The €6.3bn pension fund PostNL has hammered out an agreement with its employer and unions on a new pension plan, with limited sponsor obligation for plugging funding gaps and an increase of the retirement age to 67.In return, the pensions accrual will be increased, while the ‘franchise’ – the part of the salary exempt from pensions accrual – will be reduced.Because pension arrangements for the employees of PostNL and parcel delivery company TNT Express – currently implemented by the pension fund PostNL – will “diverge further”, a new pension scheme for TNT Express workers will be set up.As part of the new agreement, the accrual rate will be increased from approximately 1.92% to 2%, while the franchise will be lowered from €15,417 to €13,227. However, the stakeholders pointed out that the new accrual rate could be adjusted upward or downward, depending on the set cap on contributions.The pension fund, employer and unions also agreed to limit the sponsor’s obligation to fill in funding gaps to a yearly maximum of 1.25% of the scheme’s liabilities.The sponsor will make an additional €300m available, but only for the next four years.To prevent a coverage shortfall at the end of this year, PostNL will make another €150m available.Last August, the scheme’s funding was 102.8%, whereas the required minimum at year-end was almost 105%.The new arrangements are still subject to approval by the unions’ rank and file members.Last year, an arbitration board concluded that PostNL had to address the shortfall at its pension fund, irrespective of the scheme’s ability to recover on its own steam.At the time, the pension fund demanded €131.5m from the employer.However, the company preferred to suspend the payments, citing the increasingly large financial risk posed by the pension arrangements.The Stichting Pensioenfonds PostNL has approximately 99,000 participants in total.Its indexation in arrears was approximately 4% at the end of 2012.
This has added around £2bn (€2.4bn) to the value of ABC arrangements, taking the total to more than £7bn.The firm expects this year to add substantially more given the funding situation from 2013 triennial reviews.Actuarial funding levels for schemes with 2013 dates, which will be finalised this year, will see substantial falls due to market conditions.The fall in funding for schemes that ran valuations in 2009 and 2012 was not as drastic.David Fripp, pensions partner at KPMG, said market conditions were still partly responsible for last year’s growth.“These conditions have persisted into 2014, and we’re finding that increasing numbers of companies and trustees are turning to ABCs to fund part or all of their deficits,” he said.KPMG also said the expectation of rising Gilt yields would make the arrangements even more popular.Schemes are concerned about current ‘artifical’ deficits and future surpluses, which can be alleviated by ABCs.KPMG’s analysis also found the average size of ABC arrangements fell substantially as popularity increased, as smaller schemes gained access to the option.The average ABC value between September 2012 and October 2013 was just £83m compared with £141m in 2010-11 and £323m in 2009-10.This was combined with an increase in the proportion of scheme assets being used.Five arrangements were valued at more than 20% of scheme assets in 2013, compared with two in 2012, and one a year earlier.Also increasing in popularity were longer-term arrangements, with 2013 seeing three deals reach the maximum 25 years.Five ABCs were put in place with terms ranging between 20 and 25 years, the first in more than two years.KPMG said updated guidance from the Pensions Regulator (TPR), released last year, would also increase interest in ABCs.Fripp added: “The guidance provides a helpful framework for companies and trustee boards to assess ABC proposals, which may make the implementation process more straightforward.” The use of asset-backed funding arrangements in UK pension schemes is expected to grow further this year after 2013 saw a substantial rise in the number of arrangements.Research by consultancy KPMG showed there were more than 20 arrangements put in place in the year from October 2012, accounting for almost half the number of deals to date.Its analysis found 13 deals were announced in the first half of 2013, the highest for any half-year.By comparison, only five were announced in the same period in 2012.
The development was sold by US investors that “do not want to do the refurbishment needed in the near future from their location and were looking for German buyers”, Kretschmer said.He said the ÄVWL was able to take on this kind of development risk because it had been building up a sufficient risk buffer.“Our main aim is not to achieve the highest return possible per year but to achieve stable returns over the long run,” he said.For 2013, the Versorgungswerk reported a net return of 4.4%.It also pointed out that it has used not even half of its risk budget, roughly 16% of overall assets under management (€10bn).“This way we can ensure that, even if the interest rate environment remains low, we will be able to achieve our discount rate annually until 2018,” Kretschmer said.With respect to equities, the ÄVWL will maintain a “low two-digit allocation” and “certainly not 30%”, making “tactical but not strategic adjustments”.“There is too much volatility in equities, and this means it will crash at one point or another, and the equity market is very politically driven, as well as highly leveraged, which all means downturns can happen quickly and strain the ongoing return,” Kretschmer said.Last year, the slight interest rate increase, as well as the sell-off in emerging markets, hurt the overall performance of the Versorgungswerk, while alternatives and real estate generated “above-average returns”.For 2014, the ÄVWL will cut back on covered bonds and go into emerging government bonds, where Kretschmer now sees opportunities after the downturns in May-June 2013 and January 2014.He said the Versorgungswerk’s anticyclical approach also suited a deal it was currently closing in London, where it is selling an asset bought in a fire-sale briefly after the Lehman crisis.“We want to cash in on overheated markets,” Kretschmer said.The ÄVWL said it it had been approached “a lot” for debt investments, which it will be “looking into”, if they generate sufficient returns at a certain level of risk. The €10.5bn Versorgungswerk for doctors in Westfalen-Lippe (ÄVWL) will take on a €200m real estate development project as part of its long-term strategy to generate stable returns and build sufficient risk buffers.In recent years, the ÄVWL – joint winner of the 2013 IPE country award for Germany – has increased its investments to infrastructure and real estate, both via direct investments and loans for developments. Andreas Kretschmer, managing director at the ÄVWL, told IPE the Versorgungswerk wanted to continue to build up these investments this year.“We are about to close a deal on a €200m investment in a real estate project development in an inner-city location of a German city,” he said.
With a return of 24%, the 41% equity portfolio was the best performing part of the scheme’s investments.It added that developed market equities, through Robeco’s Global Equity, returned no less than 47%.Private equity and global high yield also performed well, generating 6.8% and 7.5%, respectively.The pension fund noted that lower-rated high yield and investment-grade bonds achieved better results than higher-rated investments in both asset classes.As a consequence of the increased interest rates, the Rabobank Pensioenfonds lost 0.2% on its 42% fixed income portfolio, it said.The scheme indicated that it had decreased its active risk budget for fixed income, and also limited its deployment to active countries allocation, following “years of disappointing performance” by Robeco, its main asset manager.It said it also transferred the management of its mortgages mandate to Aegon Asset Management, after Robeco decided to cease managing this strategy.The annual report showed that a new investment in risk parity – a strategic allocation to traditional asset classes with a risk-based portfolio spread – incurred an 11% loss.The scheme attributed the negative result to the effect of the US Central Bank’s statements on monetary policy.The Rabobank Pensioenfonds also reported returns of -0.7% on its 9.2% holdings of alternative investments, and 3% on its 7% property allocation.It said it kept its hedging policy against extreme investment risks largely intact, only replacing expiring total return swaps with equity options and, as such, increasing its exposure to equity markets.According to the pension fund, a new asset-liability management study (ALM) showed that its recent change from defined benefit to collective defined contribution arrangements had only limited consequences for its strategic asset allocation and strategic risk management.Last year, the Rabobank Pensioenfonds granted its pensioners and deferred members an indexation of three-quarters of the consumer index.Its active participants did not receive an indexation, as their salaries were not increased last year. The €17.5bn Rabobank Pensioenfonds saw its 8.4% return on investments largely evaporate due the effect of rising equity markets and swap rates on its hedging policy for equity and interest risk on liabilities. As a result, it lost 7% on its hedge.In addition, it lost 0.8% on its inflation swaps, in the wake of the expected slowdown of inflation, it said in its 2013 annual report.The pension fund’s net return of 0.8% included a 0.3% return on its currency hedge.
The Railways Pension Scheme (RPS) increased its exposure to growth assets significantly in 2013 and looked to take advantage of rallying equity and economic markets, according to its annual report.The fund, a multi-employer defined benefit (DB) scheme for the British rail industry, continued to benefit from global equities while reducing its liability-driven investment (LDI) portfolio.After reaching a total of £18bn (€23bn) at the end of 2013, an increase of 6.8%, it now allocates less than 1% to LDI strategies and only 12.5% to its defensive and bond strategies.Over 2013, the fund reduced its LDI exposure by 54%. The fund is also examining its investment beliefs and reviewing the use of pooled funds, which it uses for all asset classes.Derek Scott, chairman of the scheme, said the board was engaging with the pensions committee, employers and stakeholders before proposing a new investment and pooled fund strategy, after also reviewing investment beliefs.RPS made significant shifts in diversification as it reduced its global equities portfolio by 65%, moving the majority of the assets into its mixed-asset growth portfolio.The growth portfolio pooled fund changes allocations depending on the scheme’s risk budget, allocating to equities, corporate bonds, property, commodities, hedge funds and reinsurance.It returned 8.6%, accounting for 61% of total assets, much of which was down to the performance of global equities.Its standalone global equities portfolio, made up of active and passive mandates, returned 23% over the year and now accounts for £1.2bn, or 6.7%, of the fund.This was despite the £1.5bn redemption of assets moving to the lower-returning growth portfolio.Its £1.9bn private equity holdings returned 11.4%, which the fund said was less than the benchmark.“There is often a significant time lag for revised information on underlying investments to flow through to valuation,” RPS said.“Therefore, due to this lag, the return for 2013 has not fully captured the rally in equity markets.”The fund also made positive returns in infrastructure and held £876m in assets at the end of 2013, after returns of 21.3%.Property returned 11.5%.However, the fund’s defensive pool of assets, which it set up in 2012 to “facilitate risk reduction”, lost 1.1% after investing in sovereign and corporate bonds, both which suffered drops in value.Scott said the investment returns were “reasonably strong”, with the growth fund boosted by double-digit equity returns.He also pointed out that the growth fund – which underperformed benchmark – was not designed to match the performance of equities but to “balance the risks and volatile returns”.
Since 2009, four of the national buffer funds – AP1, AP2, AP3 and AP4 – had paid out nearly SEK90bn (€9.8bn) to close the gap between contributions and payments in the mandatory pay-as-you-go pension system, she said.“Seen against that background, we find it difficult to understand that the Pensions Group has proposed such wide-ranging changes to the current system of AP funds,” Hessius said.She acknowledged that the system did need to be reviewed from time to time.“But we are concerned the recommendations will have a negative impact on both current and future pensions,” she said.In March this year, the cross-party Pension Group decided to accept many of the recommendations from the 2012 inquiry into the buffer fund system chaired by Mats Langensjö, and close two of the five funds concerned – AP1 to AP4 and AP6.The overhaul encompasses the investment strategy and governance structures of the funds.A further review is being carried out to help decide which two funds will be wound up.AP3 said in its interim report that it had generated an average annual return of 8.2% over the last five years, measured at the end of June – compared with 8.5% at the same point last year – and 6.4%, compared with 6%, over the last 10 years. This, said AP3, compared with annual increases of 1.6% and 2.5% in the income index over these periods.In the January-to-June period, AP3’s profit rose to SEK16.57bn from SEK12.46bn, or 6.5% after expenses, up from 5.4% in the same period last year, the pension fund said.Fund capital climbed to SEK14.1bn between January and June to SEK272.58bn, it said, with SEK2.47bn having been transferred to the Swedish Pensions Agency during the period.AP3 said it cut its equity exposure in the first six months of the year to 49% from 52.6%, reallocating funds mainly to fixed income as well as to property, infrastructure and risk premium strategies.It said it was continuing to diversify the portfolio to make it more robust.Fixed income exposure rose 8.6 percentage points to 22.7% in the first half, reflecting “a cautious investment approach in the light of asset valuations, risk appetite and our assessment of macroeconomic conditions”. Sweden’s third national pensions buffer fund AP3 has criticised the government’s decision to whittle down the buffer fund system to just three funds, citing its own returns record.Releasing financial figures for the first half of this year, AP3’s chief executive Kerstin Hessius said: “Our asset management strategy has worked well, resulting in high returns and low costs compared with similar pension funds at international level and a doubling of fund capital since inception in 2001.”She added: “We have made a strong contribution to the financing of the pension system by generating returns that have grown faster than the income index.”The income index is a Swedish indicator used to keep pensions in line with inflation.
People above the age of 48, once the new parameters are applied from 2017, will receive a monthly top-up if they remain with the BVK for another five years. Those that have already reached the age of 60 that year “will be guaranteed a minimum pension based on a theoretical retirement a day before the lower conversion rate takes effect”, a spokesman for the pension fund told IPE. “This is to prevent people being forced into early retirement because of the measures taken.”The BVK’s spokesman said there was “a lot of pressure on the young people who are getting less interest on their assets today because the money is needed to finance pension promises made with a too high conversion rate”.Many of the authorities that are currently members of the BVK, however, are now criticising the move, and some are even mulling an exit.The University of Zurich has now established a working group to look into the effects the changes will have on its 4,500 employees in the fund.The university said in a newsletter to its members that the “drastic changes allow the University to terminate the contract with the BVK early per year-end 2016 and to join another pension fund”.It put together a panel of experts to look into “all possibilities”, including “getting offers from other Pensionskassen”.Another body in Zurich, the VZGV – an advisory board to municipalities made up of former municipal and city employees – has also commissioned an independent study with the consultancy Dipeka that will be used to advise municipalities and cities in the canton.The study’s author, industry expert Boris Morf, said the cut in the technical parameters was an “adequate response to future developments” and that the application of a generation table instead of a periodic table was “sensible” and “positive, especially for young members.He added that “most of the providers are confronted with the same problems as the BVK, and members have to be careful not to get out of the frying pan and into the fire”. The University of Zurich has commissioned an independent study to determine whether recent technical-parameter changes will affect the pension fund’s ability to fulfil its obligations.The fund (BVK) – for local entities and other authorities in the canton of Zurich – decided last summer to make major cuts, lowering the conversion rate to 4.8% and the discount rate to 2%. Other pension funds in Switzerland have taken similar steps in recent years, but the BVK’s amendments, while welcomed by many experts, were seen as being particularly drastic.The BVK is investing CHF950m (€775m) in total to soften the effects of the changes to the technical parameters.
There are, of course, lots of different ways of defaulting. The Greeks do it in a very simplistic way by not giving the money back, but you can do it by inflation or by restructuring. In Japan, the idea has even been floated of issuing a zero-coupon perpetual.If the world moves to an environment where governments do start defaulting in debt, the characteristics of sovereign debt change dramatically. Government bonds would become a much more volatile asset class, and equities would be able to hold their own against that kind of choice of investment classes. The idea of default risk in euro-zone and UK government debt removes a key plank of the intellectual foundation of the doctrinaire approach to LDI.The premise of a doctrinaire LDI approach is that it is purely a risk-management problem rather than an investment problem. It is predicated on the idea there is a legal requirement to pay out a fixed set of cashflows.The problem is how to ensure those liabilities can be met with as much certainty as possible. As pension schemes become more mature, they can be paying out 6% or more of assets every year – well in excess of yields available on any asset – so they have to redeem capital effectively.That creates the risk that they are selling assets when the market has fallen, forcing them to crystallise a loss. Not many schemes are able to ignore that issue, which is the reason for ensuring future cashflows can be matched with certainty through government bonds. As a result, for the majority of pension funds, it is the mark-to-market valuation of equities that matters and not the dividend stream. If, however, there is default risk in government bonds, the mark-to-market volatility of sovereign debt will increase, as it no longer represents a risk-free asset. Comparisons with equities then become a trade-off between income and volatility, even if the issue is a risk-management problem. Given the low government bond yields, pension funds will be trying to find sources of secure income other than government bonds. Whether that pushes them as far as some types of equities is the question. In theory, there are some listed companies where the equity just looks like a slightly subordinated corporate bond.But quality or low-volatility companies have performed very strongly, just like bonds themselves. The market is already giving high valuations to listed tobacco companies, utilities and so on that do offer a low-risk income stream when bond yields are at record lows. Pension funds may have little choice but to look again at equity income streams and their characteristics. In any case, investors are rapidly running out of bonds in certain markets given the rate of central bank purchases.At a basic level, the market value of equities tends to be about twice as volatile as dividend streams. Concentration risk, though, is also a problem, with the 10 largest dividend-paying companies in the UK making up 55% of the total value of dividends paid out by the FTSE 100, and the total sum of dividends paid out by Royal Dutch Shell, BP and HSBC representing one-third of the total value of dividends in the same index. What the UK experience shows is that investors using equities for dividends should be taking a global approach. Investors seeking dividends do have some factors going in their favour. Parts of the market that traditionally have not been dividend-focused, such as Japan, are now paying records levels of dividends.Where global-equity dividend strategies become even more powerful is at the individual level, where there is more flexibility to take on a limited amount of volatility. With annuity rates driven to low levels by government bond yields, it makes less sense for individuals to purchase annuities that disappear on their death, rather than income-producing equity strategies that can be passed onto their children.That also holds true for deferred beneficiaries of defined benefit (DB) pension schemes. It can be a ‘no brainer’ for many to cash in a DB scheme, essentially priced off current, historically low bond yields, and put the proceeds into a portfolio of equities with much higher dividend yields.This should increase the actual pension payments substantially, albeit with increased volatility, and also leave a lump sum their children can inherit. The only issue may be, can they do so before president Trump’s policies drive up bond yields and inflation and drive down the value of deferred DB schemes?Joseph Mariathasan is a contributing editor at IPE Are sovereign-debt defaults are a natural conclusion to our current path, Joseph Mariathasan asksImagine there’s no risk-free debt. It’s easy if you try. That may be a shocking idea to many, but it may also be a source of liberation – there would be no hell beneath us, above us only sky (to paraphrase John Lennon).Such a situation would not be in anyone’s LDI models. Yet some investment managers have the strong belief that government sovereign-debt defaults are a natural conclusion to the current path on which we find ourselves. US president-elect Donald Trump even announced in a CBS interview earlier this year that, if the US economy “crashed,” he would offer to pay creditors less than what they were owed. “You go back and say: ‘Hey, guess what? The economy just crashed. I’m going to give you back half’.” As a self-proclaimed consummate deal maker, he is well experienced in renegotiating debt. Some now argue that it is not only the US, but the euro-zone, the UK and ultimately most of the world’s governments that are going to default on their debt. That will certainly be a source of worry – but a recognition of that possibility might also lead to a less blinkered view of the relative merits of investing in near-zero or even negative-yielding government debt, and equities with yields of more than 3% with built-in inflation proofing.
Credit: Peggy and Marco Lachmann-AnkeAir pollution in Shanghai, ChinaThe major changes started in 2016 when China signed the Paris Accord. The 18th National Party Congress also made the “establishment of an ecological society” a strategic development goal, and laws were passed regarding energy conservation, water management and environmental protection.By 2020, all public companies in China will be subject to a “disclose or explain” requirement for environmentally related information and a carbon market is expected to launch in the same year.One point that Li emphasised was that decision making in China was driven from the top – for better or worse.Companies are given very little time to prepare for what could be drastic changes to their regulatory environment. As environment-related policies are introduced and anti-pollution initiatives are implemented by the central government, companies with pre-emptive practices and corporate strategies tend to be better prepared for transitional risks. There is certainly far to go as currently 86% of A-shares companies rated by MSCI fall below BBB, the mid-point for MSCI’s ESG ratings.Improving standardsThere are a number of challenges that investors face when it comes to improving ESG scores. The scope and quality of ESG-related information disclosure among Chinese-listed companies is sub-par. However, it appears that regulators are in the process of providing a standard framework for company disclosures.Company awareness of sustainability issues is also low, but getting better. Many public companies, Li said, have indicated an interest to learn more and improve on their corporate sustainability. China and the concept of environmental, social and corporate governance (ESG) conscious investing seem at first to have nothing in common.Air pollution in cities such as Beijing and Shanghai has been in the headlines for decades, while social and corporate governance issues are not what investors would assume Chinese companies would prioritise.However, interest and developments in ESG themes in China has, over the past few years, experienced a step change in importance. Robert Li, who heads the ESG team at China Asset Management Company (China AMC), one of the leading managers in China, gave a fascinating description of the developments at IPE’s annual conference in Dublin last week.What has driven interest in ESG in China, he argued, has been rising living standards. As Chinese GDP per capita approaches $10,000 (€8,823), environmental protection has become a critical way of improving quality of life, as income levels in top-tier Chinese cities approach those of their developed market peers. Beijing’s smog has been obvious to all for many years, but there have been significant improvements in air quality and water stress metrics in recent years due to social and government attention. Source: Patrick FrostRobert Li of China Asset Management addresses last week’s conference, with Joseph Mariathasan, IPE, and Yan Hu, member of Vermilion Partners’ advisory boardA major problem that China AMC has found with external ESG ratings in China is that the quality of the information used in ratings can be poor. ESG rating agencies are regularly working with outdated information, while senior management often never receive emails as contact information is outdated. Getting accurate data for Chinese companies will require in-depth research beyond superficial scorecards.Li also argues that, due to a variety of historical and cultural reasons, the concept of a ‘stewardship code’ has yet to proliferate in China.Environmental issuesOn the positive side, the top-down drive to improve quality of life in China is driving companies to take environmental issues more seriously.Li said ESG improvements would likely come from two areas: enhancing information disclosure, which can quickly help companies improve ESG scores (the low-hanging fruit); and fund managers such as China AMC engaging with companies on ESG issues. This includes corporate governance, which he said would help to establish sustainable corporate strategies and practices that enhance profitability and support valuations.As China’s equity markets become a more important part of international portfolios, it is incumbent on investors to work alongside domestic Chinese fund managers such as China AMC to actively engage with companies to improve sustainable business practices. The fact that so much progress has been made bodes well for the future – even if there is still a long journey ahead.
The document has been signed by the Netherlands’ ministries for finance, foreign trade and development co-operation, and social affairs and employment.The signatories also include charities Oxfam Novib, PAX, Amnesty International Netherlands, Save the Children Netherlands, World Animal Protection and environmental organisation Natuur & Milieu.The signatories said they would co-operate on six projects – to be announced next year – aimed at boosting the impact of pension funds.The development of the covenant for sustainable investing for pension funds was co-ordinated by the Social and Economic Council (SER), which has supported similar agreements with insurers and banks.The pension fund of chemicals giant DSM and KLM’s scheme for ground staff have already announced that they have signed the document.The €1.6bn Pensioenfonds Gasunie said that it may sign if the – as yet unknown – participation costs turn out to be reasonable.The signatories must factor the OECD guidelines – stipulating how pension funds must trace and report risks – into their ESG policy within two years.A yet-to-be-established monitoring committee will check how schemes honour their commitments. More than 70 large Dutch pension funds with combined assets of almost €1.2trn have signed a covenant with NGOs, trade unions and the Dutch government pledging worldwide co-operation on sustainable investment.The aim of the agreement is to exert worldwide influence on policies and outcomes related to human rights, labour conditions and the environment through pension funds’ combined investment clout.By mapping risks and negative impacts of investments, based on the UN’s Guiding Principles for businesses and human rights and OECD guidelines, companies must provide pension funds with a better picture of where human rights violations and environmental damage occur.This would enable pension funds to mitigate risks and use their influence for solving problems, using the expertise, experience and networks of the other participants in the covenant.