The benefits of risk sharing among generations in the Dutch pensions system have been exaggerated, according to Theo Kocken, director at Cardano and professor of risk management at Amsterdam’s Free University (VU).He estimated that it would generate a “wealth advantage of no more than a couple of percent, at best”.Speaking at the FD Pension Pro IPE congress in Amsterdam, he said the much more positive figures often cited were based on “an unfair comparison between a utopian defined benefit scheme and a bad defined contribution plan, based on current legislation that does not allow for proper DC”.According to Kocken, the limited benefits of intergenerational risk sharing are more than offset by its considerable disadvantages. “The current system contains much unnatural interest risk and does not allow for tailor-made age differentiation,” he said, adding that the system was complex and lacked transparency.He said it was also increasing distrust between the generations.“Moreover, the system is very susceptible to political decision-making – about parameters, for example,” he said.“I am not opposing solidarity, but rather the way all kinds of solidarity are lumped together in the current system.“This is not social, and therefore I call for less solidarity.”Presenting his proposals for a dual pensions contract – a combination of DB and DC, “without room for risk sharing between generations” – every participant accrues a collectively managed individual pensions pot, without rights transfers between generations.Until the age of 50, participants invest 100% in equity, but after that a gradual purchase of annuities must ensure a nominal pension.The older the participant gets, the more of his assets are invested in nominal investments, such as bonds, Kocken said.The share of risky investments would be gradually decreased, but continue after the retirement date.This way, the participant could even make returns – for indexation, for example – during retirement.Kocken placed the benefit of intergenerational risk sharing at approximately 10%, rather than 40%, and suggested that this could also be achieved through a smart DC plan.Under current Dutch legislation, one disadvantage of DC schemes is that a full annuity must be bought at retirement, which makes participants very vulnerable to interest rate movements, Kocken said.In addition, investments in DC schemes are made fully risk-free at the retirement date.Kocken said he also wanted to deal with the “illogical” solidarity between rich and poor.He proposed homogeneous pension collectives and suggested that individual longevity should be taken into account for new entrants.As a consequence, higher educated participants would pay more contributions than lowly paid workers, who usually have shorter lifespans.“My proposal requires a big transition to a new system,” Kocken said. “But if we don’t do anything, we will be forced to adopt a bad DC system, as has happened in the UK.”
And finally, a success because institutional investors the world over were able to lobby governments for change to regulation that will mobilise $1trn a year in low-carbon investment.Nevertheless, the conference was a case of preaching to the choir, with climate evangelists talking with other supporters, and those governments that wish to be seen as environmentally friendly dispatching their prime ministers or presidents to extol the virtue of being the greenest government ever.The 400 companies that have come out in favour of carbon pricing, part of UN secretary general Ban Ki-Moon’s Caring for Climate initiative, are more noteworthy. In an ideal world, governments would take bold action and introduce carbon pricing despite business resistance – as markets such as Australia and the European Union have.Emissions trading schemes (ETS) are not the sole solution for tackling growing greenhouse gas emissions, but they do provide an incentive to reduce output, as the levels of carbon produced before and immediately after the abolition of Australia’s ETS proved.It would also offer a financial disincentive to continued investment in high-carbon activities, as Anne-Marie Corboy, chief executive at the AUD28bn (€19bn) HESTA Super, told the conference – a view likely to be shared by Frank Pegan, chief executive of the AUD5.3bn Catholic Super, who said ahead of the event that the abolition of Australia’s ETS was a “backward” policy.Corboy, however, was also realistic during her address. “No single investor can change either system alone, but, by showing leadership and reinforcing others in the system, we can contribute to change and hasten the low-carbon future we all need.”The need for supportive capital was the UN’s motivation behind its 2010 Green Climate Fund. Four years later, the venture has so far only attracted $2.3bn to invest in emerging market climate projects – $1bn committed on Wednesday by France, a further $1bn previously offered by Germany. It shows that, despite government recognition of the risks of climate change, very little concrete action is forthcoming.The hope remains that, spurred by the private sector’s coordinated response, as foundations move to divest fossil fuel, pension investors reduce carbon and companies call for a carbon price, governments will be compelled to agree new, binding carbon-reduction targets at next year’s conference in Paris.At that point, the investor community’s work may pay off, as they remember that these reduction targets can be delivered with the help of investors worldwide, aided by a new regulatory framework boosting low-carbon investment to the targeted $1trn a year. Despite coordinated lobbying from investors and rousing rhetoric from governments, Jonathan Williams wonders whether the UN Climate Summit achieved anythingThe UN Climate Summit in New York – which attracted more than 120 heads of state and government, campaigners including actor Leonardo DiCaprio and Nelson Mandela’s widow Graça Machel – should be viewed as a success and failure in equal measure.A success because, in the run-up to the one-day event, its host city saw more than 300,000 protesters take to the street, demanding action on climate change. While this pales in comparison to the turnout for anti-war protests, it also highlights that climate change is no longer the sole concern of green NGOs.A success because AP4, Sweden’s SEK274bn (€30bn) buffer fund, will lead a pack of institutions in reducing the carbon footprint of $100bn (€78bn) in assets by next December – proving it an eminently sound and practical investment decision.
Howard Covington, chairman at the Isaac Newton for Mathematical Sciences Management Committee, speaks on the risk to asset values posed by climate change
Ireland’s Pensions Authority has signalled it would like to see growth in the number of multi-employer funds as it pursues its “explicit” goal to decrease the number of defined contribution (DC) funds.Pensions regulator Brendan Kennedy said the organisation was seeking to grow its enforcement powers in the area of DC governance but added that it was after “more nuanced” powers to help with its oversight of the market.Kennedy – who, prior to the creation of the Authority, was chief executive of the Pensions Board – told an Irish Association of Pension Funds conference on governance that it was the organisation’s goal to raise the requirements for DC trustees, focusing on the areas of trustee knowledge, commitment and skill.In his bluntest endorsement of consolidation in the DC sector, he also said it was the Authority’s explicit goal to “substantially reduce” the current number of funds. “There are too many schemes to make it possible to achieve the trustee standards we believe are needed,” he told delegates.“The current scheme numbers increase costs and make effective regulatory oversight and dialogue too difficult.“Clearly, this objective means there has to be many fewer single-employer schemes.”Kennedy has previously said the Authority was committed to the “principle” of reducing the number of schemes, and that it would be difficult to justify the continued existence of more than 100 DC funds in a country the size of Ireland.He has previously ruled out the use of a licensing system for DC funds, as it would increase the amount of regulation.The regulator further told delegates that he would seek additional powers to oversee governance of DC funds, although this would take the shape of increased dialogue with trustees.He also said the organisation would want additional, “more nuanced regulatory powers that will underpin a more detailed oversight of DC schemes”.The Authority will also be seeking to increase the standard of defined benefit trusteeship, and Kennedy said it was already in discussion with the Department of Social Protection over amending existing regulation.The proposed changes to DC regulation are under consideration as the Irish government plans the launch of a supplementary pension system.Minister for social protection Joan Burton has previously said the rollout of such a system would be “very gradual”, but pledged that details of the reform would be published next year.
Finnish pension insurer Veritas believes a large-scale quantitative easing (QE) programme by the European Central Bank (ECB) – expected after the bank’s governing body has met – could revitalise economic growth in the region but is worried about German opposition to the plan.Niina Bergring, CIO at Veritas, told IPE: “I am disappointed at the German stance on QE.”She said it was hard to take a view on details of ECB policy in the short term, and that Veritas did not take positions in the short term on things it could not analyse.“Slightly longer term, I have to believe the ECB can stimulate, as we are still carrying risk in our portfolio and do have European equities in a slight overweight, although again, the Germans do worry me a lot,” she said. If the ECB failed in its intentions, she warned, Europe was in some trouble. The announcement about QE is likely to come with a lot of strings attached, she predicted, adding that this will spark further analysis.“I cannot rule out that, if it is complicated and avoids joint responsibility, this may lead to vocal opinions and questions on the euro as a solid long-term currency – again,” Bergring said.With German opposition so strong – and some recent Finnish opposition materialising too – she said, a bad outcome for the euro as currency area is possible in the slightly longer term.Because of this concern, Veritas has kept a low weighting in peripheral euro government bonds.“We would rather take credit risk in companies we can analyse,” Bergring said.Meanwhile, Finnish pensions insurance company Varma has positioned itself in the run-up to the ECB’s announcement by taking on US government bonds and trimming European equities holdings.Timo Sallinen, head of listed securities at Varma, told IPE: “We have already bought more US Treasuries and reduced our European stock market exposure a bit after a nice rally.”Sallinen does not believe any eventual decision by the European central bankers has been fully priced in to the market yet, despite the drop in bond yields and weakening of the euro that has already happened.“The ECB needs to surprise the market,” he said.The bond-buying itself is likely, in his opinion, to be carried out by the ECB itself, rather than by national central banks, with the main focus of the purchases being on the debt of core countries.
Overall, the fund has a 8.5% strategic allocation to property, but currently falls far short of its 5% domestic target and at the end of 2014 only had €247m in Luxembourgish real estate.A project that will see it approach its 5% target, the ’Cité de la sécurité sociale’, is currently under development, and will see the construction of an office complex to house the domestic social security office. The fund decided last year to build up its global exposure through holdings in real estate funds to further diversify its portfolio and increase exposure to inflation-linked assets.To date, the portfolio, which returned 10.96% last year, has largely been split between fixed income – accounting for nearly 60% of assets – and equities (38.4%). Luxembourg’s €14.3bn pension reserve fund has hired two managers to oversee its €500m push into global real estate.The Fonds de Compensation commun au régime général de pension (FDC) announced its board of directors had settled on Aviva Investors and CBRE Global Investment Partners as its inaugural managers, after first tendering the vacancies in August.Each manager will be handed €250m for an unlisted global real estate mandate, part of FDC’s attempt to meet its 3.5% strategic allocation to property outside the Grand Duchy.In addition to appointing Aviva Investors and CBRE, UBS Asset Management has been appointed as standby manager, should either of the two managers seeded need to be replaced.
As London has the largest market for derivatives, pension funds’ transactions with investment banks are usually subject to British legislation.Earlier this year, the Commission proposed that pension funds were made exempt from central clearing regulations, brought in under EMIR, until 2020. These require all derivatives trades to be conducted through a central clearing house.Verheijen said: “If the current exemption from mandatory central clearing for pension funds until August 2018 were not to be extended, central clearing must take place in London, where clearing house LCH has a 95% market share for schemes that have already started central clearing.“In case of a hard Brexit, the European Commission wants these contracts [to be] subject to European legislation, as it doesn’t want to be dependent on British legislation if a British clearing house goes bust.”In this case, contracts with LCH would have to be transferred to central clearing parties based on the European mainland. A hard Brexit could cost Dutch pension funds hundreds of millions of euros to rearrange derivatives transactions currently cleared through London, consultancy Cardano has suggested.Uncertainty about the outcome of the Brexit negotiations has triggered questions about the legal status of derivatives contracts after the deadline of March 2019.“At the moment, pension funds are uncertain about where and when they must clear their contracts,” said Max Verheijen, head of financial markets at Cardano. “Pension funds must prepare for every scenario by concluding flexible clearing contracts.”Any transfer of derivatives contracts between trading venues would be expensive, he said. David Davis and Michel Barnier at a Brexit press conference in October 2017Source: EUThijs Aaten, managing director of the treasury centre of the €456bn asset manager APG, also expressed concerns about unexpected consequences of a hard Brexit for strongly regulated and complex derivatives transactions.“Existing contracts must be honoured, but what if an existing transaction leads to a new one, for example through calling an option?” he said. “Would this be a new transaction and would it be subject to existing or new regulation?”In his opinion, another problem would be mandatory ‘compression’ under EMIR legislation, which makes it compulsory to reduce a large number of transactions with the same bank to a smaller number of deals.Aaten also warned of a lack of legal clarity about whether a compression would be a new or an existing trade, and to what legislation it would be subject.Verheijen and Aaten both observed that British investment banks were preparing for both a ‘soft’ and a ‘hard’ Brexit and were setting up branches elsewhere in the EU.Aaten said he knew banks that had rented office space in Amsterdam with the option of sub-letting if the need to move did not arise. However he declined to provide details.“I keep a finger on the pulse and want to know whether I can continue a relationship with a British investment bank after March 2019,” he said.In Verheijen’s opinion, pension funds should make sure they can conduct central clearing of derivatives both in London and on the European mainland, as concluding a contract usually takes between six and nine months.“As we don’t know how the world looks after August 2018 and March 2019, we are already arranging flexible contracts with clearing members,” he said.Meanwhile, The Bank of England said that around £26trn (€29trn) of outstanding uncleared derivatives contracts could be affected by a withdrawal of permission to conduct cross-border business after Brexit, according to a record of meetings of its financial policy committee that was published today.The largest risks to the continuity of outstanding cross-border financial services contracts related to over-the-counter derivatives contracts and insurance contracts, the Bank noted. The committee had been informed by a representative of the UK’s Treasury department that it was considering all options for mitigating these risks. Overall, the committee considered Brexit posed material risks to the provision of financial services to customers in both the UK and the EU.“It would difficult, ahead of March 2019, for financial companies on their own to mitigate fully the risks of disruption to financial services,” the meeting record said. “Timely agreement on an implementation period would reduce risks to financial stability.”
Source: ChemoursA Chemours plant in Altamira, MexicoThe intention at Nationale-Nederlanden is to grant a one-off catch-up indexation payment from 1 January 2020, plus a guaranteed annual indexation from thereon. The scheme does not want to state the size of the intended payments yet as the board has yet to communicate the information to its members.At the end of May the fund had a coverage ratio of 123%.All transfers are planned for 1 October this year. Chemours is a chemical plant that split off from DuPont in 2015. In the Netherlands the company is a major producer of Teflon. “Deferred members and pensioners have fallen considerably behind in indexation,” chairman Frans van Dorsten told Dutch industry publication Pensioen Pro in April. “Active members are hardly affected. When relocating all liabilities to an insurer, you can take direct action to do something about this.” The pension scheme of Dutch chemical company Chemours is to transfer the liabilities of its deferred members to insurer Nationale-Nederlanden in a deal worth €820m.According to a press release from the insurance group, the number of participants concerned is around 3,000. The pension rights of approximately 400 active members, amounting to around €300m, are not included in the transfer. They will be relocated to a general pension fund (APF). Which APF has yet to be revealed – Chemours has so far only signed a letter of intent. Earlier this year, the pension scheme explained its reasons for splitting its active and deferred members.
“This is a significant step to de-risk the scheme and our aim is to continue to do so in the future with good partners like Rothesay Life and Aon,” he added.Aon was an adviser to the scheme alongside Pinsent Masons.John Baines, partner at Aon, said the transaction was “a great example of how patience can pay dividends when setting a long-term strategy”. The Cadbury Mondelēz Pension Fund has completed a £520m (€560m) buy-in with Rothesay Life, its second tranche of de-risking in 10 years.The deal means the snack foods company scheme has insured around one-fifth of its £4.6bn of total liabilities. Its first buy-in was in 2009, for £500m.The transaction with Rothesay covers the liabilities associated with around 1,900 pensioner members. The bulk annuity is to be held as an asset of the scheme.Greg Chick, chairman of the trustees of the pension fund, referred to the deal as “the next step in a long-term de-risking strategy”. The pension de-risking market has been growing strongly in the past year on the back of a combination of factors, including a slowdown in life expectancy increases and strong capacity in the global reinsurance market.According to consultancy LCP, a record £34bn worth of transactions were struck in the 12 months to the end of June this year, with a record also being reached for the first half of the year.Aon said over £35bn of UK bulk annuities were expected to be concluded by the end of the year, “easily a record level”.On Tuesday HSBC’s UK pension fund announced it had completed a £7bn longevity swap, the second largest such arrangement for a UK scheme.Moody’s recently said growth in the UK bulk annuity market would increase insurers’ reliance on longevity reinsurance and illiquid assets, “with mixed credit implications”.The credit rating agency also noted that demand for bulk annuities could partially subside in the event of a no-deal Brexit, if it triggered a further drop in bond yields.
According to the report, the impacts on actuarial work from a severe pandemic are likely to include the possibility of a need to reassess how the employer covenant is considered in the support of DB pensions.Sir Jon Thompson, CEO of the Financial Reporting Council, which is one of the members of the JFAR, said: “The current coronavirus pandemic highlights the importance of identifying and managing risk. It will understandably introduce additional risk and uncertainty into the work of actuaries.“The Risk Perspective takes a holistic view of this and other key risks to the quality of actuarial work. Actuaries, employers and users of actuarial work are encouraged to collaborate effectively to understand and mitigate the risks to high quality actuarial work and to explore opportunities in the public interest.”“We are alive to the areas flagged in the report and continue to work closely with the industry to ensure savers remain protected”Sarah Tune, head of actuaries at The Pensions RegulatorThe other members of the JFAR are the Pensions Regulator (TPR), the Financial Conduct Authority, the Prudential Regulation Authority, and the Institute and Faculty of Actuaries.Sarah Tune, head of actuaries at TPR, said: “The work carried out by actuaries is vital to the financial planning and investment strategies of all pension schemes and so we welcome this report which highlights the most pressing and emerging risks which could threaten retirement savings if not properly tackled. We are alive to the areas flagged in the report and continue to work closely with the industry to ensure savers remain protected.”Since early March a group of senior actuaries and other specialists have been working to help actuaries respond to the coronavirus crisis “quickly, meaningfully and thoughtfully”.Climate-related risk top hotspotThis year the JFAR’s analysis identified climate-related risk as the top hotspot, possibly “the defining risk of our times”.The risk, according to the report, is that “actuaries may not take into account appropriately, or communicate clearly, the impact of climate-related risks on decisions of users of actuarial advice”.After systemic risk, the JFAR states that ‘Ageing Population and Affordability’ is – “probably” – the third most significant risk in the context of actuarial work.It is “the risk of failure to allow appropriately for changing costs of mortality, morbidity and family support systems due to future experience deviating from projections”.The last of the “big four” risks, according to the JFAR, is “Unfair outcomes for individuals”, which refers to “the risk of actuaries not acting in the best interests of customers which may result in unfair treatment of some subgroups in favour other subgroups that are financially more profitable”.The other risks are:Geopolitical, Legislative and Regulatory Risk: The risk that actuaries are unable to consider, or plan, for the potential for political, legislative or regulatory change at an international or national levelTechnological Change and Competence In New Areas: The risk that actuaries entering new fields may not have a deep enough understanding of the statistics or that they may not adequately understand artificial intelligence models or other disruptive advancesImpact Of Undue Commercial Pressure: The risk that actuaries may be placed under significant pressure to adopt inappropriate assumptions or models to achieve desired commercial outcomesEffective Communication: The risk of actuaries failing to adequately explain the risks and potential adverse outcomes to decision makers or to others impacted by the actuarial work Systemic risk is one of three risks that have been identified as new “hotspots” by the UK’s Joint Forum on Actuarial Regulation (JFAR) because of a perceived increase in risk to the public interest where actuarial work is central.‘Effective communication’ and ‘Impact of Undue Commercial Pressure’ are the other new hotspots.In its new ‘Risk Perspective’ report, the group explained that it had decided to include the actuarial risks associated with pandemics as a subset of systemic risk, rather than to introduce a further hotspot specific to pandemics.The systemic risk hotspot is explained as “the risk that actuaries may not allow appropriately for the increasing global interconnectedness of risk or may be inappropriately guided by groupthink”. The full Risk Perspective report can be found here.Looking for IPE’s latest magazine? Read the digital edition here.