AP2 has divested 20 coal and tar sand companies due to concerns that many of its extraction projects will be unprofitable.Publishing its annual assessment of its corporate governance practices, the Swedish buffer fund also said it would be conducting an independent audit of its farmland holdings in Brazil to ensure it was in compliance with its obligations under the Principles for Responsible Investment (PRI), following criticism of how it can conducted itself.Chief executive Eva Halvarsson said the fund had been criticised by NGO Swedwatch, which monitors Swedish business activities in emerging markets, for not disclosing the precise locations of its Brazilian holdings.“We have taken this criticism to heart and have subsequently worked actively on improving transparency,” Halvarsson said. She added that AP2 would be working with an external auditor how it had been applying the Principles for Responsible Investment in Farmland.At the end of June, 1.2% of its SEK280bn (€30.4bn) was invested in agricultural land, partially through the TIAA-CREF Global Agriculture that has also attracted interest from a number of large Canadian institutional investors.It previously confirmed that it would grow its capital commitment to the joint venture by $750m (€549m). In the fund’s annual corporate governance report, Halvarsson also said that AP2 had completed a year-long study of the risks associated with its energy company holdings, resulting in the sale of 20 holdings.The divestment from the 12 coal and eight oil and gas companies, worth SEK840m in total, was seen as necessary due to the risk of exposure to stranded assets.Halvarsson said: “We have identified several energy companies that feature high relative exposure in high-cost projects such as oil-extraction from oil [tar] sands.“The fund believes such assets could be at serious risk of being stranded, and that this risk not yet is priced in the market.”However, the report argued that fossil energy remained a “vital commodity in contemporary society”, despite a shift towards a low-carbon economy.The shift has seen AP4 pledge to refocus its entire equity portfolio to low-carbon investments.The fourth buffer fund in September announced it was a founding member of the Portfolio Decarbonization Coalition, alongside asset manager Amundi which worked to develop a new low-carbon index.Are investors beginning to see stranded assets as a certainty, rather than a further risk worth considering?,WebsitesWe are not responsible for the content of external sitesLink to 2014 Corporate Governance report by AP2
Low interest rates will pose major challenges for Finland’s State Pension Fund (VER), which achieved quarterly returns of 7.4% despite its sizeable fixed income portfolio returning only 1.8%.The €18.7bn scheme, used to pre-fund state pension liabilities, saw performance boosted by the 16.7% returns from equities, which it credited to the European Central Bank’s more aggressive monetary policy and a weakening euro over first three months of the year.Acting managing director Maarit Säynevirta said the equity return was “excellent”.“Both in equities and fixed-income instruments, the positive market developments were boosted by the reflationary monetary policies adopted by the central banks,” she said. “In the future, the low general interest rates will pose major challenges in terms of investment returns.”Nevertheless, VER said returns on fixed income holdings, which account for half its assets, were higher than expected, at 1.8%.“In absolute terms, the best returns were earned on emerging market debt, which benefited from the sustained flow of investments to riskier asset classes,” the fund said.Alternatives, and its portfolio of ‘other’ investments including absolute return funds, fared less well, returning 0.8% and 0.9%, respectively.The board of VER also announced that Timo Viherkenttä had been named managing director, taking over responsibilities from Säynevirta in June.Viherkenttä, a lawyer by training, spent eight years at local authority pension provider Keva as deputy chief executive, but left in 2010.Prior to this, he spent four years as budget director at the Ministry of Finance, and more recently returned to the ministry, where he was permanent under-secretary responsible for tax policy.He has also served as chairman of the board of directors at the Finnish National Gallery, has taught law at the University of Helsinki and is a member of the Supreme Administrative Court.The position of managing director became vacant after Timo Löyttyniemi moved to Brussels after being named vice-chair of the new Single Resolution Board for euro-zone banks.Säynevirta will return to her current role as head of alternatives.
The Unilever scheme saw its nominal funding drop by 15 percentage points to 126%, while its official policy coverage fell by 3 percentage points.It said the latter, however, still stood at 136% as of the end of September.According to Kragten, the pension fund lost more than 9% on equities and incurred a “significant loss” on its commodity holdings.Progress had a 42.2% allocation to equities and a 5% allocation to commodities as of the end of 2014, but it has scaled back its exposure to securities since then in a bid to reduce risk after the scheme closed to new entrants last April.Kragten said Progress made a modest return on fixed income over Q3 while also generating positive results on private equity.In other news, the €19.5bn Pensioenfonds Vervoer reported a quarterly loss of -1.1%, leading to a year to date loss of 2.2%.The scheme for public road transport attributed the 7.5% increase in liabilities over the period chiefly to a 28-basis-point drop in its discount rate to 1.77%.It added that its nominal funding fell by 9 percentage points to 99.3% and attributed nearly half of this decrease to the lower UFR.The pension fund conceded it was unlikely to grant indexation in the coming years.Vervoer reported a 9.8% loss on its 28.5% equity allocation, while real estate and infrastructure generated losses of 0.5% loss and 0.7%. The scheme’s 67.3% fixed income allocated returned 0.3% over the same period.Meanwhile, the €7.3bn Pensioenfonds PostNL reported a quarterly loss of 1.9%, due largely to an 11.4% loss on equities.The pension fund lost 3.7% on its remaining commodity stake before it fully divested its holdings in July.Fixed income and real estate delivered positive returns of 0.3% and 3%, respectively.The Pensioenfonds PostNL closed the third quarter with a nominal funding of 104.2% and a policy coverage of 107.7%. Progress, the €4.7bn Dutch pension fund of Unilever, lost 6.5% on investments over the third quarter due to falling interest rates and declining equity markets. The pension fund also cited the impact of the new ultimate forward (UFR) rate for discounting liabilities, which was lowered this summer.Rob Kragten, the scheme’s director, said he could not yet specify the exact cause of the “disappointing” third-quarter performance, which brought the scheme’s overall loss year to date to 5%.“We experienced headwinds in almost every asset classes,” he said.
A Dutch court has ruled that raising the retirement age for the state pension could be considered a breach of the European Convention on Human Rights.The plaintiff in the case – a 60-year-old woman from the Frisian town of Joure – had argued that moving the start date of her Dutch state pension (AOW) two years further into the future, to early 2023, had caused her an “individual and excessive burden”.She argued that she had very little work experience and suffered from “several progressive chronic illnesses” that hurt her chances in the job market.She said low income prevented her from saving up or otherwise preparing herself for the longer-than-expected period without a state pension. During the added 24 months, she has the right to a bridge pension of no more than €500-600.The woman said she may have to sell off her house and live of the proceeds, before being allowed further income support.According to the Dutch administrative court of first instance in Leeuwarden, this would constitute a breach of Article 1 of the first protocol of European Convention on Human Rights, which guarantees the right to the peaceful enjoyment of one’s possessions.Exceptions to this rule are allowed in the public interest, but then the measure has to be proportional, which is not the case if a citizen must carry an “individual and excessive burden”, the court ruled.The Sociale Verzekeringsbank, the Dutch administrator for state pensions, had argued that the promise of a state pension was not a “possession” as defined in the European Convention.The court ruled, however, that a pension claim a person could reasonably expect to be honoured should also be considered a possession.The Sociale Verzekeringsbank said it would appeal the decision.In the meantime, the institution said it planned to assess the number of people who might find themselves in situations similar to that of the plaintiff.The retirement age for the state pension in the Netherlands will be raised incrementally to 66 in 2018 and 67 in 2021.
PFZW and ABP saw their official policy coverage ratio – the 12-month average of the topical funding, used as the criterion for granting indexation and administering rights cuts – drop to 97% and 98.7%, respectively, at year-end.However, the dramatic decline seen across equity markets since mid-January has yet to be factored into the coverage ratios.At the time, the consultancies Mercer and Aon Hewitt concluded that the market decline would reduce average Dutch coverage ratios by approximately 4 percentage points.“Were the topical funding to stand at 87% at the end of this year, we would have to start discounting pension rights straightaway,” said Borgdorff.He added that PFZW’s recovery plan was aimed at meeting the required funding level of 126.6% in ten years’ time, and that the mapped out improvement was based on the maximum allowed assumptions for returns, equating to an annual result of 6%.“However, [from] a funding of 87%, we won’t be able to meet our target,” he noted. PFZW fell well short of the 6% target in 2015, only achieving an overall return of -0.1%.The announcement of possible rights cuts next year came as a surprise, as it had been widely expected within the pensions sector that discounts would not be on the cards soon.In order to prevent shocks, the new financial assessment framework (nFTK) allowed the postponing cuts for five years, in case pension funds’ coverage fell short of the required minimum funding of 105%.With 98.5% and 97.7% respectively at year-end, the policy funding of the large metal sector funds PMT and PME stood at a similar level as ABP’s and PFZW’s coverage.Jan Berghuis, chairman of the €60bn PMT, noted that the planned recovery had been “delayed and the possibility of rights discounts had come closer”.Eric Uijen, director of the €40bn PME, cited “dark clouds”, and echoed Berghuis’ forecast that the lack of improvement had increased the likelihood of cuts.Following the recent decline in the financial markets, the topical funding of both metal schemes has dropped roughly 4 percentage points, and has brought them closer to the funding level of 90% that would trigger rights cuts. Dutch pension savers might face rights cuts as early as next year If the current headwind of low interest and ailing equity markets continues, two of the largest pension funds in the Netherlands have warned. While presenting the preliminary returns for 2015, Peter Borgdorff, director of the €164bn healthcare scheme PFZW, warned that the participants could face a rights cuts in 2017.However, was at pains to emphasise that any cuts could be smoothed out over a 10-year period.Corien Wortmann-Kool, chair of the €351bn civil service scheme ABP echoed Borgdorff’s warning. “The chances haves increased that cuts are necessary next year,” she said as the civil service scheme, Europe’s largest pension fund, published its preliminary results for 2015.
Meanwhile, Hargreaves Lansdown admitted it breached the Companies Act by failing to file interim accounts to support dividend payments.It is believed the breaches extend back to 2008. A random inspection by the UK’s Financial Reporting Council (FRC) picked up the issue.The rules for determining whether a company can pay out a dividend or make a distribution are complex.In the UK, the requirements are broadly set out in the Companies Act 2006. However, lawyers who spoke to IPE last March warned that companies must also consider the common law alongside the act.The Local Authority Pension Fund Forum (LAPFF) has long argued that what it considers defective IFRS accounting standards put companies at risk of paying illegal dividends out of illusory IFRS profits. The row, which has culminated in calls for companies to ignore the FRC on the question of distributions, has also put the wider question of dividend payments under the microscope.In addition to claimed flaws with the IFRS numbers, directors are also at risk of failing to comply with the requirement in the Companies Act to file interim accounts to show that their company has sufficient reserves to support a dividend.Most recently, the affordability crisis among the UK’s defined-benefit pension schemes has left companies either unable to afford to pay a dividend or having to deal with a trapped dividend.In other news, it has also emerged that the International Accounting Standards Board (IASB) has no plans to start work on its pensions accounting research project in the near future.According to meeting papers posted on the board’s website: “The staff do not expect to begin work on any of the [research] pipeline projects in the next few months.”At the conclusion of its agenda consultation last year, the board opted to assign a relatively low priority to pensions accounting and said it would focus on the effort as and when resources were available.The IASB’s pension project is expected to examine pension benefits that depend on asset returns. The board decided not to investigate other aspects of accounting for post-employment benefits.Finally, analysts at Barclays Bank have warned that the IASB’s new IFRS 9 accounting rules will increase volatility in bank earnings and capital.IFRS 9 is the IASB’s replacement for its existing financial instruments accounting standard, IAS 39.It comes into force on 1 January 2018. Supporters say that it will force banks to set aside provisions against expected losses on loans rather than wait for a loan to turn bad.Critics of the model, such as the LAPFF, argue that it is too little too late.The Barclays analysts wrote: “Capital headwinds in a downturn could be much more severe under IFRS9.”They went on to warn that IFRS 9 could knock as much as 300bp off a bank’s common equity tier 1 ratio during a typical downturn.The analysts also claimed that the provisions made under IFRS 9 will provide an insufficient buffer during a downturn.Last year, IPE reported that the financial stability impact of the new standard was ‘unknown’. Two further publicly quoted companies in the United Kingdom have owned up to paying out illegal dividends.The admissions from furniture company Dunelm and retail stockbroker Hargreaves Lansdown follow IPE’s report last week that Domino’s Pizza had uncovered problems with illegal dividend payments going back to 2000.In a statement, Dunelm said its board had “become aware of an issue” with a dividend payment made in November 2015.The company described the affair as a “technical infringement of the Companies Act 2006”.
The UK’s Pension Protection Fund (PPF) is planning to bring its private and public market credit portfolio in house within the next three years, and may do the same for its passive currency hedging.Announcing its three-year strategic plan, the £23.4bn (€29.8bn) fund also estimated growing its assets under management by more than a third by 2020, to reach £32bn.As part of its longer-term plan to be financially self-sufficient by 2030, the PPF has been gradually bringing more of its asset management capabilities inhouse. This has reduced its reliance on external managers and increased the level of flexibility and control the fund has over its investments. It has now completed the first two phases of this process, it said.Last year the PPF brought part of its liability-driven investment (LDI) portfolio in house, following the appointment of Trevor Welsh as head of LDI in August 2015. Once this has been embedded, the PPF plans to transfer its private and public market credit portfolio to the in-house team. The fund will then explore the possibility of insourcing passive currency hedging, it said.Over the next three years, the PPF said it would design and implement a new investment risk management framework that “ensures that we adopt and maintain best practice for the next stages of investment insourcing”.Other risk management steps on its agenda include refining and embedding a new scenario and stress test framework for operational and financial risk, and making sure it is on top of cybersecurity and fraud risks.Alan Rubenstein, PPF chief executive, said the fund’s operating environment contained many uncertainties but that it had “a good understanding of our risks and mitigate them where they are within our control”.“However, the future performance of the UK and global economies, and the volatile funding levels among the schemes we protect, pose particular risks. Nevertheless, we are confident that our funding strategy puts us in a good position to face the future,” Rubenstein said.The fund said it will ensure it had “the correct asset allocation” in place before the introduction of mandatory clearing for over-the-counter derivatives in 2018, under the European Markets Infrastructure Regulation.Publication of the PPF’s strategic plan was delayed because of so-called purdah rules, limiting public bodies’ communications in the run-up to last week’s general election.Read more about the PPF’s LDI in-sourcing project and strategy in the June edition of IPE Magazine
Temporary ring-fencing assets would enable merging pension funds to gradually align their coverage ratios, Klijnsma explained.Earlier, she had made clear that supervisor De Nederlandsche Bank had to approve a merger plan.She also said the new pension fund resulting from a merger could not have a wider scope than the merger partners’, and that there must be coherence between the sectors in a new scheme.In a first reponse, the Pensions Federations said it was positive that progress had been made with the bill.In the opinion of René Maatman, pensions lawyer at De Brauw Blackstone Westbroek, the cabinet should also enable merged schemes to keep assets ring-fenced for an indefinite period in collective compartments, like in the new general pension fund (APF).At the moment, mandatory sector schemes are not allowed to join an APF.Maatman noted that there would be different rules for ring-fencing in an APF and in a merged scheme.“Different regulation for separated assets for sector pension funds does not only damage these schemes, but also has the potential to negatively affect the reliability of ring-fenced assets in the APF,” he recently argued in an article – co-authored by Kees Groffen and Sander Steneker – in a local specialist magazine for pension issues.The bill, which still has to be tabled in parliament, is scheduled to come into force as of 1 January.The bill is not part of the list of controversial subjects that will only be discussed after a new cabinet has taken over from the outgoing one. The outgoing Dutch government wants to enable mandatory sector-wide pension funds to merge for benefits of scale even if their funding differs considerably.The cabinet has approved a bill that allows merger partners to keep their assets separated for a period of no more than five years.Jetta Klijnsma, state secretary for social affairs, said she wanted to remove the current ban on mandatory schemes merging if their coverage ratios differ too much at the time of the intended merger.The ban was meant to protect the pensions of participants in schemes with the highest funding level.
Keith AmbachtsheerI understand you have been handed the challenging task of solving your country’s current pension puzzle. It may interest you to know I was given the same task by the Koninklijke Vereeniging voor de Staathuishoudkunde in 2014. The resulting paper was titled Taking the Dutch Pension System to the Next Level: A View from the Outside, and presented in Amsterdam in December 2014. I thought you might appreciate a brief summary of my recommendations.Explaining why there is a Dutch pension puzzle is not difficult. The emphasis in your very large pillar 2 (i.e. workplace-based) pension sector on solvency has had a counterproductive effect on plan participants: less rather than more trust in the pension system. Why? Because young workers believe they are overpaying in relation to the future benefits they are accruing. At the same time, recent asset shortfalls uncovered by complex balance sheet solvency calculations have led to actual cuts in pension payments to retirees. So ironically, current measures to ensure the long-term solvency of your pillar 2 pension schemes are causing both the young and the old to lose faith that the system operates in their interest. In terms of that famous Dutch concept of ‘solidarity’, measures intended to increase it are actually having the opposite effect. So how to solve this problem? A good first step is to recall Albert Einstein’s dictum: “Make things as simple as possible, but no simpler.” If people are going to trust a pension system, they must understand it. For many Nederlanders, their workplace pension schemes don’t pass the Einstein test: they have become far more complex than they need to be. A good second step is to recall why Dutch academic Jan Tinbergen was the first recipient of the Nobel Prize in Economics in 1969. He showed that the number of economic goals must be matched by the number of economic instruments designed to achieve them. In pension economics, there are two goals: (1) affordability and (2) safety. Achieving the first goal requires an investment instrument that generates high investment returns over the long-term (higher investment returns mean lower contribution rates). Achieving the second goal requires an instrument that matches projected pension payments with assets of similar duration and inflation sensitivity, while also pooling longevity risk. Jan Tinbergen, winner of the 1969 Nobel Prize for EconomicsSource: Anefo/Croes, R.C. This dual Tinbergen pension scheme structure solves the noted problems of the current Dutch unitary structure, which attempts to achieve both affordability and safety goals with just one instrument. The predictable result is collective schizophrenia, with both the young and the old unhappy. The cure is to adopt the dual Tinbergen structure, where separate instruments focus on long-term wealth-creation in one, and on delivering a lifetime pension in the other. The wealth-creation instrument is a collective investment fund that aspires to generate a competitive long-term rate of return net of all expenses. The safety instrument is a collective ‘fair value’ balance sheet that promises to pay a predictable lifetime stream of pension payments to participants. Over the course of their working lives, scheme participants begin by accumulating units in the wealth-creation instrument, and eventually shift these accumulations into the safety instrument as they approach retirement. This can be done automatically, or through participant intervention if they so choose. While I believe the Tinbergen solution to the Dutch pension puzzle passes the ‘as simple as possible, but no simpler’ test, its implementation will require strong political leadership and a strong dose of national ‘solidarity’. Pension schemes will have to take three steps: (1) Establish operational wealth-creation and payment safety pools, (2) divide total scheme assets into individual member components, and split each member’s total component into allocations to the two pools based on a simple age-related formula, and (3) give participants the option to adjust those ‘default’ weightings to better reflect their personal preferences for wealth-creation and payment safety if they so choose. Executing these 3-step processes will be challenging and time-consuming. However, the end-prize will be worth it: renewed national trust in the fairness and sustainability of the best pillar 2 pension system in the world. Yours truly,Keith Ambachtsheer Here is the full English text of Keith Ambachtsheer’s letter to Wouter Koolmees, titled: A solution for the Netherlands pension puzzle.Dear Minister Koolmees, Successful reform of the Netherlands’ pension system will require “strong political leadership and a strong dose of national solidarity”, according to influential pensions consultant Keith Ambachtsheer.In an open letter to the new Dutch social affairs minister Wouter Koolmees, first published in IPE’s sister publication Pensioen Pro, Ambachtsheer – who was born in Rotterdam before his family emigrated to Canada – explained how the principles of Dutch economist and Nobel Prize winner Jan Tinbergen could be adopted in an overhaul of the Dutch system.Redesigning the system was a major part of political party manifestos during this year’s election, and debate has continued throughout the industry as to how a new pensions contract for workplace benefits could be constructed.However, the timeline for the proposed reform has been pushed back and a number of the Netherlands’ biggest schemes have voiced concerns about some of the changes.
The occupational pension funds’ third quarter returns were strengthened by the performance in the equity and euro-denominated bond markets, according to the consultancy.Schemes generated a median return of 1.0% over the period, up from 0.2% for the second quarter.The average 12-month return to the end of September was 2.6%, compared with a 2.7% return for the 12 months to June 2017.Annualised returns for the three years to 30 September rose to 3.3% from 3.0% at end-June, but fell to 5.1% from 5.6% for the five-year period to end-September.Marques said: “Both equities and euro-denominated bonds had good returns over the quarter.“Most pension funds in Portugal have very high allocations to euro-denominated bonds, which had returns slightly below 1.0%. This return was slightly enhanced by the very positive returns on equities which form a small part of Portuguese funds’ allocation.”Marques continued: “Over the 12 months to end-September, equities had an excellent run globally, and even more so in the eurozone – for example, the MSCI EMU Index returned 22%.”In contrast, he said, euro-denominated bonds had suffered negative returns as bond yields rose.But he added: “Most pension funds in Portugal hold short-term bonds which are not very sensitive to changes in yields, so this has not materially reduced overall portfolio returns.”Performance figures were submitted by so-called ‘closed’ funds, which are generally pension plans for a single employer or group of companies, and make up the vast bulk of occupational plans in Portugal. The figures incorporated more than 100 pension funds, including the five biggest pension fund managers in the country.At end-September, Portuguese pension fund portfolios were still heavily dominated by debt, which made up 53.5% of portfolios (including direct and indirect holdings), according to estimates from the Portuguese Association of Investment Funds, Pension Funds and Asset Management (APFIPP). The estimates cover 88% of the Portuguese pension fund market at end-September 2017.Equities made up 23.2%, and real estate 13.6%, of portfolios at that date. Montepio and CEFC China Energy tie-upAssociação Mutualista Montepio, the largest savings and pension fund manager in Portugal, has agreed to sell a majority share in its insurance subsidiary Montepio Seguros to CEFC China Energy, by way of a capital increase.CEFC China Energy is a Shanghai-based privately-owned corporation whose core activities are energy and financial services. One of its long-term aims is to establish an international investment bank and an investment group.Last September, Montepio and CEFC signed a strategic cooperation agreement to establish collaboration in the financial sector, intended to expand to oil and gas, new energy, and infrastructure construction. Portuguese pension funds are paying close attention to their risk management strategies, increasingly either reviewing or considering reviewing them, according to Willis Towers Watson (WTW).José Marques, senior investment consultant at the consultancy, said the funds wanted to ensure they could effectively monitor their investments relative to their liabilities.“In the pension fund world, it is important to measure performance relative to liabilities, and not simply asset performance,” he said.“Similarly, we are seeing some funds increasing the duration of their fixed income assets in order to match liabilities, and hence reduce the risk of falls in interest rates.”