The €6.6bn pension fund PostNL has reported a 5.3% return on its investments over the second quarter.As a result, its coverage ratio improved by 0.8 percentage points to 113.4%.Following a drop in interest rates, the scheme’s interest hedge – through swaptions – contributed 1.7 percentage points to its quarterly result.Its 61.1% fixed income allocation delivered a quarterly return of 2.9%, also due to falling interest rates, according to PostNL. The pension fund reported a 7% return on equity, with holdings in emerging markets performing well.Developed country equities and call options also made positive contributions, the scheme said.Property generated 5.1% due to positive results on listed real estate, as well as European non-listed property.Commodities were the main driver behind the 2.1% quarterly result on alternatives.Over the first six months of the year, PostNL’s equity investments returned 8.7%, while its fixed income and property holdings produced 5.2% and 7.4%, respectively.Elsewhere, workers and employers in the care insurance sector agreed on compensation for the reduction of annual tax-friendly pensions accrual from 2.15% to 1.875% of salary.Part of the deal is a reduction of the contribution from 20.7% to 19.9%, as well as a 1.8% salary increase.The franchise – the part of the salary exempt from pension accrual – will also be lowered from €15,225 to €13,725, while the surviving relative’s pension will be raised from 65% to 70% of the achievable pension.In addition, instead of financing unconditional indexation, the employers agreed to establish a separate indexation fund to be topped up by the sponsors with an annual amount of 2.85% of combined salaries.
Department for Work & Pensions (DWP) research has shown awareness of auto-enrolment among the UK population is increasing, as the programme’s rollout continues.Statistics from the government said 78% of those surveyed believed employers being compelled by law to provide pensions was a positive step.The research also found around 50% of those surveyed said saving into a workplace pension was a “normal thing to do”, in a boost to the government’s policy.Some 30% of those of working age have taken action as a result of the government’s advertising campaign for auto-enrolment, with around 25% having discussed second-pillar savings in a social environment. The news comes as the government announced 4m people had now been auto-enrolled into a workplace pension scheme since the programme began in October 2012.Pensions minister Steve Webb said: “Increasingly, people are waking up to the fact it pays to think about the future and consider the kind of retirement we want.“But we still have a mountain to climb. Recent DWP research found that close to half of working-age people are failing to save enough to maintain their standard of living into old age, so there is more to do.”In other news, the DWP’s charge cap, aimed at protecting members being auto-enrolled into default investment strategies, has come under fire from one of the UK’s largest insurance mutuals.Royal London Group (RLG) has told its shareholders the government grossly underestimated the impact estimates on pension companies.The cap, which comes into force in April 2015, stops member-borne charges in DC auto-enrolment default investment funds being above 75 basis points.The government estimates that, at the time of legislating, said industry revenue would be reduced by £200m (€250m) over a 10-year period.Chief executive of RLG, Phil Loney, said the policy would have the opposite consequence to its intention.“This government intervention will only distort a market that was already moving in favour of lower charges,” he said.He said the impact at his own firm, plus other impact provisions from other pension providers, showed the DWP’s estimates to be incorrect.Royal London said the £200m estimate could realistically increase to as high as £1bn.“This seems to me to be an unacceptable margin for error in the government’s understanding of the impact of its actions and the size of the impact,” Loney said.Despite the estimated £200m hit on the entire industry, insurers Standard Life and Scottish Widows have each already stated individual provisions of £160m and £100m, respectively.
According to the government’s adviser, the costs of a new system – estimated at approximately €100bn – would be considerable but not exceed the costs of abolishing early retirement arrangements (VPL).It would also be much less than the effects of underfunding on indexation.However, the CPB noted that ditching the average approach would in particular hit the generations born between 1960 and 1980, as they have been paying more than their share over an extended long period.It suggested the transition could in part be financed from the contribution, as abolishing the average accrual would free up assets, adding that a combination with less indexation and/or a funding reduction would also be possible.The adviser pointed out that the transition costs would have to be offset against the advantages of reduced redistribution, fewer barriers for labour mobility as well as lower contributions for the long term, as premiums would generate returns for longer.The CPB also looked at an average accrual with a progressive premium.However, it concluded that, given the current labour market conditions, this would damage the position of older workers, as employers pay most of the pensions contribution.The Bureau for Economic Policy Analysis also cited as alternatives a higher or more certain indexation combined with a lower initial accrual, as well as a system with individual accounts, with accrued assets equating paid and invested premiums plus their returns. Abolishing the disputed average pension contribution and accrual would improve the effectiveness of the Dutch pension system as well as its suitability for the changing labour market, the Dutch Bureau for Economic Policy Analysis (CPB) has argued. In its annual macro-economic analysis (MEV), it said removing the current redistribution of pensions accrual would serve a sustainable pensions system.The average premium and accrual is a hot issue in the Netherlands, as younger generations pay proportionally more for their pensions than older generations but are unlikely to reap the benefits later due to increased mobility in the labour market.The CPB said a “degressive” pensions accrual – with an average premium but with an accrual that decreases with increasing age – would be an alternative.
IPE’s Martin Steward wonders whether a habit of thought is developing that fails to recognise ‘stranded’ portfolio carbon assets as a risk and starts to regard them as a certaintyThere was a lot of talk about ‘de-carbonising’ investment portfolios through programmes of divestment, off the back of the recent UN Climate Summit.Sweden’s AP4 announced that it was leading the Portfolio Decarbonisation Coalition (PDC), with the aim of shrinking the carbon footprint of $100bn (€78bn) of institutional investment worldwide. PFZW committed to reducing the carbon footprint of its entire portfolio by 50%, based on data from Sustainalytics, MSCI, South Pole and Trucost. A growing number of investors, including CalPERS, the London Pensions Fund Authority (LPFA), VicSuper and ERAFP are taking steps to measure the carbon footprint of their investments. MSCI recently added Global Fossil Fuels Exclusion indices to its existing roster of low-carbon benchmarks.Are they doing this because it is the right thing to do? No: they are doing it, the argument goes, because it represents the prudent risk management that any financial fiduciary should practice. The logic tends to be expressed as follows. Carbon emissions, largely as a result of the use of fossil fuels, are behind the dangerous rising temperatures in the global climate. It is simply not possible for carbon to be emitted at the current rate and for life to persist as it is. Notwithstanding current debates, that means there is no option but to cut carbon emissions – either via regulation and legislation to make emissions prohibitively expensive, or simply by a free market re-pricing to reflect the true cost of those emissions. It is imperative investors start to think about the risk of that re-pricing to the inherent value of the companies whose stock they hold in their portfolios. I think this logic is unimpeachable. But I worry that a habit of thought is developing that fails to recognise this as a risk and starts to regard it as a certainty. Listen to the debate, and it often seems there are certain sectors, businesses and manufacturing processes for which emitting a lot of carbon is essential.But that simply isn’t the case. Certain enterprises require a lot of energy, and, given our current energy mix, that does mean a lot of emissions and a big carbon footprint. But change the energy mix, and those businesses can continue, as they were, unabated. Losing exposure to them represents a potentially huge downside risk should their energy mix change.That’s the point, argues the fossil fuel-divestment lobby. Vote with your investment euros today, and you incentivise that change in energy mix tomorrow, and contribute to making the companies in question more sustainable.But that doesn’t make any sense in risk-management terms. Removing your money protects you from the risk that the company doesn’t change and goes out of business. But it leaves you exposed to the risk that the company does change – because when that change happens, it will be priced-in by the discounting mechanism that is the market, and you will be left on the outside looking in. You’ve just replaced one risk with another, so you need to have a clear idea of which risk you believe is the greater, in terms of both probability and impact on your portfolio.But even then we would be assuming the energy mix has to change. This is the thinking behind the idea that fossil-fuel extraction companies are massive owners of ‘stranded assets’ – oil and coal deposits that will stay underground because it is simply not feasible to burn them for energy above ground. But there are potentially lots of ways material can be utilised above ground without burning it and emitting carbon.Even before we start to speculate about technologies that could enable us to generate energy from fossil fuel without emitting carbon into the atmosphere, there are a whole range of industrial uses – in chemicals, plastics and fertilisers – that do not emit carbon. The term ‘fossil fuels’ obscures this non-energy and power aspect of what oil and gas companies pull out of the earth.Admittedly, the market does not currently appear to be pricing these eventualities into oil and gas stocks. Today’s prices have more to do with damaging subsidies we could all do without. But the risk-management question is, ‘How will I know when present values have stopped pricing-in these unsustainable cash flows and started pricing-in sustainable cash flows?’ Until you know the answer, you cannot manage the ‘stranded asset’ risk – a risk, not a certainty – by divesting.I’m no expert in any of this. You’d need, say, a professor of energy engineering for that. Enter Paul Younger, who occupies the Rankine chair of engineering at Glasgow University. He recently made it known that he was “utterly dismayed by, and vehemently opposed to, the decision of our University Court to divest from fossil fuels”, which he called “collective intellectual dishonesty” because it ignored the submission of the School of Engineering (adopted as the position of the entire College of Science and Engineering) on this investment question.The School of Engineering observed that there are no viable alternatives to fossil fuels yet available at scale, and that divestment would make it difficult for the academic sector to engage with the industry to achieve that objective. Such engagement is essential, it said, because the skills and facilities of the fossil fuels industry are indispensable to the development of carbon capture and storage, which the IPCC has cited as a necessity for the attainment of decarbonisation targets. And in any case, it added, fossil fuels are essential in food production, pharmaceuticals, chemicals and plastics that do not emit carbon.For good measure, Younger decried the “dishonesty” and “gesture politics” that saw the university divest from fossil fuel companies at the same time as it is planning a new gas-fired combined heat and power system.Many pension funds do recognise these risks behind the ‘de-carbonising’ rhetoric. APG, for example, has chosen to double its investments in sustainable energy over the next three years rather than divest from fossil fuel industries. A spokesperson starkly dismissed the ‘stranded assets’ argument with the simple observation that “oil and coal will still be needed for a long time”.But this approach makes sense in a lot of other ways, too. While the clean-energy play might expose APG to the risk of fossil fuel energy production becoming much cleaner, the fund mitigates that risk by staying exposed to fossil fuel companies while also investing in technology that would be valuable in its own right, and not just as an alternative to fossil fuels.The last time I checked, this sort of thing – ‘diversification’ – was the essence of portfolio risk management. The avoidance of hypocrisy is merely an added bonus.
The CHF33.1bn (€27bn) Swiss first pillar fund AHV has returned 7.1% for 2014, but admitted that its 2015 year-to-date performance was dampened by recent Swiss National Bank (SNB) actions. According to a presentation held in Zurich today, the selective currency hedging strategy as part of a currency overlay in place since 2002 has saved the AHV and its subfunds for invalidity as well as military service compensation from losing 3.54% of its assets in January – after the SNB cut the peg to the euro, wiping an estimated CHF30bn off pension savings. On the other hand, the unhedged part of the portfolio suffered a 1.5% drop in return in January bringing the overall performance for the month down to -0.5%.Marco Netzer, president of the AHV noted the fund’s hedging strategy helped “contain losses despite the large share of foreign investments in our broadly diversified investment portfolio”. If unhedged, the AHV would see 27% of its currency risk stem from investments in US dollars, 12% from euro holdings, 3% from British pound and another 12% from other currencies.After hedging into Swiss francs, its currency exposure fell to to 6% for dollars, euro and other currencies, respectively, and stood at 1% for the British pound.However, the AHV, which is also known as Compenswiss, pointed out the “future challenges are less linked to the currency market than to the impact of negative interest rates on institutional asset management in Switzerland and other countries”.While the AHV is exempt from the negative interest collected by the SNB on accounts banks, it can still be affected by negative rates introduced by custodians such State Street or BNY Mellon due to its euro-denominated deposits.But in its presentation the first pillar fund pointed out currently 75% of its assets were managed in Switzerland or by Swiss-based asset managers.Given the nature of the fund’s cashflow it has a high share of cash – which is not included in the return calculations – of monthly income and outflows of CHF4.5bn amounting to 15% of total assets.Read how FX hedging impacted performance at other Swiss funds
AQR said the returns from corporate bonds were driven by changes in the risk-free rate and the spread over the risk-free rate.To isolate the component of returns attributed to credit risk one must remove the effect of interest rates by subtracting the returns of a risk-free instrument from a corporate bond return, while matching duration.AQR said previous research isolating credit risk-premium assumed matching duration, but risk-free bonds were generally longer and carried more term premium thus have a higher risk-adjusted retrun than shorter bonds. (see diagram)Scott Richardson, managing director at AQR, said the average duration was around seven years for a corporate bond but 12 for risk-free sovereign bonds.This meant estimates of the credit-risk premia were underestimated.”If you are subtracting the longer-dated government bond, you are subtracting too much of a return from the corporate bond return. And that simple difference pushes down the estimate of the excess credit return,” he said.“People have effectively over-hedged the corporate bond return; the consequence being that given a positive term premium you are pushing down the estimate of the credit risk premium.” The credit risk-premium generally identified in corporate bonds has been underestimated with research definitively showing its existence and that it acts as diversifier in equity and sovereign bond portfolios.A time-series analysis research paper from AQR Capital Management showed the excess return of corporate bonds over sovereign bonds had been wrongly accounted for, meaning the risk premium associated with credit risk was not correctly identified.The paper ’Credit Risk Premium: Its Existence and Implications for Asset Allocation’ also said credit risk premium does exist and would diversify a 60/40 equity and sovereign bond portfolio over the long term.The research, carried out by Attakrit Asvanunt and Scott Richardson from AQR using data from 1926 to 2014, showed term-risk was wrongly identified as equal in previous studies meaning the actual return allocated to credit risk was underestimated. Source: AQR Capital ManagementGraphic to show over-estimation of credit risk-premiaThe paper also found the average monthly credit-risk return was 21 basis points using data from August 1988 to December 2014.However, the pair also looked at whether exposure to credit risk was beneficial in a portfolio sense, or if the premia was equity risk-premia in disguise.It tested three portfolios, over different time sets, with different weightings to risk-free government bonds, equities and corporate bondsA long-only portfolio between 1988 and 2014 weighted 73%, 15% and 12% respectively gave an optimal risk and return profile, while on a longer 1936 to 2014 scale the weightings was 35%, 17% and 48%.Collectively, the results showed there was a risk-premia to be had from exposure to credit risk which is sufficiently different to equity risk-premia, the paper said.However, Richardson stressed these were tactical allocation considerations, as different periods of time and economic cycles would yield different results.He said the finding the existence of credit risk-premia was obvious, but finding the existence of positive risk-adjusted returns for credit was unique.“You can only uncover the result with careful attention to measurement.”Earlier this year, AQR teamed up with the London Business School to jointly launched the AQR Institute of Asset Management, forming a 10-year collaboration to fund and generate research across a range of disciplines.This article, originally published on 13 April, has been updated to correct a misunderstanding by the author,WebsitesWe are not responsible for the content of external sitesCredit Risk Premium: Its Existence and Implications for Asset Allocation #*#*Show Fullscreen*#*#
Further alternatives strategies and basic assumptions were also updated from the BVG 2005 index group.Based on these older indices, Swiss Pensionskassen portfolios would have returned between 1.2% and 0.6% last year.Irrespective of which index a pension fund benchmarked its asset allocation against, returns are most likely to be below 1% for 2015.In mid-December 2015, the consultancies Aon Hewitt and Libera AG issued an updated version of technical parameters to be applied by Pensionskassen when calculating longevity risks.The calculations for the update to the 2010 parameters were based on data provided by 15 large independent Pensionskassen.They showed that life expectancy for 65-year-old men had increased by 0.8 years since 2010 to just under 20 years, and by 0.5 years for women of the same age to almost 22 years.The consultancies have also updated the assumptions for Pensionskassen applying generation tables to calculate longevity risks.The latter predict an even higher increase in longevity, especially for generations already in retirement or shortly before retirement – particularly for men. Swiss pension fund portfolios using Pictet’s BVG 2015 benchmark index returned between 0.11% and 0.48% over the course of 2015, according to the Swiss bank’s estimates.The higher returns were achieved by the portfolios with a lower equity exposure of 25%, while those with a high allocation of 60% fared worse.In 2015, Pictet – which has been calculating benchmark indices for Swiss Pensionskassen since the implementation of the mandatory system in 1985 – updated its index family for the second-pillar BVG, named after the law governing it.The new index group for equity exposures of 25%, 40% and 60% introduced a more differentiated view on fixed income portfolios, including, for example, emerging market debt as a separate sub-asset class.
Forward, Unilever’s new collective defined contribution (CDC) pension fund, has reported a 20.5% loss for the last nine months due to rising interest rates and falling equity markets.In its annual report, Forward’s board said the scheme recorded a loss on its 35% interest hedge of more than 17 percentage points, after long-term interest rates began to climb over the second quarter.At the same time, equity markets entered a period of decline, hitting returns by another 3 percentage points.In terms of funding, however, the scheme, launched in April 2015, remains in good shape, reporting a coverage of 137% as of the end of September. At launch, Unilever contributed €15m to the scheme as starting capital and paid an equal amount for indexation for active participants.The latter allowed Forward to grant workers full salary indexation of 2.15% while paying pensioners 0.44% inflation compensation based on the consumer index.At year-end, the scheme’s assets amounted to €63m, against €38m of liabilities.Forward’s board warned that both its assets and liabilities were set to grow substantially in the coming years, reducing the positive impact of the starting capital on its funding ratio.The pension fund’s investment policy is based on a 60% return portfolio and a 40% matching portfolio, with an interest hedge ranging between 30% and 50%.The board said the scheme needed to generate returns of at least 5.5% over the long term to achieve its indexation target.It pointed out, however, that part of the required return had already been factored into the valuation of its liabilities, currently based on a relatively low interest rate.“As a consequence,” the board said, “as long as the interest level remains low, a return of between 1% and 1.7% will suffice for indexation.”Forward and Progress – Unilever’s defined benefit fund, closed in April last year – share the same investment philosophy, but, owing to the former’s smaller size, as well as its members’ objectives, their asset allocation differs.In November’s How We Run Our Money, chief executive Rob Kaal says Forward’s portfolio has greater potential on the risk/return side.On the one hand, he says, its smaller size means it cannot take advantage of all the asset classes available to larger investors, such as Progress.“But the required return is slightly higher because of the different member population,” he adds. “In Forward, downside protection is particularly important because participants bear the risk, and there is no employer protection in place.”Since Unilever closed Progress, all new pensions accrual has gone to Forward.The company is awaiting a licence for its general pension fund (APF), which is to accommodate both schemes.With this arrangement, Unilever hopes to simplify governance and achieve the benefits of scale.How We Run Our Money: Unilever Dutch pension funds
The pension fund for the Netherlands’ three Caribbean municipalities is facing considerable rights cuts due to adopting a different set of rules to other Dutch schemes.Harald Linkels, chairman of PCN, told IPE that the €300m pension fund had incurred a €66.5m funding gap, citing “wrong assumptions” for its capitalisation when it was established in 2010.Since then, PCN has been instructed to follow stricter Dutch rules, meaning its funding has dropped to 80% from 117% before the change, Linkels told IPE. It means the pension fund has to cut pension rights by 3.5% in April, and members face an additional cut of 12% next year.According to Linkels, neither the Dutch Ministry of Social Affairs nor the Home Department – which oversees relations with the Dutch territories – wanted to take responsibility for the funding gap. PCN has issued a summons against the state, claiming $70m (€66.2m) in damages. Supervisor DNB and both ministries did not respond to requests for comment.Linkels argued that it was unfair that his scheme had to apply cuts straight away, whereas the financial assessment framework (nFTK) in the Netherlands allows schemes to spread any cuts over a 10-year period.However, a different FTK for the pension funds covering the Dutch territories of Bonaire, Sint Eustatius, and Saba provides for a recovery period of just three years to reach to the minimum required funding ratio of 100%.Linkels attributed the problem to the fact that the pension fund, at its inception, had to adopt a fixed discount rate of 4% as well as Dutch longevity prognoses for the period 2000-2005. At the time this meant the fund had a coverage ratio of 117%.The start of the pension fund was supervised by Henk Kamp – a former minister for Social Affairs – who, at the time, was tasked with establishing the new overseas Dutch councils, following an adjustment of the state structure.Linkels said that soon after the pension fund’s inception, Dutch supervisor DNB told the scheme to use the US dollar swap curve for discounting its liabilities instead of the swap curve for the euro, as the new councils had adopted the dollar.He pointed out that, as the dollar swap curve had dropped from 3.5% to 2% in the meantime, and DNB had also prescribed the application of the most recent Dutch longevity tables, funding of PCN had plummeted.The chairman emphasised that between 2011 and 2015, returns of the Caribbean scheme had exceeded those of the €382bn Dutch civil service scheme ABP, the Netherlands’ largest pension fund.With national elections next week, PCN’s chairman said he didn’t expect a solution to stave off rights cuts next month.“Negotiations are slow and are usually limited to verbal orientations of possible solutions, without any concrete commitments being made,” he said.
A pension fund based in Belgium and a Scandinavian insurance company are each looking for infrastructure managers via IPE Quest’s Discovery service.According to Discovery search DS-2373, the pension fund wants to invest via an unlisted pooled fund, with an allocation that could be for between €10-15m.The mandate would be for infrastructure equity only.The pension fund is targeting returns of between 7.5% and 10%. It has some flexibility as to the geographic spread of investments. It specified that the mandate would be pan-European, but indicated it would accept OECD countries as the asset region if the main focus were on Europe (more than 50%).Interested parties should have a track record of at least five years and register their interest by 13 November.Meanwhile, the Scandinavia-based insurance company is looking to allocate up to €200m to infrastructure in global developed markets, via a pooled fund.It anticipates placing a mandate in March next year.The closing dead for the insurer’s DS-2371 search is 7 November.The IPE Real Assets news team is unable to answer any further questions about IPE Quest, Discovery, or Innovation 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 3465 9330 or email [email protected]