Ireland’s government and regulator could be forced to re-evaluate the minimum funding standard (MFS) for defined benefit (DB) schemes after a court case ruled it was reasonable for trustees to request funding above the minimum threshold.According to Martin Clarke, a partner at LCP’s Dublin practice, the recent High Court ruling in favour of the Omega Pharma trustees and a second case that granted a contribution request have created a new framework for trustees to work within. He added that, as long as trustees were seen to be working within the trust deed and acting reasonably, they appeared to be winning cases against reluctant sponsors.Clarke said that while only pensions in payment were offered near buyout certainty, trustees realise the MFS is an “unreasonably low” guarantee to be offering other members. He said the Omega Pharma ruling, which saw trustees granted a request for €2.23m in contributions despite the scheme being fully funded under the statutory minimum, was “almost an acceptance” that the MFS was an inappropriate basis for calculating solvency.“If the MFS is not an appropriate basis, and the court seems to be taking the view – or certainly not objecting to the view that it’s an inappropriate basis – should there not be some kind of pushback on the legislator to change it?” he asked. “Should we not have a basis that is generally acceptable as our minimum?”However, the feasibility of amending the MFS was also called into question, as the Pensions Board – now operating as the Pensions Authority – is still reviewing funding proposals after the MFS was reinstated following the financial crisis.Clarke said he was unsure if there was a “practical appetite” within the government to amend the MFS, despite previous admissions from minister for Social Protection Joan Burton that it was an “undemanding” standard, as alleged by the OECD following a review of the country’s regulatory framework.“Even if there was an appetite [to revise the MFS], they would be reluctant to impose it, as it would drive more schemes into technical insolvency,” he said.
After the takeover, the trustees of the fund negotiated a guarantee from new sponsor Schneider Electric to cover liabilities of as much as £1.75bn, with the reservoir fund split between the two.In the scheme’s annual report, chairman Kathleen O’Donavan said the guarantee meant the financial security of the fund was materially better than at any point in recent years.“The trustee will continue to review the strength of the covenant the company provides,” she said.“In light of the £1.75bn guarantee, the trustee will now also assess the improved security afforded to the scheme through the strength of the wider Schneider Electric group.”The new sponsor will not grant the scheme any additional contributions other than those for active members.This, however, will be reviewed in March next year.Due to the cash injection and reservoir contribution, the fund’s value increased by £208m despite being cash-flow negative.Two-thirds of the fund’s 78,000 members are pensioners, with only 385 active members.Some 54% of assets is invested in BlackRock’s liability-driven investment (LDI) fund, which lost 4.9% over the year, outperforming its benchmark by 1.3 percentage points.Through its BlackRock mandate and other investments, the pension fund holds 42% of its assets in index-linked UK Gilts and 17% in fixed-rate Gilts.It holds 25% in corporate bonds, where managers AXA IM, M&G Investments and GLG all outperformed their respective benchmarks.Its 3%, £131m passive allocation to equities held by Legal & General Investment Management produced a 15.2% return – nearly 11 percentage points above benchmark.However, overall returns remained negative due to the impact of rising Gilt yields on LDI strategies, which account for the lion’s share of its holdings. O’Donavan said the Invensys scheme still outperformed its benchmark by 2.5 percentage points.“The strategic target took into account the impact of changing Gilt yields,” she said.“The scheme’s strategic target was -3.4%. “The fact the assets outperformed expectations over the year helped to improve the funding position of the scheme and the security of members’ benefits.” The £4.7bn (€5.7bn) Invensys Pension Scheme has seen its £445m deficit disappear after changes in the ownership structure at its sponsoring company.The fund, which made an investment loss of 0.9% over the year to April, received a £400m cash injection last year after its sponsor, Invensys, sold its rail business to German conglomerate Siemens.The fund now boasts a £121m surplus, according its latest annual report.Earlier this year, Invensys itself was sold to Schneider Electric, which renegotiated the scheme’s covenant and an additional £105m injection after the dissolution of a £225m reservoir fund.
According to the regulator, funding on a daily basis fell from 108% to 105% on average during the January-February period.However, figures from Aon Hewitt suggested the actual funding dropped further to 101% on average over March, and that the policy funding had not changed over this period.During the first two months, the 30-year interest rate fell 46 basis points to 1.64%, and the impact of this decrease largely offset the positive effect of the 5% increase in the MSCI World Index.The Dutch pensions sector has put increasing pressure on the government to ease some of the nFTK’s new rules, in light of persistently low interest rates, on which coverage ratios are based.The Pensions Federation recently indicated that it agreed with the €40bn metal scheme PME’s opinion that the government and DNB should start discussions with the pensions sector on how to deal with the extremely low interest rate environment.Marcel Andringa, trustee and CIO at PME, said pension funds needed more leeway on either their options for raising their risk profile for investments, or on the discount rate for liabilities.Before then, the largest union FVN warned the government that low rates were becoming a “millstone” around pension funds’ neck.However, last week, the regulator responded by saying it did not see the need for accommodating struggling pension funds for the short term, “as the current rules are working well”.It said it also wanted to prevent pension funds from “gambling for resurrection”, according to Olaf Sleijpen, supervisory director at DNB.In the opinion of the supervisor, problems caused by low interest rates in the long term need to be addressed through a fundamental update of the pensions system.Sleijpen added that low interest rates hurt less in a system with more defined contribution elements – and without a pensions promise. Dutch pension funds’ ‘policy’ coverage ratio, based on the 12-month average, dropped by 1 percentage point to 109% over the first two months of 2015 due to the effects of falling interest rates, according to regulator De Nederlandsche Bank (DNB). Because current interest rates are 4 percentage points lower, the regulator warned that the policy coverage ratio was set to fall even further in the coming months.With the introduction of the new financial assessment framework (nFTK), as of 1 January, pension funds must report their coverage using the average funding for the 12 months previous instead of the three-month average.This so-called policy funding is to serve as the new criterion for indexation and rights cuts.
Philippou noted that the severity of the breach was compounded by taking place over a period of “considerable” market stress.During the period of the rule breaches, BNYMLB and BNYMIL — the third and eighth biggest custody banks in the UK respectively — held up to £1.3trln and £236bn in safe custody assets, the regulator said.“As a result of this, the firms are systemically important to the UK market,” Philippou said.In a statement, BNY Mellon noted that its fine had been lowered due to its “cooperative efforts”, and that the sum would be met from pre-existing legal reserves.”Importantly, BNY Mellon remained financially robust throughout the relevant period and, as indicated by the FCA in its Final Notice, no clients suffered any loss as a result of the issues identified.”The firm said it regretted that it had failed to meet its own or the FCA’s standards, and that it had conducted an independent review and amended its policies.BNY Mellon was one of six appointed to a national custodian framework agreement launched by a number of UK local government pension schemes in 2013.The FCA said the firms had failed to comply with its Client Assets Sourcebook (Custody Rules, or CASS).The rules are meant to protect safe custody assets if a firm becomes insolvent, making sure the assets can be given back to clients as quickly and easily as possible, the regulator said.Instead of keeping entity-specific record and accounts for the client safe custody assets they held, as required, the FCA said the firms used global platforms to manage the money, which did not record with which BNY Mellon Group entity clients had contracted.The firms also failed to stop safe custody assets being commingled with firm assets from 13 proprietary accounts, and occasionally used safe custody assets held in omnibus account to settle other clients’ deals without getting proper permission from all parties.“Other firms with responsibility for client assets should take this as a further warning that there is no excuse for failing to safeguard client assets and to ensure their own processes comply with our rules,” Philippou said. The Financial Conduct Authority (FCA) in the UK has fined custodian Bank of New York Mellon (BNY Mellon) £126m (€175.4m) for failing to follow rules meant to keep client money safe over a six-year period.The fine applied to the London Branch (BNYLB) and Bank of New York Mellon International (BNYMIL). The Bank of New York Mellon Group, to which the firms belong, is the world’s largest global custody bank by safe custody assets, the regulator said.Georgina Philippou, acting director of enforcement and market oversight at the FCA, said: “The firms’ failure to comply with our rules including their failure to adequately record, reconcile and protect safe custody assets was particularly serious given the systemically important nature of the firms and the fact that safeguarding assets is core to their business.”If the subsidiaries had become insolvent, the total value of safe custody assets at risk would have been significant, she said.
In an exclusive interview with IPE, Anne Simpson, senior portfolio manager for global equity and head of the Corporate Governance Program at CalPERS, discussed the genesis of the pension fund’s new approach, the scope of the pilot programme and the strategic goals for the initiative.“We’re reframing the ESG debate as an investment issue,” Simpson said. “For us, it’s the natural next step from adopting investment beliefs a couple of years ago. We’re shifting from thinking about this as ‘ESG issues,’ and thinking about what is required for our funds to be sustainable over the 70-year liability horizon we’ve got.”Two of the investment beliefs “set the stage for what CalPERS is doing.“One is that long-term value creation comes from the management of three forms of capital – financial capital, human capital and also physical capital,” Simpson said.“We’ve never been terribly fond of the ESG acronym. By reframing this as sustainable investment around these three forms of capital, we’ve given an economic framing of the issue to use in explaining what it is we want our managers to be paying attention to when they’re deploying capital.”The second CalPERS investment belief is the statement that “risk is multifaceted for an investor like CalPERS, because of our size, the longevity of our liabilities and so forth”.“Risk for us isn’t captured just through tracking error and volatility – natural resource scarcity and demographic and climate changes are also risks.”From that global basis, Simpson said, “the next question is what sort of agenda does that set for the policies and the monitoring we want our managers to report to us on”.CalPERS felt strongly it was important to develop this bottom-up and formed an internal cross-asset-class team of 20 people that undertook a two-year project with two objectives.“The definitions of what is meant by sustainable investment are hazy at best, so the first thing we need to do is define this for ourselves, and that’s where the investment beliefs come in,” she said.“Second, we needed to review the data and tools that might be available because, although we might be saying human capital needs to be properly managed for purposes of producing long-term value, there’s precious little by way of data and useful information about that that can be integrated into your financial assessments.”CalPERS’s system staff will develop expectations about the factors relevant to investing sustainably in each asset class and how those factors should be woven into the manager selection process.The development of sustainable investing criteria will focus most on external managers. At CalPERS, 70% of assets are invested internally via quantitatively managed public equity portfolios and an active fixed income portfolio. External managers are used primarily for private-market assets.“What we’re just starting now is a pilot phase, for about a year,” Simpson said. “We want the managers to come back to us and articulate the ESG factors – the sustainable investment factors in the new language – which they have reflected in their investment policies, and second, to report to us on how those are not just identified but how those are tracked and integrated into the decision-making process.”Despite the large number of managers that have become signatories to the PRI, Simpson said the identification of relevant sustainability issues was still at an early stage.“People might say, ‘oh yes, environmental issues are terribly important,’ but which issues, at what stage and where – something that might be just relevant at a sector level can become material depending on your location,” she said.“You can think about something as simple as water – either too much or too little. If you’re in a coastal property that might suffer inundation from the sea level rising or extreme weather events, that’s one kind of risk, while if you’re in California you can be acutely aware of what water scarcity can do to your business strategy.”Both are serious risks, she said, “but we do not have an agreed accounting standard or even a set of reliable data to track water as an input”.CalPERS aims to jump-start a process that will lead to rigorous quantification of the factors that affect the long-term sustainability of a business.All managers will be asked to explain how they define these issues, what their policies are and their data and modelling of sustainability factors.At the same time, CalPERS is reducing the number of external managers. “Another aspect of the investment beliefs is the simple and obvious statement that costs matter,” Simpson said. “We’ve got more managers than makes sense.”In what Simpson described as a “shrink-to-fit” process, CalPERS will trim its roster of more than 200 managers. “The goal is to have around 100 managers so we can have bigger strategic relationships where we’ll be able to have more impact on the fee structure and better alignment,” she said. “Next year, we’ll take a look at what managers come back with.”Responses to the sustainability initiative will be one more data point in the review.“In what will become the legacy portfolio, managers will be wound down over a period of time. In the strategic portfolio that comes out of this review and selection process, managers will report to CalPERS for the long term, and our thinking will evolve as we work our way through this pilot programme.”While some managers will lose CalPERS mandates in the course of the review, Simpson said she remained focused on the big picture.“One of the most important things we’re doing in this process is setting up an investment demand for better sustainability data and better modelling, and fundamentally, the integration of these factors into financial reporting,” she said.“At the moment, there are 101 terrific initiatives around, which gather data from some companies on some issues, but it’s not integrated into the reports that get filed or audited.”Ultimately, CalPERS is seeking to spark investment management innovation.“The prize here would be that, through this process, you get investment managers behind the notion that sustainability issues need to be properly defined, properly tracked and ultimately connected into the risk/return framework that investment is all about,” Simpson said.“That’s a big project but one that a fund of our size takes on.” The California Public Employees’ Retirement System (CalPERS), the largest public-employee pension system in the US, with about $350bn (€317bn) in assets, in June launched a pilot programme that will lead to formal requirements that all managers receiving capital allocations articulate and implement ESG principles into their investment processes.To date, ESG policies at most large pension plans have focused on company-specific issues where major asset owners could engage directly with management to push for changes at the company level.Other managers have met pension fund requirements that they incorporate ESG criteria by signing on to the Principles for Responsible Investment administered by the United Nations Environmental Programme Finance Initiative.CalPERS’s initiative aims to identify and document on a consistent basis the ESG practices, and supporting data and modelling, that managers in all asset classes use in actual investment decisions.
He said he resented that Genan was often held out as an example of how wrong things can go when the pensions sector takes on alternative investments.“Genan is in many ways a unique case,” Damgaard Jensen said.“The business and the jobs were saved because both PKA and the banks saw the potential in the company.”PKA said back in February that it secured a rescue deal with bank creditors for Genan and put Peter Thorsen in place as chairman.PKA admitted it lost money on the investment in Genan and said the facts were now being investigated by financial investigators.Genan collapsed in the summer of 2014, and PKA then took over 97% of the company’s shares.In April 2015, the operating companies were brought together under a new holding company to provide a clear and simple structure, PKA said.On 1 September, Poul Steen Rasmussen took over as Genan’s chief executive.Genan is now developing positively and has re-established many good relationships in the industry, Damgaard Jensen said. “A lot of positive things have happened with Genan in a relatively short space of time, but it is clear there is a long way to go before Genan produces the returns we expect from the business idea,” he added.He said PKA had a sharp focus on alternative investments and that this covered everything from private equity, property, wind farms and infrastructure – mainly via investment funds.“We have reaped a very good return from alternative investments, with a return of 7.2% in the last five years,” he said.“Because of this, we now have around 23% of total assets placed in this type of investment.”He said this percentage would rise to 25% within a few years. Danish pensions provider PKA has said it remains very focused on alternative investments despite the losses on its private equity investment in tyre-recycling company Genan, and plans to boost alternatives to one-quarter of overall assets within a few years.The DKK215bn (€28.8bn) provider, which manages three labour-market pension funds in the health and social care sectors, said Genan and its collapse last year should not be taken as a general example of alternative investments going wrong. Peter Damgaard Jensen, chief executive at PKA, said: “Alternative investments make us more resilient when and if a new economic crisis comes.”When equities markets fall, for example, many alternative investments will be affected far less, he said, because they are tied up in long-term agreements lasting several years for offshore wind turbines or in fixed leases for properties.
Russell Investments has been sold by the London Stock Exchange (LSE) Group to TA Associates, the private equity firm that bought UK asset manager Jupiter Fund Management back in 2007.TA Associates said it signed a definitive agreement to buy Russell Investments, the asset management business of Frank Russell, in a deal valued at $1.15bn (€1bn).It is linking with Reverence Capital Partners in the deal, with the latter making a “significant minority investment” in Russell Investments.Xavier Rolet, chief executive at the LSE Group, said: “Until completion, LSEG remains firmly committed to Russell Investments, its global customer base, its exemplary client service and its innovative product offering.” The LSE Group said back in February that it was willing to sell the investment management arm of Russell Investments, after buying Frank Russell last year, having announced the deal in June 2014.It has since split the company into an indexing part and an investment management part.The indexing activities have been merged with FTSE, also owned by the LSE Group, to form FTSE Russell.FTSE Russell is unaffected by the sale of Russell Investments, and the indices provided by FTSE Russell will remain as they are, variously branded under the FTSE or Russell names.Todd Crockett, a managing director at TA Associates, said. “The breadth of Russell Investments’ investment and implementation operations, as well as its orientation to multi-asset and solutions investing, will continue to be a differentiator and driver of growth in the market going forward.”Goodwin Procter is providing legal advice to TA Associates and Reverence Capital on the deal, while Freshfields Bruckhaus Deringer is acting as legal counsel to the LSE Group.TA Associates and Reverence Capital are also being advised by G Broadhaven Capital Partners, while LSE Group and Russell Investments are being advised by JP Morgan and Goldman Sachs.The Russell Investments deal is expected to be completed in the first half of 2016, pending regulatory approval.Russell Investments has nearly $2.7trn in assets under management.TA Associates bought Jupiter Fund Management in 2007, backing a management buyout from the then owner Commerzbank, and sold most of its stake in the company in 2010 in an IPO.
Its funding level dropped from 99.3% at year-end 2014 to 96.1% in 2015.However, the BVK took pains to emphasise that, compared with other Pensionskassen, it had very low administration costs, which “offsets some losses in times of bad returns”.The fund also argued that the ongoing low-interest-rate environment had justified its decision to radically adjust its technical parameters from 2017, a move criticised by unions and the media but unanimously supported by the trustee board. The discount rate applied to active members’ assets will be cut from 3.25% to 2%, which automatically leads to a cut in conversion rates.From 2017, a man retiring at 65 will be subject to a conversion rate of 4.82% – applied to calculate a life-long pension from his assets – whereas currently a rate of 6.2% is applied.In its most recent press release, the BVK sought to dispel a number of rumours in the media regarding recent changes at the scheme.It said the median pension would decrease by 8% and not 17% as reported by some, and that these losses would be offset by higher contributions from employers and employees.It also announced that, in order to make its investments more sustainable, it joined forces with six other retirement providers last year to found a new ESG association called SVVK-ASIR. BVK, the CHF30bn (€24.5bn) pension fund for the Swiss canton of Zurich, announced that it lost 0.7% on investments last year, although it still managed to outperform its benchmark thanks to the performance of its real estate holdings. The overall return for 2015 was worse than the 0% average calculated for Swiss pension funds by some consultancies but better than that of Publica, the federal public pension fund, which lost 2.5% over the same period. The BVK’s real estate portfolio currently makes up just over 20% of its total investments, nearly all of it being in Swiss direct holdings.The fund said it continued to aim for “broad diversification”, including commodity investments and emerging markets in their portfolio despite their both having “cost some return in 2015”.
PGGM Investments, KAS Bank, LGPS Advisory Board, Janus Capital, Legg Mason, Aviva Investors, Spence & Partners, International Accounting Standards BoardPGGM Investments – Michel Braber has been appointed risk manager at PGGM Investments, the €182bn asset manager for the healthcare pension fund PFZW. He joins from custodian KAS Bank, where he has been adviser for institutional risk management since 2011. He has also served as a member of the investment committee of the company’s pension fund.LGPS Advisory Board – Roger Phillips has been named chairman of the advisory board for local government pension schemes (LGPS) in England and Wales. Phillips, deputy to inaugural chair Joanne Segars, is a former leader of Herefordshire Council and has also chaired the Local Government Association’s pensions committee.Janus Capital – Chris Justice has been promoted to COO and head of Europe. He was previously based in Hong Kong as head of strategic initiatives for the APAC and EMEA regions. Prior to joining Janus in 2013, Justice was managing director at Quam in Hong Kong, where he led a team of research analysts and asset managers. Legg Mason – Rick Andrews has been appointed head of international marketing. He joins from Aviva Investors, where he was most recently a consultant, leading the reorganisation of the Global Business Development function.Spence & Partners – Simon Cohen has been appointed head of investment at the UK actuarial and consultancy firm. Cohen became a Fellow of the Institute and Faculty of Actuaries in 2000. He has worked for three major consultancies, holding senior roles in investment consulting and management positions. International Accounting Standards Board (IASB) – Takatsugu Ochi has been appointed for a second three-year term, while Pat Finnegan is set to retire. Ochi has previously served as assistant general manager of the financial resources management group at Sumitomo Corporation and as a member of the IFRS Interpretations Committee. Finnegan was appointed to the board in July 2009, having previously served as director of the Financial Reporting Policy Group at the CFA Institute Centre for Financial Market Integrity, as well as a former managing director at Moody’s Corporate Finance Group.
Capita Employee Benefits has been awarded a contract to run the administration for £47bn worth of pension benefits connected to the Royal Mail.The contract relates to the Royal Mail Statutory Pension Scheme, which consists of liabilities taken on by the UK government as part of the privatisation of Royal Mail in 2012.It was put up for tender at the end of 2016. Four groups bid for the business, with Capita now set to take over full responsibility for administration and related activities.According to government documents, Capita will be paid £31m for the eight-year deal, equating to £3.9m a year. The government spent an average of £5.2m a year on administration costs for the scheme since 2013, according to Cabinet Office financial reports for the past four financial years. This implies that the new arrangement could save the government more than £1m a year.While the government’s Cabinet Office has formal responsibility for the pre-2012 liabilities, Royal Mail’s Pension Service Centre (PSC) retained responsibility for administering the benefits of roughly 402,000 people who accrued pension rights before 31 March 2012.The PSC also runs the administration for the £9.8bn Royal Mail Pension Plan (RMPP), which is sponsored by the listed company. The group’s defined contribution scheme is run by Zurich.The contract award notice stated that Capita would work with PSC to cater for the roughly 116,000 people with benefits in both schemes.The change comes amid significant activity at the RMPP. It is locked in heated negotiations with unions about the future structure of the scheme, with one workers’ group having threatened strike action over a plan to close the current defined benefit scheme to future accrual.Royal Mail has estimated that RMPP would have exhausted its existing surplus by next year.The statutory scheme is unaffected by the RMPP negotiations.In August it emerged that Chris Hogg, CEO of Royal Mail Pension Trustees and a key figure in the restructuring of the scheme during privatisation, was to leave, taking on the CEO role at National Grid’s £16.6bn pension scheme. His departure date has yet to be confirmed.