A prolonged low-interest-rate environment could further exacerbate funding pressures on public DB schemes, Catherine Lubochinsky warnsThe viability of defined benefit (DB) pension schemes in both the public and private sectors has been a subject of discussion for many years in the developed world, not least because of the significant numbers of private sector organisations that have been closing these schemes, and the ongoing debate about the affordability of these schemes in the public sector.Working with the Policy and Economic Analysis Programme (PEAP) at the University of Toronto’s Rotman School of Management, the Global Risk Institute (GRI) has developed four macro-economic scenarios for the next 15 years in Canada, as the world recovers from the major crisis experienced in 2007-2008. Observations from this study may be of benefit to DB schemes in many countries.The four scenarios established using PEAP’s proprietary model were, briefly, as follows: Scenario 1 – interest rates remain low through 2014, but then rise significantly as global economic recovery finally takes hold in 2015 and successive years, with relatively strong economic growth and improving corporate and government balance sheets; Scenario 2 – as per Scenario 1, but with somewhat lower ultimate levels of interest rates than Scenario 1; Scenario 3 – low interest rates continue for an arbitrary five years longer, owing to relatively weak economic growth and demand, before rising to the relatively high levels seen in the first scenario; and Scenario 4, in which low rates for another five years eventually rise to the lower levels seen in Scenario 2. In our view, the most likely outcome based on present data is Scenario 1, with the other scenarios listed in descending order of probability. Before examining the effect of these scenarios on DB schemes, it’s worth reflecting on how the enrolment profile for these schemes has changed in Canada in recent years, especially since this profile is mirrored by other markets in the developed world, such as the UK and US.In Canada’s private sector, enrolment in DB schemes has declined from 1.9m in 2008 to 1.5m in 2011 due to scheme closures. By contrast, enrolment in Canadian public sector DB schemes has increased by 300,000 over the same period to 2.9m. This increasing DB enrolment in the public sector may be seen in the light of concerns that, because most of these schemes do not ‘mark to market’ their liabilities, the impact of low interest rates for a long period has yet to be recognised.Broadly, this research demonstrates that a prolonged low-interest-rate environment could potentially exacerbate funding pressures on public DB schemes and further accelerate the move away from these schemes in the private sector. Lower levels of employment and wages imply lower interest rates, as well as having the knock-on effect of lower contribution rates to pension schemes. Additionally, if the interest rates used to calculate the liabilities of DB schemes remain low for an extended period, the consequences – in terms of higher contribution rates or lower benefits for the scheme’s future members – may be postponed but not eliminated.Figure 19 from the report illustrates the gap in interest earnings for public sector DB schemes between a near-term return to ‘normal’ levels of interest rates (Scenario I above) and a much longer period of low interest rates (Scenarios III and IV). The gap, in terms of interest earnings, between Scenarios I and IV by 2030 amounts to CAD15.5bn (€10.2bn), with lower long-term rates accounting for CAD10bn of this difference, and the delayed recovery in rates a further CAD5bn.Figure 21 shows a similar situation in the private sector, but with important differences based on the relative size of components. The share of interest earnings as a proportion of total funding is lower than the share of contributions.For both public and private sectors, a lower long-term real interest rate has a greater negative effect on earnings than a five-year period of low economic growth before recovery. A high level of real interest rates will only be achieved with strong economic growth, which, at the same time, supports contributions to pension schemes – making strong economic growth a priority.For the public sector, questions will arise in the event of a continued low-interest-rate environment and concomitant decrease in plan solvencies. For the private sector, the continued shift away from DB schemes to defined contribution schemes has led to a transfer of risks from employers to employees, which leads to questions not covered by this research about how pension schemes can be designed with more balanced risk-sharing mechanisms.For more information about this research and GRI, please visit www.globalriskinstitute.org.Catherine Lubochinsky is managing director of research at the Global Risk Institute in Financial Services
Allianz GI bought bonds issued by Amey Lagan Roads Financial, as well as restructuring its debt.The project includes a 27-year maintenance period.Allianz GI this week launched its UK infrastructure debt fund, with backing from Nippon Life.The fund will raise up to £500m for long-term core UK infrastructure and is aimed at small and mid-sized pension funds.Deborah Zurkow, Allianz Global Investors’ CIO for infrastructure debt, told IPE sister publication IP Real Estate that, having seen “early movers” in the sector prefer separately managed accounts, the time was now right to offer a product to smaller investors looking to join pools and match long-term liabilities.Zurkow said increased demand from UK pension funds would ultimately lead to more liquidity.Allianz has launched the fund 18 months after it created an infrastructure debt team. Allianz Global Investors has bought £130m (€163m) of bonds on a UK infrastructure project.The manager said it bought the bonds – on the Northern Ireland DBFO2 public-private partnership – for third-party investors including UK pension funds and Allianz group entities.Earlier this year, the Telent pension fund became the first UK scheme to enter an infrastructure debt platform using listed project bonds, using Allianz GI to invest in Scotland’s motorway improvements scheme.The £250m DBFO2 motorway project began in 2007.
Syntrus Achmea, State Street Global Advisors, NN Investment Partners, AXA Investment Managers, EFAMA, EY, Vontobel Asset ManagementSyntrus Achmea – Hein Brand and Fieke van der Lecq have been appointed members of the pension provider and asset manager’s supervisory board. Van der Lecq is currently professor of pension markets at the Erasmus School of Economics in Rotterdam, as well as chair of the supervisory boards of the Pensioenfonds Robeco and Pensioenfonds Zoetwaren, the industry-wide scheme for confectioners in the Netherlands. Brand was chief executive at ING Real Estate Finance from 2001 to 2008, and prior to that was head of global credit restructuring. State Street Global Advisors – Greg Ehret has been named president. He has been with the company for more than 20 years, overseeing areas including the firm’s ETF business. His new role will see him in charge of SSGA’s client-facing activities. NN Investment Partners – Ivan Nikolov has joined the convertible bonds team as senior portfolio manager. Based in London, he joins from Aberdeen Asset Management and has worked at KNG Securities and Pine River Capital Management. AXA Investment Managers – Sailesh Lad and Olga Fedotova have joined the fixed income emerging markets team. Fedotova, who will be head of emerging market (EM) credit, will join from UniCredit in August. She has previously headed up HSBC’s EM corporate credit team and worked at ING Bank. Lad joins as senior portfolio manager from Ignis Asset Management, and has previously worked at Henderson Global Investors, BlueBay Asset Management and Moore Capital Management.EFAMA – Alexander Schindler has been appointed president of the European Fund and Asset Management Asssociation. Schindler is also an executive board member at German asset manager Union Investment. He will serve a two-year term with William Nott, chief executive of M&G Securities, acting as vice. Schindler replaces Christian Dargnat, who has been president since 2013. Nott has been on the EFAMA board for six years.EY – Karina Brookes as joined the UK’s consultancy arm in a senior role within the pensions covenant advisory team. She joins after spending 15 years with rival PwC, latterly as a director in the pensions credit advisory team.Vontobel Asset Management – Ludovic Colin has been appointed to the Swiss asset manager’s fixed income team as a portfolio manager and foreign exchange and interest rate specialist. Colin will take responsibility for Vontobel’s bond global aggregate fund as a deputy portfolio manager. He joins from the London office of Goldman Sachs where he was a multi-asset macro specialist, and previously worked for Amundi, under its previous guise of Credit Agricole Asset Management.
PFA, 300 Club, Lombard Odier Investment Managers, MercerPFA – Denmark’s largest commercial pension provider is losing one of its four directors, as group chief commercial officer Lars Ellehave-Andersen resigns from the DKK552bn (€74bn) company. Ellehave-Andersen, who came to PFA from labour-market pension fund PensionDanmark, is responsible for corporate customers and partners, advisory services, subsidiary PFA Bank and Greenlandic business PFA Soraarneq. PFA’s group chief executive Allan Polack will take responsibility for the sales and customer business previously handled by Ellehave-Andersen.300 Club – Jan Straatman, who headed up investment at €356bn Dutch public service pension plan ABP between 2001 and 2006, is the latest person to join the independent 300 Club, which aims to speak out against mainstream investment practice. Straatman, now global CIO at Lombard Odier Investment Managers, brings the number of members to 16. Ron Barin, CIO of the US pension fund for Alcoa, joined last month.Mercer – Edinburgh-based Steven Blackie has been appointed UK head of investments. He will succeed Patrick Race, who held the position for more than four years. In his new job as UK head of investments, Blackie will focus on developing Mercer’s advisory and delegated services. He has been commercial director for Mercer’s UK investments business up until this appointment, having first joined the consultancy back in 2009 as head of the Edinburgh investment team.
- No Comments on Schroders stresses Dobson’s experience as CEO promoted to chairman
- Posted on
Schroders has promoted Peter Harrison, its current head of equities, to chief executive after incumbent Michael Dobson decided to step down after 15 years in the role.Harrison first worked for Schroders in 1988 when he was a graduate and re-joined in 2013.A year later, he was promoted to the board and named head of investment.He has also worked at Newton Asset Management, JP Morgan and Deutsche Asset Management. Dobson is instead set to succeed Andrew Beeson as Schroders’s non-executive chairman following Beeson’s decision to retire.Philip Howard, senior independent director at Schroders, said he was “delighted” with Harrison’s succeeding Dobson as chief executive. “Peter has great experience of the investment industry and a deep knowledge of the firm, its culture and values,” he said.Howard added that Dobson was an “outstanding” candidate for chairman and the board’s unanimous choice.Dobson’s appointment as chairman will raise some eyebrows, however, as naming a current chief executive to the role is against the UK Corporate Governance Code.Schroders sought to address the concerns in a letter by Howard to shareholders.In it, Howard acknowledges that the appointment goes against best practice laid out in the code but notes that the company consulted major shareholders ahead of today’s announcement.“Michael has enjoyed the strong support of the shareholders as chief executive, and we believe that he will, as chairman, continue to serve their interests as effectively as he has in the past,” Howard said.“The board does not regard this appointment as setting a precedent at Schroders, and the separation of the roles of chairman and chief executive remains in place.”Both Harrison and Dobson will assume their new positions in early April.
The mutual funds arm of Sweden’s Länsförsäkringar is bringing almost one-quarter of its assets in house and has poached two senior portfolio managers from Nordic asset manager Alfred Berg to take charge of the new task.The insurance alliance, which also provides pensions and is owned by 23 independent insurers in Sweden, announced its unit LF Mutual Fund Company (Länsförsäkringar fondförvaltning) would start managing all SEK23bn (€2.5bn) of its investments in Swedish equities this autumn, in its first move to take asset management in house.The mutual funds unit had SKE109bn in assets under management (AUM) at the end of 2015.Eva Gottfridsdotter-Nilsson, president of the LF Mutual Fund Company, said: “In recent years, corporate governance work has become increasingly integrated in our management, and, in this way, we will become clearer and more effective in our corporate governance of Swedish equity funds.” She said that since the firm’s customers had a large part of their fund investors in Swedish equities, it felt natural to concentrate its in-sourcing task in this area.“The change will also contribute to higher efficiency and create synergies,” she said.As things stand, around 98% of total AUM in the LF Mutual Funds Company is managed by external portfolio managers, with the unit just managing five funds-of-funds itself.The unit’s funds are used by Länsförsäkringar’s clients in unit-linked pension saving.Gottfridsdotter-Nilsson said Länsförsäkringar’s mutual funds that invested in other asset classes and abroad would continue to be managed externally.She said customers’ savings should be managed by those who had the best prerequisites for the job and the highest level of skills.“Today, we are so large in Swedish equities we ourselves can recruit the best managers in the market,” she said, adding that the firm had now succeeded in doing just that.Länsförsäkringar has hired Peter Norhammar and Petter Löfqvist to manage Swedish equities at its mutual funds arm from this autumn.Both men will step into newly created roles at the Swedish insurance group’s subsidiary, and will have the title of portfolio manager.Norhammar is currently head of Swedish equities and senior portfolio manager for Sweden at Alfred Berg.He heads the Swedish equities team there and is lead portfolio manager for Nordic listed real estate equities including the fund Alfred Berg Fastighetsfond Norden.Meanwhile, Löfqvist is senior portfolio manager for Sweden at Alfred Berg.He is the lead portfolio manager of Nordic and Swedish small caps and takes charge of the Luxembourg-domiciled fund Parvest Equity Nordic Small Cap.Norhammar and Löfqvist joined Alfred Berg in 2014.Matching the latest experience of the two new hires, Länsförsäkringar said the first step of its work to bring domestic equities management in house would be taken in the management of the Länsförsäkringar Real Estate fund and Länsförsäkringar Small Cap Sweden fund.The firm said the SEK23bn it has in domestic equities is spread across three active Swedish equity funds.
The UK’s John Lewis has seen its pension deficit increase by more than £500m (€586m) in six months, as the UK retailer’s real discount rate fell by 95 basis points into negative territory.The company said its defined benefit (DB) deficit rose by £512m between January and June this year, despite fund assets increasing by more than £550m, to £4.7bn, over the same period.It said a “steep reduction” in interest rates was to blame for liabilities rising to £6.2bn and noted that while it had applied a 0.7% real discount rate in January, by the end of June, the figure had fallen to -0.25%.Deficits across the UK DB universe have been increasing steadily since May, with the latest authoritative figures estimating an overall funding level of 76.1% across nearly 6,000 schemes. However, John Lewis was able to reduce its pension operating costs by 21.2% over the six months, largely as a result of its April switch away from enrolling employees into the underfunded DB scheme in favour of a hybrid fund.In other news, the Department for Work and Pensions (DWP) declined to comment on press speculation that the £13.3bn (€18bn) British Steel Pension Scheme (BSPS) would not be granted a cut in indexation, as the government has attempted to decrease the pension burden ahead of a sale of Tata Steel’s UK business.A consultation was launched earlier this year on a potential cut to pension indexation, seen by the trustee of BSPS as a way of cutting liabilities and avoiding entry into the Pension Protection Fund (PPF), where it believes members will face significant benefit cuts.The proposed changes to indexation are controversial, and have been criticised by the Pensions and Lifetime Savings Association as “inconceivable” special treatment.Now, according to reports, the changes have fallen out of favour since Theresa May became prime minister in July.Allan Johnston, trustee chair at BSPS, said earlier this week the change in indexation remained the trustee board’s “preferred option”, and that he expected to have further discussions with the government until a decision is reached.A DWP spokesperson told IPE the government was still reviewing responses to the consultation and would publish its response to it “in due course”, once it had fully considered all responses.
In addition, Fidelity reported that almost half (49%) of European analysts said their companies were “less willing” to invest in the UK over the next two years while the Brexit negotiations took place.One-quarter of Asian analysts agreed.The analysts cited a lack of clarity over UK/EU relations, risks to the financial sector in London, risks to the property market and a possible loss of talent as companies choose to relocate.UK prime minister Theresa May yesterday stated that the country would be giving up access to the EU’s single market when it leaves the union.Fidelity’s research also covered analysts’ views of Donald Trump, who will be inaugurated as US president on Friday, as well as the wave of national elections across Europe in 2017.Almost three-quarters (72%) of Fidelity’s analysts said their companies were positive on the two-year outlook under Trump’s presidency.The Republican party’s dominance of Congress, as well as the president-elect’s stance on areas such as corporate tax, income tax, infrastructure spending, fossil fuels and deregulation, all point to an encouraging future, the analysts said.European analysts were less bullish, with 39% saying their companies had a positive US outlook.However, only 12% said the outlook was negative.Nearly two-thirds (64%) of analysts covering emerging Europe, the Middle East, Africa and Latin America said the impact of Trump was “moderately negative”.Despite the mixed views of companies, Michael Sayers, director of research at Fidelity, said the research had also shown that “none of these political risks are seen as strong enough to offset upbeat cyclical forces that are evident in all regions and sectors”.Fidelity claimed their research suggests “concerns over political risk are not enough to disrupt the upbeat cyclical forces evident across all sectors and regions”.The annual survey questioned 146 of the asset manager’s equity and bond analysts. A significant proportion of analysts across Europe and Asia are expecting a negative impact from Brexit on the companies they cover, according to Fidelity International.Almost 60% of the asset manager’s European investment analysts said the UK’s departure from the European Union would have a “moderately negative” impact on their companies.More than one-third (40%) of Japanese analysts said the same.Of particular concern are firms in the industrial, energy, discretionary consumer goods, financial and IT sectors.
- No Comments on Collateralised loan obligations gain traction with German institutions
- Posted on
Barbara Pohlmann, portfolio manager at Union Investment, said securitisations were “largely immune” to interest rate movements.Analysts at investment bank Wells Fargo have forecast a new record high of for CLO issuance this year of roughly $150bn (€129bn), beating the previous high of $123.6bn in 2014.Growing interest in structured credit from institutional investors – including typically more conservative German allocators – reflected a maturing market, but Swiss consultancy Siglo also noted a psychological effect in the wake of the 2008-09 financial crisis.“The promised high liquidity of a lot of funds and [exchange-traded funds] containing illiquid instruments drives cold sweat down our backs,” the analysts said in a newsletter.They added that investors had learned that “illiquid investments are more consequent in their illiquidity and therefore hold less potential for negative surprises”.The Siglo research team warned about asset-liability mismatch in times of crisis if all investors and managers wanted to get rid of assets at the same time.With truly illiquid strategies and products, the investors should be aware from the start that these investments cannot be sold easily on short notice, Siglo said.“In a time of low interest rates it would be a shame not to look into illiquidity premiums as they can significantly raise the expected return,” Siglo added. Two major asset managers have launched collateralised loan obligations (CLO) funds in Germany in recent weeks as appetite grows for the asset class.US-based Neuberger Berman and Germany’s Union Investment have both launched their first CLO products.Neuberger Berman’s fund – registered in Germany, Austria and Switzerland – focuses on CLO mezzanine investments, while Union’s structured credit product invests “mainly” in CLOs.Dik van Lomwel, head of EMEA and Latin America at Neuberger Berman, said: “We have seen significant interest from clients who are comfortable with non-investment grade credit and are looking to capture the additional yield and fundamental credit enhancement offered by CLO debt.”
- No Comments on EU court confirms lifeboat fund must amend compensation limit [updated]
- Posted on
The lifeboat fund also applies a limit on annual compensation for members that chose to take early retirement.Hampshire launched his case after his expected annual pension was slashed by 67% following the insolvency of Turner & Newall, formerly a manufacturing business, and the transfer of the plan to the PPF’s assessment period.Today’s ruling cannot be appealed, so the PPF must now discuss with the government’s work and pensions department about how to implement it. A spokeswoman for the fund said this process had already started.The PPF said that the “vast majority” of its members already received more than half of their accrued benefits, meaning “less than 1%” were expected to be eligible for an increase. This would push its liabilities up by at most 1%, the fund said.As of 31 March 2018, the PPF had total liabilities of £29.6bn (€32.9bn) but assets worth £36.3bn, meaning it was 122% funded.The spokeswoman added: “We will work to implement the judgment as quickly as possible but first need to consider the judgment further to understand what action we can take prior to legislative change and the conclusion of the UK court proceedings. “Members can be reassured that we will update them further as soon as we are able.”The headline for this story was updated on 6 September to clarify that the compensation limit will not be scrapped following the ECJ ruling. The UK’s Pension Protection Fund (PPF) must ensure all of its members receive at least half of the defined benefit (DB) pension they were promised before their employer went bankrupt, according to a European court ruling today.The European Court of Justice (ECJ) ruled this morning in line with a legal opinion published in April by Advocate General Juliane Kokott on the case of Grenville Hampshire versus the board of the PPF.The ECJ said the EU’s rule regarding pension compensation “must be interpreted as meaning that every individual employee must receive old-age benefits corresponding to at least 50% of the value of his accrued entitlement under a supplementary occupational pension scheme in the event of his employer’s insolvency”.Currently, the PPF pays 90% of the pension entitlements of DB scheme members when their employer goes bust. Those who have already retired receive 100%, but may face limits on inflation-linked uplifts.