In other news, the International Integrated Reporting Framework (IR) has been released, following a three-month global consultation led by the International Integrated Reporting Council (IIRC), which collected more than 350 responses from every region of the world. IR applies principles and concepts that are focused on bringing greater cohesion and efficiency to the reporting process, and adopting integrated thinking as a way of breaking down internal silos and reducing duplication. It aims to improve the quality of information available to providers of financial capital to enable a more efficient and productive allocation of capital. IIRC chief executive Paul Druckman said: “The Framework brings technical rigour and cohesion to a process that has grown organically and through market pressure over the last three years. ”Today, we have fired the starting gun on a period of global adoption that will begin in early 2014 by showcasing practical examples of reporting innovation, including how businesses are demonstrating value creation using the ‘capitals’ model and principles such as the connectivity of information.”The framework will be used to accelerate the adoption of IR across the world, where it is currently being trialled in more than 25 countries, 16 of which are members of the G20.Meanwhile, French reserve fund Fonds de réserve pour les retraites (FRR) has selected responsible investment research specialist EIRIS to analyse the extra-financial risks of the FRR’s global equity portfolio, including small and mid caps and its corporate fixed income portfolio.EIRIS will assess the portfolios against the norms and principles enshrined in international conventions for corporate involvement in anti-personnel landmines, cluster munitions and biological and chemical weapons.It will also assess the portfolios against governance criteria.Research will be undertaken annually and the results provided to the FRR’s Responsible Investment Committee.Shale gas fracking, meanwhile, has a hidden impact on climate change, according to a report by the Environmental Integrity Project (EIP), namely the unleashing of a tidal wave of construction or expansion of more than 90 chemical, fertilizer and petroleum plants that will release about as much greenhouse gas pollution as 21 large baseload coal-fired power plants.Since 1 January 2012, companies have proposed or already obtained 95 Clean Air Act permits authorising a 91m tonne increase in greenhouse gas emissions for the construction and operation of new compressors, pipelines and other major facilities made possible by cheap shale gas.The climate implications of the new sites are considerable, says the report.For example, nitric acid units at fertilizer plants release large amounts of nitrous oxide, which has a global warming effect more than 300 times that of carbon dioxide.Proposed new liquefied natural gas (LNG) terminals will release about as much greenhouse gas as would a new coal plant.The total of 91m additional tonnes of GHG pollution does not include new emissions from proposed gas-fired power plants or the multitude of smaller wells, gas processing plants, compressor stations and flares springing up across the US in shale-gas rich states like North Dakota, Pennsylvania and Texas.The EIP report can be found here.However, professors Richard Muller and Elizabeth Muller argue in their paper ‘Why every serious environmentalist should favour fracking,’ published by the Centre for Policy Studies, that air pollution can be mitigated by the responsible development and utilisation of shale gas.The authors consider some of the concerns raised by opponents of fracking and conclude that they are either largely false or can be addressed by appropriate regulation.Fugitive methane emissions, in particular, can and must be mitigated – but the impact of even the highest estimates of these emissions are far below that of coal emissions on global warming.Developed economies should, therefore, help emerging economies switch from coal to natural gas, and shale gas technology should be advanced as rapidly as possible and shared freely.The Mullers conclude that environmentalists should recognise the shale gas revolution as beneficial to society – and lend their full support to helping it advance.The paper can be found here. Liechtenstein-based LGT Venture Philanthropy (LGT VP) and private bank Berenberg have announced the first close of their social impact fund, Impact Ventures UK (IVUK), after raising £20.8m (€24.8m) from investors.Investors in IVUK include the London Borough of Waltham Forest Pension Fund, Deutsche Bank via the DB Impact Investment Fund, Stichting Anton Jurgens Fonds and The Golden Bottle Trust, in addition to the cornerstone investment of £10m from Big Society Capital. IVUK will invest in enterprises that create strong positive social impact for disadvantaged people and communities in the UK, as well as generating a financial return.The fund has a broad mandate and will invest in companies with business models that target specific areas of impact, ranging from education, housing, employment and skills through to access to finance, as well as mental and physical health.
Two of Finland’s largest pension providers have raised concerns about the impact of the political crisis in Ukraine on its investments.Ilmarinen, the €33bn pensions mutual insurer, returned 1.3% over the first quarter of the year, down from 2% over the corresponding period in 2013, and cited increased market uncertainty and fluctuating share prices as the reason for the lower returns.Timo Ritakallio, the mutual’s CIO, cited the escalation of political tensions between Russia and Ukraine and uncertainty over developments in China as driving the uncertainty.The €19bn Elo, returning 1.1% over the first quarter of the year, also said the situation in Ukraine was increasing market uncertainty. Ritakallio noted that only 0.3% of the mutual’s investments were located in either Russia or Ukriane and that country-related risk was “already low at the start of the crisis”.However, he expressed concerns that the problems would impact Finnish listed companies, many of which benefit from Russian tourism and trade.“The crisis will create difficulties, especially for Finnish companies operating in Russia, as well as for companies engaged in exports to the country,” he said.“This negative development will be reflected in the companies’ share prices and therefore also in Ilmarinen’s investment portfolio.”Ilmarinen’s equity portfolio returned 1.5% over the first three months of the year, down from 4.1% over the first quarter of 2013.However, fixed income and real estate returns were largely unchanged over the same period last year.Elo’s returns mirrored those of Ilmarinen, seeing 1.1% growth from the equity portfolio overall, despite private equity returning 3.7% and unlisted equity 7.6%.Hanna Hiidenpalo, director and CIO at Elo, said: “On the equity markets, little changed during the first quarter of the year. On the fixed income markets, long-term rates fell in both the US and Europe. Central bank reactions to the economic trend diverged on the two continents.”For more on the Nordic pensions sector, see the upcoming May issue of IPE
In practice, he said, many arrangements between pension funds and asset managers regarding bonuses involve performance that cannot assessed, due to lack of expertise.He said too many pension board members believed that an academic course lasting just a few days was sufficient to challenege hedge fund managers, something he described as a “grave misconception”.He also criticised the ease with which pension funds outsource work by “simply by throwing it over the fence to an asset manager”.“Nobody lends their car to somebody without ensuring they have a driving licence,” Koelewijn said. “But we just put our money outside, and are confident everything goes well.”The professor called for an increase in expertise among pension trustees.He also claimed the DNB and the AFM, both regulators in the Netherlands, were drawing up rules that were too detailed, failing to take into account the people at which they are aimed. Outperformance is almost impossible, and pension funds’ willingness to pay for it is contributing to the current bonus culture, according to Jaap Koelewijn, a professor of corporate finance at Nijenrode Business University.Speaking at a seminar on fee policy and bonuses at Dutch pension funds, Koelewijn argued that a number of studies show that outperformance is hardly ever achievable.“Asset managers suggest they can outperform, and clients are willing to believe this,” he said. “It is a kind of magic we are kidding ourselves into.”However, Koelewijn, who is also an independent adviser on financial supervision, acknowledged that bonuses were not necessarily negative in concept, as long there was a clear relation between the reward and the delivered result.
Institutional investors are coming under increasing pressure to develop a long-term investment plan rather than simply engage with companies on individual matters, according to the secretary general of the AP Fund Ethical Council.John Howchin, who heads the body charged with coordinating the engagement efforts of the SEK1trn (€112bn) Swedish buffer fund system, said questions on developing a strategy were catching many investors off-guard.Speaking at the RI Europe conference in London last week, Howchin admitted the investment community as a whole was doing too little to tackle the risks posed by climate change, but he said this was down to the nature of the industry.He said there were often hopes that, when a issue became topical, there would be a revolution led by investors. “Well, I’m sorry to say – and I’ve been saying it for 15 years on panels – that we are not very revolutionary,” he said.“We are very evolutionary. Although I agree, we have to be a rather quick evolutionary group, bordering on revolutionary maybe.”He added: “People accept what we’re doing with the assets we hold, that we are trying to change these assets, but they are more keen to know what we are doing, strategically, as investors.”He said the changed emphasis was a “fundamental shift”, leading to questions about who investors would wish to be.“Quite honestly, a lot of investors are struggling with this,” he said. “It is a long-term change that needs to be discussed, and climate change is very much a driver in that discussion.”Howchin also stressed that discussions surrounding the Norwegian Government Pension Fund Global’s exit from the oil sector should not be viewed as agreeing with the carbon divestment movement, but rather as risk diversification.Prior to joining the Ethical Council in 2010, the secretary general was in charge of environmental research and corporate dialogue at the oil fund’s manager, Norges Bank Investment Management.“Since they have such a high exposure to oil, the question was why should they have more exposure to oil in the portfolio,” he said.
The IAIS, the global association of insurance supervisors, is to hold its annual conference in Amsterdam this October with the Dutch Central Bank (DNB) as host.Noëlle Honings, policy adviser for insurance at the DNB, said: “This is the first time in the 20 years of the IAIS that the annual conference of this global supervisory umbrella will be held in this country.“This is an extra special occasion for us due to the fact the DNB is also celebrating its 200th anniversary this year.”The event takes place on 23-24 October with around 500 delegates expected to attend – including supervisors, insurance companies, consultants and government representatives. Jeroen Dijsselbloem, the Dutch finance minister, is a keynote speaker.The IAIA was established in 1994 and represents insurance supervisors in more than 200 jurisdictions and 140 different countries, representing some 97% of worldwide insurance premiums.Around 130 observer members represent international organisations, insurance associations and (re)insurers.Honings said the recognition of the IAIS had increased strongly over the past year.“In autumn 2013, the IAIS took on the task of developing and rolling out a global capital standard for systemically relevant insurers,” he said.“This straightaway put the organisation high on people’s agendas.”The October event runs from 20 to 25 October, with two additional conference days for insurance and other related areas, such as pensions.Joanne Kellermann, DNB director, will speak on governance and risk culture in insurance companies, while Michael McRaith, director of the US Federal Insurance Office, will speak on the global capital requirements for insurance.EIOPA’s Gabriel Bernardino will discuss co-operation between supervisory authorities.For more information and registration, visit http://www.iais2014.org/.
Jeremy Woolfe finds much talk, but little action so far on the European Commission’s proposed €315bn investment planLife has potentially been breathed into the EU’s new European Fund for Strategic Investment (EFSI), the plan with the ambitious aim to combat the EU’s economic stagnation.EFSI, which aims to inject €21bn into €315bn of investments, is said to be at “the very heart” of president Jean-Claude Juncker’s investment offensive.The step forward sees the idea converted into an actual proposal for an EU Regulation – that is, a set of rules that would apply uniformly across the whole economic zone. It has reached draft legalisation after only a scant 50-plus days since the first announcement was made, in November 2014.Its backers hope, perhaps optimistically, that the Regulation can now be rushed through the Brussels legislative machinery, to see the light of day by June this year.To achieve this, it will have to clear hurdles in both the European Parliament and the Council of Ministers, which represents the EU member states. The €315bn fund, which would seek to invest over three years, is hoped to attract private and public investments into economically “strategic” sectors.These would include the development of the EU’s broadband networks, and energy transmission lines.Also, it would support smaller companies – that is, those having fewer than 3,000 employees.The intention is to encourage economic growth in the EU by underpinning investments using various processes, such as securitisation. This would reduce the risk factor for investors into target projects.EFSI is to work “in close partnership” with the European Investment Bank (EIB). The bank applies strict rules on the viability of placements.One sign of the urgency of the initiative is that, as soon as December last year, a task force had already identified more the 2,000 relevant projects, worth more than €1.3trn. Another indication of haste is a recent announcement of a forthcoming advisory service for potential investors, to be set up by the EIB, within months. The plan should be seen as working in conjunction with the European Structural and Investment Fund (ESIF), but there will be no direct overlap.While EFSI focuses on attracting private investors in economically viable projects, the bulk of ESIF consists of grants. Under these, EU member states are encouraged to at least double them to achieve innovative financial instruments.There are two strongly clashing assessments of Juncker’s plan, sitting alongside a third group that is sitting on the fence. For those of opposing views, in the one corner are the sceptics, who scorn EFSI.Their opponent is the European Commission-EIB combine. All groups have solid credentials in economics.An early characterisation of scorn came in The Economist newspaper. It carried a cartoon that portrayed president Juncker as a magician, and poured derision on his plan as “unbelievable”!One clearly jaundiced view came from another high-status platform. The words were: “It could happen, it could happen!” but meaning, it probably wouldn’t. This was expressed by Erik Nielsen of UniCredit, at a recent meeting of Brussels-based think tank Bruegel.The chief economist at the Milan-based banking and financial services firm listed several “missing” criteria. These included (unlikely) waivers from the EU’s Stability and Growth Pact (SGP), although the Commission will allow some limited concessions to ensure countries are not hindered by the 3% new debt threshold.He added a need for work on the SGP to separate investment from consumption. The bank’s equity value is over €600trn.Close to home, the Commission itself states that pension funds are, in principle, following EFSI with interest, but not committing themselves. It finds it “too early to give figures” on the proportion of the estimated €12trn of European insurance and occupation pension at present invested outside the EU that might be moved to inside the fold.Among those sitting on the fence is PensionsEurope itself, representing the occupational pension sector. The federation states that EFSI could be a “step in the right direction”. “No doubt the investors will look into the matter and make their decisions in due course.”It adds, pragmatically, that pension funds “just have to look into individual projects – and decide whether to invest or not”.Similarly, Joana Valente, of BusinessEurope, tells IPE: “We are still analysing the proposal”.However, she adds, it could be “an important part of an investment-driven EU recovery”.Notably, the organisation published, in November, a 30-plus page study on “expectations from an EU Investment Plan”.This finds that: “Over six years since the onset of the financial crisis, the EU is the only major global economic region to have failed to return to pre-crisis levels of economic output”.Clearly, the industry body is anxious for a solution.
Norway’s domestic government pension fund — the smaller counterpart of the NOK6.8trn (€723bn) oil fund — saw an investment loss during the second quarter of 2015 as long bond yields ticked higher for the first time in years.The NOK196bn Government Pension Fund Norway, which along with the Government Pension Fund Global (GPFG), forms part of the Government Pension Fund, reported a return of 5.5% between January and June this year, but a 0.3% loss for the second quarter on its own.In absolute terms, the first half profit was NOK10.2bn and the second quarter loss came to NOK503m.The returns compare to 9.3% for the first half of 2014 and 6.7% for the second quarter of that year. Olaug Svarva, chief executive of Folketrygdfondet, which manages the fund, said: “After a strong first quarter, market developments were more hesitant in the second quarter.”The second quarter saw investors focus on uncertainty around Greece’s relationship with the rest of the euro-zone, China’s slowdown in growth and the prospects of the US Federal Reserve lifting interest rates, she said.Companies exposed to the petroleum sector, which make up a large part of the fund’s equity portfolio, were now undergoing intensive restructuring, Svarva said, adding that this was a challenging period with difficult choices for investors.The pension fund is split into an equity portfolio and a bond portfolio. The equity part posted a 9.4% return in the first half, 0.2% below the benchmark return, while the bond portfolio made a 0.2% return, beating its reference index by 0.4 of a percentage point, Folketrygdfondet said.In the second quarter alone, the equity portfolio returned 0.1% — half a percentage point below the benchmark, while bonds lost 0.8% — which was a 0.4 point improvement on the benchmark.“Yields on long-dated government bonds rose in the second quarter after falling for many years,” the fund’s manager said in the interim report.This rise in yields for bonds with a long time to go to maturity was the reason for loss on the bond portfolio, it said. However currency movements had helped trim the loss.While the Norwegian bond market fell 1.1% in the second quarter measured by the benchmark, and the benchmark for bonds for the whole of the Nordic region fell 1.7%, the decline of the latter had been reduced because of Norwegian krone weakness in the quarter, according to the report.The fund’s assets grew in value to NOK196bn at the end of June from NOK186bn at the end of December 2014.
Cyprus has failed to put migrating workers’ pension rights on equal footing to those of employees remaining within the country, according to the European Union’s highest court.The European Court of Justice (ECJ) said the Republic of Cyprus failed to allow the free movement of workers after it left in place a clause allowing for civil servants under 45 to be treated differently to those above the age.The disputed clause allowed for those over 45 and with a pensionable service record exceeding five years to receive a lump sum payment on leaving the civil service, and draw their accrued pension from 55, whereas those under 45 are merely entitled to a lump sum payment.In its judgment for case C‑515/14, the ECJ said that, by failing to repeal the clause with retroactive effect from the day Cyprus joined the EU in 2004, it left in place a law deterring workers from leaving the country to work in another member state. This resulted in “unequal treatment” of migrant workers, the court said, which violates the EU treaties.The clause no longer applies to new recruits, following a reform of civil service pensions effective from late 2011.The ruling notes: “Although member states retain the power to organise their social security schemes, they must, nonetheless, when exercising that power, observe EU law and, in particular, the provisions of the EC Treaty on freedom of movement for workers and the right of establishment.”The case was brought by the European Commission in 2013 as part of its regular referrals to the ECJ over member state failure to comply with EU law.,WebsitesWe are not responsible for the content of external sitesLink to European Court of Justice ruling
The UK’s Pensions Regulator (TPR) was given contradictory and incompatible objectives when it was required to balance the security of pension savings against the growth of sponsoring employers, a report by the Pensions Institute has warned.Report author Keith Wallace, examining instances where sponsors sidestepped deficit-reduction payments or exploited pension funds for financial gain – including cases of apparent mergers where sponsors siphoned off the scheme’s surplus – said it was naïve to assume such practices were now in the past, given the current level of underfunding.Wallace cited high dividend payments, high-interest loans and management fees payable to sponsors as ways of sidestepping deficit payments, with some of the methods being employed by the sponsors of the underfunded BHS pension schemes, which have since entered the Pension Protection Fund (PPF).A report by the parliamentary work and pensions committee last month argued that the BHS schemes had been weakened prior to its insolvency by the company’s management. “The Pension Protection Fund faces a huge moral hazard as a result of the practices employed by some companies in this country,” warned Wallace, who is also president of the Association of Corporate Trustees.A pension scheme is like a coach and horses carrying gold on a long journey through hostile territory in a Wild West movie.In the report, ‘Milking and Dumping: The Devices Businesses Use to Exploit Surpluses and Shed Deficits’, Wallace argues that TPR was an ineffective regulator due to its conflicting mission statements of protecting schemes while ensuring a sponsor’s solvency.“In practice, the muddled role saps trustees’ negotiating stance and gives them a moral ‘let out’, a sense of helplessness, or both,” he said.“Were there no TPR role here, negotiations between trustees and sponsors might be more acute, but beneficiaries would know clearly where the buck stopped.”TPR’s obligation to balance a scheme’s deficit-reduction payments were made more explicit in 2012, when a new statutory objective to account for sponsor growth was agreed.Wallace contrasted TPR’s objectives with those of the PPF, which he said were clearer, with the lifeboat scheme showing “every appearance” it would be able to meet them.The report continues: “Where there is some latent moral hazard, though, is in the very existence of the PPF and the harbour it offers.”Wallace, arguing that the existence of PPF guarantees allows sponsors to justify insufficient levels of contribution, adds: “It affords some lowest common denominator of acceptable benefit.”David Blake, director of the Cass Business School-based Pensions Institute, said: “A pension scheme is like a coach and horses carrying gold on a long journey through hostile territory in a Wild West movie.“Despite the determination of the trustees to navigate a safe journey over the rocky terrain and the bravery of the Pensions Regulator as outrider, the coach with its valuable bullion is a sitting duck for corporate ingenuity.”,WebsitesWe are not responsible for the content of external sitesLink to ‘Milking and Dumping’ report
Accrued DB rights, as well as pension benefits for 8,000 pensioners and deferred members, will be moved to the general pension fund Stap, managed by insurer Aegon and its subsidiary TKP.The Getronics scheme is the second to join Stap after E-Way, the Dutch pension fund of Eastman Chemicals, which outsourced €155m of assets for 500 active participants.In other news, the €323m company scheme of Hunter Douglas will also be liquidated, transferring its assets to the €45bn metal scheme PME.The manufacturer of window-dressing products said finding board members had become increasingly difficult.It said hiring an external board member, as well as an external chair for its investment committee, had increased costs per participant from €368 to €498.As of the end of October 2016, funding at the Hunter Douglas scheme and PME stood at 97.9% and 92.1%, respectively.Clemens van Slingerland, vice-chair at the Hunter Douglas scheme, said a liquidation surplus was likely and would be added to participants’ pension rights.The pension fund, which has 665 active participants and more than 1,200 pensioners, will move administration from AZL to MN, PME’s provider.The Dutch regulator issued the liquidating scheme with fines of €20,000 in total, for failures in its investment policy and operational management in recent years.The regulator also cited the lack of a clear policy for derivatives and active management. The €1.2bn pension fund Getronics is to be liquidated and its assets divided between the €10bn scheme of telecommunications company KPN and the new general pension fund (APF) Stap.The Getronics scheme was affiliated with the IT company of same name, which KPN acquired in 2007.The pension fund, which closed to new entrants in 2015, said its closure had made it more difficult to ensure continuity.It has transferred €520m of pension rights, accrued in defined contribution arrangements for 11,500 participants, to the pension fund of its parent company.