Month: September 2020
Wednesday people roundup
The Investment Association (TIA) – Helena Morrissey is set to become chair of the newly created TIA, after the merger between the Investment Management Association (IMA) and the Association of British Insurers’ (ABI) investment affairs division. In light of the merger, Morrisey will replace Douglas Ferrans, current IMA chairman, who is stepping down after four years in the role. Daniel Godfrey remains chief executive of the newly merged lobby group. Morrissey is also chief executive at Newton Asset Management and founded the 30% Club, an organisation dedicated to the promotion of women onto corporate boards.JP Morgan Asset Management – John Bilton has been appointed head of the global strategy team in the firm’s investment management solutions global mulit-asset group. Bilton joins from Bank of America Merrill Lynch, where he was the European equity strategist responsible for asset allocation research. From London, Bilton will be responsible for global economic and asset allocation strategies. Towers Watson, Railways Pension Scheme, AVÖ, The Investment Association, JP Morgan Asset ManagementTowers Watson – Chris Mansi, currently the consultancy’s European delegated CIO, has been promoted to a global role in charge of all $60bn (€44.2bn) of delegated mandates. Mansi, who has been with the firm for 15 years, has been promoted alongside Craig Baker. Baker was previously global head of research at Towers Watson’s investment division, and has been named global CIO.Separately, Michael Valentine has joined the firm in Zurich from Mercer to consult German-speaking Swiss clients on investment issues. He follows Edouard Stucki in some of his positions, but not as a board member. Stucki had left the consultancy earlier this year to pursue new opportunities. Sebastien Brocard remains as investment consultant for the French-speaking Swiss clients, a position he has held for two years now.Railways Pension Scheme – John Chilman has become chairman of the pension scheme for railway workers in the UK. Chilman replaces Derek Scott, who was chair for seven years and will remain employer director of the scheme for his final three years on the board. Chilman, who has been on the board since 2007, is also director of reward and pensions at FirstGroup, a bus and rail company.AVÖ – Manfred Rapf has been elected president of the Austrian actuarial association AVÖ. He also heads the life insurance department at the Austrian insurance federation VVÖ. Rapf follows Christoph Krischanitz, managing director of actuarial consultancy Arithmetica. After six years in office, Krischanitz could not be re-elected president and is now serving as vice-president.
Dutch regulator forced to pay €4.8m after failing to convince high court
The high court said it noted that the gold had been sold in three stages, against a price that rose in each phase.SPVG had based its claim on having divested all of its holdings against the maximum market value.Eric Lutjens of law firm DLA Piper, the scheme’s legal adviser, said: “It is not unreasonable to assume the pension fund could already have sold its gold in an earlier stage. However, we are very pleased with the verdict.”A spokesman for the DNB, however, described the ruling as “disappointing”.He said the regulator would assess the verdict and consider a possible “follow-up”.Meanwhile, SPVG has decided to liquidate itself and transfer the pension rights of its almost 3,000 participants to the €18bn industry-wide scheme for the printing sector, PGB, as of 1 October.Last year, the scheme lost 11.2% on its investments, as it missed out on rising equity markets due to a relatively large stake in government bonds.As a consequence, the scheme was forced to cut pension rights by 4.35%, despite an additional contribution from the employer of €7.5m, along with an extra €4.2m as a “dowry” for joining PGB.At the time, it also guaranteed payment of the amount the pension fund expected to receive from the DNB. The Dutch regulator (DNB) has been ordered pay the pension fund of glass manufacturer Vereenigde Glasfabrieken €4.8m in compensation for having forced the scheme to divest most of its 15% gold allocation. In 2011, the DNB instructed the pension fund, SPVG, to reduce its gold allocation to 3% after deeming the investment a concentration risk – and gold a “speculative commodity without any intrinsic value”.Gold prices soared after the forced divestment, and SPVG subsequently estimated its losses for missing out on the value increase at €9.5m, in addition to €1.5m for related costs. The DNB has failed to convince a Rotterdam-based court – and the now highest court in the Netherlands – that the glass scheme invested irresponsibly.
Consultants’ fixation on short-term holding back green asset growth
In addition to the misalignment of incentives, an issue examined in the review of UK equity markets chaired by John Kay in 2012, the working paper also said that many trustees remained concerned that consideration of environmental matters was “essentially a breach of fiduciary duty”.A recent review of fiduciary duties by the UK Law Commission found that environmental, social and governance (ESG) issues were often “ill-defined” and instead suggested that trustees examine specific financial and non-financial matters instead.Caldecott and Rook also suggested that a lack of standardised terminology was holding back the growth of green investments, and said that the use of different terms by both consultants and asset owners could result in “unnecessary or exaggerated disagreements and misunderstandings”.“Moreover,” they added, “because many green investment concepts and products do not easily fit under conventional labels (e.g. modern portfolio theory approach to handling risk; asset-class-based allocations) many [asset owners] encounter difficulties in ‘making green investment fit’ within their broader investment aims.”The authors suggested that growth in the green investment market was being hampered by investment consultants attempting to reconcile mandates from asset owners with strategies that integrated green concerns.The report therefore suggested that investment consultants be compelled to focus greater attention on long-term matters, or otherwise risk damage to their reputation and relationships with clients.It concluded: “We anticipate that ICs could face a jolting devaluation of their reputational capital if they fail to help their AO clients plan for and cope with a long-term future that arrives ‘sooner than expected’.”,WebsitesWe are not responsible for the content of external sitesLink to report ‘Investment consultants and green investment: Risking stranded advice’ The inability to place green investment into clear investment categories is holding back their growth, as is the continued fixation on short-term investment by consultants, academics at the University of Oxford have alleged.A working paper by Ben Caldecott, director of the Stranded Assets Programme at the Smith School of Enterprise and Environment, and Stanford University research fellow Dane Rook has argued that both asset owners and investment consultants were to blame for the lack of activity in the green investment market.But it argued that the way consultants approached their business was causing some of the friction, as fee structures acted as a disincentive to investments that did not result in a near-term return.“Because [asset owners] may not be keen to pay explicitly and directly for ‘green investment’ services, many [investment consultants] may not be adequately incentivised to develop such capacity, even if it might provide a long-term advantage,” the authors said.
Church Commissioners co-file climate change resolution with Exxon
The Church Commissioners for England, who run the Church of England’s £6.7bn (€8.7bn) endowment fund, have co-filed a shareholders’ resolution calling on ExxonMobil to disclose the resilience of its business model in the wake of the Paris Agreement on climate change.The Church Commissioners said it was the first climate-related resolution they had filed with a US-based company.Alongside the Church Commissioners, the resolution has been led by the New York State Common Retirement Fund – the third-largest public pension fund in the US – with co-filers also including the Vermont State Employees’ Retirement System, the University of California Retirement Plan and The Brainerd Foundation.Altogether, the group of investors represents nearly $300bn (€275bn) in assets under management and more than $1bn in Exxon shares. The Paris UN Climate Conference concluded with world leaders committed to holding the rise in global temperatures well below 2˚C and to seek to restrict warming to 1.5˚C.The shareholder proposal asks ExxonMobil to publish an assessment of how its portfolio would be affected by a 2˚C target through, and beyond, 2040.Specifically, it said the assessment should include an analysis of the impacts of a 2˚C scenario on the company’s oil and gas reserves and resources, assuming a reduction in demand resulting from carbon restrictions.The resolution will be voted on at ExxonMobil’s annual general meeting unless it is withdrawn because of action taken in response by the company, or the company seeks to have the resolution struck off by the Securities and Exchange Commission.Edward Mason, head of responsible investment for the Church Commissioners of England, said: “Climate change presents major challenges to corporate governance, sustainability and ultimately profitability at ExxonMobil. As responsible investors, we are committed to supporting the transition to a low-carbon economy.”Mason added: “We need more transparency and reporting from ExxonMobil to be able to assess how they are responding to the risks and opportunities presented by the low-carbon transition.” Thomas DiNapoli, New York State comptroller and trustee of the New York State Common Retirement Fund, said: “The unprecedented Paris agreement to rein in global warming may significantly affect Exxon’s operations.“As shareholders, we want to know Exxon is doing what is needed to prepare for a future with lower carbon emissions.”DiNapoli added: “The future success of the company, and its investors, requires Exxon to assess how it will perform as the world changes.” Last year, Shell and BP agreed to disclose how they would be impacted by efforts to lower greenhouse gas emissions in response to similar shareholder proposals co-filed by the Church Commissioners and other investors and endorsed by the boards of both companies.More recently, 10 global oil and gas companies, including Shell and BP, announced their support for lowering greenhouse gas emissions to help meet the 2˚C goal.
West Midlands pensions chief Drever to retire
Chair of the WMPF pensions committee, councillor Ian Brookfield, said: “It has been a real pleasure to work with one of the industry’s best known individuals. We wish Geik well in her retirement – she is a great colleague who will be sorely missed.”Meanwhile, Fletcher is to leave WMPF after less than a year in order to lead the LGPS Central pool’s investment team. He joins Andrew Warwick-Thompson, LGPS Central’s CEO.Since joining in September last year, Fletcher has played an active role in setting up LGPS Central, co-operating with senior staff at fellow LGPS funds for Cheshire, Derbyshire, Leicestershire, Nottinghamshire, Shropshire, Staffordshire, and Worcestershire.He also led a groundbreaking review of WMPF’s asset management costs, using a template developed by Chris Sier and now being adopted across the LGPS in England and Wales.Fletcher joined WMPF after a 20-year career at the Universities Superannuation Scheme, where he was latterly deputy CIO. He has also worked at the British Airways Pension Fund.Fletcher said: “Since joining the West Midlands Pension Fund I have thoroughly enjoyed working with the other partner funds of LGPS Central. I am delighted to have been offered one of the most exciting challenges within the industry, and to have been given the opportunity to work with our partner funds to deliver their objectives.“There is a lot of hard work ahead and a very challenging timetable, but I am convinced that LGPS Central will be successful in its ambition of providing transparent, high quality, excellent value for money investment management services to its partner funds.”WMPF is actively recruiting for its senior management team, although investment strategy implementation will pass from WMPF’s internal team to LGPS Central from April 2018.Last week another LGPS pool – Brunel Pensions Partnership – announced the appointment of two staff from one of its founder members to its senior management team. Geik Drever, strategic director of pensions at the UK’s West Midlands Pension Fund (WMPF), is to retire at the end of September, the public sector scheme announced today.The £14.3bn (€16bn) local government pension scheme (LGPS) is also set to lose its chief investment officer, Jason Fletcher. He is to move to LGPS Central, the £40bn asset pool of which West Midlands is a founding member.Drever joined WMPF in 2012 after a 25-year career with Edinburgh council. In the Scottish capital Drever was the council’s chief accountant, before moving to run its pension scheme, the Lothian Pension Fund, in 2002.Rachel Brothwood, WMPF’s director of pensions, will take over from Drever from 1 October 2017, the scheme said in a statement. She joined the fund in 2015 and has since led reviews of its administration, funding, and investment strategies.
UK regulator warns insurers over illiquid assets and alternatives
PRA estimates suggest that illiquid fixed income assets – defined as those “other than traded debt securities” – currently account for “more than 25% of the assets backing annuities across UK insurers”. Life insurers seeking higher returns from illiquid assets such as equity release mortgages or student housing must properly understand the underlying risks, the UK’s insurance supervisor has warned.In the face of low interest rates and declining yields, many insurers have sought to back their annuity books with increasingly risky forms of investments, said David Rule, executive director of insurance supervision at the Prudential Regulation Authority (PRA), said in a speech last week.“Illiquid assets can be a good match for annuities,” he said. “Diversification may lower overall portfolio risks. And long-term infrastructure investment has wider economic benefits.“But these assets bring a wider range of risks than those familiar to bond investors. Insurers need to ensure they have the skills to understand and manage them.” David Rule, executive director of insurance supervision, Prudential Regulation Authority“Insurers’ business plans suggest this proportion might increase to around 40% by 2020,” Rule added.Issues have arisen following a spate of high-profile bankruptcies in the UK, including the January collapse of Carillion, formerly the UK’s second-largest construction company.“The failure of Carillion left some insurers needing to replace a contractor on construction projects,” said Rule.He also cited other recent investment trends and their associated risks: “Financing student accommodation exposes insurers to the risk of changing UK student numbers; and financing railway stock creates a risk at the point when a new train operator wins a franchise.”Alternative strategies have risen in popularity in recent years as falling bond yields and low interest rates in many developed countries have led investors – both institutional and retail – to seek higher returns elsewhere.According to Preqin, the data provider: “The proportion of investors with a preference for higher-risk strategies such as special situations and distressed debt vehicles has increased from Q1 2017 to Q1 2018, with the largest share (52%) of investors now showing a preference for distressed debt.”Sourcing the best and most appropriate assets was critical, said Duncan Hale, portfolio manager of Willis Towers Watsons’ Secure Income Fund.“Good sourcing not only means that you can access assets to generate strong returns, but good sourcing is critical to managing the risk as a well,” he said. “Liquid assets can be bought or sold, but a poorly-structured illiquid project is likely to be a big drag on returns.”Hale added: “You want significant diversification to manage the idiosyncratic risks seen across the spectrum, but you want to be selective and work with the best partners in each area. It is hard to do, but the benefits for those willing to do the hard work are quite attractive.”For Andrew Epsom, principal at Mercer’s insurance investment team, more illiquid types of assets “do seem like a good fit”.“In terms of understanding the risk, there is definitely lots of due diligence that insurers would go through before they invest in these types of instruments,” he said.“Given the size of the life insurers – their high profile, and the fundamental [role] they play within the UK economy – the [PRA] is paying close attention,” Epsom added.“A lot of life insurers have upgraded their internal processes to be able to cope with this fact.”
Joseph Mariathasan: USS debate raises profound questions for UK DB
The Centre for the Study of Financial Innovation (CSFI) held a roundtable last week on the issues of pension funding raised by the USS debate, with protagonists from two schools of thought regarding pension liability valuations.On one side were those who believe that pension liabilities are akin to bonds and can be valued as such, while the other side believes that cashflows, not present value calculations, are what should drive investment policy. Credit: Warwick University UCU branch UCU members striking at Warwick University over USS proposals earlier this yearThe debate – if it can be called that – was a great disappointment. The two sides have fundamentally different philosophical frameworks for defining the valuation and hence the management of defined benefit (DB) pension schemes and no amount of arguments are likely to create a consensus, any more so than the creation of a ‘consensus theology’ could have arisen from the religious wars of the past.Religious wars were ultimately settled by an acceptance of the freedom to worship as one wishes. That option is not available for the protagonists in the debate over pension valuations.The one thing both sides can agree upon is that the crisis surrounding USS is due to failures in the system of pension regulation and control rather than in the management of USS itself. That raises the point that, quite apart from the ‘theological’ arguments over valuations, the more important question is whether and how DB schemes can remain in existence. That issue, along with issues such as finding other providers of risk capital for the UK economy, are still to be resolved .The writing on the wall for DB pensions came when what used to be regarded as promises to pay pensions on a ‘best efforts’ basis became legal liabilities. Managing a DB pension scheme thus became a risk management problem, not an investment one, so eliminating all investment risks irrespective of the costs trumps any other objective.For many individuals with DB pensions, that has provided extremely attractive transfer values – in many cases, members have been offered 40 times their annual pension when considering transferring out, as a result of the yields on gilts and index-linked gilts falling to low levels as pension funds have bought them up to match liabilities.Perhaps the most important product of the JEP’s report was that the second phase of its work should seek to determine whether there is an alternative methodology for future valuations that could provide long-term stability for USS while enjoying the support of all parties.Where does this leave USS ? Guy Coughlan, chief risk officer, points out that the real issue is not whether USS has a current surplus or deficit in terms of accrued obligations, but whether contribution rates will be sufficient to generate the income for the fund to provide for the continued accrual of new pension benefits in a world of lower returns. It is this issue, he argues, that is the real driver behind the recommendation to increase contribution rates.It is difficult to see how the JEP by itself can solve the underlying issue of the high cost of guaranteed annuities that lies behind the demand for higher contributions. The panel may be able to postpone any drastic decisions for a few more years, and it is conceivable that market conditions could change for the better with regard to prospective asset returns.Given the importance of the higher education sector, however, there may be a case for future governments to consider alternative options, which could range from granting a state-backed guarantee, to measures enabling more risk-taking.At the extreme, the government could even take on historic liabilities as it did with the Royal Mail Pension Plan a decade ago, absorbing assets to help pay down the national debt and pay pensions to academics out of general taxation, as is currently the case with civil servants.Ultimately, pensions are just one element of the total compensation package offered to academic staff. What they should be and how they should be delivered cannot be separated from a more general discussion on how academic staff should be paid in order to attract and retain talent in a critical sector for the UK. The first report of the Joint Expert Panel (JEP) on the valuation of the Universities Superannuation Scheme (USS) was published on 13 September. This should keep academics happy for a while and gives the management of USS a clear direction on which way to head.However, while this provides a compromise of sorts, the underlying issues that gave rise to the passionate debate and industrial action have not actually gone away.As expected, the JEP has come out with a set of recommendations that should enable the future contributions rates to be set at levels significantly lower than originally proposed. It has done this through a series of tweaks to the investment assumptions used by USS enabling the JEP to recommend reduced contribution levels.The key changes they have put forward involve re-evaluating sponsors’ attitudes to risk and the reliance on the sponsor covenant; adopting a greater consistency of approach between the 2014 and 2017 valuations, which affects the scale and timing of deficit recovery contributions; smoothing future service contributions to ensure greater fairness between generations of scheme members; and using more current information, including recent market improvements, new investment considerations and the latest data on mortality.
Danish FSA to probe market-rate pension payouts
Denmark’s financial watchdog has launched an investigation into market-rate pensions provision and the associated risk transfer to scheme members that has occurred since the products gained prevalence.The Danish Financial Supervisory Authority (FSA) said the study would examine the payout process and how companies managed investment risk – and whether this newer pension model was of benefit to its customers.Carsten Brogaard, Danish FSA deputy director, said: “The payout process in market-rate schemes can be very different from the traditional guaranteed pension schemes.“Payments cannot be expected to be stable, and for some products payments may vary significantly in size over the payout period. We must have a better overall overview of this.” In recent years, Danish pension providers favoured market-rate pension products – which are linked directly to financial market performance – over the traditional average-rate products that smooth returns from year to year, and sometimes include a yield guarantee.In some cases companies have switched customers to market-rate products automatically, and in other cases clients have been given a choice.The FSA said the reason for the “theme survey” was that the risk in market-rate products, previously carried by companies, has been transferred to individual pension savers who must bear any losses on the investments.The regulator said it would focus particularly on the decisions taken by pension companies’ supervisory boards on the payout process.Linked to this, it said it would investigate the stability of pension payouts and how this was included in the risk management of the product – including the extent to which stabilisation and smoothing mechanisms were used.The FSA said it expected to publish its conclusions later this year.This is not the first time the Danish FSA has honed in on market-rate pensions. In early 2017, it released a paper scrutinising, among other things, consumer risk in the market-rate model.
Changing Dutch accrual rates needs more attention, says Shell scheme
Shell’s Dutch scheme lost 0.6% on its investment portfolio last yearThe Shell scheme posted a 0.6% loss on investments in 2018, according to the annual report. This would have been a 2.2% decline without its interest rate hedge position, the scheme said.Private equity holdings and matching assets were Shell’s best performing asset classes, with returns of 13.4% and 14.9%, respectively. Real estate delivered 3.7% through positive revaluations as well as rental income.In contrast, listed equity holdings fell 8.7%. Shell attributed a 4.1% loss on fixed income to rising risk premiums for emerging market debt and risk-bearing credit.It described the 0.9% loss on hedge funds as disappointing, given its long-term return goal for the allocation was Libor plus 3%.In its annual report, the Shell pension scheme also said it had decided to raise its allocation to Dutch residential mortgages by €1bn.The board explained that, despite the asset class’s limited liquidity, the investment offered an attractive return, adding that mortgages’ long duration matched the scheme’s long-term liabilities.It reported asset management and transition costs of 0.58% and 0.1%, respectively. Administration costs amounted to €267 per participant.At year-end, the Shell scheme had 7,685 workers, 18,665 pensioners and 7,280 deferred members. Discussion about pensions reform in the Netherlands are paying insufficient attention to the potential impact of the transition from average to degressive pensions accrual, according to the Dutch pension fund of Shell.In its annual report for 2018, the €27bn SSPF argued that a new pensions contract – which is subject to negotiation between the government, employers and unions – was not relevant to every pension fund. However, the government’s decision to abolish the current pension accrual method would affect all Dutch schemes.“Compensating older workers for the negative effects of degressive accrual through a new pensions contract won’t be feasible for many pension funds,” the closed pension fund said.It concluded that, if the government’s plans were implemented, the scheme’s contribution rate of 23.5% last year would have to rise significantly, without delivering a better pension. Therefore, the Shell scheme advocated granting schemes sufficient legal leeway in the transition to a new way of pensions accrual, to enable closed schemes to carry on with their existing pension plan.Separately, the pension fund said it planned to decrease its investment risk when its funding was improving, and vice versa, based on a new asset-liablity management study.As a consequence, it had reduced its allocation to return-seeking assets by 10 percentage points to 5.1% in 2018, while increasing its interest rate hedge from 10% to 25% of liabilities.At year-end, the pension fund’s coverage ratio stood at almost 128%, enabling the scheme to grant a full 1.6% inflation compensation.Private equity offsets listed losses
CERN gains from real estate revaluations to post 1.3% 2018 return
Scientific research institute CERN’s CHF4.2bn (€3.4bn) pension fund gained 1.3% in 2018 following revaluations of some of its real estate holdings.In its annual report for 2018, CERN said the net-of-fees return “includes the real estate revaluations carried out between October 2017 and December 2017”.It explained that including the revaluations was the result of “an operational constraint” imposed by the scheme’s previous custodian State Street. In September, CERN announced it had appointed Northern Trust as its new custodian, ending the contract with State Street after 24 years. In its annual report, the pension fund said the transfer of assets to the new custodian had been “successful”.As a result of the custodian change, CERN said, custody and performance calculation functions had been separated. Within the 1.3% investment gain, CERN said an equity protection strategy had helped mitigate the effects of the equity market crash in the fourth quarter of the year. The portfolio lost 5.8% for the year, but all its equity allocations outperformed their relative benchmarks.In fixed income, the scheme exited a CHF40m position in direct loans, which protected it from a sell-off in the sector later in the year.Private equity investments, which made up 8.2% of the portfolio at the end of 2018, brought in CHF4.5m in net cash flow from distributions. During the year CERN brought the private equity reporting and data collection functions in-house after a contract with an external adviser expired.The CERN scheme also confirmed a number of internal changes at its Pension Fund Governing Board (PFGB), which were finalised in April and May 2018.Isabelle Mardirossian joined the PFGB to replace Alessandro Raimondo. She was also made a member of the fund’s investment committee.Peter Hristov was named vice-chair of the PFGB for three years, while Martin Steinacher was appointed chair of the investment committee.The PFGB also named Marcus Klug, board member at Austria’s €1bn Bundespensionskasse, as an external member of the investment committee. His appointment followed a comprehensive search for an external adviser to the investment committee that started in 2017.