first tasks the pension fund will be tackling, Sameinaði said, is the recruitment of a chief executive and finding a building to house its headquarters.The merger partners aim to have the new pension fund operational under the Birta name by the end of this year, with all staff physically working under one roof.The merged pension fund’s supervisory board members on behalf of employees are Gylfi Ingvarsson, Jakob Tryggvason, Unnur María Rafnsdóttir, Viðar Örn Traustason and Sameinaði chairman Thorbjorn Guðmundsson.For employers, the board members are Stafir chairman Anna Guðný Aradóttir, Davíð Hafsteinsson, Guðrún Jónsdóttir, Ingibjörg Ólafsdóttir and Jón Bjarni Gunnarsson. Birta board members (from left): Gylfi Ingvarsson, Anna Guðný Aradóttir, Þorbjörn Guðmundsson, Jakob Tryggvason, Ingibjörg Ólafsdóttir, Unnur María Rafnsdóttir, Guðrún Jónsdóttir, Jón Bjarni Gunnarsson, Viðar Örn Traustason and Davíð Hafsteinsson.Birta will be the fourth-largest pension fund in Iceland, with more than 18,000 active members and net assets of about ISK310bn (€2.4bn), which equates to around one-tenth of the total assets of all pension funds in the country.
PensionsEurope has responded to Norwegian plans to introduce solvency capital requirements for pension funds to reiterate warnings on the detrimental effect of such requirements and again point to IORP II statements against the further development of solvency models for pension funds.Commenting on Norwegian government plans to introduce a simplified Solvency II requirement for pension funds in January 2018, the umbrella association for national workplace pension bodies warned against solvency capital requirements for pension funds – be they at national or EU level – as they would have significant negative consequences.Matti Leppälä, secretary general and chief executive at PensionsEurope, said they did not provide any additional security for members or beneficiaries and instead significantly increased costs and constrained pension funds’ ability to invest for the long term and thereby support economic growth in Europe.In a seemingly pointed reference to the European Insurance and Occupational Pensions Authority (EIOPA), he noted that the supervisor itself acknowledged that solvency capital requirements affected pension funds, sponsors and members. The European pensions industry believes EIOPA is on a mission to bring about solvency requirements for pension funds, to which it strongly objects.PensionsEurope and other associations have raised concerns about these being introduced by “the back door”, despite the new IORP Directive’s not containing any new solvency capital requirements, as well as statements – strong ones, in PensionsEurope’s view – against these being developed in future.PensionsEurope pointed to these statements in its reaction to Norway’s plans.“For the same reasons also at national level, now in Norway, introducing Solvency II-type capital burdens on pension funds should be avoided,” Leppälä said. MEPs are due to vote on the revised IORP Directive in November.
Claudia Wegner-Wahnschaffe, ETS’s project leader, said that the European tracking system would ultimately comprise three layers of information. The European pension tracking service (ETS) for cross-border pensions could become operational in its most basic form within two years, according to officials involved in the project.At a conference on pensions communication in Belgium this week, Steven Janssen, director of Belgian social security data bank Sigedis – a partner in the ETS project – told IPE he expected that the Belgian and Dutch tracking systems could be connected within 18-24 months.A link with data banks in Denmark, Sweden and Norway could follow soon, according to Janssen.He said that the ETS would initially focus on first and second pillar pensions, providing information about whether cross-border workers – estimated at 3% of the employee population – have pension rights elsewhere, the providers involved, and the value of the entitlement. Source: Deutsche Institut für AltersvorsorgeHowever, it could take up to 12 years before the complete system was up and running in all EU member states, she added.Wegner-Wahnschaffe said the structure of the project organisation had to established and the issue of data security still had to be addressed.She said that the project would be presented to stakeholders in September, when “open working groups” would start, focusing on subjects such as IT and exchange with national tracking services.According to Sigedis’ Janssen, the main challenges faced by the ETS project were obtaining and standardising the information and exchanging data with pension registers in individual countries.He added that it was unlikely that the UK would feed data into the ETS as it was due to exit the EU, but data in the European system would remain available to UK users.The ETS project started last month, and is supported by the European Social Insurance Platform and the European Association for the Public Sector Pension Institutions.The system is likely to be based on Find Your Pension (FYP), the German cross-border tracking service for academics, which was launched in 2011 with the support of the German government.Wegner-Wahnschaffe, who is also project manager of FYP, said the German initiative had “facilitated and fostered professional mobility”.During a panel discussion at the conference, a majority of experts highlighted that the ETS should – at least initially – be kept simple, follow a step-by-step approach, and leave the provision of more detailed information to the local tracking services.The ETS should also take local system characteristics into account.Most panel members also rejected the introduction of a legal obligation for countries to participate in the European tracking system, and emphasised the importance of testing developed solutions.