UK facilities management company Carillion has agreed a longevity swap deal to hedge around £1bn (€1.2bn) of its defined benefit (DB) pension scheme liabilities with Deutsche Bank.The swap has been agreed between the German bank and five DB schemes sponsored by Carillion.It covers around 9,000 pensioners with a liability of around £1bn, Carillion said, adding that the deal has no immediate cash impact on the company.Robin Ellison, chairman at Carillion (DB) Pension Trustees, said: “Pension scheme liabilities have risen significantly in recent years due to increasing life expectancy.” Richard Adam, Carillion Group finance director, said the deal had removed a significant amount of risk at an attractive price.“The longevity swap reflects Carillion’s commitment to ensuring the security of the benefits of all our pension scheme members and reducing pensions risk,” he said.The company said the swap was one of several exercises it had undertaken as part of its long-term strategy to reduce pension risk, improve the security of members’ benefits and increase certainty about future costs.Andrew Ward, senior consultant at Mercer, who led the advice for the trustee, said both trustee and sponsor of the Carillion scheme saw the opportunity for removing the longevity risk at a price that seemed attractive.He said around a dozen such longevity swap transactions had been done in the UK DB pensions sector to date.“We’re anticipating that this recent transaction will kick-start the market,” he said.The current year was set to prove the busiest year in terms of longevity swap and pensions buyout activity, Ward said, and he predicted 2014 would probably be even busier.However, prices for the deals could rise in the future, he said.“The long-term pent-up demand is probably bigger than the supply, so you could see price rises in the future from reinsurers,” he said.
Austrian companies will be under no obligation to offer workers a choice of pension plan, according to the University of Vienna’s Robert Rebhahn, an expert on social law.As part of the most recent overhaul of the law governing Austrian Pensionskassen (PKG), members were given the right to choose from among various forms of pension plans such as Pensionskasse and insurance-based Betriebliche Kollektivversicherung (BKV).It remained unclear, however, whether employers were obliged to offer this choice, or whether the law only applied in cases where the occupational pension plan was designed to include both options.In an article in the legal magazine Wirtschaftsrechtliche Blätter, Rebhahn said there was no obligation for employers to offer a choice. Andreas Zakostelsky, chairman of the Austrian pension fund association (FVPK), said: “This means there is now legal clarity on the subject.”Rebhahn is the second legal expert to arrive at this interpretation of the law after pension and legal expert Wolfgang Mazal published an article with a similar conclusion in December 2012.Both Rebhahn and Mazal stress there is no legal basis to sue employers for compensation if a company offers a Pensionskasse but no BKV plan.Over the last two years, there has been much uncertainty among employers and employee representatives on the subject.The legal experts explained that, in Austria, a company pension plan is a voluntary supplementary benefit offered by the employers.It is therefore free to choose the design, they said.In other news, two independent surveys are looking into how the new first-pillar pension benefit information sheet, the Pensionskonto, will change Austrians’ view of supplementary retirement provision.Since late last year, the social insurance bodies (Sozialversicherungen) have been sending out letters to members with a calculation on how much monthly pension each employer would receive if they stopped working now and retired at 60 (for women) or 65 (for men).It is the first time Austrians have received an official calculation of their future pension benefit from the first pillar.According to a survey by insurer Uniqa, Austrians still greatly underestimate the ‘pension gap’, i.e. the difference between final income and the first-pillar pension.A different survey by the Erste banking group showed that only 18% of Austrians understood how the Pensionskonto worked, while 41% had heard of it and 35% said they were unfamiliar with the term.
The €4.8bn PostNL scheme reported a 13% loss on commodities, while the €17bn Philips Pensioenfonds also announced significant losses.Over the first nine months of this year, the €334bn civil service scheme ABP and the €156bn healthcare scheme PFZW lost nearly 4% and 7%, respectively.Last year, the €55bn metal scheme PMT divested its 2% allocation to the asset class in favour of equities, while the €18bn PGB, the pension fund for the printing industry, cut its exposure by almost €500m.The €38bn metal scheme PME also fully divested, arguing that the asset class added little value and at times crossed “ethical boundaries”, particularly with respect to soft commodities.Hermes said, given the volatility of the asset class, it believed clients would be better off using commodities passively, as a diversifier.In a statement, it said: “We are an active manager, and we have found it increasingly challenging to deliver sustained, active returns in commodities.“A growing number of our clients and prospects are viewing commodities as a tactical diversification play, and, longer-term, we see this trend continuing.“This will impact future demand for our strategy and affect our ability to deliver best value to our clients.”Jason Lejonfarn, a commodities experts at BNY Mellon, has attributed the disappointing returns in commodities to a drop in prices of cereals, as well as the slowdown of the Chinese economy.However, Philippe Roset, head of Benelux at ETF Securities, has argued that returns over the past 10 years have averaged 7.3%.“This is better than equity,” he said.Roset said he referred to the Bloomberg Index, “as this provides a better picture because energy has a less prominent weighting than the Goldman Sachs Index”. Dutch pension funds and investment managers have questioned the value in outperforming commodity benchmarks, while in the UK Hermes Investment Management has shut down its commodities business line.The asset manager, wholly owned by the £40bn (€51bn) BT Pension Scheme, will close its business after finding it increasingly difficult to deliver active returns in the asset class.The news follows a growing trend in the Netherlands, where a number of pension funds – including large market players such as PMT, PME and PGB – have shifted away from commodities entirely. The beleaguered asset class has hit returns at a number of the larger Dutch schemes of late.
It noted that the 30-year swap rate – Dutch pension funds’ main benchmark for discounting liabilities – fell by 25 basis points to 1% in February.The consultancy also cited the impact of falling equity markets.Mario Overduin, senior associate and investment consultant at Mercer, said: “Although the large losses of mid-February have been largely made good recently, the MSCI World Index has decreased 1% on balance.”The MSCI World Index, following a 6% drop in January, fell by 8% by mid-February.According to Aon Hewitt, the average Dutch real estate portfolio lost approximately 6% last month, while fixed income portfolios returned 5.4% on average over the same period. Mercer estimated the overall average investment return at 1.5%, Aon Hewitt 1.9%.Both consultancies saw pension funds’ official ‘policy coverage’ – the current-funding average over the previous 12 months, and the main criterion for rights cuts and indexation – decrease by 1 percentage point on average.Mercer placed policy funding at 103%, Aon Hewitt 102% as of the end of February.Most Dutch schemes will need to start discounting pension rights if their current coverage ratios fall below 90% at year-end.Under the new financial assessment framework (nFTK), however, schemes can apply the discount over a 10-year period.Frank Driessen, chief commercial officer for retirement and financial management at Aon Hewitt, said: “If conditions remain unchanged and the funding is still at the current level at year-end, it is inevitable a number of pension funds will have to apply rights cuts next year.“We expect pension funds will soon provide clarity about this.” Coverage ratios at Dutch pension funds fell by another 2-3 percentage points in February, after having already fallen by 5-6 percentage points the month previous. Mercer and Aon Hewitt, however, said funding ratios had rebounded slightly from a dip in mid-February, when equity markets declined sharply.Mercer calculated that the average coverage ratio at the end of February stood at 96%, while Aon Hewitt, employing a slightly different methodology, placed the ratio at 94%.Mercer attributed plummeting ratios chiefly to the low-interest-rate environment.
A plenary session of the European Parliament has passed a potentially damaging report on the activities of the IFRS Foundation and the International Accounting Standards Board (IASB).The own-initiative report of the Parliament’s Committee on Economic and Monetary Affairs (ECON) lends weight to criticisms made by leading investors of the International Financial Reporting Standards (IFRS).Although the report is non-binding and lacks legislative force, it comes at a difficult time for the IASB as leading UK investors challenge the legality and financial-stability impact of its new financial-instruments accounting rules.Tim Bush, head of governance and financial analysis at Pensions & Investment Research Consultants in London, welcomed the report’s findings, which in the UK could pile further political pressure on the IASB and its supporters. “The Motion of the Parliament sets out the correct endorsement criteria, which, like the written answer from Lord [Jonathan] Hill, demonstrates that EFRAG (European Financial Reporting Advisory Group) and some member states of the Accounting Regulatory Committee have used the wrong criteria due to writing the law down wrongly.“Each link in the endorsement chain seems to have involved the UK Financial Reporting Council, its immediate alumni, or its secondees.”The ECON report also lends weight to the argument advanced by the Local Authority Pension Fund Forum (LAPFF) in the UK that the so-called true and fair view requirement for accounts under EU law applies to specific components of the accounts and not just to the accounts as a whole.Specifically, in accord with the LAPFF’s view, the ECON report states: “The annual financial statements shall give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss.”The report further notes that “this purpose relates to the capital adequacy function of accounts … that both creditors and shareholders use … as the basis for determining whether a company is ‘net asset’ solvent and for determining dividend payments.”More damagingly for the IASB, the ECON report finds that the IASB’s understanding of the principles of prudence and stewardship is at odds with the legal position under European case law and the Accounting Directive.Major long-term investors have argued that the concept of prudence, or caution, plays an important role in ensuring that a distribution to shareholders is lawful and backed by real profits.These investors believe defective IFRS accounting rules, particularly IAS 39, which deals with financial instruments accounting, enabled major banks to book illusory profits in the run-up to the financial crisis of 2008.But, having distributed these profits, the banks were then forced to take a major hit to shareholder equity when losses suddenly mounted on impaired financial assets.The IASB has now finalised IFRS 9, a replacement standard for IAS 39, which it argues will force banks to set aside greater provisions against future losses.Meanwhile, contrary to the Parliament’s position that the principle of prudence “should be accompanied by the principle of reliability”, the IASB has recently tentatively voted to reject the reintroduction of prudence as a bias toward conservatism.The board, however, has yet to commit to paper its understanding of the relationship between prudence and its preferred accounting concept of neutrality as part of its conceptual framework project.Elsewhere in the report, the European Parliament calls on the IASB and EFRAG “to strengthen their impact analyses.”More action is needed, the MEPs warn, “notably in the field of macroeconomics, and to assess the different needs of the wide variety of stakeholders, including long-term investors and companies, as well as the general public.”The issue of macro-prudential impact of accounting standards was recently brought into sharp focus when it emerged that the European Systemic Risk Board had yet to carry out a stability assessment of IFRS 9.This picture emerged despite the production of a series of studies by academics at the University of Mannheim supporting the endorsement of IFRS 9 for use across the European Union by major banks.The ECON report now calls on the Commission “to remind EFRAG to strengthen its capacity to assess the impact of new accounting standards on financial stability”.In September last year, the LAPFF argued that EFRAG misapplied EU law in its endorsement advice on IFRS 9.Then, in December, both the LAPFF and EFRAG wrote to the EU’s internal market commissioner, Jonathan Hill, to clarify their position on IFRS 9.
The €700m Dutch pension fund of Royal Bank of Scotland is the first Dutch company scheme to make use of the new general pension fund (APF) vehicle and hopes to grant participants full indexation of pension benefits as a result.It will join the APF run by insurer Centraal Beheer, a member of Achmea Group, from next year, according to Jacco Heemskerk, executive member of the RBS scheme.Heemskerk said Centraal Beheer had been awarded the contract because it seemed to be keener to get the mandate than Stap, the APF jointly operated by Aegon and its subsidiary TKP, which had also been short-listed.According to Heemskerk, an additional benefit of the Centraal Beheer APF is that his pension fund had already outsourced its administration to Syntrus Achmea. “As a consequence, our arrangements were already pretty much standard and only required minor technical adjustments to fit into Achmea’s new administration system.”In the Centraal Beheer APF, the RBS scheme will have the option to transfer its pension rights after five years, explained Heemskerk. He added that other APFs had dropped out because they could not offer a single compartment dedicated to the pension fund.A spokesman for Aegon said the company regretted missing out on the contract but declined to comment further.The RBS scheme sought consolidation as the employer is withdrawing from the Netherlands and will cease its active involvement with its pension fund. The scheme has about 300 active participants but this number is expected to drop to a handful at the end of next year.“This will leave the pension fund without workers to fill board positions,” Heemskerk noted.He added that the RBS scheme, because of its funding of 125%, expected to grant its participants a full indexation by joining the APF.“Had we joined an insurer, inflation compensation would hardly have been possible.”Heemskerk made clear that joining the APF would significantly reduce administration costs and would also decrease the “already low” asset management costs.’
Finland4672.9 Chile8866.4 Denmark1180.5 Canada8766.4 Switzerland6468.6 UK11960.1 Ireland101162 Finland moved up two spots and Ireland edged into the Top 10 in the latest Melbourne Mercer Global Pension Index of global pension systems, while changes to net replacement-rate calculations adversely affected countries such as Switzerland.Denmark, the Netherlands and Australia maintained the three top spots, in that order, in what is the eighth edition of the index. Denmark and the Netherlands – with an index value of more than 80, equivalent to an A grade – are considered to have “first-class” retirement systems.Finland, Switzerland and the UK were the biggest movers among the European countries in the Top 10 in last year’s index. Australia3377.9 Sweden5471.4 Netherlands2280.1 Singapore71067 Finland moved up into fourth place, having been sixth in the 2015 index, while Switzerland and the UK each slipped two spots, into sixth and 11th place, respectively.Sweden also moved down the rankings, into fifth.Selected Melbourne Mercer 2016 Global Pension Index resultsCountryRanking 2016Ranking 2015 Overall index score Out of 27Out of 25 Ireland moved into the Top 10, which is completed by Singapore, Canada and Chile.Singapore experienced the biggest change in ranking among the Top 10, moving up from 10th in the 2015 index to 7th in this year’s.Germany remains ranked 12th and France 13th.The country’s pensions systems are scored on their adequacy, sustainability and integrity, with more than 40 indicators taken into account.Twenty-seven countries were assessed in 2016, with Argentina and Malaysia new additions.The producers of the index, Mercer and the Australian Centre for Financial Studies (ACFS), warn against drawing too definite a comparison between countries’ systems when the difference in the overall index value is less than 2 points.But they also state that when the difference is greater than that, “it can be fairly concluded that the higher index value indicates a country with a better retirement income system”.Eighteen-and-a-half points [corrected from 12.5] separate Denmark in first place (80.5) and Ireland in 10th (62). Replacement rate rejigsThe average decline in the overall score was 1.5, with most countries’ scores affected by “minor changes”.In some instances, however, the score changed by more than 2 points.For Canada, Chile, Germany and Switzerland, this was due to changes made to the calculation of net replacement rates the Melbourne Mercer Global Pension Index sources from the OECD’s Pensions at a Glance publication.The decline in the UK score was also primarily caused by the reduction in the net replacement rate, which Mercer and the ACFS attributed to the introduction of a state pension, and voluntary contributions linked to auto-enrolment being excluded from the calculation.“However,” they added, “the ongoing introduction of the auto-enrolment process should improve the index value in future years, with broadening coverage and an increase in the level of funded retirement benefits.”The overall index value for several countries was also affected by new questions asked by Mercer and the ACFS as part of the index this year, such as about the requirements, if any, for independent trustees or fiduciaries and the balance between employer and member representatives on the governing board of a pension scheme.The decline in Sweden’s score was primarily caused by the reduction in the household savings rate and the assumed level of funded mandatory contributions set aside for the future, according to Mercer and the ACFS.,WebsitesWe are not responsible for the content of external sitesLink to 2016 Melbourne Mercer Global Pension Index
“This decision is consistent with our ambitions for continued and greater ESG integration across AXA IM,” Rossi said. “It is also in line with our belief that asset managers have an important role to play in helping the global transition to a low carbon economy. We want to engage with our clients, increasing awareness about the potential long-term risks related to the production and consumption of coal at current levels and encouraging investors to fully consider the long-term benefits of low carbon portfolios.”The policy will apply to 99.5% of its €717bn of assets under management, AXA IM said. Index funds and funds-of-funds will be exempt, while clients with segregated portfolios can choose to opt out of the policy.AXA IM expects to sell €165m of fixed income assets and €12m of equities.The asset manager’s decision reflects that of a number of large asset owners across Europe in recent months.Norges Bank Investment Management (NBIM), which manages Norway’s giant sovereign wealth fund, has excluded nearly 70 coal companies from its fixed income and equity portfolios following criteria introduced in 2015. Companies with more than 30% of their activities in the coal sector are excluded by NBIM.FRR, the €37.2bn French pension reserve fund, said in December that it would exclude from its portfolios any companies deriving more than 20% of turnover from thermal coal extraction or coal-fired power generation.Denmark’s DKK250bn (€33.6bn) PKA has also excluded some coal companies it believed were at risk of having their business disrupted by the shift towards renewable energy.Switzerland’s BVK, the CHF30.6bn (€28.5bn) pension fund for the canton of Zurich, has excluded coal producers from its global equity portfolios. AXA Investment Managers (AXA IM) is to sell roughly €177m of assets as part of a policy to divest from companies heavily reliant on coal.From the end of June, the French asset manager will divest from companies that derive more than half their revenues from “coal-related activities”. This will primarily affect mining and electric utilities companies, the group said.The move comes nearly two years after its parent company, insurer AXA Group, pledged to divest roughly €500m from coal-related assets.Andrea Rossi, CEO of AXA IM, said divesting from coal would help the firm’s clients avoid “stranded” assets. Carbon-intensive industries such as coal are widely expected to be challenged as investors and corporations implement measures designed to keep global warming to the 2°C scenario as outlined in the 2015 Paris climate change agreement.
Ethos said Biedermann had decided the time was right to hand over the organisation to “the next generation”. His role had been criticised because his wife Yola is head of Ethos’ corporate governance department. The perceived “shortcomings in corporate governance” led the pension fund for the Swiss postal service to announce it would end its membership as per year-end 2018.In a statement issued earlier this year, the €15bn Pensionskasse Post said it might revise this decision if Ethos made changes to its management structure prior to the general assembly.Françoise Bruderer Thom, managing director of Pensionskasse Post, told IPE: “As Mr Biedermann will no longer stand for presidency either of the Ethos Foundation or Ethos Service, his conflicts of interest are resolved, which we welcome.”However, the pension fund would carefully review the proposals for the general assembly and then decide on how it would vote, as well as its further relationship with Ethos, she added.The two Ethos boards have decided to appoint different presidents, one for Ethos Foundation and one for Ethos Services.To replace Biedermann as chairman of Ethos Foundation, the members have put forward former social democrat MP Rudolf Rechsteiner, who is an expert on renewable energy and president of the charity Swissaid.Beth Krasna, an engineer at the university ETH Zurich and an expert in microfinance and corporate governance, has been proposed for election as president of Ethos Service.Swiss pensions journalist and commentator Peter Wirth suggested Rechsteiner could be a controversial candidate. “This proposal adds a political flavour which is problematic and which not all members will want to stomach,” he wrote in a recent newsletter. Dominique Biedermann, long-term president of the Swiss proxy voting service Ethos, will not stand for re-election at upcoming general meetings of the company and the Ethos foundation.In a statement Ethos – which is owned by Swiss pension funds – said the meetings on 14 June were “an important milestone in Ethos’ history”. “Dominique Biedermann, the last remaining Ethos founding member, will not stand for re-election after 21 years of continuous engagement in favour of Ethos’ development,” it said. Biedermann will step down as president of Ethos Foundation and Ethos Services. The foundation was established by several pension funds in 1997 to represent them at shareholder meetings of listed Swiss companies. In 2000 it created Ethos Services to take over management and consulting services in socially responsible investment and active ownership.
Danish commercial mutual pensions giant PFA has become the latest member of the United Nation’s Net-Zero Asset Owner Alliance (NZAOA), citing the alliance’s potential to facilitate knowledge exchange as a key benefit for it as an investor.The DKK688bn (€92.2bn) pension fund said that apart from the commitments participants in the initiative made, PFA could also use the project to swap climate investment experiences.Kasper Ahrndt Lorenzen, PFA chief investment officer, said: “In some areas, climate-friendly investment is an immature area, and data quality, for example, can be a challenge.“By working together as some of the world’s largest investors, we can jointly find better solutions to those problems than if we work individually,” he added. NZAOA members pledge to lower greenhouse gas (GHG) emissions in their investment portfolios to net-zero by 2050, to align with the Paris Agreement aim of limiting global warming to 1.5°C above pre-industrial levels.In addition to this, PFA said by signing up it had to set five-year targets outlining its projected progression towards this goal.The alliance said the addition of PFA as its 23rd member brought the initiative’s total assets under management to over $4.6trn (€4.25trn).Alan Polack, PFA’s group chief executive officer, said: “With more than 1.3 million clients, PFA has a special obligation to contribute to sustainable development of our society.“We are proud to be part of the Net-Zero Asset Owner Alliance, and we will actively contribute to the cooperation between asset owners to make the alliance stronger and its impact bigger,” he added.At the end of April, the NZAOA put out a “call for comment”, expressing the need for a robust carbon-neutrality measurement methodology, in the absence of any existing initiative fulfilling all the group’s needs.The set of requirements laid out by members was “demanding”, the alliance said, but seen as a roadmap for future progress rather than a set of criteria any one provider would satisfy.In March, the French civil servant pension fund ERAFP (Établissement de retraite additionnelle de la fonction publique) and Germany’s sovereign wealth fund KENFO also joined the alliance, becoming its 20th and 21st asset owner members.The 22nd member to join was US pension fund Wespath Benefits and Investments, a non-profit agency of the United Methodist Church, Glenview, Illinois.Looking for IPE’s latest magazine? Read the digital edition here.