The European Investment Bank should be encouraged to work with managers behind the European Commission’s long-term investment vehicle, offering capital guarantees and its own expertise in evaluating projects, PensionsEurope has said.A position paper published by the European pension association also said the European executive should consider relaxing guidelines around the use of derivatives in its proposed European Long-term Investment Fund (ELTIF), allowing investing pension funds to continue with “sound” risk-management strategies.The association further argued in favour of a broader list of eligible assets, speaking out in particular for the inclusion of listed small and medium-sized enterprises (SMEs), and said the vehicles should be also be able to exceed 30% leverage.The draft ELTIF regulation, published by the Commission last June in the wake of its long-term investing Green Paper, currently does not allow the vehicles to use commodities, engage in securities lending or borrowing, or use derivatives “unless these instruments are used for hedging purposes”. However, the association argued that the limitations on derivates should be reconsidered.“We wish that the use of derivatives would be allowed to hedge against risks associated with all ELTIFs investments and not only against interest rate or currency risks,” the paper said.“This would allow institutional investors such as IORPs to have a sound risk management strategy.”It also suggested that the current maximum leverage threshold of 30% should be reconsidered, “especially for funds mainly composed of equities”.“Indeed, we consider the investor to be aware of the risk attached to these types of funds,” it said, arguing that the threshold be raised to 50%.PensionsEurope also suggested that, to make the mutual funds more attractive to the core audience of small to medium-sized pension funds, the European Investment Bank should offer guarantees for some of the investments made through the ELTIF.“The EIB’s Project Bonds Initiative and other similar activities should be directly linked to the ELTIF,” it said, “with the EIB assuming riskier tranches and providing guarantees.“This would reduce the risks inherent to these kinds of investments, and investors would see the ELTIF as a secure investment vehicle.”It also recommended the EIB and other national bodies “actively cooperate” with asset managers and investors involved with the ELTIFs, as smaller pension funds could not be expected to possess the resources to assess infrastructure projects.However, despite suggesting several amendments, PensionsEurope said it was broadly in favour of the funds.“Pooled investment vehicles are important for smaller IORPS so they can invest in long-term projects without jeopardising the diversification of their asset allocation,” it said.“Furthermore, by pooling existing knowledge, institutional investors may profit from each other’s expertise in different areas so that all of them stand to gain from a pooled investment vehicle.”,WebsitesWe are not responsible for the content of external sitesLink to PensionsEurope’s position paper on ELTIFLink to European Commission’s current draft regulation on ELTIF
Translating these ideas into spending patterns, 78% of the firms recognised their investment management technological infrastructure as being of vital importance to improving operational efficiency, with enhancing investment management platforms being rated as similarly important to meeting risk-management needs.In this context, a common concern of hedge fund investment managers remains the accurate translation of their trading objectives through to trade execution, with 36% saying the major obstacles to this seamless trading revolve around the variability or complexity of instruments, communication within firm (including mobile access) and accuracy in pricing and valuation.Currently, the majority of participant firms have investment management platforms that were at least partially delivered via pure in-house installation or in-house installation with some vendor-hosted components, with only 15% report having completely hosted infrastructures.Danielle Tierney, an analyst at Aite, said: “Respondent firms tend to employ somewhere between two and 10 different components of portfolio management and accounting infrastructure, with the median number hovering around five, although 15% of firms do employ a single platform spanning the front-to-back office.”Meanwhile, Deutsche Bank’s annual Alternative Investment Survey found that investors remain bullish on industry growth.Hedge funds are expected to reach a record $3trn by year-end, up from $2.6trn the year previous, it said.What’s more, nearly half of institutional investors increased their hedge fund allocations in 2013, while 57% plan to grow their allocations this year.According to Deutsche Bank, investors are “happy” with hedge fund performance – 80% of respondents said hedge funds had performed as expected or better in 2013, after their allocations returned a weighted average of 9.3% in 2013. The vast majority of hedge funds have assigned the highest importance to building a well-reputed and trusted institution to assuage fears over operational risk, according to a survey by Aite Group.In the second part of its ‘Hedge Fund Trends and Challenges 2014’ report – based on interviews with hedge funds headquartered in the US, Europe and Asia, with $900m (€660m) or more in assets under management (AUM) – Aite highlights the increasing importance of engendering ‘institutional credibility’ within the hedge fund sector.Nearly 80% of the hedge funds surveyed by Aite gave ‘institutional credibility’ the highest importance, possibly in light of the recent underperformance of the sector – it managed to deliver an 8% aggregate gain in 2013 against a 30% rise in the S&P, according to data from Eurekahedge – as well as the recent high-profile closures of QFS Asset Management funds and FX Concepts.On a cross-regional basis, 39% of those surveyed saw the key element of ‘institutional credibility’ as providing a robust institutional infrastructure to take on complex investment structures, while 23% regarded it as constructing an integrated solution suite allowing firms to leverage technology to satisfy investor and regulatory requirements.
Hill also appeared to accept calls from MEPs for greater parliamentary involvement in level 2 legislative texts, also known as delegated acts, by saying the chamber “clearly” needed to be involved when discussing them.Delegated acts can allow the Commission to implement regulation without scrutiny, with such an act initially proposed as a means of fleshing out the new risk-evaluation for pensions (REP) regime within the revised IORP Directive.The UK commission nominee also stressed the need for the launch of the Capital Markets Union (CMU), calling it one of the most exciting opportunities facing the European executive, and one that could allow small and medium-sized enterprises (SMEs) to attract funding “based on merits, not the country in which they are based”.“Sixty years after the Treaty of Rome, we are finally seeing the emergence of a single market for capital, the Capital Markets Union,” Hill told MEPs.Asked about the prospect of ‘too big to fail’ financial institutions, Hill at first only hinted at regulation for parts of the non-banking financial sector, but later gave a firm commitment when questioned by Kay Swinbourne, a UK member from his European Conservatives and Reformists parliamentary group.“The whole ‘too big to fail’ question can indeed extend beyond banks, and the example you have given us of the CCPs [central counterparties] is exactly such an example that we do need to look at,” Hill said.He went on to say that details of a resolution framework for clearing houses, or CCPs, would be published by early next year.The risk of a CCP defaulting has been highlighted by the financial sector repeatedly, including by Dutch pension manager APG and the International Swaps and Derivatives Association.Pension investors are so far exempt from the need to centrally clear, but the exemption granted under the European Markets Infrastructure Regulation is set to lapse next year.Burkhard Balz, a German MEP from the European People’s Party, further pressed Hill on his intentions for occupational pensions in light of the difficult investment market.Hill responded that pensions were “obviously an extremely important area”.“We need to make sure we don’t do anything to discourage the pension market,” he said, noting that cross-border products allowing savers to “prepare for old age” would be an important part of creating the CMU.In written answers submitted to ECON yesterday, Hill said the “underdeveloped” pensions market in Europe was acting as a barrier to the CMU and highlighted the benefits of cross-border personal pensions. The European Parliament should be involved in the drafting of delegated acts, according to Jonathan Hill, who insisted he did not want to “discourage” the development of a Continental pensions market.Hill, commissioner-designate for financial stability, financial services and capital markets union, faced the Economic and Monetary Affairs Committee (ECON) for a second confirmation hearing after MEPs said he failed to provide concrete answers.He said there could be a need to “deepen the single rule book, where necessary” for financial institutions, with changes potentially needed “around solvency rules”, without explicitly referencing the pensions sector.However, he also said he was “extremely keen” to focus on proportionality of regulation and ensure there was no “excessive” burdens for market participants.
Research by the Dutch pensions regulator (DNB) has found that a tenfold increase in assets under management (AUM) equates with a 7.7-basis-point reduction in investment management costs on average, irrespective of a pension fund’s scale. The DNB’s Dirk Broeders, Arco van Oord and David Rijsbergen, the authors of the study, also found that the relative benefits of economies of scale often varied according to asset class.Over the course of 2013, they examined 225 Dutch pensions funds with nearly €930bn in combined AUM, analysing the link between investment costs and a pension fund’s scale and calculating investment expenses for six asset classes.The researchers said they found “significant” economies of scale in fixed income, equities and commodities but not in real estate, private equity or hedge funds. A tenfold increase of the fixed income and equity allocation lowered annual investment costs by 4.8bps and 7.8bps, respectively, with an even stronger effect for equity mandates of less than €20m.However, the study indicated that, for commodities, the initial benefits of scale largely disappeared for investments of more than €300m.In contrast, property investments were subject to diseconomies of scale, which the researchers attributed to small mandates.Broeders, Van Oord and Rijsbergen also found that performance fees largely dictated investment costs for equity, private equity and hedge funds, with a tenfold allocation increase increasing fees by 0.7bps, 41.5bps and 33.4bps, respectively.They said they found that larger pension funds paid significantly higher performance fees for the latter three asset classes and suggested these schemes invested relatively more in asset classes with higher investment costs.The researchers said company pension funds on average paid 7.3bps more in investment costs than industry-wide schemes, citing a “misalignment” of interests, “as they usually rely on commercial asset managers”.They added that they did not see significant differences in investment costs between defined contribution and defined benefit plans.They also concluded that increasing the interest hedge on liabilities had cost advantages, as a duration increase of a pension fund’s government bond portfolio reduced investment costs by almost 3bps for every year that was added.“Therefore,” they said, “it is more attractive to hedge through bonds than through derivatives.”
With respect to Institutions for Occupational Retirement Provision (IORPs), the “vulnerabilities” identified in the 2015 stress test of the occupational pension sector “need further supervisory response”.Gabriel Bernardino, chairman at EIOPA, said: “Insurers and IORPs need to use robust risk-management practices to manage the ongoing macroeconomic challenges.“With Solvency II, the risk culture in the insurance sector is significantly reinforced. In the IORPs sector, prudential regimes are not sufficiently risk-sensitive and thus might underestimate the risks.”In April, EIOPA argued that occupational pension funds should be required to carry out risk assessments based on a standardised framework, and Bernardino referred back to this opinion in his comment on the financial and macro-economic risks facing IORPs.EIOPA’s report also highlights the funding situation in the occupational pension sector, noting that, based on preliminary data, “cover ratios seem to have dropped” among those countries reporting data for last year.This, it says, creates additional pressure for the sector.Complaints or warnings about the impact of the low-yield environment and the European Central Bank’s (ECB) quantitative-easing policy have become a fairly regular feature among pension funds in recent times, including references to funded pension systems as “collateral damage” or to ECB policy as “a train-wreck in slow motion”. In today’s financial stability report, EIOPA points out that its 2015 stress test exercise for IORPs “underscored that current heterogeneous national prudential regimes are often not entirely sensitive to market price changes,” and warns this could lead to the underestimation of risk.It says it also makes it harder to gauge consistently the impact on pension schemes across countries.According to EIOPA, its risk assessment has largely identified the same key concerns as those held by national supervisors – the key risks and challenges for the insurance and pension sectors “remain broadly unchanged”.It sees, however, a shift away from investment in fixed income toward other asset classes, which “might evolve over time as a response to the low-yield environment”.This has the potential to constitute “excessive ‘search for yield’ behaviour”, which national supervisory authorities must watch closely “to ensure all risks are properly managed”.It says this applies in particular to life insurers.However, it also notes that, among IORPs, the UK sector continues to shift toward fixed income, although at a slower pace than in recent years.“A few other countries also reported increased investment allocation to equities due to the low interest rates,” EIOPA says.“The monitoring of this trend is recommended, as, in case it persists, it has increased exposure of the [occupational pension fund] sector to market risk.”According to EIOPA figures, the average rate of return on assets for IORPs dropped from 8% in 2014 to 3% in 2015, attributable to the “low performance of the equity and fixed income markets during the second half of 2015”.“The current low-yield environment,” it adds, “also puts additional pressure on the overall performance of occupational pension funds.” The European Insurance and Occupational Pension Authority (EIOPA) has called for “further supervisory response” to the “vulnerabilities” identified in its stress test of European pension funds.In its financial stability report for the first half of the year, the supervisory authority warns that the macro-economic and financial environment remains “extremely challenging” for insurers and occupational pension funds, and concedes that yields are likely to remain low for a prolonged period of time.It also acknowledges that a “double-hit” scenario – involving a drop in the risk-free rate used to calculate liabilities combined with higher risk premia – cannot be ruled out.EIOPA says it will factor in the problem of low yields and the double-hit scenario as part of its stress test of the European insurance sector later this year.
At present, this intention relates to Glassford, a joint venture with Housing Solutions, a housing association based in Maidenhead, Berkshire. The pension fund said it intends to expand this joint venture to develop additional housing schemes in the neighbourhood.The submission also said that in principle any future asset management agreement between the pool’s investment vehicle LPP Investments (LPPI) and Berkshire will be able to accommodate a percentage of assets to be allocated to local investments for the pension fund’s sole benefit.These could either be managed via LPPI on an advisory basis, or with Berkshire’s own resources.In terms of infrastructure, the target allocation for LPP could be as high as 10%-plus, with Berkshire planning to increase its own allocation to a maximum of 15%.In January 2015, LPFA and Greater Manchester Pension Fund (GMPF) – now part of the Northern Pool – established an infrastructure joint venture, which is being expanded this summer to include the pair’s pooling partners to lift total commitments to over £1bn.By end-2016, it is also planned to restructure the joint venture into an infrastructure fund open to every local government pension scheme pool or fund.Meanwhile, based on just the LPFA and LCPF participation so far, the LPP said it expects to save £33m in investment management fees over five years from pooling, and around £1m in pension administration costs in the second year of operations.It also said it anticipates improved investment outcomes of around £20-£30m from current levels over the next five years, and that even greater savings should be achieved with the addition of Berkshire to the pool and the opportunity to exploit further economies of scale. The Royal County of Berkshire Pension Fund is to join the £1bn (€1.1bn) infrastructure platform to be set up by the Local Pensions Partnership (LPP) and the Northern Pool, two of the UK’s eight local authority pension pools which are being launched to enable increased infrastructure investing.Berkshire joined the LPP – whose other partners are London Pensions Fund Authority (LPFA) and Lancashire County Pension Fund (LCPF) – earlier this summer, with its participation expected to be formally approved by end-January 2017, and assets transitioned by April 2018.The value of the three funds’ combined investments is currently around £13bn.However, according to LPP’s pooling proposal submitted to the UK government in July, Berkshire wishes to retain certain locally-focused investments permanently outside the pool and will seek its own approval from the secretary of state to do this.
It is also taking part in a joint venture with Vantage London, which redevelops offices and aims to significantly increase energy efficiency.Last year, PFZW started implementing a 50% reduction of carbon emissions from its equity holdings, to be completed in 2020. It said this year it would look at the reduction potential of its alternative equity, property, and credit allocations.The scheme added that it had transferred part of its responsible investment team to its asset manager, PGGM, in order to increase PGGM’s sustainability expertise.The healthcare pension fund reported a net return of 12% for the year, with equity and private equity generating 13% and 14.6% respectively. Private real estate returned 9.4% and infrastructure yielded 7.3%.PFZW said credit and high yield delivered 11% together, while structured credit gained 21.7%. Securities and credit investments had benefited from a strong US dollar, the fund said.Meanwhile, equity, property, and infrastructure received an additional boost from improving economic prospects as well as low interest rates, it added.The scheme made clear that its credit investments had “maximum tailwind”, benefiting from low and falling interest rates, narrowing spreads, and limited defaults.With a yield of 22.4%, commodities was the best returning asset class, thanks to rising oil prices. The scheme also attributed a 12.3% return on emerging market debt to dropping interest rates and appreciating local currencies.Fixed income produced 13.7% as an effect of declining interest rates on government bonds and interest swaps.PFZW explained that its 0.5% allocation to mortgages gained from movements between the moment of quote acceptance and the execution of the mortgage contract, leading to a return of 9.5%.The scheme indicated that it had driven down asset management costs to 0.46%, a reduction of one-quarter since 2013. Transaction costs stood at 10.3 basis points.It made clear that reducing its administration costs of €67.90 per participant was hampered by costs following new legislation, stricter supervision, and new ICT systems. PFZW said it expected a reduction to €60 by 2020, rather than the planned €58 by next year.The healthcare pension fund also said that it had replaced indexation based on salary inflation with consumer index-linked inflation compensation, and that it would no longer invest with the aim of providing indexation in arrears. The €187bn Dutch healthcare scheme PFZW has started investing in green bonds as part of its plan to quadruple its sustainable investments to €20bn by 2020.In its annual report for 2016, PFZW said it had invested in ABN Amro and Alliander green bonds with proceeds backing energy-efficient buildings and thermal grids, a form of geothermal energy production.The Netherlands’ second-largest pension fund said it had also invested in food security through credit from fertiliser manufacturer Eurochem, and in green projects in Brazil through Latin American paper producer Suzano Papel e Celulose.The investments come amid rapidly growing interest in the asset class. Nikko Asset Management has estimated that the green bond market could double in size to $400bn (€366bn) by the end of this year, and could exceed $1.2trn by 2020 if it continues on this growth trajectory.
By the end of this year the regulator intends for the group to have achieved consensus on a standardised cost disclosure template, based on Sier’s work with the LGPS. It will also aim to agree how the template will be used, how accuracy will be ensured, and how it should be adapted in future – including for use with “non-mainstream” asset managers”.“It is a brave appointment by the FCA,” said Con Keating, head of research at insurer Brighton Rock and a fellow transparency campaigner. “It makes a statement that the regulator isn’t going to take any prisoners.“To analyse a manager’s skill, you need data on performance, cost and fees. This will harm inefficient and corrupt managers. In so doing, it will make UK asset management more competitive globally.”Sier’s role as convenor is to bring together interested parties – including the asset managers’ trade body, the Investment Association, which initially fiercely rejected calls for transparency – but he has also done his own work on devising cost transparency frameworks.He recently gained recognition for his work adapting a Dutch disclosure template for use by local government pension schemes (LGPS), which has already shed light on areas of ‘hidden’ charges.The LGPS work was facilitated by Unison, the public-sector trade union, which now expects trade union representatives to be part of Sier’s convened committee.Colin Meech, national officer for Unison, said: “We hope that both Chris and the FCA recognise the role trade unions have played both in the UK and in the Netherlands in delivering greater transparency for pension funds. We ask both Chris as convenor and the FCA to ensure that there is a seat for the Trades Union Congress on the cost transparency committee.”The working group was proposed as part of a raft of recommendations from the FCA to improve the asset management sector, set out in its Asset Management Market Study. The UK regulator has appointed Chris Sier to oversee the new framework for cost transparency across the entire asset management sector.The Financial Conduct Authority (FCA) has tasked Sier – an outspoken campaigner for improved disclosure – with leading a working group that will attempt to achieve a consensus on how to make asset management costs clearer.Sier – a professor at Newcastle University Business School – has campaigned for 10 years in both retail and institutional investment to uncover the charges that impact savers.Announcing Sier’s appointment, the FCA said the working group’s first meeting was slated for September.
The Swedish Pensions Agency has introduced functions on its website enabling customers to to choose sustainable investment funds more easily on the country’s Premium Pension System (PPM) fund platform.Customers using the PPM – the defined contribution section of Sweden’s state pension provision – can filter out funds based on CO2 risk and a range of other activities that investors might not want to support.Erik Fransson, head of the Swedish Pensions Agency’s funds marketplace, said: “It will now be easier for all savers who want to include sustainability aspects in their fund choices for the premium pension. In this way, we are fulfilling the government assignment to make it easier for the savers who want to make sustainable fund choices.”The agency introduced new rules for the PPM’s fund marketplace last autumn as part of a larger reform of the system, which is being overhauled following scandals around individual private pension providers. Providers have had to re-apply to continue offering their funds on the platform. The agency has so far approved 42 funds to be marketed on the platform, including 21 funds from Norwegian pension and investment provider Storebrand and its subsidiary SPP Fonder.Åsa Wallenberg, chief executive of SPP Fonder said: “The premium pension has had a great influence on the private economic development for the past 20 years and contributed greatly to Sweden having a relatively high level of knowledge about savings and retirement.“The fact that we have been entrusted to distribute our sustainable funds in the new premium pension fund market is therefore very gratifying.”Storebrand is the fourth firm to be approved for the PPM platform after AMF was accepted at the beginning of March.Swedish fund management company Optimized Portfolio Management was the fifth, and most recent, addition to the list of approved firms.
An independent organisation has been established with a view to growing and improving impact investing in the UK.The Impact Investing Institute brings together two existing bodies that aim to increase the scale and effectiveness of the UK impact investing market: the UK National Advisory Board on Impact Investing (UK NAB) – set up in 2013 under the UK’s presidency of the G8 – and the Implementation Taskforce on Growing a Culture of Social Impact Investing in the UK, commissioned by the prime minister to take forward recommendations made by an advisory group.“By combining the energy, supporter base and achievements of these two groups, the institute aims to provide a focal point for impact investing in the UK to accelerate the potential for finance to address social challenges,” a statement on the institute’s website reads.The institute will be led by the two bodies’ respective chairs, Harvey McGrath and Elizabeth Corley, and will be launched formally in the autumn. They are currently recruiting for a chief executive officer. It has broad backing across the financial services and social sectors, according to statements from the institute and the UK government, and will be supported by private companies and foundations alongside government departments and the City of London Corporation.Corley, a senior adviser to and former CEO at Allianz Global Investors, said: “The institute will play a significant role in ensuring the UK continues to stay at the forefront of innovation in impact investing, enabling UK savers to invest in line with their values and have increased ownership over the social outcomes that their money generates.” Chairing the Institute’s management board is the next step in impact investing for Elizabeth Corley, former CEO of AllianzGIOn a panel at the UK pension fund association’s investment conference earlier this year, Corley said the implementation taskforce should join forces with other bodies leading on impact investing in the UK to “form a body that can really deliver a consistent and constant point of contact for industry and government”. The institute said it would engage “across the spectrum of investors and investees – with asset owners, managers and intermediaries and with businesses, social enterprises, and other organisations committed to making a social impact”.Interest in impact investing has grown rapidly in recent years as climate change has become a higher profile public concern and the UN Sustainable Development Goals have provided the private sector with a framework to guide investment activities. The asset management industry has embraced the goals in a big way, and many asset owners also have strategies informed by them.The Global Impact Investing Network, an organisation dedicated to fostering impact investing, recently estimated the size of the global market at $502bn (€449bn).The rapid growth of impact-oriented investment offerings in the mainstream market has also led to concerns about “impact washing” or a dilution of standards.In April the International Finance Corporation announced a set of “Operating Principles for Impact Management”, which are intended to address these concerns by providing a market standard. Several large asset managers have pledged to adhere to them.Impact investing refers to investing with the aim of generating social and/or environmental benefits alongside a financial return.