Vehicles must be developed to allow for pension investment in small-scale infrastructure projects, a trustee of one of the UK’s largest pension fund has said.Donald MacDonald, trustee at the £40bn (€48.3bn) BT Pension Scheme, said infrastructure investment by the industry faced an uphill struggle, as there was too much money “chasing insufficient opportunity”.He said BTPS had been in competition for infrastructure projects with the UK’s Universities Superannuation Scheme and Railpen Investments, the Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan, as well as Australian Super funds.MacDonald told the RI Europe conference in London: “What we need to be doing is talking to the governments and inter-governmental organisations to look at how we package projects – because a lot of the projects, for pension funds, are actually sub-optimal. “We just haven’t got the resources and finance to manage loads and loads of small investment in infrastructure opportunities.“Things need to be bundled, risk needs to be shared. We need to look at better ways of mutual investment and co-investment vehicles, which is becoming much more part of the scene.”MacDonald, speaking at the event in his capacity as chairman of the Institutional Investors Group on Climate Change, said the UK’s Green Investment Bank and the European Investment Bank would be “quite critical” in allowing for such co-investment deals, as they were building alliances with private sector partners.He added that many governments and civil servants had only recently begun to understand that the construction risk of infrastructure investments was not of interest to pension funds.He said other parts of the financial market were simply better equipped for such ventures.Speaking of the BPTS’s annual pension payments in excess of £2bn, he said it needed to have a “very conservative risk profile”.“Although, interestingly, both myself and others, as we become more familiar with infrastructure issues, are starting to look at [construction] risk and possibly doing more in that area,” he said.BTPS was among the three pension funds to withdraw its support from the Pension Protection Fund-backed Pensions Infrastructure Platform (PIP) earlier this year, claiming at the time that its direct investment programme was the “most appropriate solution” for the fund. However, the two other funds – the London Pensions Fund Authority and the BAE System pension scheme – both cited concerns over the risk/return profile of the PIP.
“That is what fiduciary responsibility is about. It is not a legal concept, but what makes business sense.“Even if you were a selfish businessman, and wanted to build a business for the long term, it’s common sense starting with the customers.”BlackRock chief executive for Europe, Middle East and Asia, David Blumer, echoed Bonham Carter’s views and said starting with the legal definition of fiduciary duty was the wrong idea.“It has to be about core principles and values,” he said.“It is a trust people put in us as asset managers. If you start on the legal side and putting it into contracts, we are going to lose clients again.”The comments come as the debate over the definition continues within the UK asset management industry.The Investment Association, formerly the Investment Management Association (IMA), has previously called for fiduciary duty to be viewed as a code of conduct, rather than binding investors to a strict legal definition.However, critics of the IMA’s approach have said they were “suspicious” about attempts to focus the debate on a manager’s approach, rather than its legal responsibility.The Law Commission, the UK body responsible for the definition and interpretation of legal statute, is current evaluating the meaning of fiduciary duty, and whether the concept should extend further down the investment chain.The National Association of Pension Funds (NAPF) had also previously called on the Commission to provide guidance on the meaning of fiduciary duty, rather than an updated definition.Bonham Carter also said evidence of the fund management industry not implementing the duty in principle form was seen in product launches.He said managers launching products should be about what asset class would deliver in the next 10 years, and whether one had the resources to offer value and performance. Employing a strict legal definition of fiduciary duty when managing client assets is the first mistake a fund manager can make, senior industry figures have said.Discussing the issue at a panel on putting investor interests first, Edward Bonham Carter, vice-chairman at Jupiter Asset Management, said fiduciary duty was not a legal concept but one of morals and principles.Speaking at Fund Forum in Monaco, Bonham Carter said the ideology of starting with investor needs, and placing fiduciary duty as the foundation of asset management, made good commercial and moralistic sense.“It is the case of back to the future, and starting with the customer first,” he said. “If you get that right, then everything else flows from that.
The amendments made by the Italian EU Council presidency to the revised IORP II Directive will lead to “considerably lower implementation and follow-up costs” than the initial draft by the European Commission, according to Peter Gramke, head of Internal Audit at the €4.2bn SOKA-BAU, a supplementary pension plan for construction workers in Germany.Speaking at the German pension fund association’s (aba) annual conference, Gramke – one of the aba’s experts on European affairs – pointed out that the new proposal no longer contained any delegated acts linking IORP II to other legal frameworks, which “eases the burden considerably – also regarding costs”.He said there were fewer supervisory reporting demands than a year ago and that the Directive, were it to be implemented in its current form, would be a “limited burden” on pension fund costs. He said the information requirements had been cut considerably, adding that the Commission had “completely underestimated” these costs. Gramke also commended the Italians on changing the wording in the definition of IORPs from financial institutions to “pension institutions with a social purpose that are active on financial markets”.“This is an important [distinction] that will change regulation over the medium term,” he said.But Gramke said he was unsure why the Italians re-introduced an element to IORP II similar to the compliance function under Solvency II.“It is an artificial link, a bit torn between the internal control system and the revision, so it is basically a compliance element – then why not call it that?” he asked.One member of the audience voiced concerns that the chapter on ’risk evaluation for pensions’ in the IORP II was modelled too closely on the ORSA requirements under Solvency II.Dietmar Keller, head of division at German supervisor BaFin, said the requirement to calculate the funding needs and sponsor support would be tantamount to “introducing the holistic balance sheet (HBS) approach via the back door”.He said he was convinced that EIOPA would “continue to work on HBS” and bring it back to the table after the current commissioner’s five-year tenure, if not before.
Ola Eriksson, head of business support at AP2, added: “Cost-effectiveness and price pressure were the two main factors, but the exchange of knowledge was also very positive.”With the news, AP3 reappoints Northern Trust, while AP2 replaces its current provider.Separately, Northern Trust announced that it has won a custodial mandate in the UK.The company is to provide the London Borough of Brent to with global custody, performance measurement and valuation reporting services for its £650m (€930m) in pension fund assets.The mandate is Northern Trust’s seventh under the National Local Government Pension Scheme Framework. Swedish buffer funds AP3 and AP2 have appointed Northern Trust as global custodian for each of the funds.The funds procured Northern Trust’s services jointly, allowing them to “share experience” on operational processes, among other things.Mattias Bylund, chief risk officer at AP3, said the procurement process had been a cost-effective and “valuable exchange of experiences”.“It also showed the funds already have very good cooperation on key issues,” he said.
It said a harmonised approach to valuing assets and liabilities was central to being able to compare stress test results and assess the impact of shocks on financial stability at the EU level.This is the common methodology developed by EIOPA, which uses a market risk-free rate for discounting liabilities and is the main reason for the divergence between the deficits calculated under the NBS and common methodology assessments. It was based on current national regulations and the holistic balance sheet (HBS), although EIOPA said no decisions had been taken at EU level regarding the use of the HBS, “which is still subject to further EIOPA work”.Obvious but valuableBernardino acknowledged that some aspects of the stress test results “may seem obvious”, but he stressed the importance of having the data to show this.“That’s the first gain from the exercise,” he said, “both for supervisors and also in the engagement that supervisors will have with the national authorities.“I wouldn’t say there is something striking, or something that was completely unexpected from the results of the exercise. But, when we look at the numbers and the impacts of the different scenarios, we get much better knowledge and a much better understanding of where the real vulnerabilities are.”EIOPA carries out stress tests on a two-year cycle, and its next exercise is due to take place in 2017. In the interim, EIOPA will analyse the evolution of the market to decide what will be the relevant indicators to stress at that point in time.EIOPA said more work needed to be done to understand how IORPs’ vulnerability to economic shocks and prolonged adverse market conditions might affect financial markets and the real economy, especially via the mechanism of sponsors coming under pressure to increase future contributions.It has, however, concluded that the risk of pension funds transmitting financial shocks to other market participants is limited.The stance was welcomed by The Pensions Regulator in the UK, which noted that high-quality risk management and strong employer covenants were among “flexibilities” that limited the link between pension schemes and financial stability.Andrew Warwick-Thompson, executive director of regulatory policy at TPR, said: “We are not surprised EIOPA’s pension stress test found only a limited link between pension schemes and financial stability.“In our view, the results of the EIOPA pensions stress test illustrate the flexibilities under which UK pension schemes can operate.”Neither was the Dutch Pensions Federation surprised by the outcome of the stress tests, “as they had been conducted while pension funds’ balance sheets were already stressed”.It attributed EIOPA’s conclusion, that Dutch pension funds posed a limited risk to financial markets, to the long-term character of schemes’ liabilities and recovery plans.“As a consequence, Dutch pension funds have a stabilising effect on financial markets,” it said. The first EU stress tests of occupational pensions have provided useful information about their vulnerability to market shocks and the need to better understand the possible secondary impacts on financial stability, even though the exercise did not yield any big surprises, EIOPA chairman Gabriel Bernardino has said.Setting out the main outcomes of the stress test exercise during a press conference today, Bernardino stressed that it was too early for the supervisory authority to draw “absolute” conclusions about any systemic impact of IORPs’ vulnerability to market shocks or prolonged adverse market conditions, such as persistently low interest rates.He emphasised that the deficits shown by the stress tests under the different adverse market scenarios – using either a National Balance Sheet (NBS) assessment or the common methodology devised by EIOPA for cross-border comparison – did not represent funding shortfalls, and that there were various means by which economic and/or financial shocks could be absorbed by defined benefit schemes, such as long recovery periods or benefit adjustment mechanisms.The heterogeneity of the European pensions sector is also a hurdle to making more definitive conclusions, EIOPA said.
Norges Bank Investment Management (NBIM) has welcomed the Financial Stability Board’s efforts to draft “homogeneous, appropriate and consistent” reporting guidelines for climate risks.The manager, responsible for Norway’s NOK7.1trn (€763bn) Government Pension Fund Global, was responding to the Task Force on Climate-Related Financial Disclosures (TCFD) chaired by businessman Michael Bloomberg.It welcomed the TCFD’s attempts to draft an “effective” framework.In a letter co-signed by Petter Johnsen, CIO of equity strategies, and William Ambrose, global head of ownership strategies, NBIM said the development of any such framework of climate risks was a “priority”. It said the TCFD’s work could see consistent reporting across not only jurisdictions but also sectors and asset classes.The task force has already said it would like to introduce a reporting template for real assets as part of its work. “Sectoral guidelines are necessary, both to ensure appropriate information is disclosed and to avoid an unnecessary, heavy general reporting burden,” the letter continues.“A parsimonious set of consistent and comparable indicators, related to absolute and relative direct and indirect emission levels and future targets, as well as information about investment plans, underlying assumptions and selected asset-related information, could and should be achievable for most sectors.”The letter, released by NBIM earlier this month, also warns the TCFD about the differing types of climate risk facing investors.“Investors in secondary markets will face different risks and opportunities than, for example, the mortgage banks or insurance companies,” it adds.“Retail investors or investors without defined liabilities will be exposed to other challenges than traditional pension funds or life insurers.”The letter concludes by stressing the importance of continued research into climate-related risks.“A thorough understanding of the economy-wide and financial implications of climate change – and the appropriate weighing of impacts, costs and benefits – is necessary to arrive at a useful set of reporting items, within the right context.”The asset manager has extended grants to research on long-term ownership behaviour and engaged ownership.
Lufthansa Group’s pension scheme liabilities are set to shrink by “a high triple-digit-million” amount after members of the company’s cabin crew trade union agreed to new collective labour agreements.In a statement, the German flag carrier said a “sizeable majority” of the airline’s cabin personnel voted in favour of the new agreement negotiated by their trade union earlier this summer, formally ending a long-running industrial dispute.The new collective labour agreement entails changes to the remuneration structure and a shift from a defined benefit (DB) to a defined contribution (DC) pension scheme. Lufthansa said the deal will enable it to reduce the group’s occupational pension obligations by “a high triple-digit euro amount” and provide the group with annual savings in the “mid-double-digit-million-euro region”. “The vast majority of this will impact on group results for the current year, where it will have a correspondingly positive effect on the annual EBIT (but not on the adjusted EBIT) result,” said Lufthansa.As at 31 December 2015, Lufthansa had group pension liabilities of €10.8bn, representing a 63% increase on year-end due to the fall in the discount rate, from 2.8% to 1.6% as at 30 June 2016.In its half-year report published earlier this month, Lufthansa said that higher pension obligations put its investment grade rating granted by Standard & Poor’s at risk.“In the long term the switch from a defined benefit to a defined contribution system will reduce the burden,” it noted.In return for the cost concessions obtained by Lufthansa under the deal, cabin crew pay will increase and the staff will have guaranteed employment until 2021.Also, employees that do not draw so-called transition benefits by retiring before the earliest state pension age can have these counted toward their occupational pension entitlement. This was not possible under the system that is being replaced.The deal to which the cabin crew and Lufthansa have agreed is a proposal developed by a mediator, Matthias Platzeck, the former premier of the German federal state of Brandenburg.The new arrangement for pensions and transitional benefits will remain in effect until the end of 2023, the expiry date for the collective labour agreement.“However, this does not mean that the new pension scheme will be changed, amended or replaced by a new set-up after 2023,” a spokeperson told IPE.Pension entitlements accrued by active members prior to the transition to the new system coming into effect will remain valid, he added.The shift to a DC scheme has already been agreed for Lufthansa’s ground personnel, leaving pilots as the only labour group with which the company has not yet reached a settlement.In its half-year report the airline said that “important matters have still not been agreed with the Vereinigung Cockpit pilots’ union” but that “constructive, confidential talks are currently taking place”.
The European Investment Fund (EIF), part of the European Investment Bank Group, which helps European SMEs to access financing, is also involved.The fund is managed by BNP Paribas IP’s alternative debt team.It is incorporated in France as a closed-end Fonds Professionnel Spécialisé (FPS), structured as a SICAV, and has Fonds de Prêt à l’Economie (FPE) and European Long-Term Investment Fund (ELTIF) status.The fund is intended to be complementary to traditional bank loans.David Bouchoucha, head of institutional, and Laurent Gueunier, head of alternative debt management at BNP Paribas Investment Partners, said: “We are very pleased to have completed a successful fundraising, reaching our target level of €500m at first close. “This confirms the strong interest from investors in an asset class that offers a compelling investment opportunity.” French civil service additional pension scheme ERAFP and the Belgian pension fund for the construction sector are among institutional investors that have signed up to a European SME debt fund recently launched by BNP Paribas Investment Partners.The asset manager reached its target of €500m for the private debt fund at first close, which took place last Friday (30 September).The fund finances small and medium-sized enterprises (SMEs) in Europe by way of bank lending and fund financing, with the fund focusing on investing mainly in senior secured debt.A number of leading European institutional investors are involved, including major French social protection group AG2R La Mondiale, civil service pension fund ERAFP, Belgium’s Pensio B, the construction sector pension fund and the BNP Paribas Group.
Pension funds investing in the green economy should consider how they can help make the move away from fossil fuel-based energy generation a fair and just transition, according to former Ireland president and UN human rights commissioner Mary Robinson.Addressing delegates in Prague at IPE’s annual conference, she encouraged pension funds to invest in the green economy and back away from coal, but to be mindful of the individuals that could be hurt by these actions.“I’m aware that we also need to remember those who worked in the coal industry and the other fossil fuel industries,” she said.Citing a recent announcement from the Italian government that it planned to exit coal power by 2025, Robinson said this move could require more than 20 coal power plants to be closed by then, which “will be very stark and dramatic for a lot of families”. “I don’t know what the number is but it’s real people, a real contribution that they’ve made,” she said.She encouraged European pension investors to think about a “just transition – how to have a fairer transition to where we need to get to”. Robinson was asked by a delegate for a call to arms for pension investors as fiduciaries, whose “ability to invest how they might see fit, for example in clean energy, is somewhat restricted”.She also spoke about climate change and the implications of its impacts for political stability in Europe and other countries, touching upon the feelings of alienation in certain regions emanating from migration.However, Robinson emphasised that her approach to climate change was a human rights-based one.In concluding remarks she appealed to delegates to be “prisoners of hope”, borrowing an expression from Archbishop Desmond Tutu – one she said she had made her personal philosophy.“If you just describe how bad things are all the energy goes out of the room,” she said. “And indeed any sense of how to cope.”Being a prisoner of hope meant being realistic about problems but also seeing hope things can change, she said.“I believe that that hope for the world lies in that double framework of 2015,” Robinson concluded. “In the [UN Sustainable Development Goals] and the Paris climate agreement. “That is the sustainability of our world.”
“The main reasons were uncertainty over the trade war between the US and China, the domestic political situation in the US, and political fragility in Europe following the election of populist governments,” Geroa stated.The Basque pension fund’s equity allocation – 35% of its €2bn portfolio – lost 12.1%.During 2019 the fund’s equity weighting would be reduced to an average 25%, Geroa said, with a maximum of 30%, in order to avoid high volatility and losses.Geroa’s portfolio had a 58% allocation to fixed income as at end-2018. Mark-to-market fixed income lost 2.3% and short-term fixed income lost 0.2%, but fixed income held to maturity gained 3.2%.Meanwhile, investments in the Basque Country and neighbouring Navarra rose to 14.6% of Geroa’s total portfolio during last year. This included its 50% stake in Orza, an asset manager set up to invest in Basque businesses. The investment amounted to 2.6% of Geroa’s portfolio at 31 December 2018.Geroa Pentsioak provides supplementary pension cover for medium and low-paid workers, and was judged best Spanish multi-employer scheme in last year’s IPE awards.Rise in dollar softens Caixabank scheme losses Caixabank’s headquarters in Barcelona, SpainSpain’s biggest private sector pension scheme posted a 1.7% loss for 2018, down from a 1.8% gain for the previous year, largely down to poor performance in the fourth quarter of the year.Pensions Caixa 30’s equities allocation lost 8.6% during the year, compared with a 10.5% gain in 2017. All regions posted losses, with emerging markets declining by 10%. Eurozone equities lost 14.8% while its frontier markets allocation lost 15.1%.The fund’s control commission has decided to lower the scheme’s benchmark equity exposure for 2019 from 33% to 30% and to raise the fixed income benchmark from 46% to 51%. Within fixed income, it is increasing the weighting to US public debt to defend against market corrections.Pensions Caixa 30 – the €5.6bn employees’ pension scheme of the Caixabank banking group – also decided to lower the benchmark exposure for alternatives from 21% to 19%, while increasing exposure to private equity and real assets.In contrast to the equity losses, the scheme’s fixed income allocation made 1.9%, compared with a 4.3% loss the previous year. Non-eurozone bonds were the best performers in 2018, with a 5.5% return, while alternative fixed income gained 4.5%. The pension fund said these returns were lifted by the appreciation of the dollar.Alternatives made 6.1%, including private equity’s 16.1% return, and real assets, which added 12.8%.The fund’s portfolio is managed by VidaCaixa, which is owned by Caixabank. At end-2018, equities made up 31.4% of investments, with 40.7% in fixed income and 20.7% in alternatives.The result dragged down the three-year average annual return for Pensions Caixa 30 to 1.4%. In the three years to the end of 2017 it had gained 3% a year on average.For the five years to 31 December 2018 the fund added 3.2% a year, compared with 5.5% a year for the five-year period to 31 December 2017. Two of Spain’s biggest occupational pension funds are cutting equity allocations in the wake of investment losses incurred last year.Geroa Pentsioak, the multi-sector pension fund for workers in province in Spain’s Basque Country, lost 4.8% in 2018, compared with a 3.8% return from its benchmark.This also compared with a return of nearly 10% banked by the pension fund in 2017, and was also below the 3.2% average loss for Spain’s occupational pension funds during 2018. It took Geroa’s average annual return since inception in 1996 to 6.1%.The loss was due to poor performance across all markets, particularly in equities, said the pension fund.