Month: September 2020
She also acknowledged that the proposed contract in real terms offered only limited options for indexation.In a letter to Parliament, the state secretary added that two different arrangements would not lead to an unequivocal framework or clarity, and would also increase the costs of pension provision.Klijnsma suggested that, in her reviewed proposal, merging existing nominal pension rights into a real contract could be avoided.The state secretary indicated that, while fleshing out the new variant, she would focus on the smoothing method for financial shocks and clarity the rules for rights cuts during hard times.She also said she would look at the possibility of basing the contributions on the 10-year average of interest rates, in order to achieve stable and cost-covering contributions.The Pensions Federation responded positively to Klijnsma’s reviewed proposals.However, it argued that pension funds should be allowed to continue linking their contribution level to “prudent” returns.The large healthcare scheme PFZW, which had championed the real contract, said it regretted Klijnsma’s change of mind, but that it appreciated the new option of evening out rights cuts.However, it said it doubted whether the indexation target would still be achievable in the new scenario, or that the new contract would still allow pension funds to carry out a population-specific investment policy.In the opinion of Theo Kocken, risk-management professor at the Free University (VU), the best element of the new contract variant is that pension funds no longer have to implement significant rights cuts at the end of a recovery process.However, he also stressed that solutions still needed to be found for sufficient age differentiation, to address the different capacity of younger and older workers to absorb financial risks. The new Dutch financial assessment framework (FTK) is to accommodate a single pensions contract, rather than two, as had been envisaged initially.Responding to the outcome of the consultations on her concept proposals, Jetta Klijnsma, state secretary for Social Affairs, came up with a “middle way”, consisting of elements of both earlier proposed nominal and real contracts.She explained that limitations in these contracts had caused her to review her proposals.“The nominal contract lacked the option of properly smoothing out financial shocks, as well as a sufficient perspective for long-term investment policy for indexation,” Klijnsma said.
The Dutch pensions industry is facing substantial job losses of up to 30% or more as the number of pension funds in the Netherlands continues to decline.The number of schemes has fallen from 688 in 2008 to 372 today, and there is no end in sight – according to financial supervisor De Nederlandsche Bank (DNB), another 120 schemes are presently winding up or have indicated their intention to do so over the next few years.The regulator recently suggested that at least 60 more may be unsustainable in future.At this rate, the number of schemes will dip below 200 within the next few years, and the decline seems certain to affect employment in the industry, ranging from consultants to asset managers and professional trustees. According to Jan Jaap Dahmeijer at the DNB, the regulator has not yet conducted any research into the matter, but he said he was convinced the impact would be substantial.“The changes may be more significant than we now realise,” he told IPE sister publication FD IPNederland.Experts believe ongoing consolidation will lead to up to one in three jobs in the industry disappearing over time.Martijn Vos, director of pensions and risk management at Ortec Finance, told FD IPNederland: “In five years’ time, perhaps one in five jobs will have been lost. One in three jobs is a fair estimate in the long run.”Theo Kocken, chief executive at Cardano, agreed.“It would not surprise me if some 20-25% of jobs in the industry disappeared over the next 10 years, and that number may rise to one in three jobs in 20 years – or possibly sooner,” he said. Kocken said smaller schemes would be hit hardest, and that the services of consultants and actuaries for this segment of the market would be needed less and less.He added: “Asset managers are less vulnerable to the effects of consolidation, as they are paid based on assets under management, although asset managers of course cannot escape the fact they are part of the financial services sector – which, as a whole, will be shrinking for the next 10-15 years as a result of deleveraging.”Only the legal profession will be spared, he argued.“Considering the many regulatory changes, they will likely have plenty of work going forward,” Kocken said.However, the worst job losses are not expected to materialise for another five years, according to Vos.Initially, the rising number of pension schemes winding up will actually create more work for consultants of all sorts.“In addition, there’s the greater focus on risk management, communication with plan participants, adjusting schemes to fiscal and regulatory changes and so on,” he said.“So it will be a while yet before we start to see a serious decline in employment opportunities.”If the consolidation trend were to accelerate, however, the numbers are likely to be more grim, says Dries Nagtegaal, a professional trustee with the corporate Sabic scheme and metalworkers fund PME.As more and more schemes are forced to contend with falling numbers of active participants and thus falling contribution levels, more schemes – including healthy schemes with solid funding ratios – must consider winding up to safeguard the long-term interests of their participants, he said.Nagtegaal pointed out that the majority of the top 100 Dutch pension funds are facing these or similar issues today.“If the number of remaining schemes were to drop to 100, this would mean that 50% of the business in the industry will be lost,” he said.
By the end of June, according to recently reported figures from the pension providers, allocations to equities and equity-like investments was 47.1%, and fixed income allocations stood at an average of 42.5%. These allocations have changed from 43.9% and 45.3%, respectively, at the end of June 2013.Property investments accounted for 10.4% at the end of June 2014, down from 10.8% 12 months earlier.Rissanen predicted that the role of returns in the financing of pensions would gradually increase over the next few decades due to the rise in pension expenditure.Meanwhile, in its interim report, Finnish insurance company Fennia said a high level of solvency had allowed it to take more risk with investments in its life and pensions unit in the first half, for the sake of boosting returns.Seppo Rinta, chief executive at Fennia Liv, said: “Our pensions business is continuing to grow. The company’s good solvency position made it possible to undertake result-oriented risk-taking in our investment.”Premium income rose to €67m in the January-to-June period from €49m.The net return on investments was 4.1%, compared with 5.2% for the whole of 2013.At the end of June, assets under management increased to €705m from €693m at the end of 2013.Solvency capital grew to €156m from €137m at the end of December, and the solvency level rose to 23.5% from 21%.In other news, Finland’s State Pension Fund, VER, reported an investment return of 4.8% in the first half, up from 0.6% in the same period last year, with fixed income investments reversing their year-earlier losses.The total value of investments rose to €17.1bn at the end of June from €16.3bn at the end of December.VER’s managing director Timo Löyttyniemi said the world’s economic development had been unstable and vulnerable for some time.“Expectations are high that the US will boost the rest of the world towards an improved situation,” he said.Fixed income investments returned 3.6% in the first half, bouncing back from a 2% loss in the first half of 2013 and a 1.6% loss for the whole of 2013.Equities, meanwhile, returned 6.8%, up from 4.3% in the first half of last year.The category of ‘other investments’ returned 2.8% in the first half, compared with 1.6% in the same period in 2013.In this asset segment, private equity returns produced the best returns, benefiting from a strong stock market, while property funds were helped by the continued positive trend in the real estate markets.Allocations to the different asset classes were broadly stable at 51.8% to fixed income, 39.5% to equities and 8.6% to ‘other’ investments at the end of June, with these allocations having changed by less than 0.5 percentage points each since the end of December. Finnish earnings-related pension funds made returns on investments of 4.4% on average in the first half of this year – up from 2.3% in the same period last year – and total assets across providers rose by €3.7bn in the second quarter to stand at €169.2bn at the end of June, according to Finnish pensions alliance TELA.In an analysis of first-half figures reported by providers in the sector, TELA, which represents occupational pension providers in Finland, said that during the period the financial markets had been affected by a number of uncertainties, tentative growth and geopolitical crises.Within this context, Finnish occupational pension providers were successful with their investment strategies, TELA said.Maria Rissanen, an analyst at the alliance, said: “Equity markets in North America have risen more than European equity markets, and there is a clear difference between the expected economic growth in these two regions.”
Sweden’s seventh AP fund (AP7) has said its board decided in the first half of this year to reduce the gearing in its SEK261bn (€27.7bn) equities fund gradually to 125% from 150%.In its interim report for January to June 2015, the state pension fund said that, as part of this plan, it had trimmed the fund’s gross leverage to 139.5% by the end of June.While the normal level of leverage had been set at 150% of the fund’s capital, its board is allowed to reduce this on the chief executive’s recommendation – in situations where it is seen as appropriate to lower exposure to the stock market, for example.The pension fund said it produced a 9.8% return for savers in its balanced Såfa pension fund in the six-month period, which outperformed the average 8.3% return for competitor funds in Sweden’s premium pension system. AP7 operates as a state-owned alternative to the private investment funds in the country’s first-pillar premium pension system.Its Såfa fund is composed of AP7’s “building-block” equity and fixed income funds, with the proportions set depending on customer age profiles.The equity fund generated a 10.5% return in the first half of the year, in line with the benchmark.In absolute terms, the return was SEK24.6bn, and the fund’s total assets increased to SEK260.7bn at the end of June.AP7 said: “The positive development seen in the fund is due to the upswing on global equities markets in 2015, which was intensified by the fund’s leverage as well as the weakening of the Swedish krona.”Active management contributed positively to the result, it said, adding SEK12m, although tactical allocation reduced returns to the tune of SEK38m in the reporting period.It blamed the tactical asset allocation underperformance on the fact the fund had had a lower global equity exposure than the benchmark, adding that this had also had the effect of reducing the fund’s risk level.Meanwhile, the fixed income fund produced a 0.6% return in the period, identical to the benchmark return.The return was SEK99m, while total assets in the fund rose to SEK18.3bn.
Because the pension fund must set aside 58% of its liabilities for its pensioners, its defensive investment policy still comes at the expense of pensions accrual for its younger participants.The scheme also noted that the contract for pensions provision with Unisys was set to expire at the end of 2017.In its annual report, it said it returned 0.36% on investments, due chiefly to a 3% return on its 30% return portfolio.It lost, however, 0.63% on its matching portfolio, consisting for the most part of long-term government bonds.As of the end of June, funding at the Unisys scheme, which granted active participants an indexation of 1.4%, stood at 102.6%.Last year, the pension fund reduced its interest hedge from 70% to 60%, following its decision to introduce a dynamic cover with a range of 60-75%.It pointed out that it uses the 20-year interest rate to set its hedging level.The scheme’s board added that, following an asset-liability management study, it decided against adjusting its investment policy, “as the low funding and low interest rates complicated a proper balancing between the several investment portfolios”.Last year, the Unisys pension fund invested €20m in residential mortgages at the expense of its holdings in long-term government bonds, and replaced one-third of its US high-yield credit with similar holdings in Europe.It also increased its stake in infrastructure to 5.5% after deciding that the minimum allocation to any asset class should be at least 5%. The €453m Dutch pension fund of IT company Unisys is thinking to join one of the six general pension funds (APFs) on offer by commercial players in the market.In its annual report, the scheme’s board said to continue as an independent scheme would be “unrealistic”.It cited the pension fund’s rapidly declining number of participants – 1,280 pensioners and just 285 active members – as a chief problem.As a consequence, annual contributions represent a mere 1% of total pension assets, while administration costs per participant are no less than €529.
For 30% of pension funds, the drop would be greater than 500bps; around 18% of schemes, however, would see funding levels improve.The effect would be worse for public pension funds (a 620bps drop), as many are underfunded or being kept partly funded under a state guarantee.Complementa said it expected the group of Pensionskassen experts that annually sets a benchmark discount rate to propose a cut to 2.25% in its next session at the end of September.The 6.8% minimum conversion rate set down in current regulation for mandatory savings is widely considered too high.In the AV2020 reform proposal, a rate of 6% is under discussion, but experts have described a rate closer to 5% as being “actuarially correct”, according to Complementa.The consultancy said the alleged increase in the discount rate based on the parameters Pensionskasse are actually applying had been boosted by a 2.7% return over the first eight months of the year.In 2015, funding at the more than 380 Pensionskassen surveyed fell by 170bps.Complementa said it was also concerned that 51% of the 119 Pensionskassen taking part in a special survey said they did not yet have a systematic risk-management process.Nearly 80% of the participants, however, said they were content with the risk management they had, while 17% said they would need to improve it were they to take on more risk. Complementa’s latest risk update for Swiss pension funds has largely offset the positive news of increasing average funding at the country’s Pensionskassen.Average funding has increased year on year to more than 105%, yet the consultancy’s research shows that Pensionskassen “have only partly adjusted their valuation parameters to the low-interest-rate environment and increasing life expectancy”.For its latest risk analysis, Complementa applied harmonised parameters based on an average discount rate (technischer Zins) of 2.25% and a conversion rate of 5.1%.According to these calculations, the average funding level would then drop by 480 basis points.
MiFID II will accentuate every trend affecting the European asset management industry today, according to Moody’s.The credit ratings agency said the new EU financial legislation would accelerate a move to cheaper passive funds, sharpen competition and drive consolidation.It could also lead to more regulation, as a result of detailed costs and other data becoming visible for the first time.Depending on their asset allocation and responses to ongoing pressures, European asset managers’ effective fee rates could fall 10%-15% over the next three years as a result of cost disclosure requirements under MiFID II, according to Moody’s. MiFID II was also likely to accentuate a trend for asset managers to shift from offering traditional benchmark-driven funds to offering outcome-oriented solutions that aimed to meet investors’ financial goals, the agency said.Managers were already on this path in a response to scepticism about the value of active management, said Moody’s, but new MiFID II product governance and product suitability rules could push them further in this direction.Coming on top of fee pressure, the cost of complying with MiFID II was likely to lead to consolidation among smaller asset managers because they lacked the scale to absorb the extra costs, according to Moody’s.It cited an estimate from consulting firm Opimas that the 15 largest asset managers spent an average of €10.3m to implement MiFID II, and that maintenance costs will amount to around €4.5m a year for the next five years.Moody’s estimated that managers’ costs could increase by between 0.5% and 5%, taking into account compliance, disclosure, budgeting, audit requirements and investment research costs. Overall, it meant that MiFID II was “credit negative” for the asset management industry.“The introduction of MiFID II will put pressure on asset managers’ profits by lowering their effective fee rate and increasing their costs,” said Marina Cremonese, senior analyst at Moody’s.“However, cost saving initiatives, new investment solutions and mergers and acquisitions will likely offset some of the negative effects, limiting their credit impact.”Cremonese has also said MiFID II would probably encourage greater use of exchange-traded funds by institutional investors because they would be able to know full trading volumes and liquidity levels.Commenting on MiFID II a day before its entry into force, fellow credit ratings agency Standard & Poor’s (S&P) said it saw the regulatory regime as “somewhat negative” for asset managers. It was “generally negative” for brokers and all but the largest investment banks, “slightly positive” for exchanges and other trading venue operators, and “manageable” for most other banks.With regard to asset managers, S&P said it did not foresee market dynamics changing dramatically in the near term, but that it could be a catalyst for consolidation among active managers given the pressures they were already under.
A survey by financial newspaper FD suggested that no more than 29 sponsors had committed themselves to plugging a funding gap via a guarantee.Key in the new pension plan of the Ikea scheme is the replacement of a cost-covering contribution with a premium that is cushioned over a three-year period, but aimed at achieving an annual funding of 105%.This is the minimum required level to avoid rights cuts: under the financial assessment framework (FTK), Dutch pension funds have to apply a discount if their funding is short of 105% for five consecutive years.The scheme said the new contribution model was also lower and less volatile.STIP added that the employer was required to fill in the shortfall if the scheme was unable to prevent or postpone discounts in benefits and accrued pension rights in any other way.At September-end, the coverage ratio of Ikea’s pension fund stood at 116.1%.As the FTK allows pension funds to start compensating for inflation in part when their funding level hits 110%, STIP has granted its 6,940 workers a 0.11% inflation-linked payment based on the salary index in January this year.Deferred members and pensioners, whose indexation follows the consumer index, received an inflation compensation of 0.09%. STIP, the €408m Dutch pension fund of home furnishing store Ikea, has introduced a new pension plan including an employer’s obligation to plug any funding gap.It said the new arrangements followed an agreement between the sponsor and trade unions about financing the pensions of its 15,000 members.The provision of guarantees on funding levels has become rare in the Netherlands.Many have abolished the guarantee – made expensive by low interest rates in the wake of the financial crisis – and have instead paid a one-off contribution as risks shifted to their schemes’ members.
The pension fund said in its annual results announcement that its allocation to foreign securities had expanded by 2 percentage points during 2018, to end the year at 35% of total assets.Bond funds also grew significantly, with this allocation rising to ISK92.9bn or 13% of assets, from around 12% the year before, it said. Two of Iceland’s largest pension funds recorded positive investment performance in 2018 despite weak markets in the fourth quarter.The Pension Fund of Commerce (Lífeyrissjóður verzlunarmanna), posted a 4.3% return for 2018, with assets reaching ISK713bn (€5.3bn) – an increase of ISK48bn. In net real terms, the return was 1%, it said.The result follows a string of reports from other major European pension funds, the majority of which posted losses in 2018 after equity markets dropped sharply in the fourth quarter. Source: Marcel PrueskeThe iconic Hallgrímskirkja in Reykjavik, IcelandThe pension fund said its 10-year average return was 4.5%, with the 20-year average at 3.9%.The fund is Iceland’s second largest after Lífeyrissjóður starfsmanna ríkisins (LSR), the Pension Fund for State Employees.Gildi gains on fixed income allocationThe country’s third-largest pension fund Gildi reported a 5.8% return on its investments for 2018 – a result it says was supported particularly by the performance of domestic bonds.According to its full-year financial figures, the return was 2.4% in net real terms.Árni Guðmundsson, Gildi’s chief executive said: “In my opinion, this performance is acceptable, but market conditions were difficult in many ways in 2018.“However, pension funds are long-term investors, and in this context it can be pointed out that net real returns over the past 10 years are 3.9%, and 3.7% for the last 20 years”.Gildi said domestic bonds produced good returns last year, as did unlisted shares, both domestic and foreign. Returns on other asset classes were weaker.The fund’s net assets rose to ISK561.2bn at the end of 2018, up by ISK43.9bn from the year before.Transparency improvements for Icelandic funds The leaders of three other Icelandic pension funds have hailed transparency improvements in the sector – but emphasised that there was still further to go.In a joint article published on Icelandic news site Kjarninn, the trio – Frjalsi CEO Arnaldur Loftsson, EFÍA and LSBÍ boss Snædís Ögn Flosadóttir, and Lífeyrissjóður Rangæinga CEO Þröstur Sigurðsson, discussed society’s demands for increased access to information about pension fund activities.They said the funds, supervisory bodies and the Icelandic Pension Funds Association had all done well in disseminating information.They welcomed the fact that pension scheme members had become more interested in pension funds’ activity, and said they hoped this would increase even further.“Pension funds, as well as their supervisory bodies, have strived to provide detailed information in recent years and are constantly being added,” they said. “However, it is clear that it is always possible to do better and improve presentation.”
While major Swedish pension providers Skandia and Alecta fall on different sides of the EU-led solvency regulation frameworks still taking their final form in the domestic rule book, both express dissatisfaction with the continued lack of clarity on pensions law.On 13 November, the Act on Occupational Pensions Companies Sweden’s implementation of the EU’s IORP II directive which is also entitled “A new regulation for occupational pension companies” – was passed by parliament.But at the same time, the legislators made a strong request for urgent adjustments in four areas of the legislation.They demanded more detail regarding solvency requirements; clarification of certain issues around information to customers through a third party, in cases of outsourcing; that occupational pensions for the self-employed should be included in the legislation, and that companies solely offering added insurance related to the occupational pension offered by another pension company or IORP should themselves be allowed to transform into an IORP. Two days later, the Ministry of Finance published a memorandum clarifying some questions about how occupational pension companies will be affected by the new laws affecting pension providers.In this, the government addressed several different issues and proposed some amendments to laws, including the Insurance Operations Act, which is partly based on Solvency II, and the Act on Occupational Pensions Companies.These changes are mainly aimed at clarifying the implementation of the IORP II and Solvency II directives, and there are some proposals for minor adjustments in the association rules for insurance companies and occupational pension companies.However, the memorandum was not prompted by the demands from parliament, and the ministry said these issues were being addressed separately.Mattias Munter, head of public affairs at insurance company and pension provider Skandia, said the company was not really happy with the way this legislation was progressing for pension providers.“It is not in anyone’s interest that there is still quite a bit of uncertainty as to the details of this legislation,” he told IPE.“The smaller pension funds that abide under a legislation that is already annulled need the clarification most urgently, but for ourselves at Skandia there are also big strategic decisions to be made and we need to see the whole picture to be able to make those,” he said.Munter said the company expected that virtually every aspect of the IORP II law would end up being softened.“This is due to late and extensive lobbying from union and employers’ associations and their own soon to be occupational pension companies,” he said.Asked for its opinion about the progress of the legislation, pension provider Alecta’s chief executive officer Magnus Billing attributed the delay to an irony at the heart of efforts to create the new law.“The new act, ‘A new regulation for occupational pension companies’ should make it self-evident for Alecta to transform itself, since occupational pensions are what we do,” Billing told IPE.“But that is not actually the case, there is still an ‘if’ for us in all of this — because all the details are not yet known — when there should simply be a ‘when’,” he said.Billing said a fundamental reason why this ‘if’ was still there, was that the ambition to harmonise Solvency II and the Swedish implementation law for IORP II had gone very far.“And along the road, one of the main purposes of IORP II has to some extent been lost – namely to establish a regulatory framework specifically for occupational pension activities,” he said.Managing imbalances was an important focus of EU legislative work, he said, but the parties in the Swedish labour market had already created a balance in the collectively-agreed occupational pension that made sure pensioners were well protected in Sweden.Deadlines for IORP II implementation in Sweden have come and gone over the last two years, and the latest date of 15 December now seems certain to be missed. Last week, one member of parliament was quoted in the Swedish media as saying the changes could be in effect by May 2020 according to the current time frame.