The pensions industry, however, largely rejected the notion of §17b plans for essentially introducing a pure defined contribution system in Germany for the first time.In March, the government put on hold a revised proposal that included minimum guarantees to see through the implementation of the Portability Directive, scheduled for early 2016.BMAS now wants to explore possible alternatives to the §17b industry-wide proposal.In a statement, it said Hanau and Arteaga would consider whether new pension funds have to be set up under the §17b model, as well as how existing pension funds might benefit from the proposal.They will also assess how companies and workers lacking collective labour agreements might be integrated into the new model.Gabriele Lösekrug-Möller, parliamentary state secretary to BMAS, said the voluntary expansion of occupational pensions would work “only after the social partners are strengthened”.Once the legal experts submit their final report in March 2016, the government is to decide how to “further develop occupational pensions and how to best strengthen the model”. The German government has commissioned Peter Hanau, a professor in the University of Cologne’s legal department, and Marco Arteaga, a partner at law firm DLA Piper, to come up with further proposals for occupational pension reform.The legal experts are to focus on the so-called ‘social partner model’, where occupational pension plans are agreed by company and worker representatives.Last year, Germany’s Labour and Social Affairs Ministry (BMAS) caught many in the industry by surprise after it called for the introduction of industry-wide pension funds, in a bid to increase the take-up of occupational pensions.The government’s proposal became known as §17b, based on the legal paragraph in which they would be set down.
The €7.4bn KLM pension fund for ground staff (Algemeen Pensioenfonds) attributed its quarterly return of 1.6% in particular to the performance of equities and real estate, which generated 5.4% and 2.3%, respectively.Its return over the full year was 0.7%, with real estate and equity returning 8.6% and 3%, respectively.It lost 0.9%, however, on its 52% fixed income portfolio.The ground staff scheme closed the year with a funding of 111.1%The €2.5bn KLM pension fund for cabin staff said a fourth-quarter return of 1.9% allowed it to avoid reporting a loss for 2015, ultimately delivering 0.5%.Real estate, returning 8.6% over the year, was the best performing asset class.The scheme said its equity holdings returned 3%, whereas its fixed income generated an annual loss of 1%.At year-end, funding at the Pensioenfonds KLM Cabinepersoneel stood at 108.5%.Meanwhile, the €17.6bn Philips pension fund reported a quarterly return on investments of 1.1%, which it attributed in particular to real estate and equity.It said its annual return was 1.2%.During the past three months, high-yield credit and emerging market debt delivered positive results.In contrast, euro-denominated government bonds, global government bonds and commodities all declined.The pension fund said it official policy funding stood at 111.7% at year-end and that its assets had dropped from €19.8bn to €17.6bn over the fourth quarter.Lastly, the €20bn sector scheme for public road transport (Vervoer) reported annual and fourth-quarter returns of -1.5% and 0.7%, respectively.Vervoer said its policy funding stood at 104.4% at year-end. The three large KLM schemes and the Philips Pensioenfonds have reported “modest” results for 2015, with KLM’s pension fund for cockpit staff performing best with a 2.3% annual return.At least one KLM scheme, thanks to relatively strong performance over the fourth quarter, was able to avoid closing out the full year with a loss, according to the schemes’ quarterly report.The €7.9bn KLM scheme for cockpit staff (Vliegend Personeel) reported a fourth-quarter return of 1.5%.Its policy funding – the criterion for indexation and rights cuts – stood at 122.9% at the end of 2015.
Ireland’s sovereign development fund has joined a $50m (€46.9m) equity raise by sales platform InsideSales.com, which will see the creation of 120 jobs in the country.In addition to funding from the €8.1bn Ireland Strategic Investment Fund (ISIF), the website also attracted support from Microsoft and existing venture capital investors as part of the latest round of fundraising, which brings its total capital to $250m.In a statement, InsideSales said its long-term goal was to create a centre of excellence for artificial intelligence (AI) and machine learning in Ireland, with plans to hire 120 staff across product development, engineering and sales once a suitable location for the office is decided on.Eugene O’Callaghan, the ISIF’s director, said the fund was pleased to welcome InsideSales to Ireland’s “flourishing” technology community. O’Callaghan added: “This investment is well aligned with the ISIF’s mandate, with the key benefits to the Irish economy being the targeted creation of more than 120 high-quality jobs over the next three years.”InsideSales.com’s chief executive Dave Elkington underlined the firm’s commitment to opening an office in Ireland, stressing that the AI technology at the heart of the sales platform would be unique among Ireland’s technology companies.“We’re not only looking to hire some of Ireland’s best and brightest technology graduates,” said Elkington, “but also to help build a new, highly skilled industry in the region.”The creation of jobs is but one of the metrics employed by the ISIF to measure how successfully its investments are at stimulating Irish economic growth.In an upcoming issue of IPE, O’Callaghan said the fund had recently begun expanding its impact metrics beyond measuring job creation to be “a bit more verbal, a bit more qualitative, a bit more case-study driven”.Its most recent economic impact report, covering the six months to June 2016, estimated that nearly 19,000 jobs had been created through the ISIF’s activities but also that the jobs created paid employees €657m in wages last year.For more on the ISIF’s investment strategy, see our interview with Eugene O’Callaghan in the February issue of IPE
The small but rich Dutch pension fund HAL indicated it considered the policy of supervisor De Nederlandsche Bank (DNB) as encouraging small schemes to liquidate and a risk to its existence.In its annual report for 2016, the €132m scheme, with a nominal funding of 184%, said it had spotted a tendency at DNB to categorically perceive small pension funds as not futureproof.The board of Pensioenfonds HAL, which was established by the shipping company Holland America Line, responded to a warning from its visitation committee for internal supervision, an external body, which had also spotted risks as a consequence of supervisory measures. However, pension fund HAL – with 42 active participants and more than 1,500 workers – does not feature on a list of 25 schemes deemed to be vulnerable by DNB. The scheme, nevertheless, is afraid that it will be harmed by other developments, such as the pending fundamental update of the Dutch pensions system.“What would be a solution for most pension funds, could become a – possibly insurmountable – problem to us,” it said.According to the visitation committee, “the increased burden of regulation raises the question whether the pension fund should consider alternatives”.The scheme’s board in turn stressed that it wanted to keep the scheme’s set-up as simple as possible.It acknowledged, however, that fundamental system changes had led to increased complexity and insecurity, adding that it was looking at the options to remain independent.In a comment, a spokesman for DNB said that “every scheme that is able to keep on complying with the increased demands from their participants, society and the legislator is futureproof, as far as we are concerned. However, we see that small schemes in particular must put in extra effort to keep on top of it.”He made clear that small pension funds must explain how they see their future.“But this is not because we think they should liquidate, but because we need to investigate and address their vulnerabilities,” he added.At year-end, the coverage ratio in real terms of the Pensioenfonds HAL stood at 142%, which means that the chance of a rights cut was less than 0.2%.The investment policy of the Pensioenfonds HAL is aimed at generating cashflows for the real pension benefits over the next fifteen years.Last year, it had an investment mix of 59% equity, 14% government bonds and 27% cash.The overall return was 3.3%, against 10% over 2015.The pension fund reported implementation costs of €141 per participant for 2016. It spent 0.68% of its average assets on asset management.
Institutional investors have publicly objected to pay levels – at both ends of the spectrum – at FTSE 100-listed housebuilder Persimmon.At the company’s annual general meeting today, Aberdeen Standard Investments voted against Persimmon’s 2017 remuneration report because of the amount of money that was due to accrue for the three most senior executives under a long-term incentive plan established in 2012.“And while we do appreciate the concessions made by the chief executive, the reduction in the amount accruing to him from £110m to £75m does not even get close to acceptable,” said Euan Stirling, head of stewardship at the asset manager in a statement to the AGM. Aberdeen Standard Investments owns 2.3% of the company’s shares. This “grossly excessive pay” was damaging the company’s reputation, Stirling argued, and in allowing this to happen the directors looked to be in breach of their legal duties to promote the long-term success of the company. Being a company director, especially a chief executive, “requires an understanding of where the company sits within the society within which it operates”, he said.“Unfortunately when directors act in contravention of their role to promote the best interests of the business, they are inviting more external attention which will affect not just them, but all of their corporate peers,” added Stirling.The vote on the pay report is advisory. Final results are due later today. Meanwhile, UK pension funds NEST and Strathclyde chose to focus on Persimmon’s decision not to pay the voluntary “living wage” – £7.85 an hour outside of London.In a statement co-ordinated by campaign organisation ShareAction prior to the AGM, NEST chief investment officer Mark Fawcett said: “For investors such as ourselves, accreditation with the Living Wage Foundation sends a clear signal that a company values its employees and is focusing on the long-term success of the business through investment in staff.“We would be very encouraged indeed to see Persimmon progress towards Living Wage accreditation.”Both NEST and Strathclyde had engaged the housebuilder on its decision not to pay this rate to its entire staff, including contractors, ShareAction said. NEST, the £2.7bn defined contribution scheme, wrote to Persimmon in 2015 to ask why the company was not accredited with the Living Wage Foundation.Richard Keery, investment manager at Strathclyde Pension Fund, a £21bn Scottish public sector fund, added: “It is fundamental that companies within the FTSE 100 are able to demonstrate responsible business practice and the fair treatment of staff.“Particularly in light of recent developments, and with a now-compelling investment case behind the long-term benefits of the Living Wage, it would be reassuring to see Persimmon show positive leadership in working to accredit as a Living Wage employer.”The interventions from Aberdeen Standard and the pension funds come at a time of heightened attention to the notion that company directors must take into account the interests of a range “stakeholders” and not just their shareholders’ interests.The Financial Reporting Council (FRC) has suggested revising the UK corporate governance code to acknowledge that companies have a wide-ranging impact and that boards should consider the way companies interact with employees, customers, suppliers, and other stakeholders.This is based on section 172 of the 2006 Companies Act, under which company directors are required to promote the success of the company for the benefit of its shareholders and “have regard to a range of matters” in doing so.The FRC previously indicated it was considering amendments to the Stewardship Code to include a “section 172 for asset managers”.
Source: Government Pension Investment FundThe carryover mechanism In the first year of the new fee structure being in operation, GPIF will pay 45% of the performance-based fee to the asset manager and carry over the remainder. From the second year onwards, the fees paid and retained will be a proportion of the sum of the performance-based fee for that year and the carryover from the year before.In connection with the long-term fee structure, GPIF promised to commit to “multi-year” contracts for its asset managers. The pension fund said it recognised that if asset managers were going to be under pressure to deliver good investment performance, it was in the pension fund’s interests to commit to “lengthy” contract periods to enable managers to meet their targets over the medium to long term.Such an arrangement was unprecedented for the management of traditional assets such as bonds and equities, according to the GPIF.The full report detailing GPIF’s new fee structure is available on its website .Addressing poor performance The backdrop to the changes was poor performance by the pension fund’s active asset managers, GPIF said.Around 20% of GPIF’s assets are actively managed, but during the 2014-16 period only a few funds had outperformed their targets.The asset owner recognised it could become better at selecting funds and that it was working hard to increase sophistication in this area, but said its fee structure also had a part to play.The GPIF’s current model – fixed annual charges with partial performance-based fees – meant asset managers were paid “considerable sums regardless of their investment performance”, the pension fund said.“They therefore have little incentive to set target excess return rates appropriately, to be innovative in seeking excess returns, and to control their management capacity, so a resolution of this issue was regarded as being far off,” said the GPIF.The performance fee The world’s largest pension fund is introducing a new performance-based fee structure in a bid to strengthen the alignment of interest with its active asset managers.Japan’s ¥163trn (€1.2trn) Global Pension Investment Fund (GPIF) has “drastically” cut the base fee rate to the same level as institutional passive accounts. It has also scrapped a cap on performance-based fees.GPIF has also introduced a “carryover mechanism” to its fee structure, designed to promote long-term investment (see illustration, below).Under this mechanism, the pension fund will hold back a portion of the performance-based fees calculated each year “to ensure that the amount of fees is linked with medium- to long-term investment performance”. Source: Government Pension Investment Fund
However, one Swiss pension fund CEO was dismissive of the proposal’s significance, describing it as “completely irrelevant” and a political concession. Pension funds could already invest in venture capital if they wanted to under the current framework, the CEO told IPE.The proposed change goes back to a parliamentary motion from December 2013, which called for regulatory and legal changes to allow pension funds to make long-term “future-oriented” investments. It also proposed that the government initiate the creation of a “future fund” to invest in innovative Swiss companies. Questions were raised at the time about whether this was intended to be mandatory or voluntary for pension funds.Hans-Peter Konrad, director of ASIP, the Swiss occupational pension fund association, welcomed the government recognising that “the extent to which individual pension funds are able and want to exploit the potential of venture capital investments also depends on their respective risk capacity”.The government was right to underline that responsibility for investment decisions should remain exclusively with the individual pension fund, added Konrad.“We will see if the proposed amendment has an impact on pension funds’ investment behaviour,” he said.The government said a 5% asset allocation allowance would be big enough to fully cover any demand for venture capital in Switzerland, but small enough not to endanger the security of occupational pension provision.However, it said that, for risk and return reasons, Swiss workplace pension providers had invested little directly in “venture capital Switzerland”, instead opting for global diversified private equity mandates.See the December edition of IPE’s magazine for a report on Swiss pensions The Swiss government has proposed to make it easier for the country’s pension funds to invest in venture capital for domestic start-ups.Earlier this month the government asked the federal internal affairs department to look into introducing a category dedicated to Swiss venture capital into the investment guidelines for occupational pension funds.Any investments made under this category would be capped at 5% of a pension fund’s total assets and would drop out of the existing alternative assets allocation bucket, according to the government.It also emphasised the importance of investment product transparency, calling for discussions on how to deliver this and suggesting an industry-led approach as a potential solution.
Credit: Manuel JosephShanghai, ChinaAegon Asset Management has signed a memorandum of understanding (MoU) with the Shanghai Lujiazui Administration Bureau, a free trade zone in China, with a view to jointly supporting the establishment of a global asset management centre.Aegon said the agreement “signalled its intention” to set up a subsidiary in Shanghai to distribute products to China’s high net worth and institutional investor sectors.The company already has a partnership in China with Industrial Securities, known as Aegon Industrial Fund Management Company (AIFMC), which was set up in 2008. The new company in Shanghai would “complement AIFMC’s distribution strategy and investment capabilities”, Aegon said.Martin Davis, head of Aegon Asset Management Europe, said: “As signatories we will be one of an early group of global asset managers able to bring world class investment strategies to the domestic Chinese high net worth and institutional market.“As such we are extremely pleased to be working with the Shanghai Lujiazui Administration Bureau to establish this new centre of asset management excellence.” Jean Raby, CEO of Natixis Investment Managers, said: “At a time where the infrastructure investing market is growing significantly, creating a stand-alone specialised affiliate, with an entrepreneurial approach and proven track record, will enable global investors to more easily access the infrastructure investments fitting their specific needs and constraints.”The launch of Vauban follows a number of additions to Natixis’ line up of affiliates focused on real assets and alternatives, including the creation of Flexstone Partners in December 2018, the acquisition of MV Credit in June 2018, and the launch of a private real asset debt co-investment offering run by Ostrum Asset Management and Natixis’ investment banking arm.Aegon targets China onshore market Natixis Investment Managers, one of Europe’s biggest investment houses, plans to launch a new subsidiary focused on infrastructure.Subject to approval by the French regulator, Vauban Infrastructure Partners will oversee €2.8bn in assets and join Natixis’ network of asset manager affiliate companies. It has been spun out of Mirova, which Natixis established in 2014.The affiliate firm will be run as a partnership, Natixis said, with Gwenola Chambon as CEO and Mounir Corm as deputy CEO. The Vauban team has raised five funds and bought more than 50 assets during 10 years of operatons as part of Mirova.Corm said Vauban aimed to double its assets under management in the next few years, adding: “Our mission is to continue to deliver long-term sustainable value to all our stakeholders, including investors, local communities, public entities, employees, and industrial partners, with the highest quality of service.”
HSBC’s UK pension fund has completed the second-largest longevity swap for a UK scheme, a £7bn (€7.6bn) deal with The Prudential Insurance Company of America (PICA).The transaction was structured as an insurance contract with a Bermuda-based, HSBC-owned captive insurer, which reinsured the longevity risk with the Prudential Financial subsidiary.The deal covers half of the HSBC scheme’s pensioner liabilities. The scheme is one of the biggest in the UK with more than €30bn in assets.Russell Picot, chair of the HSBC Bank (UK) Pension Scheme, said the transaction was “an important step to ensure that our members’ benefits are strongly secured against improvements in life expectancy”. “This is a continuation of our de-risking journey and we are pleased to have completed the deal at attractive pricing and working in partnership with our sponsor,” Picot added.According to a statement from PICA, the deal was the first captive longevity reinsurance transaction for a pension scheme associated with a major bank.“The captive approach has become the strategy of choice for large pension schemes seeking to hedge longevity risk,” said Amy Kessler, PICA’s head of longevity risk transfer.The largest longevity hedge for a UK pension scheme was a £16bn deal for the BT Pension Scheme in 2014, also reinsured with PICA.Since then, British Airways’ Airways Pension Scheme, the Merchant Navy Officers’ Pension Scheme and Marsh & McLennan have all used the captive insurer model to offload £6.5bn in combined longevity risk.According to PICA, creating a company-owned insurance entity allows a pension scheme to “efficiently access the deep and liquid longevity reinsurance market”.David Lang, PICA’s transaction lead on the deal, said: “Market demand for the certainty that comes with pension and longevity risk transfer has increased as Brexit nears.”Other types of de-risking have also become more affordable for pension schemes. Last week British American Tobacco announced it had offloaded £3.4bn-worth of pension risk, with Rolls-Royce, Pearson and Marks & Spencer also having struck deals this year. Mark Thompson, the former chief investment officer of HSBC’s UK pension scheme, left the bank in June and is to become the permanent CIO for the London CIV in September.HSBC Holding’s group chief executive, John Flint, stepped down “by mutual agreement with the board” yesterday.
The trustees and employer also agreed that British Airways can make dividend payments to International Airlines Group (IAG), its parent, of up to 50% of pre-exceptional profit after tax, compared with 35% before.British Airways will be allowed to pay IAG a dividend higher than the 50%, but in this situation it would either have to provide NAPS with a guarantee for 100% of the amount above 50% or 50% of that amount as an additional cash contribution.As previously agreed, British Airways is also to make a one-off contingency payment of £250m this year.The agreement struck by the airline and the NAPS trustees is based on a de-risking path involving a steady switch of 3% of the scheme’s investments each year from return-seeking assets to liability-matching assets.The company said that if the funding situation improves faster than expected, half of the excess performance will be used to reduce the deficit, with the other half used to reduce volatility by accelerating de-risking.The NAPS was closed to future accrual from 31 March 2018 and was replaced by a new defined contribution scheme.Last year the airline and its other DB scheme agreed a £4.4bn buy-in with Legal & General. The deal, which at the time was the UK’s largest bulk annuity transaction, covered more than half of the Airways Pension Scheme’s liabilities. As at 31 March 2018 the technical provisions deficit was £2.4bn, down from £2.8bn three years before.Under the new overpayment protection mechanism, contributions would restart if funding subsequently fell below 100% funding and, if required, catch-up payments would be payable commensurate with the contributions forgone during the period contributions were suspended. British Airways is to make higher fixed contributions to the £16.9bn (€19.6bn) New Airways Pension Scheme (NAPS), bringing forward the target date for the defined benefit (DB) scheme to be fully funded on a technical provisions basis.As part of the latest three-yearly valuation of the scheme, the airline has agreed to make fixed deficit contributions of £450m per year from April 2020 until March 2023, compared with £300m per year and up to £150m per year in variable contributions based on British Airways’ cash position.Under the previous recovery plan, the fixed deficit contributions were to be made until March 2027.On Friday the airline announced it had also agreed with the NAPS trustees an overpayment payment protection mechanism under which deficit contributions would be paid into an escrow account if funding reaches 97%, and suspended if the scheme reaches 100% funding.