UK pension funds focus on inflation, rate protection as LDI market grows

first_imgQuarterly figures, gathered from derivatives trading desks, showed interest rate liability hedging grew an additional 9%, which the firm put down to an increase in funding levels boosting risk-reduction.The manager said pension funds’ previous interest in inflation hedging had led them to add interest rate mechanisms to create real rate hedges.Inflation hedging decreased for the second quarter running. However, even interest rate hedging remains below a record of £23.4bn set in the third quarter of 2013.KPMG’s research, brought together using figures from LDI managers, showed growth in the use of swaptions within LDI strategies, albeit to a limited audience, generally larger schemes.Allocations grew by £9.8bn over 2013, but the number of pension funds utilising swaptions was still only 25.Other synthetic return generating approaches were not as popular, with some strategies seeing a decline in allocations.The use of equity options within LDI strategies fell, with small growth in the use of futures and total return swaps in equities. However, the use of these strategies remained limited.As with swaptions, the concept of LDI also remained fairly limited and under-utilised by schemes smaller than £50m.Some 21% of the 825 mandates seen to date have been used by schemes of this size.KPMG said there was not significant appetite for LDI strategies, despite some allocations from smaller pension schemes, .“There appears to be plenty of opportunity for small schemes to access well structured and good value pooled vehicles,” the KPMG report said.“It seems the demand from small schemes is much less than from larger schemes.”With regard to implementation, schemes larger than £500m implemented segregated and bespoke mandates from managers, while those between £50m and £500m have appetite for this and pooled mandates.KPMG’s report also predicted further growth in the LDI market through 2014, as funding levels continue to improve for UK schemes.Barry Jones, head of LDI at KPMG, added: “With many pension schemes looking to lock in the profits following another bumper year for equities, we’d expect another wave of de-risking in 2014, and the LDI market is likely to be the primary recipient.” The UK liability-driven investment (LDI) market continued to grow in 2013 as the value of allocated assets broke £500bn (€628bn), with a 21% increase in the number of mandates, research shows.Annual research from consultancy KPMG showed the level of assets from pension funds reached £517bn by the end of last year, an addition of £74bn.During 2013, in an alteration from the year previous, growth in liability hedging was shared equally between inflation risk and interest rate risk, compared with 2012, where inflation caused more concern to schemes.This trend has continued into 2014, according to additional research from asset manager F&C.last_img read more

Investors ‘warming’ to alternative ways of viewing portfolios – survey

first_imgInstitutional investors may be warming to approaches beyond traditional asset class-based allocation regimes, with many also turning to factor or objective-based alternative investment models, according to a survey commissioned by State Street Global Advisors.Conducted in the second half of last year, the survey was of senior executives with asset allocation responsibilities at 400 large institutional investors from around the world.It focused on investors’ objectives, their approach to asset allocation and their framework for measuring success.According to State Street, the survey shows investors are “reassessing strategic asset allocation models and turning to objective and factor-based approaches to better achieve investment objectives in a low-return environment”. Respondents’ long-term return expectations were generally elevated across most asset classes, raising the question of whether these were overly ambitious, State Street said.For example, they are looking for a return of 10.9% on the long-term performance of their portfolio, 10.9% in real estate, 8.1% in commodities, 10% in equities and 5.5% in bonds.More than half – and in some cases more than 75% – of respondents said their return expectations were being met (plus or minus 1%) for the overall portfolio and in different asset classes.However, nearly one-quarter of respondents (20%) said their long-term return expectations were not being met, with only 13% saying that, on average, their expectations were being exceeded (State Street pointed out that the survey was conducted before the significant market downturn at the start of this year).For Rick Lacaille, CIO at State Street Global Advisors, the survey shows institutional investors are “beginning to question whether they can achieve objectives through traditional investment models in the current lower-for-longer return environment”.He added: “Not only does this challenge traditional, strategic asset allocation models by forcing greater consideration of risk, but it also confronts investors with a need to focus from a top-down perspective on the drivers of returns in their underlying asset class choices.”Investors, State Street noted, have traditionally viewed their total portfolios through the lens of asset classes, and 41% of respondents said this was the most important asset classification method – simplicity was one of the reasons cited.However, the survey revealed the “significant adoption by many investors of an additional layer of factor-based classification (or by assets’ exposure to different types of risk)”, according to the asset manager.Although 30% indicated their primary method was to classify assets by factors or exposures to types of risk, 65% said they applied this method in addition to others.A further 55% also classified according to assets’ contribution to their portfolios’ overall objectives, such as growth or income.“This may be evidence of a warming to approaches beyond rigid asset allocation regimes,” said State Street.A breakdown by investor type is not provided in the report, although pension funds are described as being most traditional in their approach, with nearly half of respondents saying they focused on asset class-based categorisation.This compares with two-thirds of sovereign wealth funds (SWFs) indicating that factor exposures and contribution to objectives served as the primary method for classifying assets.For those respondents whose overall portfolio was performing below expectations, the most popular change in approach identified was to increase the allocation to alternative investments – SWFs (42%) and pension funds (24%) were more likely to feature this approach as their most preferred, according to State Street.“Other popular tactical changes included the introduction, or increased use, of objective-based investing (selected by 63% of respondents), and an increased use of active managers (selected by 59% of respondents),” said the asset manager.However, the survey also showed investors feel they face significant barriers to adopting new approaches, according to State Street.These include limited or slow peer-group adoption of strategies such as smart beta (60% of respondents), difficulties obtaining board buy-in (46%) and a lack of in-house expertise (46%).last_img read more

ECB planning to collect data from European pension funds – BaFin

first_imgInstitutions such as the European Systemic Risk Board (ESRB) and the European Central Bank (ECB) are paying greater attention to the pension-fund sector, with the latter planning to exercise its right to collect data from schemes “probably from 2018”, according to Dietmar Keller, head of occupational pensions at German regulator BaFin.At the Willis Towers Watson’s Pensionskassen Day in Frankfurt, some delegates said the ECB’s decision to start collecting data was one way EIOPA’s “common methodology” concept could be recommended for IORPs.Another delegate at the conference told IPE that Germany’s Bundesbank had asked IORPs – on behalf of the ECB – to specify which data could be collected, at what cost and by how much effort.The first results of the ECB’s data-collection exercise are to be published by 2019, but exactly what data will be collected remains unclear. In his Pensionskassen Day presentation, Keller concluded that the holistic balance sheet (HBS) – or EIOPA’s renamed “common methodology” approach – would “remain on the agenda”.“EIOPA recommends, in its opinion from 14 April, to use the concept as a risk-management tool, including a public disclosure of the main elements,” he said. Keller pointed out that, “for an implementation of that proposal, a change of the current IOPRP Directive is necessary”, but he added that, so far, there had been “no reaction” from European institutions.The BaFin representative said he expected the HBS concept to be used in “possible further stress tests”.Also speaking at the conference, Martin Schrader, chairman at the Pensionskasse Rundfunk, warned that the introduction of HBS elements “via the back door of stress tests” could deter companies from offering occupational pensions.“Both employers and employees will see there is a problem rolling towards us,” he said. “But I’m unsure whether HBS is suited to explain this problem to members.”According to some delegates at the conference, EIOPA’s announcement that some of the data calculated under an HBS approach might have to be published has already “changed the debate” on the future of occupational pensions.One example is the debate over industry-wide pension plans in Germany, where guarantees are to be taken on by neither the company nor the pension fund but rather a protection plan.But BVV board member Helmut Aden pointed out a problem with this approach.“There will still be guarantees,” he said, “but everyone is pointing to someone else to take them onto their books.”He said the concept of a protection plan had not yet been explained “convincingly” and that this protection included systemic risks that “will also have to be paid by someone”.In Germany, the introduction of industry-wide pension plans, possibly with an opting-out model for members, is now under review.last_img read more

IPE Views: Beware the stimulus hype

first_imgIn that respect Philip Hammond, the Chancellor of the Exchequer (finance minister), was right to identify the UK’s weak productivity as a key problem to address. In his official speech he noted that: “We lag the US and Germany by some 30 percentage points. But we also lag France by over 20 and Italy by eight.”He went on to spell out what this means in practice: “It takes a German worker four days to produce what we make in five; which means, in turn, that too many British workers work longer hours for lower pay than their counterparts.”The subsequent news that real wages look likely to be lower in 2021 than they were in 2008 underlined the scale of the problem. If productivity does not increase then wages will continue to stagnate.Hammond’s proposed solution is the creation of a National Productivity Investment Fund that will provide £23bn of additional spending over five years. Its focus will be on transport, digital communications, research and development (R&D), and housing.The most striking thing about this proposal is how small the planned spending is relative to the scale of the problem. The UK’s GDP is about £1.9trn so an extra £4.6bn a year is a tiny amount in contrast.In addition, £7.2bn of the proposed new fund will go to housing. There is nothing wrong with that in principle – on the contrary, the UK’s decaying housing stock could do with much more investment – but it will not raise productivity. Investment in housing is essential to improving living standards, which is welcome, but it does not contribute to making future production more efficient.Increasing productivity cannot be achieved simply by spending more money. Another key requirement is a willingness to stop state support for unproductive or “zombie” companies. In the authorities’ desperation to keep the economy ticking over, for instance by allowing the provision of cheap credit, otherwise defunct firms are often allowed to survive. Such action hinders the economic process of creative destruction that is essential to dynamic growth in any market economy. This problem is apparent in Japan where economic growth has remained weak despite several attempt at fiscal stimulus.From this perspective the two common reactions to the Autumn Statement can be put into context. For a start, the scale of the fiscal boost, at least on the spending side, is tiny relative to the huge task of bolstering productivity.In addition, the discussion of Brexit in this context is a diversion. It is hard to make any meaningful estimate of its likely cost when the form it will take remains so uncertain. Meanwhile, the preoccupation with the subject obscures the fact that Britain’s weak productivity record long predates the Brexit referendum. The problem would exist whether or not the UK was in the European Union.Although the UK’s circumstances are unique, there are broader international lessons to be learnt. The widely anticipated fiscal stimulus from the incoming Trump administration in the US could also be on a smaller scale than much of the discussion suggests. Talking about improving infrastructure is much easier than doing it. Ensuring it bolsters innovation and economic growth is particularly tough.With the global pendulum swinging towards fiscal stimulus it is more important than ever to separate the reality from the hype. The UK seems to have fallen in line with a growing international consensus on the need for fiscal stimulus. Central banks seem to be “running out of ammo”, to use the favoured expression, so higher public spending and tax cuts are gaining political support.Infrastructure spending in particular is coming into favour. Not only does infrastructure across the developed economies need more investment, but such spending could bolster economic activity more widely. Its advocates contend that improving infrastructure makes economies more efficient and so helps generate future growth. Better roads, railways and telecommunications are all welcomed in this respect.The UK’s plans were announced on Wednesday in what is known as the Autumn Statement (one of two annual sets of parliamentary proclamations on the government’s fiscal plans). In broad terms there were two reactions to it. First, it was hailed as a dramatic break from the harsh austerity of the previous government. Second, there was a lot of excitement about its implicit estimate of the likely cost of Brexit to the British economy (£58.7bn (€69bn) judging by additional borrowing costs).But a closer examination shows that, at best, these points are secondary. The plans should be judged in relation to their stated goals.last_img read more

BMW opposes ‘mandatory’ membership of industry-wide schemes

first_imgLarge German companies have called for membership of industry-wide pension plans to be voluntary, as the country’s parliament debates reforms to its system.Wolfgang Degel, head of BMW group’s centre of competence for retirement provision, was among the most outspoken on the topic at this year’s Handelsblatt conference on occupational pensions in Berlin.“The collective bargaining agreements should only set minimum standards for the new pension vehicles,” Degel argued. “Participation should be completely voluntary for companies and they should not be forced to transfer existing pension plans.”He added that occupational pensions were an important feature of a good employer: “With industry-wide pension plans companies can no longer set themselves apart with special arrangements.” Evelyn Stoll, head of pensions at fellow German car producer Volkswagen, said: “We do not have to be among the first to introduce a new pension vehicle. We can wait – maybe for the teething troubles to be over.”She emphasised that Volkswagen would stick to its on-book pension promises, known as “Direktzusage”, echoing similar commitments by other large companies.Carsten Velten, head of pensions at Deutsche Telekom, said he was in favour of the new pure DC plans in principle. “It is an option, but my gut feeling says that our employees might not want this,” he said.Robert Bosch Group’s head of the retirement provision Dirk Jargstorff was a bit more positive, adding: “What really helps during the retirement phase is to get away from the dogma of the strict investment strategy.”Under the proposed pure DC model – to be introduced via the “Betriebsrentenstärkungsgesetz” (BRSG) – asset allocation would no longer be limited by the need to provide guarantees to retirement benefits.“We would not have any commitment to make additional payments, which we currently still have for retirees if we cannot reach the promised guarantee,” Jargstorff said. “This would bring even more stability and equality among the generations.”However, BMW’s Degel was convinced of his company’s existing provision: “What we are offering will be more attractive than the defined ambition plans created under the BRSG – and we would like to continue the way we do.”BMW introduced a new pension plan last year for new entries after March 2016, and any employees who chose to switch. It does not have a pension payout phase – instead money can be withdrawn upon retirement in instalments.This year and last BMW paid €200m into the new plan both from the company’s 150th anniversary bonus and the employees’ share of the success premium.last_img read more

Equities drag Switzerland’s Publica to 3.2% loss in 2018

first_imgSwitzerland’s largest pension investor made a net loss of 3.2% across the CHF37.6bn (€33bn) of total consolidated assets it managed for 20 pension plans last year, it announced yesterday.Without currency hedging, the result would have been 10bp higher (-3.1%), said Publica, which manages the retirement savings of federal employees.Publica runs money for 13 open pension plans and seven closed plans. The CHF34.3bn run for open pension plans lost an average 3.5% in 2018, while the seven closed plans’ invested assets lost an average 0.2%.The 0.2% loss for the closed pension plans was above the performance of the Pictet Swiss pension fund indices, while the result for the open pension plans was slightly below that of Pictet’s comparable indices, it said. The main reason for the negative performance in the open plans, Publica said, was its strategic decision to broadly diversify its portfolio and – among other things – to invest 16% in emerging market equities and bonds. Emerging market equities fell by 13%.The indices calculated by Pictet for Swiss pension fund portfolios have a small strategic allocation to emerging markets, so they were less affected by the downturn.Most major asset classes detracted from Publica’s overall performance last year, especially its equities allocation. Emerging markets weakened overall performance by just under 1.5%, while investment in industrialised countries weakened performance by roughly 2.1%.However, the strategic decision to invest in private infrastructure debt paid off, as these assets returned 2.1% in 2018, Publica said.The best performing asset classes were domestic and international real estate, which returned 6.7% and 4%, respectively. Together they added just under 0.5% to the portfolio.Publica’s annual average return was 2.9% over the period from 2000 to 2018, exceeding the average return of the fund’s benchmark by 20 basis points per year.The funding ratio for the open plans was estimated at around 100% as at the end of 2018, and at 107% for the closed plans.The results reported by Publica are unaudited, with exact figures due to be published alongside its 2018 annual report in the spring.The pension fund is rolling out a revised investment strategy that it decided on last year. This includes increasing its allocation to private markets, including real estate debt, and cutting its government and corporate bond allocations.last_img read more

Climate change: PRI develops ‘inevitable policy response’ forecast

first_imgOne of the main parts of the IPR work is a “Forecast Policy Scenario”, which the project partners say is primarily aimed at demonstrating latent risk in investor portfolios. It is said to differ from climate scenarios in that it does not work back from a pre-defined target temperature, but works up from probable policy and technology developments.Speaking on the conference panel, Jason Eis, executive director at consultancy Vivid Economics, emphasised that a forecast was not a hypothetical future scenario but “a hard-nosed business planning tool to really prepare corporate action, corporate investments and also investor action and investor decisions for what is likely to happen in the future”.According to the project organisations, the forecast of an IPR provided an alternative to the widely used International Energy Agency (IEA) “New Policies Scenario” as a business planning case for investors, regulators and companies.Critics of the IEA NPS see it as a ‘business-as-usual’ scenario that is out of line with the ambition of the Paris Agreement goals. According to the Forecast Policy Scenario, there will be an acceleration of policy announcements related to climate change in 2023-25, coinciding with a stocktake of all announced policy agreements that is foreseen under the Paris Agreement.Other developments forecast by the IPR work include a ban on internal combustion engine cars in “first mover countries” by 2035, and carbon pricing of $40-60 per tonne of carbon dioxide by 2030, also for first movers. Sharon Hendricks, chair of CalSTRS, the US public pension fund for teachers in the state of California, said the IPR was “critical”.“This work helps us on the policy level because ultimately as board members we’re not investors – we direct our staff, we have lots of policies that guide us and it’s the board’s job to modify and change policy,” she said.“I would say the biggest thing we’re talking about right now is making sure our policies include language around the materiality of climate change and making sure we are thinking about that in terms of the risk and returns of our portfolio”.The PRI released five papers last week, one explaining the Inevitable Policy Response, one covering the policy forecasts themselves, another providing “a unique meta-analysis of public corporate support” for the low carbon transition, another focusing on renewable energy, and another on the need for a just transition.Modelling results about the impact of the forecasted policy scenario are due to be released from later this month. Investors should be braced for governments to act forcefully but in an uncoordinated fashion on climate change within the next five years, according to the Principles for Responsible Investment (PRI).The organisation last week released major research papers related to modelling the financial impact of what it has called the ‘Investable Policy Response’ (IPR).Introducing a panel dedicated to the IPR work at the PRI’s annual conference, Sagarika Chatterjee, director of climate change at the PRI, said: “Signatories around the world are very concerned that markets are not pricing in climate risks and investors tell us that they believe it’s not about if governments will act but when, how and with what impact.”The project is a collaboration between the PRI, Vivid Economics and Energy Transition Advisors, with contributions from 2° Investing Initiative, Carbon Tracker and the Grantham Research Institute on Climate Change and the Environment.last_img read more

UK regulator mulls trustee board diversity reporting requirement

first_imgThe UK’s Pensions Regulator (TPR) is working to improve the gender balance and diversity of trustee boards with an eye on recent improvements to the diversity of corporate leadership.Speaking at the Responsible Asset Owners Conference in London yesterday, Amanda Latham, policy lead at TPR, said the regulator had included a focus on diversity in its recent consultation on trusteeship and governance.In the consultation, which closed on 24 September, TPR asked respondents whether pension boards should be required to report diversity data to the regulator – in line with a similar requirement from the Financial Reporting Council for corporates – and whether there should be more industry-driven initiatives to improve diversity on trustee boards.“What we know as a regulator is by having to report how you’ve implemented a policy really does start to change behaviour,” Latham said at the conference. Amanda Latham, policy lead at TPRData from the Pensions and Lifetime Savings Association (PLSA) from 2017 showed that 83% of private sector pension fund trustees were male. This compared to just under 70% of FTSE 350 company directors, according to the 30% Club.Latham said the pension sector had “a particularly long road ahead of us” to catch up with developments in the corporate world.However, she added that TPR’s annual surveys had shown that trustees were beginning to see the benefits of improving diversity.Latham said: “There is a copious amount of research now showing that, when people have different views, decision-making is more difficult, it’s less agreeable, but they come up with much better solutions to problems most of the time. That’s an area that that we’re focused on.”The PLSA launched a diversity campaign in 2017 titled ‘Breaking the Mirror Image’. It introduced leadership programmes aimed at women in the pensions sector with the aim of building a “pipeline of future trustees”. “We think the most effective pension boards have a diversity of skills and experience, allowing them to draw from various different perspectives. Having demographic diversity [means] a trustee board is more representative of its members, and it can better engage with its membership, it can have better understanding of the issues that some members face, and how they live their lives.”last_img read more

VNU scheme to transfer assets to Aegon in buyout

first_imgThe scheme added that, by joining Aegon, it would also avoid a situation in which it can no longer find capable board members.At Aegon, all participants and pensioners will receive an inflation compensation based on the European consumer index.As the pension fund’s coverage ratio stood at 127.4% at the end of September, the scheme had sufficient assets to also grant part of the indexation in arrears.The pension fund’s active participants continue to accrue new pensions rights with another provider as of 1 January.The scheme nor the employer could be contacted for further details. The €630m Dutch pension fund VNU said it will transfer all its pension assets and accrued pension rights to insurer Aegon in a buyout, adding that it will liquidate subsequently.It said this way it wanted to secure accrued pension rights as well as inflation compensation for its approximately 5,200 workers, deferred participants and pensioners.VNU, the pension fund of publishing company Nielsen, had already placed €440m of its liabilities with Aegon, but still paid inflation compensation from its remaining assets.On its website, it explained that there is a possibility that it will not be able to keep on granting indexation, and that a buyout will eliminate this risk. Since 2009, the scheme could not pay full indexation during a couple of years.last_img read more

With a rainforest backdrop, this large family retreat is tipped to draw plenty of attention

first_imgMore from newsCairns home ticks popular internet search terms3 days agoTen auction results from ‘active’ weekend in Cairns3 days ago51 Red Peak Boulevard, Caravonica.The home features polished timber flooring and extensive use of floor-to-ceiling windows, a lavish master bedroom suite with enormous separate walk-in robe and ensuite, and wraparound timber decking on the upper level, which can be easily accessed from every room.The modern entertainer’s kitchen comes complete with Miele appliances and enormous Caesarstone island bench.“There’s also a fully self-contained, separate living area downstairs,” says Mr Oberdan.“It’s perfect for families who have frequent visitors from out-of-town,” he says. 51 Red Peak Boulevard, Caravonica.Other features of the property include a sizeable wine cellar, cyclone bunker, sparkling in-ground pool with water feature, double garage with side access for additional cars, the boat or caravan, intercom, monitored alarm and airconditioning throughout.Nestled at the base of Red Peak Mountain on the Macalister Ranges, the home offers residents all the comforts of suburban living with a backdrop to World Heritage-listed rainforest and Far North Queensland’s cane fields.The home has the convenience of a central location and is a short drive to the Cairns CBD, Cairns Airport, James Cook University, numerous local private and state schools, Smithfield Shopping Centre and the stunning northern beach coastline of Cairns. 51 Red Peak Boulevard, Caravonica. Cairns Post Real Estate 30/06/18SET in the prestigious Red Peak Forest Estate against a unique rainforest backdrop, this five-bedroom family retreat embraces its surrounds with a simplistic yet elegant architectural design.Sprawled across two levels, 51 Red Peak Blvd has a clever, open-plan layout with multiple indoor and outdoor spaces, offering large families a range of living options.With the inclusion of essential tropical living requirements, including abundant spaces filled with prevailing cool mountain breezes and drenched in natural light, the multi-award winning home offers the perfect balance of style, comfort and contemporary living.Joe Oberdan moved into the property – his “dream home” – with his wife and three children soon after it was completed in 2008. 51 Red Peak Boulevard, Caravonica.“It’s quite an amazing setting there,” he says.“You see all these butterflies and native birds flying around.“The children absolutely loved living there. It’s a really beautiful place.” 51 Red Peak Boulevard, Caravonica.Combine this with the beauty of tranquil rainforest-covered mountain surroundings, panoramic ocean views, cascading waterfalls, leafy hiking trails and a lake, and you have discovered one of Cairns’ best kept secrets.Mr Oberdan says while he and his family have thoroughly enjoyed the past 10 years at, the time has come to move on to the next chapter.“We have really loved living there, but it’s just one of those sad things – we’ve moved interstate now and we’re moving on.”last_img read more