“It might help us to reduce costs by 25%,” he said. “If some small company schemes were to join us, our combined assets would be €5bn.“This would reduce costs for pensions provision, actuaries and supervision, and also improve the quality of governance.”In his opinion, there is an overlap in the sectors served by both pension funds.“Among the participants of Bakkers are industrial bakers and traditional pastry cooks, whereas Zoetwaren also accommodates industrial pastry cooks,” he said.Leonne Jansen, chairman at Zoetwaren, said: “Bakkers is the most logical partner for us. The participants have similar jobs, education and background.”But she stressed that a merger would be a “second choice”.“Firstly, we want to investigate a cooperation,” she said. “Our predecessors, the pension funds Cake (Koek) and Candy (Snoep), also had a joint investment committee for years.”Zoetwaren is the product of a merger of the industry-wide schemes for confectioners and chocolatiers (Snoep) and the sugar-processing sector (Koek) in 2011.Jansen said: “We thought we had become quite a large scheme then, but, a couple of years on, we are among the small ones again.”She conceded that a merger would probably the most efficient solution in the end. Bakkers, the €3bn industry-wide pension fund for the Dutch bakery sector, and Zoetwaren, the €1.7bn scheme for confectioners, are investigating a possible cooperation that could culminate in a full merger. Speaking with FD Pensioen Pro – the new partner of IPE sister publication IPNederland – Jacques van de Vall, the employers’ chairman at Bakkers, said the pension funds had set up a joint committee to look into options for “symbiosis between the schemes”.The committee would investigate how sharing an actuary and an accountant, and having a joint pensions bureau or joint communications, could drive down costs, said Van de Vall.He confirmed that a full merger was also an option.
Emma Watkins, a partner at LCP, said: “After the first quarter of 2014, we thought there was a position where demand was starting to outstrip supply, and we could see a scenario where insurer pricing became less competitive.”The Budget announcement in March removed the need for individual DC savers to purchase annuities.This meant insurers with both retail and bulk annuity businesses shifted capacity to the bulk space over expectations that individual sales would plummet.“The see-saw levelled out again,” Watkins said, “and the competitive pricing seen at the end of 2013 and early 2014 continued.”The LCP report also highlighted potential growth in demand.Analysing 53 of the FTSE 100’s constituents, 10 company schemes were 80-100% funded, with six of those already insuring some longevity risk.The consultancy’s market expectations for 2017 predict the number of funded schemes will rise to 23, representing £125bn of longevity premiums for insurers to write.Watkins said, by the end of 2015, demand is likely to shape the dynamics of the market.“Insurers can easily write £10bn a year,” she said. “But if pushed, and given the sort of noises insurers are making about their appetite, there could be up to £15bn in capacity.”Watkins said, with insurer Legal & General looking to write £4bn-5bn a year and Prudential, Rothesay Life, Pension Insurance Corporation and Aviva around £2bn, the market has more potential than the expected £10bn.This is even before other annuity insurers enter the market to survive the post-Budget environment.In April, IPE revealed LV= was looking to enter the medically underwritten bulk annuity space due to falling sales in individual annuities.“But this would require demand to go up in the same fashion, and that will be dictated by market conditions [on funding levels and Gilt prices],” Watkins said.The LCP report also highlighted a growing trend for larger schemes to move away from longevity swaps and more towards insurance buy-ins.The consultancy said options were opening up to larger schemes, whereas transactions worth more than £1bn were previously limited to longevity swaps, due to the high cost of transactions for buy-ins.Watkins said the sophistication of insurers meant the cost of swapping assets had decreased, making a buy-in more attractive.This was shown by the £3.6bn buy-in arrangement for the ICI Pension Fund and the £1.6bn for the Total UK Pension Plan.However, she added that longevity swaps still made sense for the significantly larger schemes that were not looking towards buyouts in the near future.“If you are holding Gilts and corporate bonds to match pensioner members, investing in a longevity swap probably means you would have to re-risk your investment strategy,” she said. “For some schemes, they do not have the willingness or expertise to do that, so a buy-in makes more sense. But for a large sophisticated scheme, a longevity swap may make sense.”This was shown by the £16bn longevity deal organised by the BT Pension Scheme and Aviva’s pension fund.The UK bulk annuity market continued to grow as the CTL Engineering Pension Scheme wound up its liabilities with a £12m buyout.This followed deals by the Unilever and Panasonic pension schemes, as sponsors respond to favourable market conditions. The balance of power in the UK’s bulk annuity market will continue to shift between pension funds and insurers as meddling through market conditions and outside forces continues.LCP, a consultancy, published its seventh annual report on the longevity insurance market and said it expected annual transactions of £10bn (€13bn) in bulk annuities to become the new norm.The market in 2014 stormed ahead of previous levels and was close to reaching last year’s £7.5bn annual total by the end of June, backed by increasing demand and insurer appetite.LCP expected the balance of power to shift to insurers until reforms were made to the individual defined contribution (DC) market.
The second pillar was introduced in January 2013 by the previous government, which then lost the general election the following October.Sobotka’s pre-election warnings that his party would scrap the system if it won undoubtedly contributed to the low take-up, and with some providers in the long-standing third pillar declining to participate.The second pillar is funded by diverting 3% of the 28% first-pillar social security contribution, alongside an additional 2% of members’ gross wages.Under the liquidation scheme, recommended by a cross-party working group appointed earlier this year, second-pillar members will be able to choose whether to receive their funds into private bank accounts, with the option of returning the 3% portion back into the first pillar, or reinvest them into existing third-pillar funds.Labour and Social Affairs minister Michaela Marksová, a CSSD member, had earlier argued for the 3% portion to be compulsorily returned to the first pillar. The Czech three-party coalition government has announced that the voluntary second-pillar pension system will be eliminated by January 2016, rather than a year later.The decision for the earlier date was spearheaded by prime minister Bohuslav Sobotka and his Social Democrat (CSSD) ministers and backed by those from the Christian Democratic Party (KDU-CSL).Sobotka explained to the press that the system was not beneficial for most Czech workers and had attracted relatively few members.Finance minister and deputy prime minister Andrej Babiš and his ANO 2011 party ministers unsuccessfully argued for the later date because of potential legal challenges from the 84,000-odd members of the second pillar, and the five providers who had set up 20 so-called ‘retirement funds’.
Lithuania’s second and third-pillar pension funds posted strong returns in 2014, according to Bank of Lithuania, the central bank and pensions regulatory authority.The annual nominal return for the 26 voluntary second-pillar funds averaged 7.78%, compared with an annual inflation rate of 0.1%, and well above the average 4.28% generated in 2013.High-risk funds, which can invest up to 100% in equities, generated the best average return, of 9.73%, followed by low-risk funds (with up to 30% in shares) at 8.20%.The medium-equity funds, the most popular vehicle, returned 7.95%. Conservative funds, with no equity share, generated 4.02%, compared with 0.58% the previous year.According to Audrius Šilgalis, senior specialist at Bank of Lithuania’s financial services and market analysis division, the low-equity funds benefited from a strong performance in the bond markets, and the high-risk funds from their investments in US equities.Membership grew over the year by 3.5% to 1.16m, close to 80% of the workforce, while assets grew by 18.3% to €1.9bn. Asset growth was partly boosted by the high percentage of members who had earlier chosen to add an extra 1% of their wages to their second-pillar savings, matched by a further 1% of average annual earnings from the state.The base contribution fell from 2.5% in 2013 to 2%.In 2016-19, the additional worker contributions and state subsidy increased to 2%.In the much smaller third pillar, the 10 funds returned 7.34% on average, compared with 6.42% in 2013.Returns ranged from 9.32% for medium-risk funds to 8.24% for high-equity funds and 2.19% for conservative structures.Membership increased by 16.6% to 39,993, and assets by 25.8% to €47.5m.
The RvT also recommended the pension fund increase its independence from pensions manager TKP Pensioen, which provides administration, as well as board support and advice.Schilthuis said the board would address the issue by demanding separate reporting on pensions administration and advice.Recently, the DNB suggested in a survey that Dutch pension funds should do more to tackle so-called “integrity risks”, including conflicts of interest, corruption and fraud.Its own pension fund had been among the 25 schemes covered in the survey.The board said its own evaluation of the pension fund’s performance and governance had shown that the time required to run the scheme, the availability of expert board members and relatively high implementation costs had created “bottlenecks”.It said it dealt with the problem by increasing board support from its internal advisers.Meanwhile, according to its annual report, the DNB scheme returned 29.3% in 2014 due largely to its 93% interest hedge through fixed income investments, as well as interest swaps.Its sizeable allocation to European government bonds returned 21.7%, with holdings in long-duration bonds returning 31.4%.Equity and property returned 10.9% and 1.5%, respectively.The board said it would increase the scheme’s risk profile to improve its indexation potential by raising its equity allocation from 17.5% to 25%, while lifting its property allocation from 3% to 5%.It said the adjustments would come at the expense of exposure to long-duration government paper.Following its decision to switch to passive investment, the pension fund reduced the number of equity managers from three to one, who would invest against a “broad and diversified global index”.It said a passive strategy would also be applied for its real estate portfolio through global exposure to real estate investment trusts.The Stichting Pensioenfonds DNB has 1,990 active participants, 1,300 pensioners and 1,510 deferred members.Its current policy funding stands at 117.3%. The board of the €1.6bn pension fund of Dutch regulator De Nederlandsche Bank (DNB) has said it will look into a potential conflict of interest respecting its use of BlackRock as both fiduciary manager and asset manager for some of its investment funds. The board’s statement came in response to a critical report compiled by the supervisory board (RvT), which recommended reducing the scheme’s “dependency” on BlackRock, which it deemed a “concentration risk and a cost risk”.Floris Schilthuis, independent chairman of the board, said: “We take the RvT’s recommendations seriously and will take steps to improve checks and balances if necessary.”However, he also argued that potential risks to the fund had lessened after the board switched to a “predominantly passive” investment style, which includes passive fixed income funds managed by BlackRock.
The £17bn (€24bn) National Grid UK Pension Scheme has agreed to sell its in-house asset manager to Legal & General Investment Management (LGIM), IPE understands.The pension fund for the UK’s electricity network operator invests 75% of assets (£12.8bn) with Aerion Fund Management, an entity wholly owned by the scheme. Aerion employed 27 fund management and 12 administrative staff as of March 2014, according to its financial statements. Its total salary and related costs were £9.1m.In May the National Grid scheme announced an attempt to sell the asset manager after changes to its investment and governance model, which would include a transfer of assets and investment staff. Sources close to the deal informed IPE that after also holding discussions with BlackRock and BMO Global Asset Management, the scheme is set to sign a deal with LGIM in the coming days.National Grid’s decision to sell Aerion was based on the investment profile of scheme, as its liabilities matured.Nigel Stapleton, chairman of trustees for the scheme, told IPE in May that given the ageing membership the scheme’s liability management was becoming more complex and it required more specialist liability-driven investment (LDI) solutions.LGIM is the largest pension asset manager by AUM in the UK with £644bn in third-party institutional assets, according to data compiled by IPE, and is the largest provider for LDI solutions, according to KPMG.It is not yet clear under what terms LGIM would take on Aerion, or how long the scheme will commit to any potential LDI mandate as part of the sale.The National Grid scheme’s remaining 25% of assets are managed externally, mainly for property, private equity and emerging markets.The fund has appointed a team to support the trustees with monitoring of external managers, investment strategy and liability management.The team will report directly to the trustees, focusing on the scheme’s needs on a full-time basis.Fenchurch Advisory, an asset manager buy-and-sell specialist, is advising on the sale.The National Grid UK Pension Scheme and Redington, its adviser, would not comment on ”market speculation”.LGIM declined to comment.
“With so many councils proving they can co-operate by bidding together to Treasury for more devolved powers, we must urgently develop models that secure the appropriate level of local accountability whilst partnering on investments, liabilities and administration,” he said.Cockell said the Lancashire and London Pensions Partnership (LLPP) model showed what could be done, and that this could be developed much further.In July, the boards of the Lancashire County Pension Fund (LCPF) and the LPFA approved plans to form the LLPP, an asset liability management partnership that will merge the two pension funds’ investments, liability management and administration.Cockell said it was an interesting and challenging time for the LPFA and the LGPS, with the government having made it clear in the Budget that public sector pension funds needed to change or have it forced upon them. “Only through collaboration can we meet the desired outcomes and results needed to take the LGPS out of deficit and keep our future in our hands,” Cockell said.Cockell takes over from Edi Truell, who left the top job at the LPFA to become the Mayor of London’s adviser on pensions and investments.Truell was to promote collaboration between public sector pension funds and their investment in infrastructure and housing in London and across the UK.He was also asked to set up an advisory board for the LLPP. The new head of the London Pensions Fund Authority (LPFA), Merrick Cockell, says the UK capital’s public sector scheme must lead other local government schemes around the country in joining forces to be more efficient on investments, liabilities and administration.Cockell, officially appointed today as chairman of the LPFA, said: “The LGPS is a sleeping giant, and, instead of looking enviously at Canada or Australia, we should get on with creating our own LGPS equivalents.”He said it was time to challenge the status quo in the UK’s Local Government Pension Scheme (LGPS) and show sector leadership.While the LGPS is one scheme, its administration is currently carried out through 99 regional pension funds across the country.
The LAPFF first contacted the European Commission about the issue on 23 September.The local authority pension funds body warned that the EU Commission could in future face legal action were IFRS 9 to be endorsed.In that letter, the LAPFF also warned that, were the Commission to endorse IFRS 9, it could face a legal challenge through the courts.Despite the opposition to IFRS 9 from the LAPFF and other long-term investor interests in the UK, not all shareholder interest groups are opposed to IFRS 9.Eumedion, a corporate-governance lobbying forum, has lobbied both the European Commission and the European Parliament’s economic affairs committee in support of adoption.In a 30 November letter, obtained by IPE, Eumedion argued that any delay in clearing IFRS 9 “would increase the risk” that banks and insurance companies would be unable to convince investors to stump up fresh capital during any subsequent crisis.The LAPFF’s position on IFRS 9 endorsement is that Article 3(2) of the IAS Regulation 2002 requires IFRSs to comply with Article 4(3) of the Accounting Directive (2013/34/EU).Within Article 4(3), the LAPFF points to the requirement for accounts to “give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss”.The true and fair view notion is at the heart of the argument the LAPFF and other investors have about IFRS accounts.They claim IFRS is defective and fails to meet this requirement.This shortcoming, they argue, caused what appeared to be well-capitalised banks with apparently healthy balance sheets to implode during the financial crisis.These investor groups point to current IFRS financial-instruments literature, together with the use of mark-to-model fair values, as one reason why IFRS fails to meet the true and fair criteria.They also complain about the lack of accounting prudence in the IASB’s conceptual framework.The IASB has responded to these and other criticisms with a project to replace its current financial-instruments standard with IFRS 9, Financial Instruments.It has also unveiled plans to reintroduce the concept of prudence to its conceptual framework.Meanwhile, in a separate development, the EFRAG hit back at the charge its IFRS 9 endorsement advice was legally flawed in a further letter to the Commission.In that letter, the EFRAG agreed with the LAPFF that Article 4(3) of the Accounting Directive refers to specific numbers in the accounts.However, the EFRAG went on to argue that this requirement must be read alongside Recital 9 of the IAS Regulation.In its latest response to this claim, the EFRAG said the EU should consider the true and fair view requirement “in the light of the said Council Directives without implying a strict conformity with each and every provision of this Directive”.The EFRAG added it had “concluded that IFRS 9 is not contrary to the true and fair principle”.An LAPFF spokesperson told IPE: “Recital 9 [of the IAS Regulation] is not undermining the core purpose of accounts per the Accounting Directive set out in Recital 3, which is member and creditor protection.“Quite the opposite, in fact. Recital 9 is allowing for the dropping of those things that are not essential in the light of that core purpose.”The statement concluded: “The EFRAG’s reading is back to front and wholly arbitrary because it drops the essential purpose and falls back onto extraneous matters instead. The EFRAG has no power to change the very purpose of legislation.”The row over prudence in accounting, the true and fair view requirement and, latterly, IFRS 9 has dominated the landscape between audit watchdog the Financial Reporting Council (FRC) and some investor parties.The increasingly bitter war of words between the FRC and these investors has seen both sides take specialist legal advice on the issues of prudence and the true and fair view in a bid to gain the initiative.Alongside its analysis of the legal test for adopting a new IFRS, the EFRAG said insurance industry concerns were insufficient reason to delay the adoption of IFRS 9.The IASB’s work on insurance liability accounting has yet to come to an end. In February 2014, the board voted to fix IFRS 9’s effective date at 1 January 2018.This move means insurers must apply the new insurance standard several years after they have applied IFRS 9 – even though the two standards are supposed to complement each other.The EFRAG said in its 1 December letter to the Commission that the benefits of applying IFRS 9 from 2018 outweighed any hardship the insurance sector might face.The advisers wrote: “[We] concluded that the efforts necessary to support financial statements presenting a true and fair view would not, in all circumstances, lead to an acceptable cost-benefit trade-off.” The war of words between the Local Authority Pension Fund Forum (LAPFF) and the European Union’s advisory body on accounting matters, the European Financial Reporting Advisory Group (EFRAG), shows no sign of letting up.In the latest development in the battle over the endorsement of the International Accounting Standards Board’s new financial instruments accounting literature, the LAPFF and the EFRAG have written to the EU’s internal market commissioner, Jonathan Hill, to clarify their position on IFRS 9.The LAPFF argued that the EFRAG process “is defective because it has used the wrong endorsement criteria”.The EFRAG, meanwhile, insisted its reading of the law was correct.
The €24bn multi-sectoral pension fund PGB increased its mortgage allocation eightfold to €1.2bn last year, representing 5.4% of its entire investment portfolio.In its annual report for 2016, it said residential mortgages offered better returns than government bonds with a similar duration, while also having limited credit risk. Its mortgage allocation returned 7.6% over the year.It added that European credit, which returned 4%, had a similar advantage. The profit from both asset classes far offset the higher management costs the scheme incurred, PGB said.The pension fund, which has 304,000 workers and pensioners in total, posted an overall yield of 10.9%. Euro-denominated government bonds were the best returning asset class, generating 13.4% due to falling interest rates.The equity portfolio (40% of total assets) generated 9.9%. The pension fund said it had refocused on passive investments and intended to increase its worldwide factor-based and quantitative mandates.PGB added that it had further diversified its holdings by investing in alternative credit through corporate loans. Its portfolio (4.2% of total assets) delivered 11.4% during the year.Infrastructure also performed strongly, gaining 12.2%, while its inflation-linked bonds returned 9.2%. PGB has 3.9% invested in infrastructure and 4.7% in inflation-linked bonds.The multi-sectoral fund said it would set up a new IT system for administration and communication in an effort to improve its client relations. Its affiliated employers will be offered a new pensions portal, including a dashboard with self-service options.Last year, PGB spent €163 per participant on administration and paid 0.29% of its assets for asset management.It attributed the doubling of its transaction costs to 0.12% to an increased number of transactions in the wake of its dynamic policy for hedging its interest rate risk.Its hedge ranges from 20% when the 30-years swap rate is less than 0.5% to 80% when the swap rate is higher.According to the pension fund, the surplus return of its dynamic hedge far outstripped the rise in transaction costs. Its interest hedge – largely comprising government bonds – remained less than 40% over the year.In 2016, PGB also absorbed the pensions of the maritime fishing industry (Zeevisserij), the wholesale sector for flowers and plants (Groothandel Bloemen en Planten), and paper and glass (Papier en Glas). It now serves eight sectors.At the end of April, the pension fund’s coverage ratio stood at 104.8%.
The introduction of a new pensions contract in the Netherlands is facing further delay, according to several members of the Social and Economic Council (SER).The contract is supposed to be the key element of a new, more sustainable pensions system. Speaking at an industry event yesterday, Kees Goudswaard, chair of the SER’s committee for system reform, said that completing necessary legislation and implementing the transition to the new system by 2020 was going to be “a challenge”.Doing this in a hurry would not be sensible because of the complexity of the issues involved, he said. According to Chris Driessen, pensions strategist at workers’ union FNV, the target date of 2020 set by the Netherlands’ new government was “just symbolic”.“This is unrealistically ambitious, as we just need this time for completing legislation,” he said. “Experience tells us that passing these things through parliament takes much longer usually.”“It would be good if the foundation for a transition was in place in 2020,” added Hedda Renooij, pension secretary of employer organisations VNO-NCW and MKB Nederland.She said that the transition would not be a “big bang” but a “very gradual process which would take up several years”.However, none of the SER committee members wanted to elaborate on when the new system could be introduced.In September, the government coalition partners granted employers and workers – who have been discussing the issue for several years now – additional time to come up with their own proposal for a new pensions contract.The members of the SER committee confirmed the earlier prediction of Gerard Riemen, director of the Pensions Federation, that an introduction in 2020 seemed to be impossible.In Riemen’s opinion, the transition process would take up at least five years, and possibly even 10.Currently, the SER is fleshing out a new pensions contract involving individual pensions accrual combined with collective risk sharing, as an alternative for the predominantly defined benefit arrangements which are increasingly seen as unsustainable.Goudswaard, a professor of economics at Leiden University, said his committee still needed to negotiate several hurdles, including clarifying the effects of such a contract on the volatility and stability of future pensions, in order to prevent some generations of pensioners losing out as a result of economic conditions in the accrual phase.He also said that a decision needed to be taken about what level of volatility would be acceptable, and what the desired scale was for financial buffers as part of the new pensions contract.Also during the event, Erik Lutjens, pensions lawyer and professor of pensions legislation at Amsterdam’s Free University, emphasised that second-pillar pensions were the prerogative of employers and workers, and that it would be difficult for the government to issue legislation.“However, the cabinet could indirectly steer the process, for example through fiscally facilitating a pensions contract, a retirement age, or the percentage of tax-facilitated pensions accrual,” he said.