“That question is ‘is my current investment function dysfunctional or less than, say, 70% optimal in the quality of the decision-making and the time and timeliness of the decision-making’,” he said.However, he noted that there were other tools available that could be used instead of fiduciary management if a pension fund wanted to improve performance to address a deficit – such as hiring a CIO, or launching an investment sub-committee with powers beyond recommending a new strategy to trustees.“There is no silver bullet to this problem, there is no one solution that will solve this problem – there are lots of silver pellets, lots of little strategies that will help you achieve your stated objective,” he said.”When you’re buying fiduciary management, bear that in mind. It is not the answer to achieving your funding goals. It is just part of the answer.”When the panel was later asked whether benchmarking fiduciary managers was an effective way of comparing performance, Sion Cole, head of client solutions at Aon Hewitt’s delegated consulting business, said it was “nigh on impossible” and warned against such an approach.“We benchmarked balanced fund managers, and that led to their demise, partially, because they all did the same thing,” he said.Cole said that, because fiduciary management was bespoke by design, and because each provider took a different approach, fair measurement would be difficult – made even more problematic by a different understanding between current providers as to what constitutes fiduciary management and how much responsibility was delegated.“Because we can’t pre-define it, it’s very hard to benchmark against somebody else, because pension scheme A’s mandate and how they perceive fiduciary management is very different from pension scheme B’s consideration of what fiduciary management is.”He said providers should be assessed on individual performance based on the pre-defined mandate and examine whether the decisions taken in their time added value to the investment.Patrick Kennedy, director at independent trustee company Entrust, concurred with Cole that benchmarking was not the route to pursue, and urged trustees to take a closer look at the approach taken by any fiduciary manager.Speaking of his preferred approach to hiring a fiduciary manager, he said: “You’ve got to rip the bonnet off and have a good rummage around.” Trustees should ensure fiduciary management is an approach beneficial to their members rather than being swept up in the excitement of the latest “must-have gadget”, the managing director of an independent trustee firm has warned.Richard Butcher of PTL compared the marketing of fiduciary management in its various guises with the excitement surrounding the release of new Apple products.“You do need to rise above that hype,” he said during a panel at last week’s National Association of Pension Funds annual conference. “You need to ask yourself whether fiduciary management, as a bit of kit, actually does the job for you, the job you want done.”He said trustees needed to decide whether fiduciary management was right for them by asking themselves a question about their current investment approach.
Month: September 2020
Much about EMIR is still uncertain, even at this late stage of the game, warns CordiumLate last month, we learned that February 2014, after all, will be the likely start date for Europe’s new reporting regime for exchange-traded derivatives (ETDs). The industry had been expecting the regulator to stay its hand, following ESMA’s proposal of a one-year extension to resolve a number of practical issues. Now, much to its horror, the industry has just a few short months to prepare for implementation of the onerous new reporting rules, which form a part of the EU’s incoming European Market Infrastructure Regulation (EMIR).To recap, the regulation is designed to reduce instability within Europe’s derivatives market (perceived to have been a contributory factor to the 2008 banking crisis) by bringing over-the-counter derivatives trades into the light and under regulatory purview. It aims to replace a tangled web of derivatives exposures with a system in which each market participant is exposed only to the credit risk of a central counterparty (CCP). Where central clearing of OTC contracts is not possible, strengthened risk requirements will seek to manage operational and counterparty credit risk.It is understandable firms are concerned about the timeline for implementation, as the new requirements imply a profound shift in how they go about meeting their regulatory obligations. In particular, reporting and risk management under EMIR will force them to place greater reliance on their back offices to collect an expanding array of data. This, together with the increasingly technical nature of regulatory compliance, means compliance personnel may have to develop a better understanding of back-office operations. When preparing for EMIR, compliance and operations may have to work alongside one another much more closely than they have done in the past. Much is still uncertain, even at this late stage. When it comes to ETDs, there are question marks over which parties to a trade should bear the reporting burden. And with reporting in general, there are issues yet to be resolved around information sharing and confidentiality.Aside from uncertainty over the rules, there is also a cultural challenge to be negotiated, in that there has traditionally been a ‘language barrier’ of sorts between compliance and operations. This must be overcome if the two are to work together in a far more integrated, day-to-day fashion.All in all, it is unclear whether the industry will be ready to comply with the new reporting rules come the New Year, deadline or no. EMIR isn’t just causing a convergence of compliance and operations – legal will be thrown into the mix as well. Segregation and reporting procedures under central clearing will necessitate contractual agreements between counterparties, brokers and clearing houses. It could take months to get these agreements signed and in place, but without a single CCP authorised as yet, it will be difficult for firms to get this process started.All of this would be challenging enough in isolation, but EMIR is just one part of a deluge of reform facing the industry. With so many new regulations bearing down on the market in tandem, firms will face real difficulties in prioritising objectives and finding sufficient resources to meet all of their deadlines. The fact Europe has yet to provide clarity – for example, on how to comply in practice with the reporting of ETDs – doesn’t make things easier.This convergence of operations and compliance is not just about EMIR. It is part of a wider regulatory trend that can be observed across all of these reforms. Regulation – whether the Alternative Investment Fund Managers Directive or EMIR – is headed in the direction of greater transparency and oversight. Keeping tabs on financial markets means reporting, and reporting means data. Compliance personnel and regulators alike will therefore need greater operational knowledge if they are to make sense of their data reporting requirements, blurring the conventional lines between the two functions.This trend will not have an equal impact on all firms. It is difficult to predict, but larger businesses (such as banks) with more formalised internal structures and sophisticated IT systems may be best placed to adapt to these new requirements. The challenge could be far more acute for smaller firms within the alternative space. And whereas investment banks will potentially see an upside to all this in the form of new profit opportunities, it is unlikely the same could be said of smaller asset managers and other affected market participants. As some key deadlines are fast approaching, it is important for all affected firms, large or small, to get on with their preparations.Jonathan Mott is a managing consultant and Tom Lucey a monitoring consultant at Cordium
Danish labour-market pensions administrator PKA wrote down the value of its private equity investment in troubled tyre recycling company Genan to DKK250m (€33.6m) in the first half of this year — about DKK750m less than the amount it originally invested of around DKK1bn.The write-down effectively wiped out PKA’s return on its entire private equity portfolio in the period, according to first half figures provided by the company.At the end of June, PKA’s private equity portfolio — which amounts to around 6.3% of total assets— was valued at DKK11bn, and at the same level as it was at the end of December.The pensions administrator said that if Genan had been excluded from the private equity portfolio, the investments would have returned around 8% for the six-month period. Around 25% of the private equity portfolio is made up of direct holdings with the rest in funds and funds of funds.Overall, PKA reported a return on investments for the five pension funds it runs of DKK10.7bn for January to June, equating to 6% — up from the 0.3% in the same period last year — despite the write-down.Total assets rose to around DKK190bn as a result of the profit, it said as it published the interim reports of the five healthcare and social sector funds.Peter Damgaard Jensen, chief executive of PKA, said: “Interest-rate hedging has had a positive effect on the return and when we combine that with good profits on equities, it has gone up to an even higher level.”The result took account of the write-down of Genan’s value, he said.“There has been a certain amount of focus on this individual investment, so it is very good to be able to show that in spite of this write-down, we have done well on the financial markets and delivered a good return for our members’ pensions,” he said.The private equity portfolio had produced good results over the last 10 years of 11% a year, Damgaard Jensen said.“PKA’s private equity investments have grown strongly, both in funds and direct infrastructure, and that has been a focus on ensuring a professional set up to manage these investments,” he said.He said the results showed that this had been successful.PKA has come in for criticism from the Danish media over its handling of the investment in Genan.The pensions group made most of the investment back in 2007, saying its then 45% stake in the tyre-recycling company suited its desire to get involved in the environmental sector.However, serious financial problems at the company surfaced earlier this year, resulting in PKA taking almost full ownership of Genan to save it.It lifted its stake to 97% last month, by taking over all the shares owned by the company’s founder and major shareholder Bent Nielsen.
AP1 has warned that reforms to the Swedish buffer fund system could lead to the “undesirable standardisation” of investment strategy and lower returns over the longer term. Managing director Johan Magnusson, speaking as the SEK296bn (€296bn) fund announced first-half returns of 5.1%, highlighted the need to focus on a real return – targeted at 4% over a decade. “That target we have overshot, delivering real return of 5.3% measured over the past 10 years,” he said. Magnusson took aim at government plans to reform the buffer fund system, which, under current proposals, would see AP6 merge with AP2 and the closure of a second, as yet undecided fund. The cross-party agreement announced over the summer also suggested the launch of a National Pension Fund Board, with a principal in charge of buffer fund assets and allowed to set the level of risk taken within the system by setting risk budgets. The managing director warned the steps would lead to a greater focus on short-term investing and “undesirable standardisation” between the three remaining AP funds – echoing comments from AP3 managing director Kerstin Hessius that the reforms would make the system inflexible.Mats Langensjö, chairman of the 2012 Buffer Fund Inquiry, has previously warned that the government’s reforms would see the funds deploy a passive, index-tracking portfolio over time.Mats Andersson, Magnusson’s counterpart at AP4, has said the reforms could “destroy” the system, while AP2 managing director Eva Halvarsson has said the changes were “costly and risky”.Magnusson also highlighted that AP1 had undertaken its first infrastructure investment in 2015 – acquiring a stake in a local electricity distribution network – arguing that the asset class was strategically important to his fund’s portfolio. The reform proposals would also see responsibility for all unlisted assets transferred to AP2, with the funds asked to set up a joint investment committee to represent the other buffer funds’ interests.AP1’s infrastructure portfolio returned 3.4% over the course of the first half of 2015, matching returns from developed market equities but underperforming its overall equity return of 6.7%. AP1 is currently the smallest of the four main buffer funds and the only one not yet to have exceeded SEK300bn in assets.However, it has achieved a higher real return over the past decade than AP3, which managed 4.8%, compared with 5.8% by AP2 and 6.1% by AP4, currently the largest fund, with SEK310bn in assets.
The €3.4bn Dutch industry-wide pension fund for bakers has appointed State Street as its custodian.BPF Bakkers said State Street would also handle all aspects of accounting and administration, oversee its securities lending programme and compile reports aligned with the Dutch financial assessment framework (FTK).Jacques van de Vall, chairman of the fund’s board, said: “In an environment where pension schemes are facing increased regulatory oversight, it is critical to have the correct services in place to manage these functions.”He said the appointment would allow the fund to remain focused on its “primary function” of securing pension income. Oliver Berger, State Street’s head of asset owner solutions, added that the increased regulatory burden facing pension funds meant they would require enhanced data-management services.In other news, Hampshire’s £4.5bn (€6.2bn) local authority pension fund is looking to hire a consultancy to run its manager procurement.The scheme said the three-year contract, renewable for a further two years, would see the consultancy run five procurement exercises for unspecified asset classes.Interested parties have until 21 October to contact the council, with the contract commencing in early December.
Germany’s occupational pension fund association, aba, has bemoaned the UK vote to leave the European Union, saying that, although the precise implications for occupational pension provision in Germany were not yet foreseeable, the Brexit decision meant “nothing good”.In an update on 28 June, aba chief executive Klaus Stiefermann writes: “The capital markets are reacting negatively, a large part of German occupational pension fund assets are invested through London, and the British were always at our side when it came to reining in regulatory delusions and excess. “And there’s a fair amount of that going on again.”His comments echo the response of the Dutch Pensions Federation, which lamented the “loss of an ally” but said it is too early to say whether the British would leave the pan-European association PensionsEurope. In another reaction from a national industry association, Denmark’s Forsikring & Pension (F&P) said keeping a good trading relationship with the UK was a priority for the country.,WebsitesWe are not responsible for the content of external sitesLink to aba newsletter (in German)
In addition, BPL’s coverage ratio (102.3% at the end of February) was significantly higher than Norit’s, which stood at 97.1%.The board of the Norit scheme made clear that, were the pension fund to remain independent, benefit cuts would be likely in 2020.The pension fund, with 300 active participants, almost 300 deferred members and 400 pensioners, had already applied a cut of 10% to pension payments five years ago.Joining BPL would require bridging the funding gap, which could be achieved either by another rights cut or through an additional contribution from the employer, US-based Cabot, which bought Norit in 2012.Joining PGB would have required an extra payment of €9m from the sponsor to fill a funding difference of 8%. The company was not prepared to pay this, according to the pension fund.It said that the employer hadn’t provided clarity yet whether it was willing to pay the required additional contribution this time.The board argued the one-off payment would be compensated in part by lower administration costs and lower premiums.The administration of the pension fund of Norit – a specialist producer of “activated carbon” – is carried out by Mercer. NN Investment Partners is its asset manager. The €100m Dutch pension fund for specialist chemicals firm Norit wants to liquidate and join BPL, the €17.1bn sector scheme for agriculture.According to the board – chaired by Frans Prins, the former director of the €8.8bn pension fund PWRI – this would be the best option for all of its 1,000 participants.An earlier effort to join the €23.3bn multi-sector scheme PGB failed because of the high costs involved.The Norit pension fund said the BPL arrangements were better because of its lower franchise – the part of an employee’s salary exempt from pensions accrual – and higher annual accrual rate.
The process can be active or passive. The Bloomberg Commodities index is to be used as the benchmark.There is no minimum or maximum tracking error for this mandate.Interested parties should have at least three years of performance. When applying they should state performance net of fees to 31 October. The deadline is 30 November at 5pm UK time for both mandates.The IPE news team is unable to answer any further questions about IPE Quest, Discovery, or Innovation tender notices to protect the interests of clients conducting the search. To obtain information directly from IPE Quest, please contact Jayna Vishram on +44 (0) 20 3465 9330 or email [email protected] An Asia-based institutional investor is looking for a commodities manager for a $100m (€87.7m) mandate via IPE Quest.According to QN-2489, the investor is looking to invest globally, based on a “beta/enhanced beta/active” style. It is considering either a discretionary or a systematic strategy.Performance should be benchmarked against the Bloomberg Commodities index. The investor expects a tracking error of at least 0.5% but it should not exceed 5%, according to the tender.In a separate tender, QN-2491, an Asian investor is searching for a commodities manager for a $20m risk premia/absolute return mandate, also global in its scope.
UK church investors have tightened their voting policy on key corporate governance issues ahead of the annual general meetings (AGMs) of some of the country’s largest listed companies.The Church Investors Group (CIG) – which represents church organisations with combined investment assets of around £21bn (€24.5bn) – wrote to FTSE 350 companies earlier this month warning that it would take a tougher voting line where it deems reform on major issues to be too slow.The group Church Commissioners for England and the Church of England Pensions Board, which have regularly led shareholder campaigns for reforms at major listed companies, alongside other main investing bodies of the Church of England and the Methodist Church.CIG members using the group’s common voting template will continue to hold directors to account, and refuse to re-elect directors where the company is out of line with best practice. Last year, the CIG template led participating members to withhold support from over 60% of FTSE 350 remuneration reports. The Church Investors Group has joined the Investment Association in scrutinising executive pension paymentsHowever, the group said it continued to have concerns about CEOs receiving pension payments more generous than those made to other staff, and – as last year – would not support remuneration reports where the CEO receives a pension payment of more than 30% of salary.The UK’s asset management trade body, the Investment Association, last month issued a similar pledge to focus on executive pension arrangements.The CIG said it would also vote against remuneration reports of FTSE 350 companies that did not disclose the pay ratio between the CEO and average employees.Overall, the CIG said it expected boards of companies that have experienced a vote of 20% or more against management to show a commitment to shareholder engagement and rectify areas of high concern.Stephen Beer, CIO at the Central Finance Board of the Methodist Church and vice-chair of the CIG, said: “Despite the claims of some companies to be listening, we still see excessive executive pay schemes, many of them supported by investors. Ultimately, a business is shooting itself in the foot if it does not get this right.”Climate change and other issuesThe church investors said they would vote against chairs of companies rated level 0 or 1 by the Transition Pathway Initiative (TPI), a tool used to assess companies’ management of their carbon emissions.The CIG also planned to vote against chairs of energy companies that did not have emissions reduction plans consistent at least with the UK’s national carbon reduction plan, introduced under the Paris Agreement.For the first time, corporate tax transparency featured in the CIG voting template: the investor group pledged to vote against the chairs of FTSE 350 and Russell 50 companies with a score of zero for tax transparency according to FTSE’s ESG ratings.Voting on gender diversity within company boards has also been toughened. The CIG will encourage early adoption of the revised UK Governance Code, which now requires remuneration committees to take into account workforce remuneration and related policies when setting director remuneration.CIG policy allows for votes against a whole remuneration committee where three or more of its principles are breached.Executive pay
Manifesting itself in public demonstrations such as the Fridays-For-Future strikes by school children and Extinction Rebellion protests in various European cities in April, the change could also come to be reflected in the political arena, Hassler suggested.“In game theory, the solution to the prisoner’s dilemma framework changes when time and repetition are considered,” he said. “As costs and benefits change, collaboration becomes the optimal solution for rational actors.“The sight of school children and older generations on the streets, demanding action, may prove the start of a snap back from the world’s political apparatus.”Hassler’s colleague Simon Webber, a lead portfolio manager at Schroders, last week noted that the projected costs of unsubsidised wind and solar power were lower than the average wholesale power price across the European continent.“In recent years it has been a very powerful and well-used argument for entrenched industry and various politicians to argue that tackling climate change is socially regressive,” he said.“Yet instead of being a liberal-inspired tax on the poor (who spend a greater portion of their income on heating and energy), renewable energy is now making electrical power and electric mobility more affordable, a fact that is likely to be increasingly recognised by politicians across the political spectrum.”The importance of this shift was being underestimated by financial markets, said Hassler. Investors reiterate needs, demandsThe Schroders employees’ observations come as leaders of the world’s 20 largest economies prepare to gather in Japan on Friday for a two-day summit. Osaka, Japan hosts G20 leaders for a two-day summit this monthIn anticipation of the meeting, a major group of investors this week issued an urgent call to action, emphasising the need for G20 governments to step up their ambition on climate change and enact strong policies by 2020 to achieve the goals of the Paris Agreement.A record number of investors – 477, with $34trn (€29trn) in assets under management – put their name to the statement, in which they ask government leaders to achieve the Paris Agreement’s goals, accelerate private-sector investment into the low-carbon transition, and commit to improving climate-related financial reporting.“As an investor in global markets, we are exposed to the increasing risks and opportunities that climate change presents to our portfolios, especially in Asia where the physical impacts of extreme weather events will be the harshest and of the greatest cost,” said Seiji Kawazoe, senior stewardship officer at Sumitomo Mitsui Trust Asset Management.“To enable us to effectively invest in the necessary transition to net-zero carbon economies around the world, we have signed this statement to urge governments to take the actions needed to set us on the course to limiting global warming to 1.5°C [above pre-industrial levels].”In the UK the lower house of parliament earlier this week passed legislation introducing a target for net-zero greenhouse gas emissions by 2050, which if met would effectively mean the UK ending its contribution to global emissions by that date. The UK’s current target is to reduce greenhouse gas emissions by 80% by 2050, compared with 1990 levels. Renewed calls from hundreds of major investors for governments to act to cap further global warming may this time be followed by political action, analysis has suggested.According to Marc Hassler, sustainable investment analyst at Schroders, “a tipping point may be approaching” whereby governments no longer postpone actions to address climate change. This was because of changes in the cost-benefit equation for addressing climate risks, which had made collective action a more attractive option.“The costs of taking action have fallen and the benefits of addressing climate risks have become clearer,” said Hassler. “That has prompted an increasing proportion of the global population to forego self-interest and choose collaboration”.