Poland’s decision to appropriate its second-pillar pension assets to fix its public finances has inevitably started to raise questions in the region about the viability of using public social contributions to fund privately run pension funds.In early October, in neighbouring Lithuania, Stasys Jakeliūnas, financial affairs adviser to prime minister Algirdas Butkevičius, called for a suspension of contributions to the voluntary second pillar as of January 2014.He argued that the system was making the financial position of SoDra, the social insurance fund responsible for the first pillar and other benefits, increasingly unstable.Jakeliūnas has been backed by some other members of the Social Democratic Party – the largest in the ruling four-party centre-left coalition that took power following the October 2012 election – including Algirdas Sysas, deputy speaker of the Seimas (Parliament), who has also hinted at nationalising the second pillar. In November 2012, the new Parliament voted in the previous government’s pension reform.This raised the members’ second-pillar contribution from 1.5% to 2.5% in 2013.In 2014, members can make an additional contribution of 1%, matched by a state contribution of 1% of the national average wage.In 2016-19, the additional member and state contributions rise to 2%.Workers who joined the voluntary second pillar in 2013 have to make the additional contribution, while existing members have until 30 November to decide whether to pay extra, leave the system altogether or continue paying only the base contribution, which falls to 2% in 2014-19.Those who fail to declare their intention remain in the second pillar under the old terms.Given the November deadline, Jakeliūnas’s timing was unfortunate.Marijus Kalesinskas, chairman of the board of the Lithuanian Pension Fund Members’ Association, said: “I guess his intention was good to stimulate a debate on how to further improve the pension system, but it came out at a wrong time and in a wrong context.“Some long-term critics of the funded pensions were quick to support his proposal and to further suggest nationalisation of the second-pillar pension assets.“That increases the confusion among those pension savers who need to make up their mind at the moment and among quite a few of those who already have.“People are left with a sense of insecurity, not knowing what further to expect from the government and the politicians.”Fortunately for the second pillar’s supporters, the prime minister has not opened up a debate on the subject, and neither SoDra’s nor the state draft 2014 budgets currently before Parliament assume any changes.Lithuania’s public finances are in somewhat better shape than in Poland, which used the size of its deficit and public debt to shrink the second pillar drastically.In Lithuania’s case, the key policy objective has been to get this year’s budget deficit to within 3% of GDP to qualify for euro membership in 2015.According to Kalesinskas, suspending the second-pillar contributions in 2013 would have decreased the budget deficit by only LTL500m (€145m) and by LTL500m-600m the following year.“That would hardly be decisive for the 3% Maastricht criteria,” he told IPE.
Month: September 2020
Eleven companies have been excluded following a thematic analysis of the palm oil industry.At around the same time, 10 companies were struck off the list of potential investments after an analysis of the power industry.These power companies were removed because they had the highest percentage of electricity generation from coal.“We can not sell off entire industries at once,” Meisingset said, adding that this would be too risky for customers in the short term.But Storebrand could exclude these companies to secure a long-term return, she said.“We will continue to have some exposure to coal, but we have removed those companies with the greatest exposure in the two main sectors,” she said.SPP and Storebrand said they would continue to reduce fossil exposure gradually, but in an orderly and manageable way.Storebrand said it has a policy of not revealing the names of excluded companies.Explaining the exclusions resulting from the palm oil sector analysis, the firm said palm oil plantations were seen as the main factor behind the destruction of tropical forests, with the devastated areas accounting for 15-20% of global greenhouse gas emissions.In addition to this, the plantations have a negative impact on the climate, and palm oil production areas include biodiversity hotspots, Meisingset said.Palm oil plantations have also been the subject of many conflicts related to human rights, she said.However, she said there were hopes that signs of stronger regulation in the sector would make the industry more sustainable.The next sector to be analysed by the financial services group will be the mining industry, Storebrand said. Swedish pensions provider SPP and its Norwegian parent Storebrand have excluded another 21 companies from their investment universe on the grounds of sustainability.The latest moves bring the total number of businesses blacklisted by the Norwegian financial services group to 176, 40 of which are climate-related, Storebrand said.Christine Meisingset, head of sustainable investment at Storebrand, said: “To ensure a good, long-term return for customers, we have to increase investments in those companies that have a smart and sustainable business and avoid the companies we do not believe in.”SPP said climate change was the greatest risk factor in sustainable development and posed a high risk to the financial stability of the company’s investments.
Pension trustees are neglecting their fiduciary duty if they pursue the highest possible return without considering the impact of their investment behaviour, the chief executive of Hermes Fund Managers has argued.Rather than chase an inflation target, pension funds should aim to offer beneficiaries a certain living standard on retirement, while investing in a way that is also beneficial to the more deprived members of a society, Saker Nusseibeh said at an event organised by think tank Tomorrow’s Company.Nusseibeh noted that pensioners were often more severely affected by price rises in key areas, such as food, energy and fuel, and said, that due to the discrepancy between the statutory inflation increase and his estimate, investors were using the wrong figure.“The pension promise should be about delivering, 30 years down the line, a living standard that is roughly 60% of what the beneficiary enjoys today,” he argued. “This must include soft issues such as living conditions, infrastructure, the environment – in a wider sense – as well as financial issues such as the price of food and energy.”He said it would be an insult to pensioners if assets held by its own fund achieved a higher return, resulting in an environment where food and energy prices had risen to a level “substantially higher” than when they were in employment.“That I would suggest is not only a dereliction of fiduciary duty even within the bounds of the current understanding of Trust Law, but in fact a form of negligence,” he said.His comments come as the UK awaits the final recommendations by the Law Commission on the matter of fiduciary duties and, to what extent these allow trustees to invest in a sustainable fashion, rather than simply seek the highest return.The Law Commission’s investigation was triggered by John Kay’s review of the UK equity market, which recommended a number of changes to encourage long-termism. Nusseibeh added: “It matters that we engage with large corporations on their behalf to maintain an infrastructure that serves the high street because, at their income level, their interaction is limited to the high street.“It matters that we pursue sustainability because, when the system fails as it did in 2008, it is their taxes that bail it out.”He said that if economist Milton Friedman’s theory of the neoclassical economic model – which Nusseibeh said was “a load of old cobblers” – were to be believed, the best investment would be addictive drugs, such as crack cocaine.“Some may think I am joking, but, in 2003, a brothel called the Daily Planet was listed on the Australian Exchange. Do we really think investing in slavery and exploitation is a ‘good’ investment?”Therefore, investors should not only think within the “dry framework” of nominal returns but also examine the “common-sense framework” of holistic, long-term returns.“We would start to look at projects like public transport and affordable housing and healthcare through a different lens, a lens that reflects the concerns and aspirations of our beneficiaries, the capital providers,” he said.
Property – representing 4.8% of the pension fund’s assets – returned 7.2%, with listed real estate generating 9% and exceeding its benchmark by 0.5 percentage points.The scheme’s combined private equity and hedge fund holdings returned 8.7%, leading to a year-to-date return of 15.3%.Since the start of the year, the pension fund’s coverage ratio – discounted against market rates – has increased from 125.3% to 130%, equating to an official coverage ratio of 138.8%. The pension fund said it preferred to use the market rate for its investment and risk policy, as this provided a “better picture of our financial position”. The €23bn pension fund of banc-assurer ING has reported a 6.6% return on investments – including the combined effect of its interest and currency hedge – for the third quarter, resulting in a year-to-date return of 22%. The pension fund’s 75% fixed income portfolio of bonds and interest swaps returned 7.9%, mainly due to currency fluctuations following increased interest spreads between the large economies, it said.The Pensioenfonds ING added that its fixed income holdings returned 27.5% over the first nine months of the year.The scheme said its equity portfolio (16.5%) returned 4.6% in the third quarter, adding that its European investments contributed no more than 1 percentage point of return.
An undisclosed corporate investor based in Germany has tendered a €100m, developed Pacific, all/large-cap equity mandate using IPE Quest.According to search QN-2084, the search is for “information purposes” only – “the best manager/product will serve as a backup for existing managers for the time being”.No passive approaches will be considered.The mandate calls for a 50% MSCI Japan and 50% MSCI Pacific ex Japan benchmark, in euros. The investor has no minimum or maximum tracking-error requirements.Asset managers must have at least €1bn in assets under management and a minimum track record of five years.Interested parties should state performance, gross of fees, to 30 June. The IPE news team is unable to answer any further questions about IPE Quest tender notices to protect the interests of clients conducting the search. To obtain information directly from IPE Quest, please contact Jayna Vishram on +44 (0) 20 7261 4630 or email [email protected]
The last review, conducted in 2013 by the previous government of prime minister Donald Tusk, saw the second-pillar converted into a voluntary system, while the OFEs were stripped of their sovereign bond holdings and forced into investing heavily in Polish equities.The removal of sovereign bonds enabled the then-government to reduce public debt as a share of GDP.With the current Law and Justice (PiS) government facing its own budget challenges, most notably financing its programme to provide PLN500 (€114) a month for every second and subsequent child, the OFEs’ net assets of PLN141.3bn (€32.8bn) as of end-April have long been seen as a tempting resource.The PiS government’s intention to support Poland’s large coal mining industry also lent credibility to the notion of a state-run second pillar obliged to invest in assets that a privately run entity would have shunned.Zieleniecki stressed that the pensions review would not start until August, after the closure of the current transfer window at the end of July.As of late May, some 25,000 had decided to switch their 2.92% from their sub-account at Poland’s Social Insurance Institution (ZUS) to an OFE.Zieleniecki told Bloomberg the government could consider widening the OFEs’ investment possibilities as their current, Polish-equity-focused portfolio structure was generating poor results.The Polish Chamber of Pension Funds earlier commissioned a report from PwC, since submitted to the government, detailing potential new investment classes for the OFEs. The Polish government has stepped in to deny press reports that the government planned to merge the 12 second-pillar pension funds (OFEs) into one entity.Yesterday, Marcin Zieleniecki, deputy minister of family, labour and social policy, told the Polish Press Agency (PAP) the concept had not been discussed, even in the loosest of terms.According to the merger story, published in the Polish daily Rzeczpospolita on 27 May, unnamed government sources stated that the new fund would be under the control of the State Treasury and run by either PZU, the Polish insurance and financial group in which the Treasury holds a 34.2% stake, or the state-owned bank BGK.The article, which cited efficiencies as the primary rationale, was widely disseminated by the Polish press, with the speculation intensified by the fact the government has, by law, to conduct a three-year review of the pension system in 2016.
Defined contribution (DC) pension schemes are “coming of age” in the UK, despite evidence that defined benefit (DB) pension schemes still represent a major burden for the country’s largest companies.Investment consulting firm Willis Towers Watson (WTW) published a report his morning claiming that DC schemes have become the “new normal”.The report, which focused on the provision of DC pensions by FTSE 350 companies, found that 98% of new employees at companies in the index join DC schemes.In contrast, DB pension scheme deficits at FTSE 350 companies were £191bn (€222bn) at the end of last year, according to JLT Employee Benefits. This is more than twice the level at the end of 2015. Funding also dropped between 2015 and 2016, from 88% to 78%. Deficits are susceptible to volatility in UK gilts, but have been generally growing as liabilities have grown faster than assets in recent years. Companies discount liabilities on the basis of high-grade corporate bonds.Although it is difficult to estimate the aggregate level of yearly contributions to DB schemes, WTW suggested that the UK’s largest companies may be paying twice as much to reduce DB deficits, compared to the amount they contribute to fund DC schemes.This was despite the sharp decline in the share of companies still offering DB schemes to new or existing employees, as well as the planned increases in statutory DC contribution rates under auto-enrolment legislation.The WTW report found that 54% of FTSE 100 companies still offer DB pensions to existing employees, down from 84% in 2009. Only 27% of FTSE 250 employers are keeping DB schemes open to existing employees. As much as 37% of FTSE 100 companies have closed DB schemes to new accrual, while 42% FTSE 250 companies have done so. Median annual contributions to DC schemes at FTSE 100 companies were £18m in 2016, increasing almost four times over since 2009. The corresponding figure for FTSE 250 companies is £6m, compared to £2m two years ago.Median DC plan assets at FTSE 100 companies were £201m at the end of last year, showing a large increase from £92m at the end of 2015. This was partly explained by the appreciation of non-sterling assets due to the decline of sterling. Median DC plan assets grew from £35m at the end of 2015 to £75m at the end of last year.Richard Sweetman, senior consultant at Willis Towers Watson, said: “While the ongoing cost of DB will remain a major issue for employers, this survey provides hard evidence of the speed with which DC provision is establishing a dominant role in the UK pensions landscape.”However, other recent surveys suggested that UK corporates were struggling to meet the requirement commitment to develop DC pensions, as they weigh important decisions on how to fund DB deficits.JLT recently said that dealing with legacy defined benefit (DB) pension schemes represented a “drag” on developing adequate DC offerings.Consultancy firm Hymans Robertson found that only 9 out of 100 UK trustees focused on the true cash flow position of their schemes, while funding gaps remained the main concern.The UK government last week launched a green paper on how to ease the burden of DB schemes on employers, setting the scene for reforming the provision of DB pensions.The WTW study highlighted that, although FTSE 350 companies are generally happy with their commitment to DC pensions, there is increasing attention on improving DC offerings.Sweetman said: “We also see an appetite to look at ways of making arrangements work better, particularly in identifying the best vehicle for delivering DC (as seen in the emergence of master trusts), restructuring contributions to allow wider savings options, improving investment strategies, and introducing enhanced member information and support around adequacy and retirement options.”
More capital has been raised internationally for renewable energy assets than for “conventional” energy investments this year, according to research into unlisted natural resources funds by Preqin.It is first time that the bulk of money flowing into these funds has been directed towards green power sources, the data firm said.Between the beginning of this year and 10 April, unlisted natural resources investment funds raised a total of $5bn (€4.4bn) of capital for renewable energy purposes, while just $2bn was raised for conventional energy, Preqin’s latest Conventional and Renewable Energy Report showed.It said this trend looked set to continue, as there were currently more renewable energy-focused vehicles seeking investor capital, and they were targeting a higher aggregate amount of money, than conventional energy funds. Preqin said there were currently 73 renewables-focused funds in the market targeting a combined $35bn, compared to 52 funds targeting $29bn to deploy in conventional energy.“This may prompt more funds to take a mixed approach, investing in both renewable and conventional energy,” the data firm said, adding that this was the strategy adopted by Global Infrastructure Partners III and Brookfield Infrastructure Fund III, which were the largest infrastructure funds ever raised.Fundraising for renewables funds was relatively constant over the past two years: $13.8bn was raised in 2015, and $12.6bn in 2016. In contrast, conventional fundraising between the last two full years of reporting, 2015 and 2016 at and respectively, but fundraising for conventional energy funds fell significantly over the same period to $22.3bn in 2016, from $38.1bn in 2015.However, Preqin said it was unlikely that this development marked a sharp shift between the strategies. More than half (52%) of investors in conventional energy also have a preference for renewables, Preqin said. In addition, 58% of renewables investors also targeted oil assets, while 61% also targeted natural gas investments.Tom Carr, head of real assets products at Preqin, said: “Public pressure and governmental policy to address climate change has placed constraints on the fossil fuel industry, while the US shale oil boom has depressed oil prices in the mid-term. At the same time, technological breakthroughs have reduced the cost-per-unit of renewable energy sources, making them more attractive to investors.”Both approaches are set to remain important influences on the energy market, Carr said, but he added that “the outsized dominance of conventional energy may not be as evident going forward”.
Pension fund consultants have been standing in the way of greater adoption of impact investment by their clients, it was argued at a conference yesterday.Katherine Garrett-Cox, member of the supervisory board at Deutsche Bank and former chief executive and chief investment officer of Alliance Trust, said pension fund consultants were “a roadblock that needs to be broken down”.She later said not all consultants were “dreadful” and there were “some enlightened ones”.David Scott, chairman at Tribe Impact Capital, an impact-focused wealth manager, argued that trustees needed to take more responsibility and challenge consultants. Fiduciary duty was about the financial return and societal impact of investments, he added. In the past impact investing was seen as a trade-off between achieving positive non-financial outcomes at the expense of financial performance. Many in the field now argue it can encompass market-rate returns.Sapna Shah, director of strategy at the Global Impact Investing Network (GIIN), said it was important to be able to present convincing data demonstrating financial performance in certain impact products. It would also be helpful to clarify where on the spectrum of impact investing these products lie, she said.Garrett-Cox said longer track records for impact investing vehicles would also help, and recommended that investment managers compare their performance against mainstream benchmarks to attract consultants’ attention.It wasn’t only about the role of consultants, however: language was also seen as a barrier.Garrett-Cox said: “We’ve had one panel, one conversation and I’ve heard multiple phrases – ESG, impact investing, SRI – and I think part of the problem around the demand side is that it’s very confusing what you’re actually saying when you talk about this.”Ultimately it was about “good long-term investment management”, she added.Gavin Wilson, CEO at IFC Asset Management Company, said the current regulatory framework, designed to promote financial stability, was impeding the flow of capital to developing countries and hampering the achievement of the UN Sustainable Development Goals (SDGs).“We have narrow regulations in the insurance, pension fund, and banking industries that impede broader global objectives,” he said.
France’s Fonds de Réserve pour les Retraites (FRR) is looking to return to active equity investing in US small caps after pulling out of the sector a few years ago.The €34bn fund has launched a €2.3bn multi-part tender to renew growth and value style large and mid-cap mandates, but has also decided to include a search for US small-cap equity managers.According to Anne-Marie Jourdan, chief legal officer and head of public relations at FRR, the fund stopped investing in US small cap stocks around 2010, due to poor performance.The value and growth mandates that are up for grabs are for €900m each, while FRR also wants to allocate €500m to small-cap stocks. In each case, Jourdan said, FRR has stated stronger requirements related to environmental, social and corporate governance (ESG) considerations.According to FRR, applicants must take ESG aspects into account in their management processes, in particular by incorporating the fund’s exclusions policy – covering weapons, tobacco and coal – and voting and engagement policy. Applicants must also produce quantitative and qualitative reports illustrating the actions they have taken in this area.For the growth style mandate the benchmark will be similar to the Russell 1000 Growth index. For the value mandate FRR will measure managers’ performance against an benchmark similar to the Russell 1000 Value index.Each of the mandates will run for four years with the possibility of being renewed once for a further year.The deadline for the application is 10 August.Multi-asset fund manager wanted for tobacconists’ schemeSeparately, the French pension scheme for tobacconists is looking to appoint a multi-asset manager for its €474m portfolio.Caisse de Dépôts et Consignation, which is the delegated manager of the scheme and carrying out the tender, has specified that the asset management must be “active and flexible”. The contract is for five years.RAVGDT is the mandatory pension scheme for those who run “tabac” shops in France. Advertising themselves with a distinctive elongated diamond sign, les tabacs are licensed to sell tobacco products but also sell newspapers, stamps and other small items.Financed on a pay-as-you-go basis, the scheme also holds reserves, comprising a securities portfolio of €474m as at the end of May.