The chief executive said it would come as no surprise that indices excluded certain countries as segments, but that it was potentially more surprising they did not reflect the listed market as a whole, citing free-floats.“The global indices are designed to cater for the needs of an investor requiring daily liquidity,” Slyngstad said. “The fund has no such needs.”He added that the obvious question was whether the sovereign fund should increase its exposure to less liquid assets, moving away from restrictions that require it to invest purely in public markets – with the exception of its 5% strategic investment to private real estate.The chief executive explained that the framework proposed in the report would allow NBIM to boost private holdings, while analysing all investment opportunities the same way, based around the opportunity-cost model.“A new framework for the management of the fund may also facilitate a development where we as manager of the fund take a greater responsibility by defining a tailor-made reference portfolio,” he added.A planned switch away from its current strategic benchmark to one consisting of 60% listed equities and 40% fixed income is meant to express the fund’s risk tolerances rather than act as a limitation on the investable universe, Slyngstad said.“This change would clarify the role of the strategic index in the management of the fund,” he said. Norway’s Government Pension Fund Global (GPFG) is to replace its current strategic index with a new benchmark meant to offer greater flexibility.The new approach, which Yngve Slyngstad, chief executive of Norges Bank Investment Management (NBIM), said stemmed from a recent review of the fund’s approach to active management, would also encourage “gradual” growth of private investments while allowing for a consistent benchmark approach across all holdings.Speaking at a seminar at the Norwegian Ministry of Finance, Slyngstad said the review by Andrew Ang of Columbia Business School, Michael Brandt of Duke University and the former president and chief executive of the Canada Pension Plan Investment Board (CPPIB), David Denison, had shown how the GPFG could exploit investment opportunities currently outside the index.He said the opportunity-cost model proposed was “worth exploring in more detail”, especially in light of the fund’s strategic benchmark – the FTSE Global All Cap index – excluding a number of countries with developed capital markets, such as Qatar and Kuwait.
However, Richter has stressed that the government does not intend to dismantle the second pillar.The announcement coincided with the start of second-pillar payouts this year for the 30,000-odd members who have reached age 62.Under legislation approved last year, pensions can be paid out in three forms: lifetime annuity from an insurer, temporary pension from an insurer, or a programmed withdrawal from a pension management company.To date, three insurers have been licensed: Allianz-Slovenská Poisťovňa, Generali and Union.The system operates through a competitive bidding process mediated by Sociálna poisťovňa, the first-pillar agency.Only a handful of eligible retirees have applied so far, but the offers have been low and are likely to have provided the impetus for the latest re-opening.According to estimates from the Finance Ministry’s Institute for Financial Policy (IFP), the monthly payout in 2015 will average only €30, with 60% of this year’s eligible retirees receiving less.The institute does acknowledge nevertheless that the system is only 10 years old, and that payouts will increase as savings build up, and at a faster rate than the state pension.The IFP also noted the low returns generated by the funds since 2009 – 2% per year compared with 16% for the MSCI World Index.However, it attributed this partly to the instability caused by government policies, including the slashing of the contribution rate from 9% to 4% in 2012, and 2013’s mass movement into so-called ‘guaranteed’ funds.That year, members had to choose one of the four funds from their provider with varying risk profiles or default automatically to the guaranteed one.As of end September 2014, the guaranteed funds, despite their much lower returns, accounted for 89% of all assets. Slovakia is to re-open its second pillar, for the fourth time since 2008, to allow dissatisfied members to leave.The exit window, and terms and conditions for members leaving the system, have not been finalised yet and will follow discussions between Ján Richter, minister for Labour, Social Affairs and Family, the six second-pillar management companies and the National Bank of Slovakia (NBS).The second pillar has some 1.5m members and assets, as of the end of September 2014, of €6.3bn, according to the NBS.Prime minister Robert Fico reiterated his long-standing hostility to the system by stating that it was disadvantageous for two-thirds of the membership.
Taha Lokhandwala considers whether the UK government’s latest move to create free choice in DC markets stacks up for pension schemesMuch of the talk in the UK over the last year has been one of annuities, whether it be bulk, individual, medically underwritten or just downright poor value. The reason has been the government’s reforms made in last year’s Budget statement.The chancellor has allowed those approaching retirement in defined contribution (DC) schemes the freedom to spend any which way they please. In yesterday’s Budget, he extended this freedom to existing annuitants as the UK government began consulting on creating a secondary market for annuities, where consumers wanting to rid themselves of the retirement product could sell their income stream for a cash sum to a third party.This creates an interesting prospect, one where bundled together annuities essentially create a new form of fixed income investment, as annuity providers continue to pay out regular income streams to the third party, until the contract ends as the original policyholder dies. On a basic level, this kind of makes sense for pension funds. Nothing is really more liability-matching than an annuity, and even when not an exact match like a buy-in, there is still some correlation. The government alludes to this. In the consultation, HM Treasury says asset managers, pension funds, insurers and intermediaries are ideal buyers for second-hand annuities, with the mortality risk the buyer takes on offset by longevity risk. And we all know pension funds have enough of that.So that should be set, then. Pensioners will rush to the markets to sell their ‘poor-value’ annuities, intermediaries will bundle them into fixed income products, and asset managers and pension funds will start adding the products into their fixed income allocations.Well, not quite.As mentioned above, bundled annuities do not quite match a pension scheme’s liabilities as well as a buy-in. So, according to Ian Mills of consultancy LCP, the only real place for the product would be if, one, it was valued cheaper than a traditional bulk annuity, and two, if it provided a better yield and risk management than traditional fixed income.It is not unreasonable to suggest that bundled annuities, packaged in the right way, could do this, but the core issue remains pricing. The government, in its own consultation, suggests it has no concept on how to price second-hand annuities appropriately. In fact, it goes on to say retail investors should not be allowed to purchase second-hand annuities due to the complexities in determining a fair price.(Immediately, one sees a contradiction here, given that the sellers in the market are given free rein while the very same market, comprising the same retail investors, are not trusted to buy. But that is another issue.)This idea of a fair price is a difficult one to understand, as annuities are priced in for all risks from the start to provide this guaranteed income. To leave this, the holder obviously must prefer flexibility, but this always comes at a huge cost. So the only real way for this market to come together is for annuity holders to take a significant shaving off the value of their income stream.Bob Scott, also of LCP, puts it quite succinctly: “If someone wants to buy your annuity, you probably shouldn’t sell it. And, if someone wants to sell their annuity, the buyer is unlikely to offer them an attractive price.”That alone makes this is a difficult policy to envisage taking off. Even if there were a fully working market for secondary annuities, which created new fixed income products for pension funds and reduced the cost of annuities across the board, it could be a counter-productive area for schemes to enter.Because whatever the benefit for pension funds, ultimately, the cost of it all will be laid fully at the feet of pensioners.
There has been a 60% increase in the number of defined benefit (DB) pension members looking to ascertain the value of their benefits as new freedoms are applied to defined contribution (DC) schemes.Data from consultancy Mercer showed that, during each month of 2014, around 1,500 people made enquiries into the value of their benefits.However, in March 2015, some 2,500 people contacted the consultancy looking for a cash-equivalent transfer value (CETV) in the run-up to freedoms that came into force on April 6.The UK government has consulted on whether to ban DB-to-DC transfers but decided to allow them to continue as long as members obtain independent financial advice. It banned transfers from funded and unfunded public sector pension schemes.Many consultants raised concerns over an influx of DB members leaving their schemes to DC options to access their pension entitlements as cash following the scrapping of rules to buy an annuity.Matthew Demwell, partner at Mercer, said the current rate would lead to around 4% of DB members being administered by the firm seeking a CETV quote.“It’s clear these changes have appealed to a number of people,” he said.“However, these are just quotations. It remains to be seen how many people will actually accept the quotation and transfer out of their defined benefit scheme.“This certainly represents an opportunity for employers and trustees to reduce the sometimes crippling burden of pension costs, but, clearly, to ensure people have enough in their retirement, the process must be carefully managed.”In other news, JLT Employee Benefits has predicted the level of deficit contributions from FTSE 100 schemes will spike in 2015, given the number of triennial valuations being finalised and the continued low interest rate environment.Around 30 firms in the FTSE 100 are set to have the valuations this year, and, with low interest rates pushing up liabilities, many companies could see trustees demand higher cash contributions, the consultancy said.Companies contributed £14.1bn (€19.1bn) in the last accounting year.Approximately £6.9bn of that was purely for deficit recovery, but the figure was lower than the £9bn reported the year previous.However, total IAS 19 deficits in FTSE 100 companies came to roughly £80bn at the end of 2014, £26bn higher than at the end of 2013.Charles Cowling, director at JLT Employee Benefits, said: “We expect to see some difficult negotiations between trustees and employers, and, inevitably, there are going to be demands for increases – potentially significant increases – in employers’ funding contributions.”
In this new capacity, the company said he would broaden his leadership of institutional sales efforts for international clients.Gatch said that, as head of the company’s sovereign business for the last five years, Thomson had already helped some of the largest investors in the world through a period of big changes and expansion.Using that experience with international sales teams will help ensure better outcomes for clients, he said.Thomson said this was a very challenging time for investors, given the continued growth in pension funds, insurance companies and sovereign investors even at a time of low yields. JP Morgan Asset Management has appointed Patrick Thomson in the newly created role of head of international institutional clients, as the company seeks to bolster sales to a changing client segment.Alongside the new job, Thomson will continue working in his current role as global head of sovereign clients, and will continue reporting to George Gatch, chief executive of JP Morgan Investment Management Global Clients.Gatch said: “As institutional investors increasingly look to more sophisticated investment strategies, and continue to evolve their asset allocation to meet the challenges of today and tomorrow’s market environment, strengthening our international client service resources ensures we can continue to provide cohesive, tailored and pragmatic solutions that address the needs of our clients.”Thomson, based in London, will start in the new role immediately.
The pension fund’s return portfolio returned 7.9% in total, with private equity, real estate and credit returning 20.2%, 5.6% and -1.6%, respectively.Dooren attributed the performance of the private equity holdings to the portfolio’s maturation.“Companies we invested in a decade ago are now being sold and have increased in value,” he added.The scheme’s 47% matching portfolio, consisting of government bonds, swaptions and liquidities, returned 1.3%.“This was largely thanks to the divestment of our €75m swaptions portfolio in February,” said Dooren, adding that the pension fund incurred a 0.3% loss on its government bonds.The Nedlloyds Pensioenfonds finished 2015 with a policy funding of 116.7%, which enabled it to grant its pensioners and deferred participants an indexation of 0.35%.In other news, the €3bn pension fund of technical research institute TNO returned 2.6% last year, generating positive results on all of its asset classes.Equity, fixed income and mortgages returned 8.2%, 0.6% and 6.4%, respectively, while real estate and private equity returned 7.7% and 15.3%.The pension fund said its overall annual return included a 0.6% return on its interest hedge, as well as a 1.5% loss on its 50% hedge of the main currencies.Hans de Ruiter, the scheme’s CIO, said the board decided to reduce the interest hedge from 50% to 40% at year-end, as the 30-year swap rate hit the preset trigger level of 1.5% as part of its dynamic hedging policy.As at the end of December, the TNO scheme had a policy coverage rate of 111.7%.The pension fund recently announced that it would grant an indexation of 0.05%. The €1.4bn pension fund of shipping company Nedlloyd has reported a 4.7% return for 2015, attributing the performance chiefly to the active management of its equity holdings.Frans Dooren, the scheme’s director, said the pension fund’s equity allocation – comprising one-third of its 53% return portfolio – returned 10.4%, outperforming its benchmark by 3.8 percentage points.He added that, over the last five years, the pension fund had outperformed its benchmark by 1.8 percentage points on average.Dooren said the scheme’s overall return outperformed the benchmark by 1.9 percentage points.
UK retailer Kingfisher has completed the single-largest medically underwritten buy-in to date, insuring nearly £230m (€312m) of risk with Legal & General (L&G).The policy, purchased by the company’s UK defined benefit (DB) scheme, targeted the “top layer” of its pensioner liabilities, the company said in its 2015 annual report.“Measured against the long-term funding objective agreed between Kingfisher and the Trustee, the transaction generated a modest funding improvement, as well as a significant reduction in funding risk,” it added.James Mullins, head of risk transfer solutions at Hymans Robertson, noted that medically underwritten transactions covered £2bn in liabilities in 2015. “At £228m,” Mullins added, “this is the largest medically underwritten buy-in to date, and Kingfisher becomes the third FTSE 100 company to have completed a medically underwritten buy-in, all of which have been ‘top slice’ transactions, which insure the pensioners with the highest individual liabilities.”Kingfisher declined to disclose the name of the insurance company issuing the medically underwritten policy, only saying that it was a “major” insurer.But consultancy Aon’s latest ‘UK Risk Settlement’ report said L&G was behind last year’s largest transaction of £228m, without naming the client. L&G’s role in the transaction is noteworthy as the medically underwritten market has traditionally been dominated by providers Just Retirement and Partnership, set to merge in April.Aon said the medically underwritten market accounted for nearly 30% of the 175 bulk annuity deals completed last year, and 12% of the £12.2bn in policies written – a steep increase from its 5% share of the £13.1bn in policies written in 2014.Kingfisher closed its UK DB fund in 2012, ahead of the rollout of auto-enrolment.A focus on de-risking its investments, which saw its annual report disclose a surplus of £246m during the most recent financial year, has seen it hedge more than 80% of its inflation and interest rate risk.For more on how Kingfisher Pension Scheme invests, read IPE’s recent interview with head of pensions Dermot Courtier and pension investment manager Matt Fuller
There was broad support among committee members for the proposal.The committee signalled it would also include a reference to materiality in the package it sends back to the IASB.The proposed amendments will force entities to use updated assumptions to measure service cost and net interest for the remainder of the reporting period when remeasuring DB liabilities under IAS 19.When developing the proposed amendments, the board argued that there would be no changes to how and when DB sponsors would remeasure the net liability. However, respondents to the amendments warned that the proposed changes could affect the frequency and timing of remeasurements.In response, the IFRIC proposed removing minor plan amendments from the scope of the changes. The board, however, disagreed with this analysis.As part of their analysis, IFRIC staff conceded that the proposals could affect where and when entities remeasure net DB liabilities.Accordingly, IFRIC staff proposed that the IASB should update the discussion in the “basis for conclusions” to the amendments.However, some board members had reservations about this proposal and instead referred the matter back to the committee for it to consider the wisdom of including minor plan amendments in the scope of the amendments.IASB accounting framework nears completionMeanwhile, the IASB has concluded its deliberations on its conceptual framework project and cleared staff to commence balloting on the updated framework document.The board’s conceptual framework – which forms the basis for its standard-setting activities – has been a battleground between some investor groups and the board in recent years.Critics of the board’s framework argued that it ought to include a reference to prudence as a brake on the excesses that led up to the 2008 financial crisis.The IASB removed the concept from the 2010 iteration of its framework.According to the latest IASB workplan, the board is slated to issue the finalised framework during the final quarter of the year.Staff told the board last November that they expect the new framework to have little impact on preparers.FRC seeks GAAP feedbackThe UK Financial Reporting Council (FRC) has issued for public comment a series of amendments to FRS 102, the UK GAAP (‘generally accepted accounting principles’) source for unlisted entities.The amendments, which are open for public comment until 30 June 2017, affect directors’ loans, intangible assets, investment property, the classification of financial instruments, and the definition of a financial institution.If confirmed, the proposals will apply from 1 January 2019.Separately, the FRC is reviewing its for process to bring changes to major international reporting standards, such as those covering financial instruments accounting under IFRS 9, as well as leasing and revenue recognition.The regulator said it was currently reviewing responses to its September 2016 consultation on the matter.Any changes to UK GAAP will not take effect until 1 January 2022. The FRC added that it would consult on any such proposals “toward the end of the third quarter of 2017”. The International Financial Reporting Interpretations Committee (IFRIC) has backtracked on earlier proposals to relax the likely impact of amendments affecting the treatment of defined benefit (DB) pension fund remeasurements.The committee will now recommend that the International Accounting Standards Board (IASB) approve the changes to International Accounting Standard 19, Employee Benefits, (IAS 19) with no update to the proposed amendments.Committee member Reinhard Dotzlaw said: “I agree with the staff proposals and I also agree with the staff proposal to amend the basis for conclusions not to give a steer as to whether it would affect the timing of, and frequency of, remeasurement.“In my mind that is based on a materiality decision and preparers would consider the materiality of a plan amendment in the context of the financial statements as a whole.”
With the UK general election on 8 June having delayed the start of formal exit negotiations with the EU, there is little certainty about the impact of regulatory changes on the financial sector.However, some businesses are already envisaging operational changes. Almost a third (31%) of the investors surveyed said it was either “moderately likely” or “very likely” that they would reduce their operational or organisational presence in the UK.A similar proportion (29%) said they did not envisage any changes, while 10% said they were likely to increase their presence.#*#*Show Fullscreen*#*# Source: State StreetHow State Street’s clients envisage changing – or not changing – their UK allocationsThe German regulator is to host a workshop for UK asset managers next month to provide information to those firms seeking to establish a presence in Germany, as IPE reported yesterday.Michael Metcalfe, head of global macro strategy at State Street Global Markets, said there were “tentative signs” of a post-Brexit slowdown – something that was widely predicted before last year’s referendum, but has yet to materialise. Long-term investors remained optimistic, however, Metcalfe said.This week the UK’s economic growth figure for the first quarter was revised down from 0.3% to 0.2%. Year-on-year growth was also revised down slightly, from 2.1% to 2%.“The beginning of Brexit would appear to have done little to dent the confidence of long-term investors in the UK,” Metcalfe said. “The question now is whether that will last as actual Brexit takes shape during the negotiation process.” The early political rhetoric surrounding Brexit has not persuaded most institutional investors to drop UK investments, according to a survey from State Street.The firm surveyed 101 of its institutional clients in the immediate aftermath of the UK triggering Article 50 of the EU constitution, which confirmed its intention to leave the bloc.One fifth (19%) of investors said they planned to reduce their UK holdings in the next six months, up from the 16% recorded at the start of the year. However, the majority – nearly two thirds (64%) – did not envisage changing their UK allocations.Sentiment was marginally more positive quarter-on-quarter, State Street reported. More than a third (35%) of investors said they were positive about global economic growth on a three to five year view, up from 33% at the start of the year. Just 11% said they had a negative outlook, compared to 19% who were bearish on medium-term prospects in January.
“Lars expressed a desire to head Danica Pensjon in Norway, and since we will continue to be able to benefit from his extensive network and strong competencies in our activities in Denmark, the move is right for both the Danica Group and for Lars, who will be heading this important task,” Klitgård said. Danica Pension is bolstering its Norwegian business with the appointment of one of its top executives to lead the operation.Lars Ellehave-Andersen, who came to Danica Pension in 2015 in a high-profile hiring coup from rival PFA, will be chief executive of Danica Pensjon in Norway.Per Klitgård, chief executive of Danica Pension, Denmark’s second largest commercial pensions provider, said: “With Lars Ellehave as CEO in Norway, we are strengthening our Norwegian business, where we see great potential.”Since August 2016, Ellehave-Andersen has been chief commercial officer (CCO) on Danica Pension’s board, having previously had a seven-month spell as chief executive of the Norwegian arm when he first switched to the company from PFA. Lars Ellehave-AndersenEllehave-Andersen is to be replaced as CCO by Søren Lockwood, who is currently chief executive of SEB Pension. Danica is in the process of buying SEB Pension’s Danish business.Lockwood will join Danica Pension’s executive board once the acquisition has been approved by the authorities, the company said.Ole Krogh Petersen has been promoted to the board as senior executive vice president, and will take on the role of chief operating officer (COO).Klitgård said that with Lockwood as CCO, the company had “the best possibilities of creating value for our customers with the acquisition of SEB Pension”.“We now have the right management team to secure an even stronger position for Danica Pension throughout Scandinavia,” he said.Danica’s 2017 resultsReporting preliminary 2017 financial results, Danica Pension said its investment return for the year gave the company “a mid-ranking in a field with very narrow margins separating the providers”.Customers in Denmark received returns of between 4.8% and 12.3%, while clients with the “Danica Balance medium risk” product, and 20 years to retirement, received 9.5%.The company made a DKK1.9bn (€255m) profit for the year before tax and premiums grew 17.5% to DKK39.7bn.The increase in premium income was partly due to a 47% increase in gross premiums via parent company Danske Bank in Denmark, it said.Out of its three Nordic markets, Sweden generated most business growth last year for Danica Pension, with premiums rising 39% there compared to 10% in Denmark and 8% in Norway.