Official institutions around the world are planning to ramp up their exposure to new markets and alternative assets in a bid for higher returns on their capital, according to a new study.State Street said its research showed 80% of official institutions – sovereign wealth funds (SWFs), central banks and public pension reserve funds – expected to increase investment in new markets and alternatives such as hedge funds, private equity, property and infrastructure, where they had a mandate to invest in these assets.Joe Antonellis, vice-chairman at State Street, said: “Official institutions are at different stages in terms of how and where they can invest, but it is clear that those institutions with a more flexible investment mandate are recalculating their approach and looking to new markets and asset classes as they search for yield.”He added that the resulting diversity of these institutions’ portfolios would present them with new challenges. Rod Ringrow, head of official institutions solutions for EMEA at State Street, said emerging markets securities were the main type of new asset being targeted by official institutions.He said it was primarily SWFs that were planning to target alternatives such as infrastructure, hedge funds and private equity.The increase in exposure to new assets is likely to be small in percentage terms for central banks and emerging market securities, he added.“With other asset classes, there are limited investment options, so allocation won’t be huge,” he said.Ringrow cited the example reported last year of the Bank of Israel planning to increase its stock holdings to as much as 6% of foreign-exchange reserves, from just 3% at the end of 2012.“We may see SWFs collaborate for investment opportunities,” he predicted.More than 70% of respondents to the study, which polled more than 60 senior executives at the institutions, said it was a challenge to keep up with the changes in regulation across global markets, while 51% said the biggest challenge was correctly measuring and monitoring the amount of currency risk they were taking.Higher interest rates were seen by 38% as one of the hurdles on the road to expanding investment into new markets and asset types, while 37% were worried about emerging market volatility, the study showed.The institutions were also concerned about the cost of execution going up due to collateral issues and extra reporting requirements, with 35% of survey respondents citing this.A quarter of respondents saw their biggest challenge in managing the complexity that came with alternative investments.In the study, 60% of respondents said they planned to increase investment in their risk-management systems and processes over the next two years.However, 32% said they had difficulties hiring staff with risk, compliance and reporting skills.
Martin Clarke, executive director of financial risk at the PPF, said the new model, designed in conjunction with Experian Credit Services, would ultimately provide more “discriminative and robust insolvency risk scores, plus offering greater transparency and access to levy payers”.Clarke, who will depart the PPF later this year after being named UK government actuary, told IPE the PPF was “pretty confident” it would be able to explain how any changes to the ranking of sponsors would be caused.“Nevertheless, we are discussing [how] we might moderate some of the impacts in the first year, by having a transitional protection,” he said.“It is not part of our core proposition, but we are offering it up to comment from our stakeholders.”He added that it would be at the cost of the “majority” of funds that would not need any protection.“It is a question of how much solidarity the population as a whole wants to [offer], or how much self-interest they want to maintain,” he said.The proposed transitional system would compare a fund’s 2014-15 levy score from the current Dun & Bradstreet system to that of the proposed Experian model, had it been in place for that period.The consultation said that, if the increase suffered because the Experian model exceeded 200%, then it would abate the 2015-16 payment.However, it also cautioned that the proposal should not be viewed as a hard, 200% cap, as any further deterioration in risk between the 2014-15 and 2015-16 levy period would need to be accommodated.Joanne Shepard, senior consultant at Towers Watson, said the radical overhaul would inevitably mean changes for affected funds.“The PPF thinks its new way of calculating levies will better reflect the risks schemes pose – and therefore that some schemes have been paying more than their fair share in the past, while others have not been paying enough,” she said. The PPF’s consultation will also consider whether there should be an option allowing sponsors with a credit rating to over-ride any levy calculation, with the score instead replaced by one that employed the default probability of its rating.Clarke said the argument for including credit ratings was that these were “the product of a much more intensive” analytical exercise.“In aggregate, they have proved to be good predictors,” he said. The new model, which would come into effect at the beginning of the three-year levy period to 2017-18, has been independently assessed by PwC, as well as the lifeboat fund’s industry steering group. UK defined benefit schemes that see their Pension Protection Fund (PPF) levy increase materially under a forthcoming levy model may be granted some transitional protection, the lifeboat fund has suggested.Publishing its consultation on the new bespoke insolvency model, the PPF said the proposals were found to be superior than other existing models in five of nine areas, and as effective as other models in the remaining four.The model, which would place less emphasis on non-financial company data, will likely result in a minority of DB funds paying a higher levy in future due to a “material shift” in the ranking of some plan sponsors, despite a 10-band approach being maintained.The fund said it had considered a broader top band, reducing the overall number to eight, but that this would have resulted in a slight levy increase for those schemes in the top band, rather than the current reduction.
Klas Akerback, senior portfolio manager at AP3, said the pension fund saw the potential for attractive risk-adjusted returns in established German regional grocery-based retail.This is because tenants are strong companies, it said, as well as the fact existing sites will benefit because stricter planning rules make new construction difficult.Taurus will remain a minority partner after both deals.The first deal closed in late April, and the second is expected to close in the second quarter of this year, they said.The whole portfolio from both transactions includes more than 200,000m2 of space in 83 grocery-based properties across Germany.Tenants include retailers such as Aldi, Lidl, Netto, NORMA, REWE and Tegut, with shops located near Munich, Frankfurt and Wiesbaden. Sweden’s third pensions buffer fund AP3 has formed a joint venture with Pramerica Real Estate Investors to invest in retail properties in Germany.The institutional investors said the joint venture had already bought its first portfolio and agreed to buy a second.The two separate deals – worth €265m in all – will give the joint venture controlling stakes in grocery-based retail properties from funds managed by Taurus Investment Holdings.Sebastiano Ferrante, head of Germany for Pramerica Real Estate Investors, said: “The German market offers good prospects for retailers amid low unemployment, low household debt and rising wages.”
“Participants could benefit from the returns of the scheme’s investments in securities after retirement date.”Meanwhile, harbour tugboat company Svitzer, which started operating in the port of Rotterdam last year, has joined the new pension plan of the Nedlloyd pension fund with its 120 active participants.Svitzer is also part of Maersk Group, which bought shipping company P&O Nedlloyd in 2005.However, Maersk company Damco will continue its collective DC plan with the Nedlloyd scheme for its 275 workers for the time being, due to contractual obligations.He added that he expected Damco employees would also join the new pension plan in the near future.The Nedlloyd Pensioenfonds reported a 21.8% return for 2014.Its €640m matching portfolio of government bonds and swaptions returned 35.2%, while its other investments combined returned 11.7%.Last January, the scheme returned more than 5%.Its current coverage ratio – drawn on market rates – is 111.6%.The Nedlloyd Pensioenfonds has 11,695 participants in total, of which 800 are employed by Dutch subsidiaries of Maersk Group.The scheme has 7,910 pensioners and 2,980 deferred members. The €1.4bn Nedlloyd Pensioenfonds has switched from collective defined contribution (DC) to individual DC pension arrangements for the staff of a number of Netherlands-based companies of Danish Maersk Group. The pension fund will maintain the pension plan but has outsourced capital accrual to asset manager Robeco, which will invest participants’ pension assets as a default in a life-cycle mix.Under the new arrangements, pension capital accrued with Robeco can be used for purchasing a pension at the Nedlloyd scheme at or even before the retirement date.Frans Dooren, director at the pension fund, said: “As a result, the pension rights could increase with future indexation at the pension fund.
The UK asset management association has defended itself against accusations the departure of its chief executive would weaken its resolve to tackle fee transparency.Helena Morrissey, chair at the Investment Association, argued that the industry body had “always been conscious” of its duty to look after client assets, and said recent events – a likely allusion to the departure of Daniel Godfrey earlier this week – should not put its commitment in doubt.“Nothing has changed our collective commitment to putting customers first and, as part of that, to effective, transparent and competitive delivery to the millions of savers who depend upon the services we provide,” she said.Godfrey’s departure from the £532,000 (€680,000) a year role came amid concerns within the industry about the body’s direction of travel, and reports that several of its members would be letting their membership lapse at the end of the year. Guy Sears, currently director of risk, compliance and legal, has been named the association’s interim chief executive.IPE understands that some of the dissatisfaction stemmed from the 10 principles governing the conduct of the asset management industry, drafted during Godfrey’s tenure and published in August.The principles called for greater clarity on management fees and asked asset managers to agree that client interests always came first.Only 25 of the association’s 204 members, representing £1.8trn of its £5.5trn in assets, backed the principles when they were released.Godfrey had previously spoken of the need to view an asset manager’s fiduciary responsibility as a “moral code, a way of behaving” at a time when there was debate around enshrining the fiduciary responsibilities of providers into law.His departure earlier this week led responsible investment charity ShareAction to question whether industry concerns were being put ahead of the best interest of clients.Morrissey added: “The board and the industry remain committed to the values captured in the Statement of Principles, but we are listening to members with regard to how it is implemented.“There is no intention to make any changes to the ongoing executive pay project.”
Heribert Karch, chief executive at MetallRente, the German pension scheme for metal workers, has dismissed a proposal from three federal state ministers for the creation of a state-backed supplementary pension, saying they drew the wrong conclusions despite having offered a “brave and accurate diagnosis”.Karch is also chair at the aba, the German occupational pensions association.He directed his comments at a proposal from three ministers in the federal state of Hessen – economy minister Tarek Al-Wazir, a member of the Green party; social affairs minister Stefan Grüttner, a member of the Christian Democrats (CDU); and finance minister Thomas Schäfer, also a member of the CDU.The CDU and the Greens form Hessen’s current government. In December, the trio maded a proposal known as “Deutschland-Rente” – a standardised supplementary pension that would be backed by the state (hence the name), to be run by an independent sovereign fund with employees automatically enrolled under an opt-out system. MetallRente’s Karch welcomed the ministers’ intervention for offering a clear diagnosis of the problems facing pension adequacy in Germany – “I have yet to read such a brave diagnosis from politicians” – but he otherwise dismissed the proposal.“The proposal would be the most complicated by far for lawmakers and no help either for employers or employees,” he said.“The risks are a technical and political mix.”He questioned the envisaged fund’s ability to generate sufficient returns, saying it would face the worst possible starting conditions given the prevailing low-interest-rate environment and that it also could not be launched with a 100% allocation to equities.The latter is a reference to the ministers’ suggestion the sovereign fund could have a higher allocation to equities than many current occupational retirement products.Karch also expressed doubts that the state vehicle would be able to achieve a meaningful size and dismissed the feasibility and desirability of emulating comparable arrangements in other European countries, such as the Norwegian oil fund, Sweden’s AP7 and NEST in the UK.The state ministers’ idea is for the new state-backed pension to be based on defined contributions only, and this, too, was criticised by Karch.While attractive to employers, the “pay and forget” principle runs counter to employees’ “set up and forget” preference, he said – i.e. the desire for an arrangement that, once established, they can put to the back of their minds and not have to “monitor for the rest of the life for fear of poverty in old age”.He also questioned how a state-backed DC option would be able to compete with other providers offering a guaranteed minimum pension.“The state hasn’t had that level of risk appetite for a long time,” he said.The envisaged auto-enrolment approach with an opt-out option, meanwhile, is “designed to flop”, in Karch’s view.He pleaded for the governing coalition to be allowed to focus on the solutions already under discussion to address the pension deficit, instead of being distracted by the Deutschland-Rente proposal.The latter, no matter how constructively intended it may be, will namely be just that – a disruption – said Karch, if not a “betrayal of all those who on all levels and in all the implicated ministries are currently feverishly agonising over a solution that can still be implemented during this legislative period”.There is not much time left before pension debates are coloured by campaigning for elections, he added.“Let’s let the current government do their homework before we write out a cheque for the next one,” he said.
Provisum, the €1.4bn pension fund for retail company C&A, has said its sizeable hedge-fund allocation accounted for more than 1.5 percentage points of its 6.3% overall return for 2015. According to its annual report, Provisum’s 14.8% hedge-fund allocation returned 15.3% over the period, outperforming its benchmark by 5.6 percentage points.The scheme, one of the few in the Netherlands to enjoy a strong funding position, attributed the result largely to the appreciation of the US dollar against the euro.It also cited the impact of its hedged-equity, event-driven and relative-value strategies, and particularly to its “exposure to Asia and volatility”. Provisum, which outsources asset management to Anthos Fund and Asset Management, said its real estate holdings returned 11.5%, with indirect real estate delivering more than 20%.It cited a revaluation of non-listed property investments, with the CBRE Retail Fund Belgium and France returning 42.3%.The pension fund’s 15% bond allocation, which returned 1.3%, outperformed its benchmark by 0.9 percentage points, due in part to positions in Spanish, Italian and Belgian government paper.The allocation produced an overall net return of 3.2%, after a 3-percentage-point loss caused by the appreciation of the US dollar against the euro.Provisum hedged 75% of the downward risk of the dollar, as well as the UK pound and the Japanese yen.C&A’s scheme strategically covered 50% of the interest on its liabilities through long-term German and Dutch government bonds, with a bandwidth of 40-60% for tactical adjustments.A relatively high coverage ratio of 124.6% at year-end enabled the pension fund to grant all of its participants a full indexation of 0.66%.The pension fund reported administration costs of €219 per participant and said it spent 0.87% and 0.03% on asset management and transactions, respectively.Provisum has 9,450 participants in total, of whom 3,385 are workers and 2,620 pensioners.
Lastly, any company whose turnover is more than 20% linked to coal will be excluded.Announcing the policy on 4 October at an event in Paris, Jean-Pierre Costes, president of the board of directors at Ircantec, said these criteria would lead to exclusions equivalent to around 1% of the scheme’s portfolio (€92m). Costes framed the coal-exclusion policy in terms of stranded assets, saying the scheme was “not ruling out significantly reducing its investments in ‘stranded assets’, notably in the fossil fuel sector”.The board of trustees last week decided to take such a step with respect to thermal coal, he added.The move has been facilitated by the work Ircantec has done to measure the carbon footprint of its investments, according to Costes.He said companies whose businesses were linked to coal that were not captured by Ircantec’s new exclusion policy would be closely monitored.Considerations about coal should be integrated into all monitoring “levers”, said Costes, in particular shareholder voting and engagement carried out by asset managers on behalf of Ircantec.This activity should be aimed at providing assurance about companies’ efforts to reduce their exposure to carbon. The new exclusion policy is in line with the energy transition roadmap that Ircantec outlined earlier this year, said Costes.He also announced that Ircantec this week launched a request for proposal for asset managers to run a standalone green bond fund, as per plans unveiled earlier this year. Decree threatIrcantec, whose €9.2bn of assets are reserves, recently increased its exposure to corporate debt at the expense of euro-denominated sovereign debt, but its fiduciary manager recently told IPE the scheme’s diversification strategy could be scuppered if the Social Affairs Ministry follows through with plans for a controversial decree unveiled earlier this summer. Ircantec has therefore asked to be exempt from the regulation. French public sector pension scheme Ircantec has adopted a coal-exclusion policy, which will affect around 1% of the fund’s total portfolio.Exclusions will be made on the basis of three criteria. The €9.2bn scheme will exclude mining companies that account for more than 1% of global coal production, based on turnover.It is also turning its back on energy producers whose energy mix is more than 30% derived from coal or that have a carbon intensity in excess of 500g of CO2.
The Green Bond Principles have been updated in a bid to clarify and strengthen the voluntary industry standards that govern the small but growing market.The changes were announced in conjunction with an annual general meeting of the Green Bond Principles (GBP) in Paris today. The principles are managed by the International Capital Market Association (ICMA).According to a statement from ICMA, the changes to the principles included updated “project and traceability language” to facilitate more issuance, especially from sovereigns and corporates, and stronger guidance on issuer communication of environmental strategy and management of material environmental and social risk factors.Other changes included “expanded and additional definitions of green categories and new impact reporting metrics”. The 2017 edition of the GBP said additional guidance had been provided on impact reporting, with suggested metrics for sustainable water and wastewater projects.Manuel Lewin, head of responsible investment at Zurich Insurance, said: “The 2017 update to the GBP encourages issuers to provide information about their green projects in the context of their broader sustainability strategy and processes, establishing a critical link between the dedicated use of proceeds unique to green bonds, and the relevance of sustainability practices in the assessment of credit risk.”Commenting before the updates to the principles were announced, Bram Bos, senior portfolio manager for sustainable credits and green bonds at NN Investment Partners, said issuers should be encouraged to include quantitative key performance indicators (KPIs) in their annual reports.This transparency would appeal to investors as it would allow them to properly assess the impact the bonds had on the environment, he said.“Green bonds have a direct and measurable impact on the environment,” he added. “A lot of investors in green bonds want to know what exactly that impact is.” According to the 2017 GBP document, the principles “recommend the use of qualitative performance indicators and, where feasible, quantitative performance measures (eg energy capacity, electricity generation, greenhouse gas emissions reduced/avoided, number of people provided with access to clean power, decrease in water use, reduction in the number of cars required, etc), and disclosure of the key underlying methodology and/or assumptions used in the quantitative determination”.“Issuers with the ability to monitor achieved impacts are encouraged to include those in their regular reporting,” the principles said. In addition to the revisions to the GBP, new Social Bond Principles were released for bonds raising funds for projects with positive social outcomes, such as affordable housing. New Sustainability Bond Guidelines were published to provide guidance for bonds combining green and social projects.Japan’s GPIF pushes proxy voting disclosure The world’s largest asset owner has told its external asset managers to disclose records for the shareholder votes they exercise on its behalf.In a letter from 8 June, Japan’s ¥145trn (€1.24trn) Government Pension Investment Fund (GPIF) said the proxy voting records should be disclosed for each investee company on an individual agenda item basis.Asset managers should do this on behalf of all clients, including GPIF, it said.The request is in line with a principle that was added to Japan’s Stewardship Code when it was revised last month.Norihiro Takahashi, GPIF president, said disclosure of the details of proxy voting records was essential for institutional investors to fulfil their own stewardship responsibilities and “deepen Corporate Governance reform and move its focus from ‘form’ to ‘substance’”.“GPIF shall continue to enhance the mid- to long-term investment returns for our beneficiaries through improvement of corporate value and fostering sustainable growth of investee companies,” he added.
Japan’s ¥157trn (€1.2trn) Government Pension Investment Fund (GPIF) is searching for an institution to provide “multidimensional” analysis relevant to the formulation of its investment strategy, according to tender documentation.The selected organisation will be asked to provide analysis on matters such as economic policies, including monetary and fiscal aspects, and political and geopolitical risks.“[O]ther analysis on the formulation of investment strategy” may also be requested, according to a draft specification about the “Project to Provide Information on Investment Strategy”.“GPIF is capable of flexible investment within the permissible ranges of deviation to policy asset mix based on the adequate forecast of market circumstances,” it noted. Such forecast should be based on strong certainty, it added, but recent market circumstances were changing significantly “by economic environment but also by political conditions or international relations”.“In order to contribute to the formulation of investment strategy considering an adequate forecast of market circumstances based on more multidimensional analysis, GPIF procures an institution to provide information on investment strategy.”A contract for the project would last until 2020, but could be terminated at any time. Applications must be submitted by 31 January. EC to commission equity investment research The European Commission is looking for organisations to carry out a study on the drivers of equity investments by insurers and pension funds.It committed to the study last June when it presented a review of its work to forge an EU Capital Markets Union (CMU). The European Parliament also has pension-related mandates to awardAlthough also about pension funds’ equity investment, the Commission appears more focussed on the study analysing insurance companies’ investment behaviour.According to tender documents, the study “aims to inform and help the Commission’s support any policy initiatives in the area of fostering higher equity investments by insurance companies in the EU”.“Incidentally,” the Commission added, “this study will also contribute to the work of the Commission on pension funds.”More specifically, the study should help provide more data on the level of cross-border investment by national pension funds. Previous research from the Commission found that pension funds’ investments seemed to be significantly biased towards their domestic market or, where cross-border, to outside the EU.The Commission noted that the organisation mandated to carry out the study will also be asked to analyse investments in equity related to unit-linked and indexed linked insurance contracts in the EU, as well as investments in equity made by defined contribution pension funds.The deadline for applications to carry out the study is 19 January.Actuarial reports for European Parliament own schemesThe European Parliament is looking for organisations to conduct actuarial studies of certain of its pension schemes.It wants a report of the annual actuarial situation of each pension scheme, and projections and/or simulations of annual cash flows.Four schemes are in question: the retirement schemes for former members of the European Parliament (MEPs) elected in France and Italy, an additional voluntary scheme, and a survivor’s and invalidity pension scheme.The schemes were set up before July 2009, when there was no EU-shared remuneration and pensions system for MEPs, and MEPs’ pensions were payable by each Member State.The schemes are closed, although one member still contributes to the voluntary additional scheme under an exception to the rules.The French and Italian schemes owe their creation to the then unequal treatment of MEPs and members of their national parliaments with regard to pensions. The European Parliament set up schemes to make up for this, with coverage requiring MEPs to pay contributions to the European Parliament.The Italian and French scheme each have just over 250 members, the voluntary supplementary scheme almost 1,000, and the survivor’s and invalidity pension scheme 41.UK public pension fund seeks custodianThe administering authority of £7.2bn (€8.1bn) Lancashire County Pension Fund is looking for a global custodian. The total value of the contract would be between £900,000- £2.1m, according to a tender notice.