The lifeboat fund said it would soon launch a consultation on the PPF-specific score, which would assess a company based on one of eight drafted scorecards – including one tailored to the needs of the charity sector.In a leaflet explaining the PPF’s approach, the fund added: “Different variables are used within different scorecards, but, broadly speaking, each uses measures that capture financial fundamentals such as scale of operations, profitability, gearing, liquidity and cash-flow.“The design combines spot and trend data and uses continuous variables, which serve to avoid cliff edges – where a slight change in a variable could deliver a large change in score.”Consultancy Barnett Waddingham said the details published looked to address major concerns previously raised by the industry.Associate Simon Taylor said the proposed model would place greater emphasis on financial data “rather than some of the more unusual indicators present in the D&B failure score system”.“Whilst some of the factors considered by D&B were statistically good early indicators of insolvency, they caused unwarranted volatility, and there were too many examples of them unfairly penalising companies, with massive financial consequences,” Taylor said.He also noted that the new approach would make it more difficult for levy players to manipulate the system, enhancing its credibility.The PPF further confirmed the new insolvency system would not be used until October, despite the suspension of the D&B score system at the end of the current tax year.As a result, scores for the 2015-16 levy period will be based on six-month averages.Taylor said: “Confirmation that scores will not count until 31 October 2014 is welcomed, and the shorter averaging period that will result is a price worth paying.” The UK’s Pension Protection Fund (PPF) has confirmed it will launch a consultation on its new, bespoke insolvency score by the end of May and allow schemes to see all data relating to sponsors prior to the system’s launch this autumn.Updating the industry on its efforts to move from the Dun & Bradstreet (D&B)-backed model to one developed by Experian, director of financial risk Martin Clarke said the new system would provide a more accurate reflection of insolvency risk.He added that the new system would also offer greater transparency for those wishing to assess how scores had been calculated – likely a concern following a High Court challenge by a defined benefit fund that alleged out-of-date company accounts were employed by D&B.“The model is also based on more objective financial data than other models, which will mean greater stability in scores over time,” Clarke said.
Finance minister Siv Jensen said: “Based on the recommendations from the 2013 Strategy Council and advice received through the public consultation process, we plan to reorganise the work. “We will integrate the current ethical exclusion criteria in the management mandate to Norges Bank.”The change means the Council on Ethics will be disbanded, a ministry spokesperson confirmed.The council was set up in 2004 as an independent body to advise on firms that should be excluded from the fund’s investment universe.Jensen said openness about the ethical exclusions of companies would still be key in the management of the fund, and said the ministry was appointing a new group of experts to assess Norges Bank’s work in this particular area.“I think the changes will give better results and a more efficient and consistent use of available resources,” she said.“At the same, we take steps to strengthen the legitimacy of the ethical side to the management.”In the report to Parliament, the Finance Ministry said: “There is a risk, as noted by the strategy council, that the decisions of the ministry are perceived as expressing the position of the Norwegian state with regard to a company or a country.”Such risk would probably increase in the coming years, it said.Integrating all responsible investment tools into Norges Bank might show clearly that exclusions were just the result of the ethical restrictions governing asset management, the report said. “This will also reduce the risk that the actions of the fund are interpreted as reflecting a desire to exercise political influence over companies or markets in which the fund is invested,” it said.The new expert group, which has been set up at the request of Parliament, is to assess whether excluding coal and petroleum companies from the GPFG is a more effective way in addressing climate issues than engagement with the companies.Up to now, the ministry said the prevailing view was that there had been no need to exclude such companies.“The exercise of ownership and exertion of influence have been the preferred strategies for addressing climate-related issues in the management of the fund,” it said.The group is to be chaired by economist Martin Skancke and will include Elroy Dimson, Michael Hoel, Laura Starks, Gro Nystuen and Magdalena Kettis.Separately, in the report to Parliament, the Finance Ministry said it had decided there was no reason to exclude oil and gas equities from the fund’s portfolio to mitigate the Norwegian economy’s already significant vulnerability to oil and gas prices.The ministry had been re-assessing the issue following a decision made in 2009.“The analyses of the relationship between the oil price and financial market investments do not justify changing the current benchmark index,” it said in today’s report. The Norwegian government is to shift responsibility for excluding investments from the Government Pension Fund Global (GPFG) to Norges Bank, which runs the fund, and disband the 10-year-old Council on Ethics.In its annual report today to Parliament on the NOK5.1trn (€621bn) former oil fund, the Finance Ministry said it was presenting plans in the report to “strengthen the strategy for responsible investments”.The move is in part an effort by the Norwegian government to make sure decisions to exclude particular investments from its high-profile sovereign wealth fund are not seen by the outside world as being politically motivated.While the Council operates independently from both Norges and the government, it is the finance ministry that ultimately needs to sanction any exclusions.
Industry veteran Nikolaus Schmidt-Narischkin is to join Towers Watson Germany in July to help the consultancy strengthen its “holistic approach” in an environment where consultancies have to “cover the whole range of added value” for companies, according to Reiner Schwinger, managing director at Towers Watson Germany.Schwinger told IPE Schmidt-Narischkin fit the consultancy’s strategy “perfectly”, pointing out that the current head of client solutions for the EMEA region at Deutsche Asset & Wealth Management (DeAWM) had worked in a number of fields, including HR, asset management and benefits.He said Schmidt-Narischkin would be working on a “broader” basis than he had done in recent years, and that placing him solely in the investment consulting department at Towers Watson would “not have presented anything new or challenging” for the occupational pensions veteran.He will therefore be working in a more “holistic role”, Schwinger said. Schmidt-Narischkin said: “Providers now have to offer everything, including asset management, platforms like a CTA or a Pensionsfonds, and risk management, both on the active as well as the passive side. The question is whether an asset manager can still provide this, or whether it will rather be the consultancies that offer these broad services.”Having been in charge of fiduciary management at Deutsche Bank, where he has worked in a number of departments over the last 25 years, Schmidt-Narischkin said, even in Germany, clients were looking increasingly to outsource to external providers, yet without the “blackbox principle” that had been applied in the Netherlands in recent years.“German clients prefer a modular approach,” he said. “They do not want any conflict of interest, and they want a provider who takes on responsibility and can be held accountable.”He said this was easy to promise in a quiet and stable market environment and that the real test for fiduciary managers would come in the next crisis.For him, the “core problem” in German occupational pensions is that too few people are participating in the system, although he said the overall legal framework was “not bad”, with small adjustments needed here or there.Citing Pensionsfonds as an example, set up in Germany 10 years ago, Schmidt-Narischkin pointed out that a lot of the occupational pension legislation was “still unfinished” and argued that it would need a “task force” to close all the gaps in the framework.Schwinger added that German occupational pension laws had to be adapted to the ageing society and changing role models to generate more attractive pension products for clients, citing the example of a single mother who does not want to pay into her pension fund because her children cannot inherit the accrued assets.Other problems arise from high discount rates and inaccurate mortality tables, he said.
Fraser said it was “imperative” that all investors took a long-term interest in companies to which they were exposed.“The Investor Forum will help facilitate better engagement between UK public companies and their shareholders to support long-term value creation opportunities,” he said.Meanwhile, Griffiths, who has worked at Capital Group and Corsair Capital, said the forum’s principles would be “rooted in the value creation for investors”.Report author John Kay added that the launch of the forum was “central” to his review, and that he was delighted to see the launch come about.“Asset managers working together can make a real contribution to improving the performance of British business,” he said.The forum aims to hold its first meetings in September and will offer both domestic and overseas investors the opportunity to come together in engagement groups to bring about change when a “critical mass of support” of participants is in place.James Anderson, who chaired the working group tasked with launching the forum, previously told IPE it “desperately” needed the involvement of overseas investors if it wished to succeed and later called on the Government Pension Fund Global to be a “beacon in the darkness”, and to be one of the sovereign wealth funds joining the forum. The UK’s Investor Forum has appointed the current chairman of the Foreign & Colonial Investment Trust as its inaugural chairman, tasked with finalising the body’s constitution.Simon Fraser, who worked at Fidelity Worldwide Investment for the majority of his career and was its CIO until 2008, will now coordinate the forum’s launch and assemble its board alongside executive director Andy Griffiths.Launched with the backing of the National Association of Pension Funds, the Association of British Insurers and Investment Management Association – soon to be rebranded as the Investment Association – the forum was one of the key recommendations to come out of the 2012 Kay Review and aims to promote the value of long-term investment by allowing institutional investors to engage with investee companies.Griffiths and Fraser’s appointments come as the forum is officially launched, leaving the pair to appoint board members and finalise its constitution and operating model.
The companies built a significant presence in the individual medical space, but a predicted fall in overall sales saw investors take flight in light of future profits.The merger comes as little surprise given both firms’ profit outlook, and their similar operating models that see them using historical medical data to accurately price risk.The new entity, JRP Group, has committed to building up capacity in the medical bulk annuity market and potentially pursuing transactions in the traditional bulk space.Consultants raised the alarm due to the short-term impact on pricing for medical bulk annuities.John Baines, principal consultant in Aon Hewitt’s risk-settlement division, said immediately after the merger that the market would lose competitive tension.“The lack of competition is a negative for pension schemes, however, the potential larger and stronger covenant, if it proves to be so, is a very big positive.“One of the things that has held back schemes from the market is the perceived [weakness] of the two firms as standalone entities,” Baines said.Barnett Waddingham’s head of bulk annuity consulting, Gavin Markham, said removing competition would not beneficial for schemes, but could trigger new entrants.“There has been beneficial pricing for schemes generated by this competition, and if the merger goes through you would assume some impact,” Markham said.“Once merged, they will reassess where their [pricing] position is but at that point they may have competition from new areas,” Markham added.There is a potential for new entrants, particularly transfers from the individual medical annuity space where market share more evenly split.This includes LV=, Aviva and Legal & General with the latter two significant players in the traditional bulk annuity market.IPE previously reported that LV= was holding discussions with consultants over entering the bulk annuity market.Despite the merger, Baines believes the medically-underwritten space would still offer better pricing over traditional bulk annuities.“The business models of the merged business will only hold up if they retain a decent margin [of at least 5%] over traditional pricing, otherwise schemes would go for the easier option,” Baines said.Deals can be around 10% cheaper than traditional products down to risk pricing and competition.This would allow the merged business some scope to take advantage of their dominant position.The merger will see Just Retirement shareholders own 60% of the new firm and Partnership the remaining 40%.It will face regulatory scrutiny with the insurers set to argue against any impact on competition by citing market shares in relation to the individual and bulk annuity markets as a whole, compared to a singular focus on the medical space.Medically-underwritten deals accounted for 5% of new business in the total bulk annuity space, with expectations it will reach 10% this year. The two providers of medically-underwritten bulk annuities are to merge with suggestions the new entity could move into the traditional bulk annuity space.Just Retirement and Partnership Assurance dominated the UK market after entering in 2013 on the back of offerings in individual medically-underwritten annuities.The pair wrote £892m (€1.2bn) of the £900m market since 2013 – with Aviva Investors the only other provider in the market, writing a single, £8m deal in 2014, according to Hymans Robertson.Both firms’ share prices were badly hit after the UK government’s 2014 announcement that individual annuities would no longer be compulsory.
The five largest pension funds in the Netherlands saw their coverage ratios drop again over the third quarter, largely as a result of falling interest rates and declining equity markets.The official ‘policy’ coverage ratio – the criterion for indexation and rights cuts – at the €161bn healthcare scheme PFZW and the €39bn metal pension fund PME dropped to 99%, while funding at the €59bn metal scheme PMT fell to 99.8% and the €345bn civil service scheme ABP to 99.7%.BpfBouw, the €47bn pension fund for the Dutch building industry, was the only scheme to buck the trend, reporting a coverage of 112.3% over the period. Under recovery rules spelled out in the new financial assessment framework, Dutch pension funds must apply rights cuts if funding drops to 90% or lower. The Netherlands’ larger pension funds reported quarterly losses ranging from 0.8% (BpfBouw) to 3.2% (PFZW), citing uncertainty over the Chinese economy and volatile investment markets resulting from central banks’ “opaque” interest policies.Eric Uijen, director at PME, said falling interest rates were likely to cause a further decrease in policy funding, calculated using the average coverage over the previous 12 months.PME reported a loss on investments of 2.5%, including a 0.6% return on the 50% interest hedge of its liabilities.The negative impact of falling rates on schemes’ funding was exacerbated by the reduction of the ultimate forward rate (UFR) for discounting liabilities, lowered from 4.2% to 3.3% in July.BpfBouw said its liabilities increased by 6.2% as a result of the combined effect, while PME attributed almost half of the 6% increase in its liabilities to the new UFR.The pension funds incurred in particular losses on equity, which varied between 8.8% (PME) and 10.6% (ABP), with the latter losing no less than 17.5% on equity emerging markets.Equity holdings fared particularly badly over the period, with PME reporting an 8.8% loss for the asset class.ABP reported a 10.6% loss on equities and a 17.5% loss on emerging market equities.Falling oil prices hit PFZW, which reported a 23.6% loss on its commodity holdings.Fixed income, however, delivered positive results for all the larger schemes, with ABP reporting a 1.1% return on nominal investments and a 4.8% return on long government bonds.PFZW saw its fixed income portfolio return 3.1%, while PME’s portfolio returned 0.1%.The Netherlands’ larger pension funds have struggled to produce positive returns over the first nine months of the year.Only ABP (0.8%) and PMT (0.5%) have managed to record positive returns year to date.PFZW and PME lost 1.2% and 1.1%, respectively, over the same period, while BpfBouw has more or less broken even.The Dutch Pensions Federation, responding to the quarterly results, warned that indexation was increasingly “disappearing from view” for millions of participants and pensioners.
“We can no longer explain how, despite [our having] an improving economy, the chances of rights discounts have increased,” he said.Riemen warned that low interest rates and volatile equity markets meant millions of participants were facing additional cuts within just a few years.To improve transparency in the industry for participants, he recommended communicating in terms of “available individual pension assets” rather than “conditional pension rights”.“This would eliminate the problem of setting a discount rate and allow for greater freedom of investment, as there would no longer be liabilities that must be funded,” he said.“As a result, pension funds could focus fully on getting the right balance between risk and return.” Riemen recommended switching from DB arrangements to collective defined contribution plans, where the risks of investment, inflation, interest rates and longevity would be shared. As long as financial burdens are not deferred, no single age group will be unduly affected, he said.Under current Dutch legislation, Riemen’s proposed pension arrangements would not yet be possible.He said, however, that the Federation was already assessing the options of a pension plan based on a combination of paid premiums and risk sharing. The Dutch Pensions Federation has called on the country’s pensions industry to come up with an alternative to the current, predominantly defined benefit (DB) system.The Federation’s director, Gerard Riemen, said DB arrangements had become “too complicated” and that explaining to participants how the system worked was now “impossible”.Even though the Dutch pensions system is widely considered one of the world’s best, participants are increasingly seeing their pension rights being eroded while still having to pay high contributions, he said. Riemen also cited the increasing rarity of indexation and the reduction of tax-facilitated annual pensions accrual.
The European Fund and Asset Management Association (EFAMA) has reiterated its call for a pan-European personal pension product (PEPP), saying it would strengthen Europe’s three-pillar pension system and help address the “fragmentation of the market for retirement savings”.The comments were made in response to a European Commission (EC) consultation on retail financial services, which closed on Friday.EFAMA is a strong supporter of actions to deepen the European single market for retail financial products and services, and argued for replicating the success of UCITS investment funds in the area of personal pensions.Peter de Proft, director general at EFAMA, said: “We feel very strongly about the need to address the current fragmentation of the market for retirement savings.” The creation of a PEPP, as proposed by the European Insurance and Occupational Pensions Authority (EIOPA), would help “foster portability and economies of scale to lower costs and generate better returns to consumers, as well as enhance transparency, competition and innovation”, he said.The association also argued that a PEPP would “strengthen the three-pillar pension system in place in Europe and diversify the risks inherent to the three pillars”.“Along with occupational pensions,” it added, “personal pension savings can help reduce the pension gap and contribute to the objective of achieving an adequate and sustainable retirement income for EU citizens in the future.”It acknowledged, however, that consumer interest in PEPPs would probably be limited without EU member state incentives, such as on tax.Without these, “the PEPP would probably only attract the financially savvy”, said EFAMA.The aim, according to the association, should not be to harmonise all types of existing personal pension products in Europe but rather to create “an EU regulation that establishes a simple, highly standardised, cost-effective and trustworthy product that could be offered across Europe thanks to an EU passport”.EIOPA earlier this year published its final advice on the development of a so-called 2nd regime for PEPPs, arguing in favour of a standardised PEPP rather than harmonising existing directives.It launched a consultation on its proposals and is due to deliver its advice to the EC later this year.The EC is still to decide whether to pursue the creation of a PEPP.Jung Duk Lichtenberger, deputy head of the Capital Markets Union unit within the Directorate-General for Financial Stability, Financial Services and Capital Markets Union, recently said the commission wanted to have “an informed view” by year-end on whether to continue with the development of a PEPP.EFAMA has recommended a separate EU legal framework for a standardised PEPP, which would be used on a voluntary, opt-in basis.This would help “overcome the differences in legislation between member states while respecting their existing framework for local pension products”, according to the association.It recommended a regulatory regime similar to that for European Long-Term Investment Funds (ELTIFs).It also backed EIOPA’s idea to create a centralised EU register, where national authorities would indicate the PEPPs they have authorised. The Dutch government and the Dutch and German pension fund associations have previously criticised proposals for a pan-European personal pension product.
Joseph Mariathasan considers the likely trajectories of oil pricesThe news oil has almost touched $50 (€44) a barrel may bring cheer to some, but few would claim it represents a turnaround for an industry that still faces considerable challenges. Assessing the shorter-term prospects for the oil and gas industry as investments is highly dependent on forecasting oil prices, and that – as even the oil majors such as Shell have found – is not so easy.There have certainly been instances over the past few decades where dramatic price falls – to as low as $10 a barrel – have caught the industry by surprise. Indeed, the drop from well over $100 in 2014 to less than $40 at the start of this year was also an unexpectedly severe drop that has left the industry floundering. Yet the short-term volatility may be hiding a longer-term reality. It is worth recalling the oft-quoted comment by sheikh Ahmed Zaki Yamani, the former Saudi oil minister: “The Stone Age did not end for lack of stone, and the Oil Age will end long before the world runs out of oil.” The increasing pressure to alleviate global warming makes his prophesy look even more pertinent.Longer term, if the issue of unacceptable man-made global warming is to be resolved, there may be no alternative to increasing the use of alternative energy sources, including nuclear power. Shorter term, however, there is still debate over the likely trajectories of the oil price. One argument is that the laws of supply and demand should bring things into balance in 2016. With US exploration and production capital-expenditure budgets slashed for this year and the rig count continuing to fall, the oil bulls argue there should be meaningful production declines from the US shale basins. That should contribute to non-OPEC supply contracting by more than 600,000 barrels a day, or around 0.7% of global supply.Outside the US, it is difficult to see from where the supply growth could come, with Saudi and Russian volumes close to capacity. Others argue the sheer size of available fracking reserves will always put a ceiling on prices, even if investment in conventional long-tail projects is reduced. Fracking can be brought back on stream very quickly. Companies are slashing costs and finding new ways to complete wells in the shale. While drill counts may have dropped in response to the price collapse, price increases will start bringing rigs back on stream as operators hit their break-even levels. That is likely to put a ceiling on oil-price increases.Fracking has been a game-changer for the economics and politics of oil. For the US, the attainment of self-sufficiency in oil over a long time period would have immense ramifications on its foreign policy towards the Middle East.A big loser would be Saudi Arabia, whose leadership has used the support of the Wahhabi clergy for legitimacy and the wealth it accrued to export this brand of Islam globally. While US support is clearly still strong, the underlying tensions are obvious. The Saudi Arabian leadership needs US support, but they face a delicate balancing act as they struggle with the tensions inherent in their society. Ensuring support means ultimately ensuring US reliance on Saudi oil, and, to ensure that, it needs to drive the fracking community out of business.That has another side benefit where Saudi Arabian interests coincide with those of the US. Russia depends heavily on energy exports, which may account for as much as 70% of total exports. It was the low oil prices in 1990 that contributed immensely to president Mikhail Gorbachev’s struggle to keep the USSR solvent and helped lead to its eventual collapse in December 1991.Perhaps, as some argue, the transition to alternative energy sources is an opportunity, as long-term demand displacement from alternative fuels and renewables curtails exploration and long-tail projects in oil and gas, impacting supply and giving oil the potential for a strong bull market in the medium term as long-term investment is reduced.But few would expect prices to reach anywhere near $100 a barrel for many years to come, if ever, given the pressures to reduce fossil fuel consumption. Investors should consider that perhaps high-yield debt may provide a better risk/reward play than equities for the oil and gas sector. If oil prices are $40 a barrel or less in a year’s time, a lot of producers will default. Those producers that can still find equity will increase their share, and low-cost producers will fill the gap.The oil majors with high costs of production and few attractive development opportunities may find acquisitions attractive and start taking over some exploration and production companies. The high-yield bonds issued by those companies would become investment grade, and investors would see huge returns.Joseph Mariathasan is a contributing editor at IPE
Whether there is any genuine expectation of a deadline extension, the government had shown no signs of budging before the referendum and is sticking to this position.Kieran Quinn, chair of the pension fund management panel at Greater Manchester Pension Fund (GMPF), England’s biggest local government scheme, told IPE the government’s answer “has been ‘No’ from day one” and that the message from the Department for Communities and Local Government (DCLG) since the Brexit vote has been that “the 15 July date is essential for them to still deliver the timescale for full pooling by April 2018”.He added: “If they move [the date] now, pooling, I think, would itself be under question.” Indeed, a spokesperson for the DCLG last week told IPE: “The administering authorities for the Local Government Pension Schemes have had nearly eight months to work on their pooling proposals. We have every confidence they will hit the deadline.”A spokesperson for the LGPS Board last week told IPE it was “not aware of any changes to the policy or timescale as a result of the referendum”. The political upheaval in the UK in the week following the vote has raised questions about the longer-term timetable and the pooling agenda itself, however.Moira Gorman, client director for LGPS at Columbia Threadneedle Investments, last week said the referendum result could have a “potential impact on the timetable and objectives for pooling, given the personalities who may lead the government following prime minister [David] Cameron’s departure”.Just over a week after the UK referendum, Mark Tinker, head of Asia equities for AXA Investment Manager Framlington, said the first area of policy uncertainty stemming from the vote was “the UK government itself”.Barry McKay, partner at consultancy Hymans Robertson, suggested the vote to leave the EU could have an impact on the government’s LGPS pooling plan at a very practical level.“Asset pooling will still be very much part of the future of the LGPS,” he said.“However, we expect HMT will be very busy in the months to come as they work on the EU exit process. This may take some of their resource away from LGPS pooling and could result in a more flexible timetable.”For GMPF’s Quinn, the fate of the LGPS pooling project is “tied much more with the outcome of the Conservative party leader election than with Brexit, with the exception that, if Brexit were to lead to a general election, then clearly pooling would be stopped.“If there is an impact [on pooling], we will know more in the autumn, definitely post-Conservative Party conference.”In the absence of clear information suggesting a change to the asset pooling timetable or agenda, the LGPS have to continue with their preparations for the asset pools, according to Quinn.“It has to be business as usual until someone tells us it’s not business as usual,” he said.AXA’s Tinker said “greater clarity on possible policy direction” should be available over the next few weeks as the official shortlist of candidates to succeed Cameron is whittled down.The first round of a series of votes by the parliamentary Conservative party is on Tuesday, 5 July. The UK vote to leave the European Union and ensuing political upheaval have raised questions about their having a potential impact on the timetable and agenda for pooling by local government pension schemes (LGPS).The government, has, however, remained steadfast with respect to the most imminent event on the timetable, a deadline coming up in less than two weeks.The 89 LGPS in England and Wales, which the government has called on to combine in asset pools of at least £25bn (€29.8bn), to submit detailed proposals on the proposed pools.The surprise vote for the UK to leave the European Union is understood to have revived questions in some parts about the deadline, which had already been viewed as challenging and has had many at the LGPS working flat out to be able to meet it.