Aon Hewitt has expanded its UK fiduciary management business to include the purchase of bulk annuities, as consultancies and investment managers continue to take advantage of the growing markets.The consultancy has developed a service called ‘implemented annuities’, allowing schemes to delegate investment strategy, the sourcing of an insurer, and the transaction of a bulk annuity arrangement.The new operation, which sits inside the firm’s fiduciary management business headed up by partner Sion Cole, has signed four of the top five insurers in the bulk annuity market to the platform, the firm said.The UK’s bulk annuity and fiduciary management markets have both seen significant growth in recent years. Fiduciary management grew from £20bn (€25bn) in assets under management in 2008 to close to £60bn in 2013, according to KPMG.While more linked to market conditions, data from LCP showed £7bn of bulk annuity transactions had occurred over 2013, while the first six months of 2014 alone saw £6.5bn.This has resulted in providers shifting business strategies to include the services. Aon Hewitt is the second company in as many weeks to offer a more holistic solution.Legal & General Investment Management (LGIM) launched a range of ‘buyout aware’ funds last week.The funds invest in liability-driven investment (LDI), credit, and growth strategies entirely designed to take schemes towards buyout funding level, while closely matching insurers’ desired assets.Once reached, pension schemes are incentivised to purchase a bulk annuity package with LGIM’s sister insurer Legal & General Assurance Services (LGAS).Aon Hewitt said schemes currently delegating investment decisions could add planning, legal and commercial negotiation, and implementation via the service.Pension schemes would also have access to ‘annuity ready’ investment funds.Senior partner and head of risk settlement, Martin Bird, denied the solution complimented LGIM’s new offering, as they remained different and independent.“They are very different things. We are independent advisors so we want to advise our clients on the best solution in the market, including LGAS,” he told IPE.“Many clients invest in all different types of LGIM funds, in particular the bond and LDI ones.“It is quite possible this would be the right fund to purchase an annuity. That could be with LGAS, or it could be with another insurance provider.LGIM’s new offering allows schemes to transact with LGAS by waiving transaction costs to shift assets, saving around 50bps off the average bulk annuity purchase.“From the client’s perspective, and from ours,” Bird said, “it does not matter what they are invested in today, and it doesn’t matter who will provide the insurance policy.“It is up to the client to decide who they want to transact with and the terms and price to be prepared to do that.”Bird also said the new service fits in well with Aon Hewitt’s ‘Pathway’ offering launched earlier this year.This offers clients standardised contract terms for bulk annuity transactions pre-negotiated with the market’s main providers.Earlier this week, the bulk annuity market continued its growth as the UK Unilever and Panasonic schemes both announced transactions.Consultancy LCP said it expected over £1bn worth of deals arranged and announced in the last three months of 2014.
Swiss pension funds will have to accept negative interest rates on cash holdings or find alternative ways to house liquidity, the Swiss National Bank has warned.Soon after the SNB cut the peg between the Swiss franc and the euro on 15 January, it also introduced negative interest rates for holding banks’ capital.A negative rate of 0.75% was introduced on the deposit account balances Swiss banks hold with the SNB, and banks are now passing the cost on to their clients.In its statement from January, the SNB said it was “lowering interest rates significantly to ensure that the discontinuation of the minimum exchange rate does not lead to an inappropriate tightening of monetary conditions”. However, it also introduced a minimum exemption threshold 20 times the minimum reserve requirements, and each bank has individually set a certain threshold for clients’ accounts, above which negative rates are charged.Christoph Ryter, president at ASIP, the Swiss pension fund association, said this threshold had been “primarily” introduced to “protect retail clients at least partly” from the negative interest rates.But he also pointed out to IPE that “the major part of private people’s assets is not in bank accounts but in Pensionskassen”, which must pay for putting liquid assets into bank accounts.According to a recent survey by Credit Suisse, approximately 6.5% of the assets held by a sample of Swiss Pensionskassen were categorised as “liquid” assets.Applying this figure to the whole of Switzerland’s mandatory second-pillar system would mean that around CHF45.5bn (€37.2bn) is currently held in cash or similar instruments.ASIP recently called for an exemption for Pensionskassen and recommended they be granted accounts at 0% interest with the SNB.Over the weekend, however, SNB president Thomas Jordan told a local radio station that this was “out of the question”.He said the measure of introducing a negative interest rate “can only work if there is no possibility of side-stepping it”.Jordan added that “allowing all participants in the financial market to have a zero-interest account with us would weaken the measure”.Publica, the pension fund for federal employees, already has a special arrangement with the SNB for an account with a minimum 0% interest rate.In its petition to the SNB, ASIP had argued that all Pensionskassen should have the same opportunity, particularly given the fact they are non-profit financial market participants, unlike banks.Ryter said ASIP was disappointed by Jordan’s rejection of its proposal.He said that, while buffers help Pensionskassen to deal with the losses suffered in the wake of the SNB’s shock decision to cut the peg to the euro, persistently low interest rates meant pension funds’ return prospects were “very limited”.He said this, in turn, would put more pressure on reforms such as the Altersvorsorge 2020 package.Find out where the reform package stands now by reading IPE’s latest update
Jacob Aarup-Andersen, CFO at Denmark’s Danica Pension, is leaving the DKK327bn (€43.8bn) commercial pension provider, where he has spearheaded a major strategy overhaul in the last year and a half to take a top position at Danica parent company Danske Bank.Aarup-Andersen was named as the successor to Danske Bank’s current CFO Henrik Ramlau-Hansen on 1 April 2016, when the latter has said he wants to resign.As well as being the new CFO, Aarup-Andersen will also join the bank’s executive board.Thomas Borgen, Danske Bank’s chief executive, said: “Jacob Aarup-Andersen has shown he is well-versed in strategy and management and possesses the qualifications needed to take up the position as CFO at group level.” He said Danske Bank was in the process of making itself more customer-focused, simple and efficient, and that Aarup-Andersen would help with this.Aarup-Andersen joined Danica in May 2014, coming to the pensions subsidiary from the role of chief portfolio manager at Danske Capital, the asset management arm of Danske Bank.In the short time he has been at Danica Pension, he has overhauled the provider’s investment strategy, putting the focus sharply on taking on direct investments and reducing its holdings in bonds.He quickly set about hiring in the skills to build an in-house team capable to making such direct investments.Danica’s subsequent head-hunting activity has been a key factor in the wave of top job changes that has swept through the Danish pensions sector in the last 18 months.Aarup-Andersen will stay at Danica until the end of December 2015, and then act as deputy CFO for Ramlau-Hansen from 1 January until he takes over as CFO in April.No one at Danica was available to comment on how he would be replaced at the subsidiary, or the implications of the move.
According to the chairman, the pension fund has also decided to leave asset manager Achmea Investment Management, formerly Syntrus Achmea Asset Management, as of 1 July.“Because we invest in US dollars and discount our liabilities against the dollar swap curve, we prefer a dollar-focused asset manager,” Linkels said.He said the pension fund was negotiating with four players, and that Achmea had declined to participate in the tender.In other news, the €300m pension fund of merchant bank NIBC has appointed NN Investment Partners as its fiduciary asset manager.NN IP is to provide strategic advice, liability-driven investment, operational balance management and management reporting.According to the NIBC scheme, it considered NN IP as a “sparring partner”, tasked with assisting the scheme’s board in seeking the best investment strategy, as well as implementation.Previously, the pension fund contracted out its asset management – in a passive mandate – to BlackRock, investing in the manager’s funds whilst almost fully following the index.Lastly, De Fracties, the €116m company scheme of Dutch food-ingredient company Loder Croklaan, has switched pensions provider AZL for Dion Pensions Services in Hardenberg, which focuses on small and medium-sized pension funds.De Fracties, a scheme with almost 750 participants and pensioners, declined to comment on the switch-over. The €285m pension fund for the Caribbean Netherlands has left Syntrus Achmea Pensioenbeheer for Rijswijk-based pensions provider AGH.Harald Linkels, chairman of the scheme for civil servants, care staff and teachers in Bonaire, Sint-Eustatius and Saba, said his relatively small and “exotic” pension fund felt more comfortable with a smaller provider.“We had a good relationship with Syntrus Achmea, but we noticed they focused on standardisation,” he said.“At AGH, we are able to collect the contribution through the pension benefits.”
Folksam Liv, Sweden’s biggest life insurer by market share, saw a sharp decline in premium income in the first half of this year after it pushed through major changes in its with-profits life products last year.The life and pensions arm of Swedish mutual Folksam reported a 42% slide in premiums written to SEK5.18bn (€543m) from SEK8.94bn in the same period to June last year.In 2015, Folksam made changes to its traditional life-insurance product by separating old and new capital with a mid-year cut-off point and applying different bonus rates for each.It did this to reduce one-off deposits aimed only at sharing in its bonus interest programme; new capital pays out only half the percentage bonus rate applied to old capital. The move has had the desired effect of decreasing one-off premiums and increasing monthly instalment payments, Folksam said in the report.“As a result, we are ensuring our customers will continue to experience long-term, secure retirement savings,” it said.Private savings into traditional pensions dropped to SEK2.6bn from SEK3.8bn.Chief executive Jens Henriksson said the company’s biggest challenge was to achieve a return on assets under management amid negative interest rates and stock-market turbulence.He said the Brexit vote, while heightening uncertainty, could also provide opportunities for long-term investors.“Even though it is difficult to foresee the long-term economic consequences of this, Folksam and its subsidiaries can, as a well-capitalised investor, withstand downturns in its investments,” Henriksson said.Folksam Liv’s solvency ratio dipped to 155% at the end of June from 162% at the same point in 2015.The decline was due to lower market interest rates, which increased the technical provisions.The total return for the period amounted to 2.6%, down from 3.7%.“Equity assets in the portfolio,” the company said, “developed slightly negatively during the period, while fixed interest securities and, above all, real estate contributed positively.”AUM rose to SEK168bn at the end of June from SEK164bn at the end of December.Solvency levels at Folksam subsidiary KPA Pension, the local government sector pension fund, fell to 154% at the end of June from 166% at the end of December 2015. As with Folksam Liv, this weakening was due to low market interest rates that had increased technical provisions.KPA’s overall return fell to 1.9% in the first half from 4% in the first half of 2015. Premium income increased during the six-month period to KPA Pension by just over 3% to SEK10.6bn from SEK10.3bn.KPA’s assets under management grew to SEK144bn at the end of June from SEK132bn at the end of December.
“If nothing else, it’s a cost in productivity. It gets more difficult and expensive to complete transactions. You really turn the clock back.”Robert Palombi, managing director at S&P Global, noted that negative rates can incentivise pension funds or insurance companies to increase their investment risk profile, which in turn can enable riskier borrowing by companies, fuelling a negative feedback loop.“Negative interest rates lead to excessive risk-taking, which could create more credit pressures and possibly defaults that have a deleterious impact on the economy, and creates the need for more stimulus,” he said.However, he said such a scenario can be avoided if the negative rates policy is successful in stimulating economic growth. Negative interest rates set by central banks run the risk of making prudent asset allocation “impossible” for pension funds and other long term investors that relay on bonds for part of their portfolio, according to S&P Global.David Blitzer, managing director, index management, at S&P Dow Jones Indices, said a negative policy rate by a central bank will spread negative interest rates across the economy, which could lower bank profits but also hurt other financial institutions.“Insurance companies and other non-bank financial institutions facing long term liabilities at fixed nominal rates will suffer,” he wrote in a contribution to an S&P report on the range of impacts of negative interest rates. “Pension funds and other long term investors which rely on bonds for part of their portfolio will find prudent asset allocation impossible.”Overall, if negative interest rates spread beyond major financial institutions, society would return to being “cash-only”, said Blitzer.
Mercer and Aon Hewitt have predicted that no more than 10 pension funds in the Netherlands will have to apply rights discounts this year, citing improving equity markets and rising interest rates over the fourth quarter of 2016, triggered mainly by the election of Donald Trump as US president.The consultancies, weighing pension funds’ coverage ratios at year-end, said any cuts were likely to be limited to 1%, as they expect the funds to take advantage of the legal option of spreading out the required discount over a 10-year period.Both consultancies estimated that pension funds’ coverage increased by 1 percentage point, to 102% on average, over December.This matches Dutch schemes’ average funding at the start of last year and exceeds the critical coverage level at which immediate rights cuts are mandatory. Aon Hewitt said it was probable that about 10 small and medium-sized schemes will be forced to make cuts this year, while Mercer estimates that no more than three pension funds are facing discounts.The country’s largest pension funds – ABP, PFZW, PMT, BpfBOUW and PME – have already indicated that they will not have to apply rights cuts.However, Frank Driessen, chief commercial officer at Aon Hewitt, took pains to emphasise that Dutch pension funds’ overall financial position was far from rosy.“Many schemes are a long way off from indexation, while governance requirements, particularly for the smaller pension funds, are tough,” he said. Driessen said joining a general pension fund (APF) was not as straightforward as expected for many smaller schemes, “as APFs don’t accept underfunded schemes as new participants”.Mercer’s Van Ek, meanwhile, said that all asset classes produced positive results last year, with emerging market equities returning 15% and developed market equities 12%.“Without the average currency hedge of 50%, developed market equities would have generated almost 14%,” he added.Commodities, returning 17%, was the best-performing asset class.Government bonds, listed property and private equity returned 7%, 7.5% and 3%, respectively, while hedge funds returned 1%, Mercer said.
Pension funds would have to carry out “due diligence” in relation to environmental, social and corporate governance (ESG) factors under amendments to a European Commission proposal that have been tabled by the politician leading the European Parliament’s response.According to Paul Tang, a Dutch national in the parliament’s socialists and democrats group, due diligence means “an ongoing process through which investors identify, avoid, mitigate, account for and communicate about how actual or potential adverse ESG factors and risks are integrated in investment decision-making and risk management systems”.Tang is the “rapporteur” on the Commission’s proposal for a regulation “on disclosures relating to sustainable investments and sustainability risks”, which is part of the implementation of its sustainable finance action plan. He is responsible for leading on the development of the parliament’s position on the Commission’s proposal within the committee on economic and monetary affairs (ECON).Under Tang’s version of the Commission’s proposal, investors would have to carry out due diligence in line with recommendations set out under the OECD’s “guidelines for multinational enterprises”. Tang’s proposed legislative text states that by carrying out due diligence in the prescribed way, investors would “not only be able to avoid negative impacts of their investments on society and the environment, but also avoid financial and reputational risks, respond to expectations of their clients and beneficiaries, and contribute to global goals on climate and sustainable development”.“In doing so, financial market participants will be obliged to move beyond a merely financial understanding of their investor duties,” the text added. The due diligence processes would have to be published on investors’ websites.More specific obligations – such as minimum standards – would be set out under so-called delegated acts to be adopted by the Commission, according to Tang’s proposal.Member consultation, executive pay Source: PVDAPaul Tang MEPThe member of the European Parliament (MEP) has also proposed that pension funds be required to actively consult beneficiaries when deciding what investments would be in their “best interests”.“Without prejudice to the discretion for trustees or responsible appointees for final choice of investment strategy, and in accordance with due diligence processes… the ‘best interest’ of beneficiaries is to be determined in active consultation with beneficiaries,” Tang wrote.Under Tang’s proposal, this requirement would be introduced by way of an amendment to the prudent person rule set out in IORP II, the revised EU pension fund directive that member states have until mid-January to implement.Proposed changes to pension fund regulations in the UK in relation to members’ views have caused concern at the country’s pension fund association. In the EU context, PensionsEurope and some other industry associations have been critical of calls for pension funds to be required to seek members’ views. The MEP has also proposed more demanding requirements in relation to the pay policies of financial market participants, saying they should be used “as a mechanism to avoid unwanted sustainability risks and to encourage sustainable investments”.Under his version of the regulation, executive directors of financial market participants would be required to “set out sustainable investment targets of minimum 50%” when establishing performance measurement criteria for variable pay.The targets could be based on achieving objectives in line with the UN Sustainable Development Goals.Under’s Tang’s version of the Commission’s legislative proposal, financial market participants would also face broader disclosure requirements.Other members of the European Parliament’s ECON committee have until 19 September to table their own amendments to the Commission’s proposal. The MEPs will then negotiate on the committee’s position, with a vote scheduled to take place on 5 November.
ABP’s funding has been improving in recent months and rose to 104.7% over the last quarter, exceeding the minimum required level by 0.5 percentage points.“We are desparate for a decent pensions agreement”Peter Borgdorff, PFZWWortmann said this would limit the chance of cuts next year to almost zero, but would not allow for inflation compensation for a number of years. Dutch schemes cannot grant even partial indexation until they reach a funding ratio of at least 110%.Peter Borgdorff, chairman of the €203bn healthcare scheme PFZW, said it was still too early to exclude the possibility of cuts as the scheme’s funding stood at 101.5%, despite improving 0.9 percentage points in the third quarter.Borgdorff echoed the view that the lack of inflation compensation was increasingly difficult to explain while the economy was running at full steam.“Therefore, we are desparate for a decent pensions agreement,” he said.He said PFZW planned to factor in the most recent longevity projections into its funding figures, and that this would lift the scheme’s funding by one percentage point.Eric Uijen, executive chair of the €48bn metal industry scheme PME, said he didn’t feel confident about a further recovery in funding, which he said would require a further rise in interest rates.His scheme’s funding improved by 0.4 percentage points to 101.8% since the end of June, but PME has to reach at least 104.3% by December 2019 to avoid applying cuts to pensioner benefits.Uijen said that the lack of a new pensions agreement would increase the chances of a benefit reduction.The €72bn PMT, which also covers the metal industry, closed the third quarter with a coverage ratio of 102.5%. It also warned that the possibility of cuts was still real.BpfBouw, the €58bn scheme for the construction sector, has the strongest funding position of the Netherlands’ top five schemes with a coverage ratio of 118.7% at the end of September.Volatility poses problemsThe market correction during the first half of October – which wiped two percentage points off of Dutch schemes’ funding on average, according to Aon Hewitt – could have an impact on the chances of future rights cuts, albeit limited.Most Dutch pension funds have around two years to recover from any funding shortfall, as their financial position at the end of 2020 is the criterion for possible cuts in 2021.However, both PME and PMT were most at risk, said Corine Reedijk, senior consultant for asset-liability management at Aon Hewitt.She explained that the metal industry schemes were already underfunded when the new financial assessment framework (nFTK) was introduced in 2015.This meant that their five-year recovery plans would expire at the end of 2019, and that both pension funds would face the issue of whether or not to apply cuts by then. ABP and PFZW, the two largest pension funds in the Netherlands, have urged the government, employers and unions to press on with agreeing pensions reform.At the presentation of their third-quarter results, three of the country’s five largest schemes indicated that a cut to pension payouts and accrued pension rights remained a real threat in the coming years.Corien Wortmann, chair of the €419bn civil service scheme ABP, said she could no longer explain to members that her pension fund was not allowed to grant indexation for the forseeable future, even though the economy was booming and salaries were rising.“This should be a strong encouragement to put lots of work into a new pensions system,” she stated.
Just over 40% of investors have noticed a decrease in the availability and breadth of fixed income, currencies and commodities (FICC) research for small and medium-sized companies in the wake of MiFID II, according to a survey by the International Capital Market Association (ICMA).This trend was likely to continue as the reforms bedded down, said ICMA’s Asset Management and Investors Council (AMIC), which carried out the survey for the second consecutive year.More than two thirds (68%) of respondents said they used less research in general compared to last year. Banks and brokers took the biggest hit, with 71% of those surveyed saying they used less research from these providers. In addition, 82% said they used fewer research providers.However, the survey suggested that investor fears about a decline in the quality of FICC research were so far largely unfounded. The vast majority of respondents to the 2018 survey said they had not noticed any change in the quality of the research they received, compared with 32% who last year indicated they anticipated research to get worse.All of the respondents found no change in the quality of research from independent providers. Views on the quality of FICC research from banks and brokers were more mixed, although a clear majority (86%) said the quality had stayed the same; 11% said it got worse while 4% noticed an improvement.Presenting the survey results in London last week, Patrik Karlsson, director of market practice and regulatory policy at AMIC, said the views about the quality of research were a positive surprise.Karlsson also highlighted respondents’ approach to dealing with conflicting rules on FICC research globally. This year AMIC found that buy-side firms were split between unbundling research globally and only using paid-for research (35%), and segregating EU and non-EU businesses (35%). Last year 64% of respondents were planning to unbundle globally and only 7% were planning to segregate businesses.“The significant change in firm attitude to the business segregation model may reflect that the costs and complexities of segregating their businesses geographically outweigh the costs and complexities that come from unbundling globally,” said AMIC.AMIC surveyed 28 companies, primarily asset managers and investment funds, from EU countries.