Positive reaction to last week’s publication of the UK government’s legislative agenda for ‘defined ambition’ pensions has dimmed somewhat due to concerns over what the Bill does not address, with law firm Slaughter and May highlighting the risk of re-characterisation and a lack of clarity over capped employer liability.Last week, the government published the legal framework for the creation of defined ambition schemes – pension minister Steve Webb’s flagship policy for addressing defined contribution (DC) schemes’ limitations on risk-sharing.Included in the Bill was the introduction of collective benefits, paving the way for UK schemes to offer collective DC-style pension arrangements, and pool risk among members.However, Slaughter and May warned that the draft legislation raised a number of unanswered questions. It pointed to the primary legislation’s lack of a “very clear statement” regarding an employer’s liability being limited to agreed contributions.Philip Bennett, a partner at the firm, said: “There should be greater certainty in primary legislation that the employer is protected against the rules being changed.“My expectation is that employers will welcome the opportunities, yet it does not specifically address one of the recurring themes in consultation – that employers want certainty.“There is no protection against additional liability, and it is something that should be added.”Additional funding requirements and “regulatory creep” are often cited as reasons for a significant shift towards pure-DC in the UK, prompting the government’s move towards target benefits and risk-sharing.But without guarantees on liability, Bennett said, UK employers will remain wary of collective DC.Further, he said the risk of re-characterisation remained in the legislation, with employers setting up collective DC arrangements at risk of becoming DB, and thus barraged with additional regulation.“Employers should have two fares – what they agree to pay, and if the scheme is meant to be a specific type,” he said. “That decision should be conclusive.”The law firm, which had previously drafted a document outlining the changes to UK legislation needed for the creation of defined ambition and collective DC schemes, said users should be aware of the two omissions.The Bill saw its first reading in Parliament last week and will now face further scrutiny before it becomes law.The government, while introducing the concept of collective schemes, said it would also look at alternative models such as ATP’s pensions income builder system, while allowing DC schemes that do not offer guarantees to annuitise internally, under current regulation.Bennett said: “It is critical that an appropriate framework be put into place so this can be a workable option for employers in future.“Otherwise, workplace pension arrangements may move to a ‘one size fits all’ world, where all employees are in individual defined contribution pension arrangements, even if those aren’t right for them.”
Lithuania’s voluntary second-pillar pension funds managed to weather market volatility, although end-of-June returns were below those recorded three months earlier.According to the Bank of Lithuania (BoL), the sector’s regulator, year-to-date nominal returns averaged 4.7% compared with 7.55% three months earlier.The five high-risk funds, which can invest up to 100% in equities, once again generated the highest return, of 9.8%.The nine medium-risk funds (with equity limits of 50-70%) returned 5.37%, followed by the four low-risk funds, investing 25-30% in equity, at 2.67%, while the eight bond funds generated 0.49%. Audrius Šilgalis, senior specialist at the Financial Services and Markets Analysis Division of BoL’s Supervision Service, wrote: “After an impressive start in the first quarter of this year, the second quarter was not as successful for pension funds.“Turmoil in European and global financial markets led to a decline in the unit value of most second-pillar pension funds in the second quarter.“However, due to a very successful beginning of the year, the return of only one conservative investment pension fund in the first half of this year has been negative.” Membership since the start of the year grew by 2.5% to 1.19m, and assets by 9.4% to €2.04bn.Investment returns contributed €77.9m to this year’s asset increase.A further €15m came from additional contributions from members choosing to top up their 2% contribution with a further 1% of their wages, and €17.9m from the match-funded state contribution for these members.In the smaller third pillar, returns averaged 6.06%, with the five high-risk funds generating 8.79%.Returns from the medium-risk funds averaged 4.88%, with two of the four generating negative returns, while the three low-risk funds averaged 1.25%.Membership of the sector grew by 11.2% since the start of the year to 44,395 and assets by 12.6% to €54m.
Denmark’s PKA and PGGM in the Netherlands have put out a joint report calling on governments to help investors in their efforts to mitigate climate change.Both pension providers said addressing climate change was a key area of focus for them.“Because of our long investment horizon, we need to consider and prepare for scenarios that potentially have material impact on our investment portfolios in the long run,” they said.Climate change was an important factor in those scenarios, they said. The two providers are suggesting several ways investors and policymakers could respond to the problem of climate change, such as forging closer cooperation between public and private parties to create a stable investment environment.The providers also said they strongly advocated mechanisms that put a price on carbon, arguing that this was the best way to shift capital and knowledge towards the most efficient solutions.Peter Damgaard Jensen, chief executive at PKA, said: “If we are to increase our green investments substantially, we need policymakers to commit to ambitious climate goals and provide investors with attractive incentive structures.”He said he hoped the joint report would add to the debate at the upcoming COP21 climate conference in Paris.Else Bos, chief executive at PGGM, said that, in order to meet the ambition of its largest client PFZW, PGGM would will quadruple investments in “solutions for climate change” in the coming four years.It has already taken important steps towards that goal, she said.“These steps have convinced us accommodating policies and regulation are essential to meet these ambitious targets,’’ she said.The funds also said there was a need for “innovative de-risking models”, which mixed public and private finance, to solve the problems of climate-related investment in developing countries, such as high political and financial risks.
The survey was carried out by social research institute TNS Infratest and co-authored by academics Klaus Hurrelmann and Christian Traxler, and Heribert Karch, managing director at Metallrente and also chair of aba, the German occupational pension association.A Metallrente statement summed up the study as showing that “midway through the pension reform process that began in 2002 … it has failed to reach its goals”.In 2002, the German government introduced state-subsidised private pension schemes, the Riester Rente.Its impact has been the subject of various comments from politicians in recent weeks, with its namesake (Walter Riester, the former labour minister) coming out to defend the initiative after claims it had “failed”.Karch said the results of the latest study were “deeply distressing”, with the younger generation in an “increasingly precarious position with regards to pensions policy”.For the first time, the survey asked young Germans about what “nudges” – an increasingly popularised behavioural economics concept – could lead them to contribute more towards their retirement.The majority (65%) of those surveyed approve of the introduction of automatic enrolment in savings plans, with approval ratings rising to 89% for plans that incorporate opt-out clauses and subsidies, according to Metallrente.Co-author Traxler said “the near unanimous approval of a default savings scheme was very surprising”.Automatic enrolment is featuring among pension reform ideas being discussed in Germany.An expert study commissioned by the German labour and social affairs ministry (BMAS) recently concluded that German industries should be free to introduce auto-enrolment into any future industry-wide pension plan.The latter are arrangements proposed by labour and social affairs minister Andrea Nahles in spring of 2015, and would involve establishing defined contribution (DC) schemes through sector collective labour agreements – this is also referred to as the social partnership model of occupational pension provision.Auto-enrolment also features in a “Deutschland Rente” proposal for a state-backed supplementary pension provision, formulated by regional state ministers in December last year.The Metallrente-commissioned study also found that occupational pension plans are becoming more popular among young adults in Germany, with 40% of those surveyed having opted to join a company pension plan versus 31% in 2010; the percentage of young people using third-pillar Riester-Rente schemes fell from 50% to 42%.Still, said Karch, more needs to be done to make company pension plans more attractive.“If we truly want to strengthen occupational pension plans, obstacles have to be removed and better conditions created,” he said.“This means subsidies for employers and employees need to be simplified and the more serious problems of fairness between the generations solved.”Under these kinds of conditions, added Karch, “models that capitalise on social partnerships could also be promising”.Policymakers must act to prevent the younger generation from old-age poverty, said Karch, calling for a “summit” of decision-makers to discuss further measures.Unemployment the problemFor researchers at a private economics research institute, however, the focus on promoting occupational pension provision risks missing the mark.The Institut der deutschen Wirtschaft Köln (IW, pictured) earlier this week said the biggest obstacle to ensuring financial security in old age was unemployment and that this was where political action was needed most.Martin Beznoska, a tax expert at IW, said: “That is a problem politicians will not be able to solve with occupational pension provision proposals alone.”The institute also said reliable data was lacking in the debate around occupational pension provision and that studies “often yield more questions than answers”.This is why the institute questions the point of the industry collective DC proposal under discussion in Germany at the moment, it said.On the basis of existing household data, IW analysed occupational pension coverage in the country.It found that the prevalence of occupational pension schemes varies between 40% in one-adult households and 66% in those with couples, although researchers Beznoska and Jochen Pimpertz argue that other sources of retirement provision also need to be taken into account.In this case, nearly 90% of households in couples have supplementary pension provision.Their study calls for scepticism with respect to calls for mandatory participation in occupational pension schemes, even auto-enrolment that includes an opt-out feature, and also says a social partner-based model does not seem up to the task of ensuring old-age financial security.Compulsion will not make a difference to households hit by unemployment that have limited financial resources, it said, and in other cases risks triggering “substitution effects”.The social partnership model, meanwhile, also does not seem up to the task, according to the institute.For one, it would not have application in case of unemployment.Also, according to IW, there is little evidence for the assumption that, in small and medium-sized companies, a lower rate of second-pillar coverage is accompanied by a systematically low savings rate by employees.Overall, the institute stresses the need for further research, saying that this, in the name of evidence-based economic policy, should have priority over “hasty political decisions”. There is strong support for auto-enrolment in pension plans among young adults in Germany, according to a study commissioned by MetallRente, while researchers at an economics institute have said reform proposals focussing on occupational pensions risk missing the mark.The Metallrente survey is the third the multi-industry pension scheme has commissioned to look into German young adults’ expectations and attitudes about retirement.The first was carried out in 2010, and the second in 2013.This year, 2,500 young adults between the ages of 17 and 27 were surveyed.
Bos, PGGM’s former CIO, said the 8% average returns of recent decades were untenable in the current economic climate.“The very low interest rates are resulting in increased savings rather than increasing consumption and investment, which doesn’t generate new jobs or growth,” she said. She said pension funds could boost returns by bringing asset management in-house, and that PGGM was building the necessary expertise to manage illiquid investments such as infrastructure and private equity.“By removing the expensive intermediate layer, we can reduce our costs by up to 200 basis points,” she said. “Moreover, in-house management enables us to take into account the issues that are important to us, such as sustainability.”Bos acknowledged, however, that costs – including staff remuneration – posed a potential hurdle for in-house management, as pay is very much under scrutiny in the Dutch pensions sector.In particular, investment experts for infrastructure and private equity usually demand sizeable salaries.“Any tightening of legislation for remuneration would make it increasingly difficult to hire the expensive specialists we need to reduce costs,” she said. Lower returns over the longer term would not be a disaster for pension funds, according to Else Bos, chief executive at the €200bn asset manager PGGM.In an interview with IPE sister publication Pensioen Pro, Bos said low inflation could help pension funds cope with low returns.“We don’t really need returns of 8%, as pension funds now base their contribution levels on an interest rate of 2% to 2.5%,” she said.“Because the European Central Bank is targeting an inflation of slightly less than 2%, returns of 5% would be sufficient to meet pension fund liabilities.”
Norwegian municipal pension fund KLP is to dump more than half a billion kroner of investments in companies behind the controversial Dakota Access Pipeline after a UN envoy criticised handling of the project.The move is despite the NOK589bn (€64.4bn) pension fund earlier this month defending its decision to remain invested in the pipeline companies even while other institutions had offloaded the exposure. After sending a staff member to the US to assess the situation, KLP last week said it had not been able to document serious or systematic violations of environmental or human rights in the matter, evidence it needed in order to justify removing a firm from its portfolio.KLP said it had subsequently decided to exclude the firms Energy Transfer Partners (ETP), Phillips 66, Enbridge, and Marathon Petroleum Corporation from its investments because of an “unacceptable risk” of contributing to human rights violations.The decision was made, it said, in the light of most recent developments around the pipeline. On 3 March, the UN special rapporteur on the rights of indigenous peoples, Victoria Tauli-Corpuz, said the tribes affected by the project had not been consulted sufficiently. She also said she was “deeply concerned” by US president Donald Trump’s executive order on 24 January giving the project the go-ahead without a broader environmental impact statement.Annie Bersagel, acting head of responsible investments at KLP’s asset management arm, KLP Kapitalforvaltning, said: “In making the decision to divest, KLP places significant emphasis on the UN Special Rapporteur’s assessment, a previous recommendation on exclusion from the Council on Ethics for the Government Pension Fund Global, as well as the lack of progress through active ownership.”It had been a difficult case, she added.KLP noted in its analysis underpinning the decision that it was “unnecessary to consider whether a state has violated human rights in order to conclude that a company faces an unacceptable risk of contributing to a human rights violation, so long as the conduct in question falls below the minimum standards outlined in international human rights instruments”.KLP will now divest roughly NOK578bn of investments, including around NOK56m of fixed income investments in ETP; some NOK190m in Phillips 66 in equity and fixed income; about NOK273m of equity and fixed income issued by Enbridge and Spectra Energy – a company recently acquired by Enbridge – and around NOK59m in Marathon Petroleum, also in both equity and fixed income.
The Church Investors Group (CIG), representing church organisations with combined assets of around £17bn (€19bn), has told FTSE 350 companies that it will take a harder line at annual general meetings where it considers change in three key areas to be too slow. It will also encourage other shareholders to refuse to re-elect directors where a company is out of line with best practice.In terms of executive pay, the CIG – which includes the main investing bodies of the Church of England and the Methodist Church – will consider fairness in the workplace, and withhold support for remuneration reports where chief executive pensions are deemed excessive.It will also withdraw support against a remuneration report where pay ratios are not disclosed, or where financial services or pharmaceutical companies do not pay the living wage. In promoting gender diversity, CIG members will now vote against the re-election of nomination committee chairs where fewer than 33% of board directors are women, and it will vote against all directors on the nomination committee if woman make up less than 25% of the board.The third key area is climate change. CIG members will now vote against the re-election of the company chair when a company is considered to be making little progress on transitioning to a low carbon world.Companies will be measured against their scores from the Transition Pathway Initiative, a tool designed to help asset owners better understand and address their exposure to risks and opportunities stemming from climate change.Carlota Garcia-Manas, deputy head of engagement for the Church Commissioners and Church of England Pensions Board, said: “We continue to see climate change as a key issue and encourage other investors to partner with us in ensuring we hold companies accountable to the highest standards and adapting their activities to fit with the Paris Agreement.”The full CIG voting policy is here.Meanwhile, Wellcome Trust – the UK’s largest charity, with assets of £23.2bn at the end of September 2017 – has revealed an above average gender pay gap.The gender gap in its median pay was 20.8% as at April last year. The UK gender gap average is 18%.Wellcome said the gap existed mainly because of the disproportionate balance of men and women at different levels within the organisation. Overall, around 64% of its employees are women, but most of the highest-paid senior roles are held by men.The charity said: “This year we will introduce fairer ways to support the recruitment, progression and retention of women at senior leadership levels. We will improve our diversity data so that we understand better where to target new initiatives, and provide staff training to mitigate bias.”All UK employers with more than 250 staff are required to publish gender pay gap data on the government website by April 2018.
Civil service scheme ABP was 82.8% after inflation, while healthcare pension fund PFZW was 79.7% funded. Metal industry schemes PMT and PME both recorded a coverage ratio of 81.4%.The occupation scheme for dental technicians (Tandtechniek) had the lowest coverage ratio in real terms, with 75.3%. The scheme is set to transfer its pension rights to PFZW on 1 October, with its members incurring a benefit cut of 9.3%.The €10.3bn occupational pension fund for medical consultants (SPMS) had the highest real-terms funding, 172.9%, due to its unconditional indexation of 3% a year.The occupational schemes for midwives and physiotherapists also had a high funding level after inflation due to unconditional indexation policies, despite having a shortfall in nominal terms.The DNB figures also showed that asset management costs rose by 1 basis point to 39bps on average last year.The €238m pension fund of potato starch company Avebe showed the largest drop, from 70bps to 26bps, following its divestment from hedge funds.With 9bps, asset management costs (excluding transaction costs) were the lowest at Detailhandel, the €20.8bn pension fund for the retail sector. Including transaction costs this figure rose to 17bps.Only the small company schemes for Metro, PepsiCo and Sagittarius posted lower combined costs. Funding in real terms of Dutch pension funds improved from 86.4% to 91.9% on average last year, according to De Nederlandsche Bank (DNB).Figures published on the regulator’s website showed that the number of schemes with funding ratio of at least 100% after taking into account inflation rose from 25 to 36 during this period.DNB requires pension funds to draw their calculations for real-terms funding on expected returns for securities of 6.75%.With an after-inflation funding ratio of 93.1%, BpfBouw, the €58bn pension fund for the building sector, was in the best financial shape out of the Netherlands’ five biggest schemes.
PensionDanmark is to pump more into real estate and infrastructure investments this year after the allocations produced strong returns in 2018, the pension provider’s CEO has said.Citing difficult conditions in last year’s investment markets, the Danish labour market pension fund recorded a 1.6% investment loss for market-rate pensions and a 1.2% positive return for average-rate pensions in its 2018 annual report.The returns, calculated using Denmark’s N2 and N1 standards respectively, compared to the positive returns of 8.6% for market-rate pensions and 3.5% for average-rate pensions reported in 2017.The Copenhagen-based fund’s total assets edged up to DKK235.9bn (€31.6bn), from DKK233.2bn at the end of 2017. PensionDanmark described its 2018 performance as “satisfactory” due to the challenging state of the market. Chief executive Torben Möger Pedersen predicted a number of years of low interest rates and volatile equity markets to come. Credit: Patrick FrostTorben Möger Pedersen (right) is presented with the Outstanding Industry Contribution Award by Candriam’s Renato Guerriero, at the IPE awards in Dublin“This means that Danish pension savers should expect to receive more moderate returns than the historically high returns achieved in the years leading up to 2018,” he said.Infrastructure generated 12.5% for the fund last year, while real estate produced 10.1%, according to the annual report. At the other end of the scale, the fund’s listed equities made a 9.6% loss and corporate bonds and loans ended the year with a 3.4% investment loss.In absolute terms, the fund’s return for 2018 was a negative DKK3.2bn, down from the previous year’s positive return of DKK16.6bn. While the year ended with slim positive returns for older and retired members of 0.2% and 0.7%, PensionDanmark said its younger scheme members experienced a loss of 2.6%.“Seen in isolation, negative returns are not satisfactory, but we are pleased that we were able to deliver positive returns to our older and our retired members, and that the losses incurred by our younger members were moderate,” Möger Pedersen saidThe fund also reported that its membership grew to 732,000 in 2018 from 713,000 the year before, with pension contributions reaching an all-time high of DKK14.2bn.
Charles Randell, FCA“We don’t know exactly how many people have been scammed into transferring their pension pots to fraudsters or skimmed by bad advice to switch to inappropriate high risk or poor value investments, but it’s clear that it could be a large number.”More than 5m pension savers were at risk of falling victim of tactics used by fraudsters, Randell added.Although Randell declined to express an opinion on the pension freedoms policy, he highlighted questions raised by MPs in the parliament’s work and pensions select committee.The cross-party group of MPs raised concerns about the implementation of the policy during an enquiry last year into the restructuring of the British Steel Pension Scheme.On the policy, Randell said: “It was implemented in 2015, relatively soon after it was announced in 2014, but responses to the risk of skimming and scamming are continuing to be developed.“For example, a ban on cold calling became effective at the beginning of 2019 and the FCA proposes to ban contingent charging for pension transfer advice from next year.“All policy makers, including the FCA, need to learn lessons for the future from this experience. One of which is that a very major change of policy like this needs a substantial period of planning and testing so that all the necessary safeguards against skimming and scamming are integrated before it is launched.”Pensions minister Guy Opperman said last month that an fraud awareness campaign launched by the FCA and the Pensions Regulator had prevented savers from losing £34m (€38m) to financial criminals. Keith Richards, CEO of the Personal Finance Society, said the ban on cold calling in relation to pensions should have been in place “from the beginning”.Richards added: “Equally, the FCA is now making commitments to police the regulatory perimeter, but in the past this area fell between many stools – the police were responsible for investigating fraud, the Treasury and Department for Work & Pensions were in charge of authorising occupational pension funds from a tax and regulatory perspective and the FCA policed conduct of regulated activity.“Scammers managed to get enough authorisations to look respectable, without having their activities properly monitored. It took a long time for all the organisations involved to develop a co-ordinated approach.” The UK may have rushed the implementation of its ‘pension freedoms’ policy in 2015, according to the chair of the country’s financial regulator.In a speech this week, Charles Randell, chair of the Financial Conduct Authority (FCA), noted that the regulator and policy makers were still developing responses to the rise in fraud activity since the government relaxed at-retirement rules four years ago.The UK government removed the requirement for people in defined contribution (DC) approaching retirement to buy an annuity in a policy decision made in 2014 and effective from 2015.It has meant a significant increase in people withdrawing their pension savings as cash from DC schemes or transferring out of guaranteed defined benefit (DB) schemes. Randell said: “A number of the victims of [fraud] are pension scheme members who have been persuaded to make poor decisions when exercising their new-found freedoms to transfer out of a defined benefit scheme. Exercising this freedom is unlikely to be in the interests of the majority of pension scheme members.