Portugal’s government has been given the go-ahead by Parliament to make cuts to the country’s occupational pensions system and raise the retirement age from 65 to 66, after several weeks of uncertainty.A proposed 10% cut in public sector pensions of more than €600 a month was overruled by the country’s constitutional court last December, on the grounds it contravened the principle of trust between pensioners and the state.Furthermore, the country’s 2014 budget, passed by Parliament on 30 December 2013, was sent to the constitutional court for review by president Anibal Cavaco Silva the day after he ratified it.Cavaco Silva considered some of its contents, including public sector wage cuts, too harsh. But the president has since received legal advice that the budget does not infringe the constitution.However, the government still needed to make savings to replace those from the rejected public sector pension cuts.Parliament has now passed changes to amend the state budget accordingly.The changes include reducing the threshold for the extraordinary solidarity surcharge (CES) on total pension income received by retired individuals, from €1,350 to €1,000 per month.The CES was brought in after Portugal agreed a €78bn bailout deal with the so-called troika of the European Commission, European Central Bank and the International Monetary Fund in 2011.The CES is levied at between 3.5% and 10%, depending on income.The government has also now introduced rates of 15% and 40% for higher income bands.Furthermore, contributions to public sector health insurance schemes for the civil service (ADSE), armed forces (ADM) and police (SAD) are also raised from 2.5% to 3%, reducing the employer’s contribution from 1.25% to 0.75%.A third change is the increase in pension contributions by public sector workers from 2.25% to at least 3% of salary.Besides raising the retirement age by a year, there is also now a mechanism for building future increases into existing legislation.The Portuguese government estimates the total amount saved by these measures will amount to €388m and ensure the state deficit is reduced to its 4% of gross domestic product (GDP) target during 2014.The bailout deal ends this coming June, after which Portugal hopes to rely solely on the markets to finance government programmes.However, the government said the measures would be temporary, and it would study the court’s earlier decision to find a constitutional process of making permanent cuts in the pension system, put it on a sustainable footing and reduce the public debt.Meanwhile, there has been a change in the way the sustainability factor, which links the level of pensions to increasing life expectancy, is determined.It was previously calculated as the ratio between life expectancy in 2006 and life expectancy in the year prior to retirement.The reference year has now been changed to 2000, changing the new sustainability factor for 2014 from the expected 5.43% to a 12.34% reduction in starting pension.The other main change of the legislation relates to the application of the new sustainability factor.In future, it will not be applied to reduce the retirement pension – instead, it will be applied to increase retirement age.For each month of work after 65 years, workers will be credited a ‘reference bonus’ of 1% of pension.So a 65-year-old worker would have to work 12 more months to reverse the effect of the application of the new sustainability factor of 12.34%.This way, the retirement age has been changed from 65 to 66 years as from 2014.In future, longer life expectancy will increase the retirement age, to reach 67 years in 2029. Catarina Galvao, senior consultant at Towers Watson in Lisbon, said: “From the government’s point of view, this is not a win-win situation in relation to pension costs.“The savings in pension payments they will make in 2014 with the increased retirement age will disappear in 2015 when those employees start to receive their pension, without any reduction from applying the sustainability factor.”The government also said it would set up a working group to study the future of the pensions system and options for reform, once the constitutional court had delivered its decision.
The cost of centrally clearing trades associated with hedging programmes is forcing pension providers, including the UK’s Pension Protection Fund (PPF), to examine new approaches.Opkar Sara, principal fund manager for asset allocation and investment strategy at the PPF, told IPE magazine the “unintended consequence” of increased regulation of the derivatives market was an increase in the cost of the lifeboat fund’s hedging programme.“The Gilt repos are less impacted, and the assets affected are mostly ones that fall under the International Swaps and Derivatives Association’s purview – the swaps and total return swaps. These are impacted by clearing rules,” he said.“We are looking for new ways to reduce that cost and decrease our reliance on them over the long term.” Jannik Hjelmsted Nielsen, senior portfolio manager at Denmark’s PKA, also noted the increased costs that would come as a result of central clearing requirements, such as client broker fees.“However, we have observed that, with other standardised instruments, such as rate futures, when clearing is introduced, spread costs fall,” he said.“We hope for this positive impact because many other aspects point to higher costs in future.”Sara also echoed previous comments by Martin Clarke, outgoing executive director of financial risk at the PPF, that it would examine other hedging options not reliant on clearing.“One idea we have considered but have yet to implement is the use of illiquid assets such as infrastructure and loans, with stable cashflows being used as a hedge in place of interest rate swaps,” Clarke told IPE last year.He said the fund was looking to reduce its dependency on unfunded hedging strategies and instead opt for a hybrid approach.“This will involve including more physical assets and making a greater allocation to illiquid asset classes and buy-to-hold strategies to improve performance and maintain our hedge effectiveness,” he added.The fund in January said it was also considering entering the direct lending market.For more, see On The Record in the June edition of IPE magazine
Pension Insurance Corporation (PIC) has invested £114m (€143m) into university student accommodation in Central London.PIC, which specialises in insuring the liabilities for defined benefit (DB) pension schemes, is the sole finance provider to help the University of London redevelop part of its student housing.The facility, once complete, will provide 1,200 student rooms for the university that will be run and managed by the University Partnerships Programme (UPP).The allocation to housing falls under PIC’s infrastructure portfolio, which includes other social housing investments. PIC has insured close to £2bn of liabilities in 2014, requiring it to further develop its investment portfolio to match its longer-dated liabilities.Investment manager at PIC, Delphone Deasy, said: “In the right investment structure, student accommodation is a good investment for PIC, providing long-dated, secure cash flows to help us match our pension liabilities.“With £3.7bn of pension scheme liabilities insured by us last year and almost £2bn so far this year, we have a growing portfolio and appetite to invest in further opportunities of this nature.”In other news, the Pension Protection Fund’s monthly update on the state of UK DB schemes has revealed the funding level has risen over the month of June.Calculated on an s179 basis, which estimates a pension scheme’s ability to pay out PPF-level benefits, the current deficit of 6,150 schemes is £109bn, down from £118.2bn – although still £4bn higher than 12 months previous.The aggregate amount of assets over the month of June fell by £3.5bn to £1.17trn, most likely driven by a 1.5% fall in the FTSE All Share.However, liability levels fell by £12.7bn to £1.28trn after the yield on 15-year Gilts rose 8 basis points.Liabilities over the 12 months have still risen significantly.There are now 4,308 schemes in deficit and 1,842 schemes in surplus.
ARC Fiduciary has launched an Energy Transition Opportunity Fund, which will invest in infrastructure projects focusing on the transition from fossil fuel to renewable energy in the US.Ingram started his career as a specialist in sustainability and private markets at APG in Amsterdam.He has also served as chairman of APG working group Principles for Responsible-Investment Hedge Funds, as well as manager of APG’s Opportunities Fund.Dempsey Gable, co-manager of ARC’s climate fund, has also managed the same fund at APG.APG said it had not yet appointed Ingram’s successor and that his tasks had been divided across the organisation.It added that it was too early to say whether it would commit assets to Ingram’s new funds. Paulus Ingram, head of hedge fund investing at APG, has left the Dutch asset manager to co-found a US-based institutional manager focusing on sustainable investing.The new company, ARC Fiduciary, will seek to achieve financial outperformance while contributing to the United Nations Sustainable Development Goals.Ingram, who has worked at APG since 2010, operated from the company’s New York office, where he was responsible for more than €25bn in hedge fund holdings.He pointed to a “considerable” lack of sustainable-investment opportunities for large institutional investors and said many pension funds wanted to reduce their carbon footprint significantly.
Lærernes said it had a solid level of reserves and was easily able to manage the Danish FSA’s various stress tests, which made it possible to take more risk with investments and therefore get higher returns.“The investment strategy for the next few years involves the company continuing to be able to invest in sectors where it is possible to make a good profit,” the pension fund said.Before Christmas, the pension fund set an account dividend of 5.61% for 2017, it said, adding that costs had been lowered again and now amounted to 1.25% of contributions.But it warned of lower returns this year.“We don’t expect to get the same high level of return in 2017,” it said, “so the return from 2016 will help to ensure that the teachers are able to have a good account dividend in the next few years as well.” Danish labour-market pension fund Lærernes Pension said it made an 11.3% return on investments last year but warned that its assets were unlikely to be as profitable this current year.Reporting preliminary return figures just days after the close of the year, the DKK70bn (€9.4bn) pension fund for teachers said emerging market investments in particular boosted the 2016 result.The pension fund said: “There have been gains in virtually all investment sectors, but particularly emerging markets stood out, with a high equities return.”The fund also said its asset managers did better in this sector than the market in general.
The government has proposed two main measures. David Gauke, secretary of state for work and pensionsIt wants to drop the lower age limit for auto-enrolment to 18, from 22.This would introduce some 900,000 young people to the benefit of workplace pension saving and would add £770m to total annual pension savings in 2020/2021, it said. The period represents the first full year after forthcoming phased increases to contribution rates.The government also wants to scrap the lower earnings limit (LEL) to make every penny earned pensionable. Currently, individuals contributing to pensions through auto-enrolment do not pay contributions on the first £5,876 of their earnings.According to the government, removing the LEL would bring an extra £2.6bn into pension saving.The government also plans to review contribution levels once the 8% contribution rate is implemented in 2019.It also planned to test different ways – “targeted interventions” – to support the self-employed saving for their retirement. Around 4.8 million individuals, or 15% of the UK workforce, currently classified themselves as being self-employed, according to the government.Since 2012, when auto-enrolment was launched, workplace pension participation in the public and private sectors has increased from a low of 55% in 2012 to 78% in 2016, according to the government.However, its latest review of the policy estimated there were still around 12 million individuals not saving enough for their retirement, representing 38% of the working age population.The secretary of state for work and pensions, David Gauke, said: “We are committed to enabling more people to save while they are working, so that they can enjoy greater financial security when they retire.“We know the world of work is changing, so it is only right that pension saving does too. This ambitious package will see more people than ever before helped onto the path towards building a secure retirement.”“The proposed pace of change is shockingly lethargic” Sir Steve Webb, director of policy at Royal London and former pensions ministerThere were varied reactions from the pensions industry.Graham Vidler, director of external affairs at the Pensions and Lifetime Savings Association, said the new measures, plus the commitment to review contributions after 2019, marked “real progress”.It was “vitally important” to get more self-employed people saving for their retirement, he added, citing figures showing that the number of self-employed people who contributed to a pension scheme fell from 1.1 million to 380,000 between 2001 and 2015.Sir Steve Webb, director of policy at Royal London and former pensions minister, said the government’s review contained some “great ideas”, but the proposed pace of change was “shockingly lethargic”.“Talking about having reforms in place by the mid 2020s risks leaving a whole generation of workers behind,” he said. “Those who never got to join a final salary pension and who have only recently come into pensions through automatic enrolment need urgent action to help them build up a decent pension pot.” From the perspective of businesses, however, the reform schedule was welcome.Neil Carberry, managing director at the Confederation of British Industry, said it was right to let the first phase of auto-enrolment policy bed in before further changes were made.“A timeline of the mid-2020s for new proposals would be sensible and enjoy business support,” he said.But he said that taking steps sooner rather than later to encourage more pension saving among the self-employed was the right approach.For the federation of British trade unions, the government review was “a mixed bag”.TUC general secretary Frances O’Grady said it was positive that pension contributions would increase, but that too many low-paid workers would still not be covered by a workplace pension. The UK government has proposed expanding auto-enrolment to capture younger workers and more earnings.It has said the measures combined would increase pension saving by just over £3.8bn (€4.3bn).It wants to implement the proposed changes in the mid-2020s, subject to discussions with stakeholders around the detailed design in 2018/19 and a subsequent formal consultation with a view to introducing legislation.Its proposals are the outcome of the Department for Work and Pension’s review of automatic enrolment, which the government said confirmed the policy’s “harnessing of inertia” had worked.
“TPR threatened on seven occasions to use a power to enforce pension contributions on the sponsor that it has never used,” the politicians wrote. “These were empty threats; the Carillion directors knew it and got their way.”The MPs noted that TPR had pledged to be “quicker, bolder and more proactive” but said they were “far from convinced” that its current leadership was equipped to effect that change.It was the government’s responsibility to ensure this cultural change happened at both TPR and FRC, according to the politicians. Without this, any steps the regulators took or new powers they were given would have little impact, the committees said.Their report indicated that the Work and Pensions Committee would “further consider TPR” in its inquiry into the government’s white paper on defined benefit (DB) pensions policy.TPR chief executive Lesley Titcomb said the balance of priorities between members and employers in the past “was not always right”. The politicians’ report underlined the significant changes already made at the regulator, but there was more work to do, she said. The UK pension regulator needs to undergo “substantial cultural change” in addition to being equipped with new powers to avoid another corporate collapse like that of contracting firm Carillion, according to an influential group of politicians.In a damning report on their inquiry into Carillion’s collapse, the pensions and business select committees said the company’s board was “both responsible and culpable” for the company’s failure.However, they also found fault with many other actors, including the regulators. One of the most concrete recommendations was reserved for the auditing profession, with the politicians calling for the UK’s big four accountancy firms to be referred for a competition investigation. The committees said they had “no confidence” in the supervisors, and accused the Pensions Regulator (TPR) and the Financial Reporting Council (FRC) of being “united in their feebleness and timidity”. Robin Ellison appearing before MPs in January30 January: Trustee chair Robin Ellison is quizzed by politicians but rejects claims that his board let the company wriggle out of contributions30 January: FRC chief executive Stephen Haddrill is also questioned by politicians over the quality of accounting standards20 February: Committee chairman Frank Field accuses Carillion executives of being “contemptuous of their pension obligations” as a series of documents relating to the pension schemes and going back more than a decade are published22 February: TPR’s Nicola Parish says the supervisor is pursuing all avenues to reclaim money for the Carillion pension schemes, including action against individual directors7 March: Asset managers Aberdeen Standard Investments and BlackRock promise to improve their stewardship rules 19 March: The UK government’s proposals for DB reform include criminal sanctions against company directors who fail to fund their schemes A tougher regulator“We are now a very different organisation,” she added. “We are clearer about what we expect, quicker to intervene and tougher on those who do not act in the interest of members.“We have reinforced our regulatory teams on the frontline and are embedding a new regulatory culture. We sought stronger and clearer powers on scheme funding from DWP and we are working with the government on how to implement the changes in the white paper, alongside our wider changes to how we regulate.”TPR plans to increase its staff by 12% this year and to become “a clearer, quicker and tougher regulator”, it unveiled in its recently published corporate plan for the 2018-21 period.Patrick Bloomfield, partner at Hymans Robertson, called for the government to review TPR’s “irreconcilable objectives to promote sustainable economic growth and protect pension schemes and the PPF”.“Carillion’s legacy will be to toughen TPR,” Bloomfield added. “Corporate failure has always been the catalyst for pension legislation… It is not the pensions industry’s place to be apologists for its regulators. The sad reality is that thousands of examples of good practice are undermined by a few spectacular failures. The consolation is that we can use these failures to raise the bar.”Martin Hunter, principal at consultancy group Xafinity Punter Southall, said much of the activity reviewed in the select committees’ report was from a few years ago, in particular the time of the 2008 and 2011 scheme valuations. He said the regulator would argue that its culture and approach had changed and would do so even more subsequent to the DB white paper.In the white paper in March the government proposed new powers for TPR, including an expanded remit to fine directors and companies to tackle irresponsible activities that might hurt pension schemes, and a tightening of the rules around mergers and acquisitions.Carillion’s downfall: a timelineCarillion was forced into liquidation in January with a number of pension schemes it sponsored entering the assessment period for entry into the Pension Protection Fund (PPF). The combined pension deficit was £804m (€911.6m) according to the company’s last annual report.The regulator had “failed in all its objectives regarding the Carillion pension scheme”, according to the committees. They said the schemes might have ended up in the PPF regardless of TPR, given the company’s poor management, “but the regulator should not be spared blame for allowing years of underfunding by the company”.15 January: Carillion declared bankrupt; pension schemes enter PPF assessment
Credit: Thomas AlexanderGerben de Zwart, APG’s head of quant equities, at IPE’s Equities conference in JuneAt the conference, De Zwart noted that the rise of passive investing was also being reflected in the bond markets, albeit with a delay of several years compared with equity markets.At the same time, as a result of regulation, more trades and trade information were being reported, which could be collected with the help of advanced computers and data storage.“If you combine that with the academic research that is finding added value in the corporate bond markets for similar quant strategies, my hypothesis is that within five years it could very well be that the structure of the corporate bond markets will be similar to the equity markets,” he said. APG currently has a 45% allocation to quant strategies as part of its €170bn listed equity portfolio. It is the asset manager for the €405bn Dutch civil service scheme ABP. De Zwart said the amount APG planned to allocate to quantitative credit strategies was not yet fixed. It wanted it to represent a “serious step”, although in terms of its whole portfolio it would be a “toe in the water”, he added. “We target managers who really take responsibility of the performance through a quant approach,” he added, “and who for that reason take quant investing very seriously and spend time and resources on enhancements or continuous enhancements of their investment strategy.” APG, one of Europe’s biggest asset managers, is planning to allocate to quantitative strategies for investing in corporate bonds.Speaking at IPE’s equities conference in London last week, Gerben de Zwart, head of quantitative equities at the €470bn pension investor, said he foresaw the corporate bond markets evolving to resemble the structure in the equity markets over the next five years. “A part is allocated to passive, a part is allocated to quant strategies and a part is high conviction fundamental investments,” he told delegates. “We want to be one of the leaders on the quant side and we are currently looking at allocating money to quant managers within the corporate bond markets.”Speaking to IPE, De Zwart said APG wanted to hire one or two external quant credit managers “with the aim to outperform the credit index through quant investing”.
Redington, St James Place, Man Group, Hymans Robertson, Societe Generale, Schroders, Epoch Investment Partners, Mesirow Financial Redington/St James Place – Rob Gardner (left), co-founder of the UK investment consultancy firm, is leaving to become director of investment management at St James Place , a FTSE 100-listed wealth manager. He replaces David Lamb, who will retire as a director in the new year.He established Redington in 2006 with Dawid Konotey-Ahulu , and led it to become one of the country’s leading investment consultants. Gardner will retain a non-executive position at the company when he takes on his new role from 7 January 2019. Redington currently works with St James Place on an advisory basis, helping it select fund managers for its range of investment products offered exclusively to clients of its 3,800 financial advisers.Man Group – The global active investment management firm has promoted Jason Mitchell to co-head of responsible investment. He holds the role alongside Steven Desmyter . In a statement, the company said the pair would work across its business “to ensure that investment processes and policies identify and integrate operational, governance and strategic risks”.Mitchell will also advise funds for which ESG, impact investing, engagement and “norms-based screening” represent a principal feature of the strategy, the company said. He was previously a sustainability strategist at Man Group, where he has worked since 2010.Hymans Robertson – The pensions and risk consultancy has promoted Anthony Ellis to the role of head of its investment consultancy practice. He takes over from John Walbaum , who is an equity partner at the company and will continue to work within the investment consultancy practice. Ellis has led the firm’s defined contribution investment proposition for three years and was made a partner in 2014. Before joining Hymans Robertson, he was an investment actuary at Phoenix Group. Santander UK Pension Scheme – Paul Trickett has been appointed chairman of Santander UK Pension Scheme’s board of trustees, succeeding Lord Shuttleworth. Trickett is also chairman of Railpen Investment, a non-execuive director of Aviva Life, and a trustee of the Mineworkers’ Pension Scheme. His previous roles include head of the EMEA global portfolio solutions group at Goldman Sachs Asset Management and CEO of the British Coal pension schemes.Societe Generale Securities Services – SGSS has appointed Mathieu Maurier as country head for Luxembourg, effective 1 September. He was previously head of coverage, leading the global sales and distribution efforts for the custodian. He has worked for the French financial services group in various roles since 1994.Meanwhile, Gildas Le Treut has been appointed global head of sales and relationship management, replacing Maurier. He joined the company in May from ABN Amro, where he was global director of prime clearing.Schroders – The UK-based listed asset manager has hired Claire Walsh as personal finance director, working across the firm’s communications, business development and public affairs departments. Walsh is a chartered financial adviser and joins from Aspect8 , a financial planning company based in Brighton and part of Benchmark Capital, in which Schroders has invested since 2016.Epoch Investment Partners – US-based equity specialist manager Epoch Investment Partners has named Philipp Hensler as president and chief operating officer. He replaces Timothy Taussig , a co-founder of the company, who is to retire at the end of the year. Hensler joins from Swiss asset manager Vontobel where he was president and CEO. He has also led distribution at OppenheimerFunds and worked for Deutsche Asset Management (now DWS) for more than 10 years in various leadership roles in the US and Switzerland.Mesirow Financial – The Chicago-based asset manager has hired Christopher Langs as managing director in its core fixed income management team. The company said Langs would work as a portfolio manager and credit analyst, responsible for the oversight of portfolio construction and trade implementation.Langs was previously a portfolio manager at GW&K Investment Management , a US fund manager, where he ran high yield and investment grade strategies. He has also worked at Calamos Investments and Aviva Investors.
BNY Mellon has launched an environmental, social and corporate governance (ESG) information reporting service for clients.It said the service would allow clients to track their portfolio investments based on ESG issues and United Nations Global Compact (UNGC) principles. The UNGC principles are principles for responsible business conduct.According to BNY Mellon, clients would be able to see “total ESG and UNGC scores on equities at the account level versus relevant benchmarks over time” and at the company-level.The data used for the reports was sourced through an agreement with Arabesque’s S-Ray quantitative tool, which uses machine learning to score companies on sustainability metrics. According to BNY Mellon, clauses within the new EU pension fund directive, IORP II, were causing increased demand for ESG scoring from institutional investors.Fraser Priestley, managing director of global risk solutions in EMEA at BNY Mellon, said: “We believe our new service around ESG metrics will be particularly helpful to a number of European pensions who… are required to disclose the relevance and materiality of ESG factors and how they are taken into account for risk management processes.” Neuberger Berman implements climate risk analysisNeuberger Berman says it has complied with the main recommendations of the Task Force on Climate-related Financial Disclosure (TCFD) and launched a “new resource to analyse potential climate-related risk”.Using different global warming scenarios, the asset manager’s portfolio managers analysed and reviewed which securities were likely to benefit or suffer from changes in weather patterns, regulation or technology.The firm then quantified the potential value-at-risk from climate change to all the listed equity and corporate bond holdings in its US mutual funds and international UCITS range, and said it would expand the analysis to holdings in other client portfolios in the future.In line with recommendations from the TCFD, the asset manager’s board had been charged with oversight of climate risk as part of its broader oversight of enterprise risk.TCFD-based reporting will be mandatory for signatories to the Principles for Responsible Investment from next year.Storebrand brings strategies to UKStorebrand Asset Management today announced the UK launch of three sustainable investment strategies.The Storebrand Global Multifactor strategy combines sustainability with value, size, momentum and low volatility as four equally-weighted risk factors.Storebrand Global ESG Plus is a fossil-free global equity strategy that tracks the MSCI World Index, while Storebrand Global Solutions is an actively managed global equity portfolio that aims to generate alpha by identifying businesses from developed and emerging markets that provide solutions to help achieve the UN’s Sustainable Development Goals.