However, it added that it incurred a 1.2% loss on its 65% cover of the interest risk on its liabilities, following rising swap rates.During the last quarter, the coverage ratio at Stichting Pensioenfonds TNO improved to 108.5% – 4.3 percentage points more than the required minimum coverage at year-end.However, CIO Hans de Ruiter warned that a significant increase in rates or falling markets could still have an impact on funding.“The liabilities must be discounted against the three-month average of the forward rate, contrary to our fixed income investments, that must be valued against the current rates,” he said.“This means a rates increase during the last quarter would only cause a limited drop of liabilities, whereas this would cause an immediate decrease of fixed income holdings.“Therefore, a rates increase poses a bigger risk for our scheme’s funding than a decrease.” The €2.5bn pension fund of TNO returned almost 2.8% during the third quarter, taking its year-to-date result to 0.7%.It said the return was mainly due to positive results on its 24% allocation to listed equity and its 58% bond portfolio, which generated almost 4.7% and 0.4%, respectively.By contrast, the pension fund of the technical research institute lost 1.4% and 0.6%, respectively, on its holdings of non-listed property and private equity.The scheme’s full hedge of the main currencies added 0.3 percentage points to its quarterly result, it said.
Martin Gilbert, chief executive at Aberdeen AM, said the firm was “confident” the transaction would deliver considerable additional value to the company’s shareholders and client base.“This transaction is significant for the long-term prospects of Aberdeen in a number of ways,” he said. “It strengthens our investment capabilities and adds new distribution channels; the acquisition of SWIP adds scale to our business across a range of asset classes; and it also introduces a strategic relationship with Lloyds Banking Group.”Lloyds has agreed to hold all of the new 131.8m shares issued by Aberdeen AM for 12 months and is committed to retaining two-thirds of its stake for two years.Three years after the deal has finalised, it will be allowed to sell down all but one-third of its total stake.Aberdeen added that the acquisition of SWIP’s private equity and infrastructure businesses would be independent of the remainder of the deal, and that failure of them to complete would see a reduction in the £550m consideration.As part of the agreement, Lloyds and Aberdeen have agreed to a “comprehensive strategic relationship” that will see the businesses work together with Lloyds Wealth, Insurance and both commercial and retail banking businesses. Aberdeen Asset Management is to acquire Scottish Widows Investment Partnership (SWIP) in a £550m (€657m) deal that will also see it partner with one of the UK’s largest banking groups’ wealth businesses.The agreement, subject to regulatory approval, will see Aberdeen AM’s assets under management grow by more than £130bn, the company said, highlighting that SWIP’s acquisition would enhance its fixed income and property divisions.Lloyds Banking Group will take a 9.9% stake in Aberdeen AM as part of the deal, accounting for the £550m cost based on the latter’s share price of £4.20 – below the £4.27 closing price last Friday.The asset manager’s shares opened at £4.79 on the London Stock Exchange on Monday morning, rising to £4.91 by mid-day local time.
Danish pension fund AP Pension has boosted its investment in China and now has more than DKK1bn (€134m), or 5% of its equities allocation, held in Chinese stocks, in the expectation the market will rebound from its current lows.Many investors are steering clear of the Chinese market right now, with some having suffered losses over the last few years.Since the spring of 2011, the Shanghai Composite Index has lost around 23% of its value.Søren Dal Thomsen, chief executive of the commercial mutual pension provider, told IPE: “We were overweight Asian and Chinese stocks over the last 24 months, so now we have increased our position in Chinese equities.” The pension fund, which had around DKK94bn in assets under management at the end of June 2014, now has 5% of its equities investments in Chinese companies.“We’ve done that because it seems to us Chinese stocks have become very cheap compared with other markets and also to developed markets,” Dal Thomsen said.AP Pension’s analysis of price/earnings ratios in markets around the world has shown that while equities in the US and other developed countries have risen strongly over the last few years, the ratios of Chinese shares have remained stable, making current prices there 42% cheaper than those of US equities on this basis.“The market focus is that there might be a bubble in Chinese banks and in the building of residential property in China, and that is keeping a lot of investors away from the country,” Dal Thomsen said.But he said it was possible to have investments in Chinese equities without having exposure to those sectors.“We don’t have exposure to banks, for example,” he said. “We have exposure to every sector except banks and residential property.”Dal Thomsen said AP Pension was now hoping Chinese equities prices would rise from their current low levels.However, more weakness in Chinese stock markets will be no deterrent to AP Pension’s strategy.“If the market drops further, then we’ll buy some more stocks,” said Dal Thomsen.
Funding across the UK defined benefit sector fell to new record lows in August, despite the Pension Protection Fund (PPF) 7800 index revisiting its own estimate of assets held by nearly 6,000 schemes.The lifeboat fund’s monthly estimate calculated an aggregate deficit of £459.4bn (€538bn) at the end of last month, equivalent to a system-wide funding level of 76.1% and down by more than 3 percentage points month on month.It also estimated liabilities across the 5,945 DB funds stood at £1.9trn, up by more than £100bn since July and an increase of £430bn year on year.Andy Tunningley, head of strategic clients at BlackRock, noted that funding ratios had dropped for the fourth consecutive month. “To compound matters,” he added, “the goalposts have shifted even further away, as the costs of insuring pension liabilities – already elevated for non-pensioner liabilities – are likely to have risen further given compressed corporate-bond spreads.”The increase would have been starker had a new estimate of pension assets by the PPF not seen a 2%, or £31.2bn, upward revision of total assets under management.“The return from growth assets in August was no match for ballooning liability values,” Tunningley said.“The key driver of increasing liabilities continues to be Gilt yields, which fell materially as the Bank of England cut interest rates and announced a package of new quantitative easing.”Boris Mikhailov, investment strategist for global investment solutions at Aviva Investors, agreed.“As a result, most pension schemes’ assets lacked pace and did not increase in value by as much as their liabilities,” he said.“This is due to their under-hedged position in rates, which continue to drive deficits up as yields fall.”
Danish pension funds PFA and Industriens Pension are joining forces to invest DKK1bn (€135m) in residential property in Denmark’s “growth cities” outside of Copenhagen and Aarhus.The money will be invested via a new investment fund set up by privately-held property firm Thylander Group, called Danske Boligejendomme (Danish Residential Properties), the pension funds said.Peter Frische, head of real estate at Industriens Pension said: “This is going to be an investment with low risk, that will be able to give a stable, attractive return for our members.”PFA and Industriens Pension will each have a 49.5% stake in the fund and Thylander Group will own the remaining 1%. Michael Bruhn, director of PFA Ejendomme (PFA Real Estate), said the fund would build up a portfolio of residential properties in selected cities and towns outside the capital, Copenhagen. Cities such as Odense and Aalborg were identified as being growth areas, with regard to the expected development of “megatrends” and demographics.“In this way, we are involved in supporting a varied housing stock with attractive rental homes in the cities, and it is a good source of return for our customers at the same time,” Bruhn said.The Danish capital Copenhagen, and the country’s second largest city Aarhus, have attracted the lion’s share of interest from property investors in the last few years of the booming real estate market, but PFA and Industriens Pension cite research commissioned by Thylander Group to argue the case for investing outside these two urban centres.According to the new study from the Copenhagen Institute for Futures Studies (Instituttet for Fremtidsforskning), there are 29 Danish cities and towns – besides Copenhagen and Aarhus – that are experiencing population growth and need more homes of different types.The newly-established fund will invest the DKK1bn that the pension funds are committing by 2019, Industriens Pension said.The two funds manage total assets of DKK607bn and DKK150bn respectively.
The UK government’s power to keep local authority pension investments in line with national foreign and defence policy has been quashed.A High Court judge ruled last week that the guidance, announced only last year, had been used unlawfully.The guidelines related to procurement and required local government pension schemes (LGPS) to have a policy on environmental, social, and governance issues. However, it also affected some schemes’ decisions to divest from certain companies.The Palestine Solidarity Campaign, which brought the case, said the power was introduced “specifically to curtail divestment campaigns against Israeli and international firms implicated in Israel’s violations of international law, as well as to protect the UK defence industry”. Unison, the biggest trade union in the public sector, said it was “preposterous that local government funds had to invest in the best interests of UK foreign and defence policy”.Several European pension investors – including Norway’s Government Pension Fund Global and the Dutch healthcare scheme’s asset manager, PGGM – have divested from specific Israeli companies in recent years because of concerns about the treatment of Palestinians in contested territories in the Middle East.Conversely, some authorities have introduced anti-boycott legislation. In 2015, the US state of Illinois put a legal block on five state pension funds’ ability to invest or maintain holdings in companies that directly or indirectly boycotted Israel.The UK ruling would not prevent government from intervening in how local authority pensions are invested. Ralph McClelland, a lawyer at Sackers, said funds “should only take a non-financial factor into account if they are satisfied that this view is shared by the membership and ratepayers and if they can do so without significant financial detriment to the fund”.Unison, however, wants the government to go further and make the £217bn LGPS system subject to the EU’s IORP directive. This would require schemes to analyse their portfolios in depth to assess their exposure to carbon-intensive assets.John Hanratty, head of pensions in the north at law firm CMS, described it as “anathema” that the biggest funded pension scheme in the country was not subject to the same regulations as private-sector schemes. “The 2016 regulations were apparently motivated in part by political interests, which is unsettling,” he said.The government may yet appeal the ruling or rewrite its guidance.
“We are now communicating our expectations more clearly to trustees. Those who fail to respond to our more directive approach may face further regulatory action.”The campaign follows a 2016 discussion paper from TPR looking at how standards could be raised among trustees and pension schemes’ governance improved.Last week the regulator said it had found “major gaps” in pension fund governance, with many small and medium-sized pension schemes demonstrating disappointing shortcomings.A week earlier, the UK pension scheme trade body said TPR needed to be less focused on processes and more on people in its approach to regulating pension fund governance.Commenting on TPR’s new campaign, Darren Redmayne, CEO of Lincoln Pensions, said he anticipated it would increase the regulatory burden on schemes, with smaller schemes likely to feel this most.“Perhaps obvious ‘winners’ from this campaign will include the professional trustee and covenant advisory firms who, I expect, will see even more work come their way as lay trustees respond to these reaffirmed expectations,” he added. The UK’s pension regulator has launched a communications campaign to make clearer its expectations of pension fund governance and what it will do if its standards are not met.The Pensions Regulator (TPR) has launched a dedicated section of its website containing “specific and relevant content that sets out clear standards that TPR expects schemes to meet”.The campaign does not involve new or higher standards being set, but the regulator being “clearer and more directive”, it said.Anthony Raymond, acting executive director for regulatory policy at TPR, said: “We have set out our intention to be clearer, quicker and tougher. This campaign is one of the ways we are delivering this commitment and I would like to see all trustees visit the new campaign web page to ensure they are doing all they can to safeguard their members’ benefits.
“The proposals would entail new powers for EIOPA to set the policy priorities of national supervisory authorities, to review their supervisory activities and to obtain information directly from pension funds,” said PensionsEurope.National pension supervisors should have the freedom to decide their own priorities based on relevant national trends and not adhere to EIOPA’s strategic supervisory plan, according to PensionsEurope. European pension funds are worried that levying the industry to fund the European Insurance and Occupational Pensions Authority (EIOPA) would lead to less oversight of the authority from EU institutions and member states, according to PensionsEurope.Commenting on the European Commission’s review of EIOPA and the other European supervisory authorities (ESAs), the association said pension funds feared this might happen if EIOPA’s budget were funded to a lesser degree by national and EU contributions.The Commission has proposed that EIOPA be given the power to raise a levy on pension schemes. PensionsEurope said funds were not directly supervised by the ESAs and therefore opposed industry fees.It said pension funds were also concerned that proposed new powers for EIOPA would be used by the authority “to urge national supervisors to adopt its view of how pension funds should be regulated”. The European Commission has proposed giving more powers to EIOPAOne of the main thrusts of the Commission’s proposals for the ESA system is to empower the European Securities and Markets Authority (ESMA), which would be entrusted with direct supervisory power in certain financial sectors. The Commission has spoken of establishing “a single capital markets supervisor”.PensionsEurope said it supported the objective of further convergence of capital markets supervision, and that ESMA should play a role in “ensuring that the harmonised rulebook is applied consistently across the EU”.It made sense to boost ESMA’s powers vis-à-vis third country firms, “so that European institutional investors can be confident that they too behave prudently,” added the association.However, increased powers for ESMA should be accompanied by “adequate representation” of pension funds and their dedicated asset managers in its stakeholder groups, it said, and ESMA would need to strengthen its engagement with stakeholders.The proposed strengthening of mandates for ESA stakeholder groups was welcome, said PensionsEurope, although this should not be a reason to change the composition of the groups. The process for selecting members of the stakeholder groups should be transferred to the Commission, it said.PensionsEurope expressed concern about underrepresentation of pensions expertise at EIOPA, in particular given that its pensions mandate would expand under the Commission’s proposal for pan-European personal pension products. The regulation on EIOPA should therefore require the Commission “to consider the expertise and competences of the executive board when shortlisting candidates”, said PensionsEurope.The European Systemic Risk Board (ESRB) should avoid having a bank-bias in its approach to other financial sectors, with pension funds fearing being unduly categorised as of systemic importance to financial stability, the organisation added.The Commission has proposed that the president of the European Central Bank chair the ESRB on a permanent basis.The proposals are now with the European Parliament and the Council.
Patrick Heisen, partner at PwC, said this was likely to reverse as fees came under more pressure.“This is in part thanks to the regulation of the European Markets in Financial Instruments Directive (MiFID II), which has lead to greater cost transparency, but also to institutional investors becoming more cost-conscious,” he said.Heisen added that the introduction of cheap passive investment products had accelerated this trend.“Although interest in active products is to remain, their added value must be better demonstrable to institutional investors,” he said.PwC concluded that costs would come down across all asset classes, and would affect cheaper passive products and more expensive hedge funds.Fees for passive investments were expected to drop from 0.15% to 0.12%, PwC predicted, while costs for active equity mandates would fall from 0.54% to 0.44%.“At these funds, we see the emergence of alternative fee structures, with the fee in part linked to outperformance,” Heisen said.PwC indicated that the predictions applied to worldwide investments, but said it expected that decreases would be more significant in Europe and Asia, as the fees were higher relative to those in the US.According to Heisen, asset managers should adjust their fee policy to the wishes and goals of institutional investors, adding that variation in fee models was still limited.Innovation and rationalisationPwC also recommended asset managers intensify product innovation, such as passive smart beta funds or funds investing in illiquid classes, including private loans.“Moreover, asset managers should made clear choices, for example through rationalising their propositions,” the group said.It said it expected a quarter of investment funds currently available to investors to disappear in the next few years.Asset managers should also focus on retaining talented staff with an attractive working environment, PwC added, as technology was required to reduce costs.However, Heisen also warned pension funds not to be too fixated on costs “as pension funds are long-term investors who also want asset managers still to exist in five years’ time”.“Therefore, it is also important to check whether an asset manager is also preparing for the future, for example through sufficient investments in technology and digital infrastructure,” he said. Asset management costs for all asset classes are expected to drop by 20% by 2025 as fees are increasingly based on performance, according to PwC.In a new report – Asset and Wealth Management Revolution: Pressure on Profitability – the consultancy argued that asset managers must embrace new technologies in order to cushion decreasing income.PwC based its forecast on an analysis of the annual reports of 64 asset managers with combined assets under management of €40trn.The past five years were a golden period for large asset managers, PwC said, as margins rose by almost 16% and costs fell almost 16% relative to an income decline of almost 10%.
The European Commission is targeting the development of an equity index family covering all listed companies in the EU, flagging the possibility of the emergence of a “Capital Markets Union asset class”.The aim is to facilitate increased investment in a large pool of companies, including small and medium-sized enterprises (SMEs), in particular in the Baltics and central, eastern and south-eastern Europe.These represented the bulk of companies listed in the EU in recent years, but typically were not included in EU-wide equity indices calculated by international index providers, the Commission said in a tender document for a feasibility study for the creation of a CMU equity index family.In addition, in recent years institutional investors had shifted their attention to larger and more liquid listed companies, to the detriment of smaller listed companies and markets, it said. Classifying certain EU countries as frontier markets prevented institutional investors from being able to allocate to them, the Commission noted, highlighting Bulgaria, Croatia, Estonia, Latvia, Lithuania, Romania, Slovakia, and Slovenia. Credit: Voytek SRiga Stock Exchange in LatviaEstonia, Lithuania, Romania and Slovenia are included in MSCI’s frontier markets index family, while Bulgaria is a standalone index, but based on MSCI’s size and liquidity criteria for frontier markets.“The creation of an EU-wide CMU index could facilitate greater local and foreign capital inflows from a broad range of investors and enhance access to finance for a larger pool of companies, especially SMEs,” said the Commission. “SMEs in all countries and more generally in small capital markets could benefit from such [a] broadly defined and inclusive index.”The possible emergence of a “CMU asset class” could also help overcome different country classifications at EU member state level, the Commission added.US exampleThe Commission cited the Wilshire 5000 Total Market index in the US as a possible example of what the CMU index could look like. The Wilshire 5000 is a market cap-weighted index of all stocks actively traded in the US.The feasibility study should develop the conceptual framework for a CMU index family and assess its market potential, according to the tender document. The market potential assessment should be based on “extensive market research and surveys among relevant institutional investors who should be also tested for the acceptance of the newly designed index”.“The analysis should pay special attention to asset manager institutions who act as opinion leaders for end institutional investors,” added the Commission.The index should comprise companies listed on regulated markets and SMEs listed on growth markets, it said, and there should be sector or thematic sub-indices. These should cover “strategically important areas”, such as fintech or sustainability.The deadline for applications is 8 February and the documents are available here.