Month: September 2020
With a mix of philosophy, science, finance and poetry, the Push Your Parents clarion call is less a cacophony, more a fine-tuned approach to ideal investment strategy. Critical to this is systemic risk stalking pension funds.Raj Thamotheram, president of the Network for Sustainable Financial Markets and co-founder of the Institutional Investor Group on Climate Change, says: “Changes within the corporate sector often come about through consumer pressure. Change could happen in the same way with investors, and investors have a huge influence over companies. The obsession with the share price can destroy companies, and that is the system we have at the moment.”But who’s in charge of bringing about change? If climate change were caused by gay sex or the practice of eating kittens, millions of protestors would be massing the streets, according to Daniel Gilbert, a social psychologist at Harvard, and quoted by Dominic Rosser, a research fellow at the Oxford Martin School’s programme on human rights for future generations. The human brain and the problem-solving skills acquired over the past 100 years, he says, equip us very badly to deal with climate change.“Something must be done,” he says. “But the question is – by whom? Governments can’t do, won’t do and don’t do everything. I am therefore called upon to act. If you do not make governments act, they won’t act, and so one goal is to embed the push for government action in a shared mindset based on private action.”Are pension funds on a proverbial wild goose-chase? And how much more exploration for, and investment in, fossil fuel can the world take? Not much, according to Myles Allen, professor of Geosystem Science, leader of Oxford University’s ECI climate-change research programme and lead author on the Inter-governmental Panel on Climate Change (IPCC).“Pension funds investing in fossil fuel exploration could be wasting their money if it turns out we can’t afford to burn the fuels they find,” he says. “Known fossil carbon reserves are already more than adequate to cause substantial, potentially dangerous, climate change. Why are we pouring billions into hunting for more?”The issue of responsible investment and sustainability is one the group believes should apply to all pension funds. Targeting specific pension funds, and so a divide-and-rule tactic, would not work since the moment one fund is persuaded to relinquish its place in the fossil fuel sector, another will simply take its place and carry on as normal. The army of Mum and Dad could perhaps assume as a de facto general the Price of Wales, who during the last NAPF annual conference suggested “a case for ensuring [pension funds’] portfolios are resilient in the long term…by incorporating sustainability into [their] mainstream strategy rather than having it sit in a subordinate silo”.The subordinate silo may sooner or later be elevated to a higher plane, if and when the Push Your Parent campaign succeeds. The launch was met with enthusiasm by those in attendance, described by one as a “fantastic campaign with clear demands and a lot of energy behind it, with a good balance between positive and protest action”.Thamotheram admits that the campaign’s ‘asks’ are not entirely doable. However, they “would actually improve the standards of enterprise risk and business continuity management in the UK pension sector. The markets are already speaking, and we can see valuations dropping dramatically. Analysts are downgrading coal companies – they’re factoring in the Black Swan, future price risk. You cannot stock-pick your way out of climate change, and that is why we have to engage ourselves with systemic solutions.”The Push Your Parents campaign has a huge task on its hands. Systemic change is near impossible to bring about quickly. Detractors and sceptics will continue to argue against climate change. Investors will continue to chase dividends, including by – most likely – fracking about with the next big source of energy.For Push Your Parents, pension funds are the key to their and future generations’ survival. They’re fed-up with the risk that Mum and Dad’s pensions will mess up their future. So be warned, an email from Mum and Dad will be winding its way to a pension scheme near you. Students are fed-up with the risk that Mum and Dad’s pensions will mess up their future. Now, they’re doing something about it, Charlotte Adlung reports.The European Commission has ditched its framework aimed at setting binding and mandatory targets for achieving renewable energy across Europe. The major green lobbies are aghast at the commissioners, with Friends of the Earth describing the EU climate change commissioner as “burned out”. A good pun, if it’s intended. The climate change debate is most audible in the political sphere, with policymakers being cajoled and/or vilified when it comes to this issue. Closer to home, a group of Oxford University students have set up a campaign group: Push Your Parents.It was in the Turf Tavern public house that Push Your Parent came into being. Theirs is a new strategy – challenge pension funds to face up to their responsibility as powerful investors. The group is calling for increased shareholder activism, and its frontline is manned by Mum and Dad.The objective is to protect pension fund members’ retirement savings from the risks posed by climate change. Environmental, social and governance issues are at the heart of their five-pronged campaign. It calls on pension funds to assess the risks of climate change for their investments and the value of the pension and reduce their exposure to the “carbon bubble” by getting companies they are invested in to put an end to new or risky fossil fuel projects. It asks pension funds to increase investments in low-carbon assets, stop companies they are invested in from lobbying to block government action on climate change and, finally, that pension funds “work with the Asset Owners Disclosure Project to improve their performance on climate change-related risks and opportunities”. Repudiation by pension funds of investment in ‘risky’ fossil fuel projects such as tar sands and coal and an endorsement of low-carbon assets such as renewable energy and alternative propulsion technology are crucial ‘asks’ for their campaign.
The fund asks that capital protection be a priority, with performance secondary.The manager must also offer daily liquidity, as well as have a minimum track record of five years.Applicants should submit performance data, gross of fees, to the end of 2013.The deadline for submissions is 28 February.In other news, The Church of England and CCLA, the investment manager for charities, faith organisations and local authorities, have appointed MSCI ESG Research to provide global ethical screening.MSCI ESG Research will also provide ESG ratings and other services after the parties subscribed to a range of products including screening and impact monitoring.The Church’s investing arm and CCLA will also use MSCI’s ratings, which support the funds’ integration of ESG factors in its engagement and portfolio analysis.MSCI’s screening will exclude tobacco, adult entertainment, gambling, defence and weapons, with a bespoke service to screen out high-interest lending organisations.It will also identify companies involved in major controversies or ones that breach the UN Global Compact standards.Lastly, Leonard Cheshire Disability, a charity, has appointed Punter Southall to organise its pension arrangements for its 7,500 employees.The charity, which supports disabled people in the UK and abroad, will be served by Punter Southall’s DC consultant Jon Webster and actuary Mike Richardson. An undisclosed European industry-wide pension fund has tendered a $100m (€74m) cash mandate using IPE-Quest.Under search QN1386, the fund said it required its cash allocation to be euro denominated.Interested parties should have a minimum of £1bn (€1.2bn) in assets under management for the mandate and $10bn for the firm itself.The fund must be AAA/AA rated and “very risk averse”.
“We are not going to invest on a pro-rata basis relative to the scale of the economic impact.”Murphy said there was likely an argument for splitting the portfolio between projects with a high economic impact and those with a lower but still noticeable benefit to the economy.“Something like social housing probably falls into the low economic impact bucket, and what we are trying to make sure is that, over the lifetime of the fund, 75-80% of our investments have a high economic impact, but 20-25% have a low economic impact,” he said. The Irish government has pledged a social housing construction programme for the coming years and is hoping to attract capital from the pensions sector, and ISIF, to the market.Murphy also explained why ISIF would not have a strict asset allocation for any one asset class.“Particularly when you have state backing, there’d be an absolute expectation that it would be achieved in a certain period of time,” he said.He added that the challenge in Ireland was deal size, as there were not many large transactions taking place in the market.“We are hoping there is going to be another round of infrastructure investments announced very soon, and potentially some of the really large projects will come back on the horizon,” he said.Murphy noted that the Dublin underground, known as the DART Underground and first proposed in the 1970s, was once again being discussed, offering the potential for a large-scale project.Eugene O’Callaghan, head of investments at the NPRF, has previously said the ISIF would be “very interested” in small-scale public-private partnerships, while the government has argued it is essential it act as an alternative source of project finance.O’Callaghan previously spoke with IPE about the ISIF’s challenge in having a dual bottom line of economic growth and financial returns.For more about the ISIF’s dual investment objective, see IPE’s interview with Eugene O’Callaghan Ireland’s sovereign wealth fund would be open to investing in social housing but will be careful not to allocate too much of its €7bn capital to low economic impact projects, according to its head of infrastructure and credit.Donal Murphy, previously head of project finance at Bank of Ireland and part of an in-house team that has grown from 13 to 35, said the National Pensions Reserve Fund (NPRF) was initially examining domestic investment propositions on the binary basis of providing an economic impact, or lacking one.However, the NPRF, which will soon become a sovereign development fund and rebranded the Ireland Strategic Investment Fund (ISIF), will assess impact based around the amount of construction involved, according to Murphy.He told delegates at an infrastructure conference organised by Stirling Capital: “Once there is a construction element to it, a reasonable construction element to it, there is deemed to be a positive economic impact, and, therefore, [it] will fall in our remit.”
The Thames Tideway Tunnel is a £4.2bn (€5.9bn) London infrastructure project funded by a group including Dalmore Capital and insurers Allianz and Swiss Life.PiP investors are collaborating with a £370m equity contribution. The NIC, the arms-length government agency announced by chancellor George Osborne in October last year, can play “a vital role” in setting long-term priorities for infrastructure investment in the UK, said the PiP, but it will be rendered “obsolete and ineffectual if its recommendations consistently fail to be acted upon”.Overall, it stressed the importance of predictability of long-term returns to pension schemes and said that, for core infrastructure, this mainly had to do with the political, legal and regulatory regimes the assets operate under, as well as in relation to subsidies and any usage revenues.Having noted that infrastructure projects are lengthy ones vulnerable to short-term political risk, PiP said: “It is critical decisions on the UK’s strategic infrastructure needs be separated from short-term, partisan, political interference and that, once the country’s needs are established, there is confidence implementation decisions will be taken within a clearly defined period – not subject to open-ended prevarication”.More specifically, it said it should be mandatory for the government to put before Parliament recommendations from the NIC.“Allowing the government discretion over whether to respond to NIC studies risks introducing political expediency, undermining the perceived independence of the NIC and ultimately rendering it ineffectual,” it said.The Treasury’s consultation proposed that the government would have discretion to do so.The PiP agreed with most other questions in the consultation but opposed the proposal that the remit of the NIC should be set by a letter from the chancellor on behalf of the government.“Allowing the chancellor of the day to set the remit for the NIC risks the introduction of politically driven short termism into the supposed 10-30 year focus of the commission,” said the PiP.“It risks the remit’s being dependent on the particular views of the individuals who happen to hold the office of chancellor at any particular time.”It also disagreed with the NIC’s “working assumption … to only review those areas of infrastructure that are the responsibility of the UK government” and that it should be free to review projects in devolved regions.The responsible authorities in these regions would not, however, be obliged to accept or act on the NIC’s findings, said the PiP.The PiP launched its first investment fund in 2014 and its second in February 2015 – both are externally managed.It launched its first internally managed fund this month, a £1bn direct infrastructure fund.,WebsitesWe are not responsible for the content of external sitesLink to National Infrastructure Commission consultation Decisions on strategic infrastructure need to be free from “short-term partisan, political interference” to unlock investment from UK pension schemes, said the Pensions Infrastructure Platform (PiP) in response to a consultation on the National Infrastructure Commission (NIC) that closed yesterday.The infrastructure venture for pension schemes set out the key conditions that needed to be met to funnel investment capital from UK pension schemes into infrastructure projects in the country:A clear pipeline of future projectsProjects structured to reduce overall risk consistent with producing real returns of 2-5% and to minimise any initial periods of zero yieldInflation-linked return streams for debt and equity financingClarity over long-term regulatory and subsidy regimes It held up the Thames Tideway Tunnel (TTT) as a good example of how multi-year construction projects could be structured to appeal to pension schemes, noting that the project “delivers a yield from day one” and includes contractual risk sharing mechanisms.
The pension funds of three financial sector firms, including the scheme of KAS Bank, recently put plans to launch a joint APF on hold after they concluded that insurers’ APFs were likely to charge much less.Although the APF was designed as a solution for pension funds seeking to cut costs and increase board expertise, applications for a license to operate an APF have been almost exclusively submitted by insurers.Insurers Aegon, ASR, Centraal Beheer, Delta Lloyd and Nationale Nederlanden (NN) have all unveiled plans for APFs.Aegon, Centraal Beheer and NN said their APF would co-operate with their respective providers: TKP, Syntrus Achmea and AZL.Last month, PGGM, the €182bn asset manager and pensions provider for the healthcare scheme PFZW, also submitted an application.On its website, it said it intended to target small company pension funds.The Dutch financial regulator is expected to issue the first APF licences within a few weeks. Progress and Forward, Unilever’s company pension funds in the Netherlands, have said they will join the company’s new general pension fund (APF) from 1 July.According to a spokeswoman, the APF’s main purpose is to reduce board costs at the €6bn defined benefit scheme Progress, which closed to new participants at the end of 2014, and its new collective defined contribution plan Forward.She said it was “unlikely” the Unilever APF would also provide pension arrangements for other employers.To date, the Unilever schemes are the only pension funds to endeavour to set up an APF in the Netherlands.
The Norwegian government has ruled out allowing either of its sovereign funds to invest in unlisted infrastructure and ignored calls from the Government Pension Fund Norway (GPFN) to broaden its mandate to include real estate.Folketrygdfondet, which manages the NOK198bn (€21.4bn) Government Pension Fund Norway (GPFN), saw its calls to diversify the fund’s portfolio ignored by the Norwegian Ministry of Finance, which said any diversification benefits stemming from a move into real assets could be achieved “by other, simpler means”.However, the government gave the larger Government Pension Fund Global (GPFG) permission to expand its unlisted real estate allocation to 7% of assets, up from 5%.In its annual report to Parliament on the management of both sovereign funds – the GPFN and the substantially larger globally focused counterpart – the Ministry said the domestic infrastructure market was “small and underdeveloped”. “Any investments in infrastructure by the GPFN will most likely result from the sale of such assets by the central or local government,” the report said.“Such a change of ownership will leave the state’s overall risk level unchanged, and usually generate significant transaction costs.”The fund, which returned 7% last year, is currently limited to investing in equity and fixed income. Of its total portfolio, 85% must be invested in Norway, with the remainder able to be invested in neighbouring Scandinavian countries. With respect to the NOK 7.5trn GPFG, the Ministry said it was “uncertain whether unlisted infrastructure improved risk diversification or raised expected returns”, arguing that only 0.5% of the global investable market was currently unlisted infrastructure.Finance minister Siv Jensen said: “A number of important factors indicate that investments in unlisted infrastructure should not be permitted.“Such investments are exposed to high regulatory or political risk. Conflicts with the authorities of other countries regarding the regulation of transport, energy supply and other important public goods will generally be difficult to handle and entail reputational risk for the fund.”She added: “The government considers that a transparent, politically endorsed state fund like the GPFG is less suited to bear this type of risk than other investors. Following an overall assessment, the Ministry is not prepared to permit the GPFG to invest in unlisted infrastructure at this stage.Jensen said it would be useful to gain greater experience with unlisted real estate before considering other unlisted asset classes – likely a reference to the now-rejected infrastructure allocation, or the exposure to private equity long desired by Norges Bank Investment Management (NBIM).The Ministry’s decision to grow the unlisted real estate allocation comes more than a year after the government commissioned a review, led by London Business School’s Elroy Dimson, on the current 5% cap on real estate.Real estate performance will also be benchmarked against a reference portfolio of equities and bonds.This would move the GPFG in line with some other large institutional investors that use a similar ‘opportunity cost model’, including the Canada Pension Plan Investment Board.“The investments will be evaluated against a broadly composed index that can, in principle, be followed closely at low cost,” the Ministry said in a statement.The new approach should give NBIM more flexibility when it comes to deciding on new real estate investments.But the organisation will need to ensure real estate investments stay below the 7% limit to avoid any forced selling should the GPFG’s listed investments suffer significant falls in their value.The decision to increase the real estate exposure comes at a time when the government awaits a review of the GPFG’s equity allocation, due in October, which could also see an increase in the equity allocation beyond its current 60%.
The US Federal Reserve (Fed) is expected to delay its next interest rate hike following Donald Trump’s victory in the presidential election, according to asset managers.Trump’s scathing remarks about Fed chair Janet Yellen earlier in his campaign have caused some commentators to speculate the membership of the Federal Open Markets Committee – which sets monetary policy – may change in the near future.Dominic Rossi, global CIO for equities at Fidelity International, said the probability of a December rate increase “has fallen sharply” following today’s shock result.“The dollar, which has been trending higher in anticipation [of a Hillary Clinton victory], has consequently reversed,” he added. “Both were threats to the bull market, and these have now been postponed. Monetary policy will remain accommodative.”Ian Kernohan, economist at Royal London, agreed the Fed might delay its rate hike.He added: “Trump’s fiscal stimulus plan would be supportive for US economic growth.“However, with trend growth lower thanks to a productivity shortfall and structural demographic pressures, it is difficult to see the US economy growing much more rapidly without running into overheating inflation and a more hawkish Fed.”However, not all commentators believed December was off the table.Mark Dowding, co-head of investment-grade debt at BlueBay Asset Management, argued that the US economy “retains reasonable momentum and, … if US asset markets stabilise, the Federal Reserve remains likely to raise rates in December”.In the run-up to the election, Trump attacked the Federal Reserve and Yellen in particular for being “political” and bowing to pressure from president Barack Obama.In an interview with CNBC in September, Trump said: “[The interest rate] is staying at zero because [Yellen] is obviously political, and she’s doing what Obama wants her to do …. They’ll keep them down even longer … because they want to keep the market up so Obama goes out and the new person that becomes president, let him or her raise interest rates and watch what happens.”Stefan Kreuzkamp, CIO at Deutsche Asset Management, warned that this rhetoric could mean “closer congressional oversight” of the Fed, which could limit its ability to act in the event of another economic downturn.David Lloyd, head of institutional fixed-income portfolio management at M&G Investments, added: “Much of what Trump has said suggests the balance of risks is towards a more hawkish Fed. “In the short term,” he said, “the market will obsess over whether Trump’s rhetoric softens somewhat – ie [he tries] to forge a constructive working relationship with Yellen. If he sticks with his campaign tone, the rates market could get quite lively.”Outside of the US, Matthew Beesley, head of global equities at Henderson, said Europe could see “modest fiscal expansion with ECB-related stimulus in place to counter the short-term impacts of a slower US economy”.However, investor attention is likely to switch to forthcoming elections in France and Germany and a constitutional referendum in Italy, he said.“What price some further anti-establishment success and with it heightened risks to the already fragile growth outlook for Continental Europe?” he asked.BlueBay’s Dowding added: “We would caution against jumping to hasty conclusions regarding the European Central Bank or upcoming European elections in France, Germany or Italy in the wake of this result.”
While three-quarters of respondents said they expected double-digit annual returns from private equity, investors expect broader investment portfolios to struggle.“One-third of LPs working for public pension plans and insurance companies,” Coller Capital said, “believe their organisations will miss their overall investment target returns in the next 3-5 years, unless there are significant changes in their economic environment or operating models.”A so-called ‘hard Brexit’, involving “significant restrictions” to the UK’s access to the European single market, was chief among investors’ concerns.Two-thirds of investors said this would have a negative impact on the European Union, while three-quarters said it would damage the UK.More than one-third (37%) said returns from European private equity holdings would suffer.Coller Capital also reported growing interest in private equity real estate and infrastructure investments, while 40% of respondents said they were planning to increase internal resources to focus on direct private equity and co-investments.Hedge fund allocations are likely to suffer as portfolios of unlisted assets grow, Coller also found.Nearly 40% of LPs said they would “reduce or stop hedge fund investing in the next 3-5 years”, and one-quarter will begin this process in the next 12 months. Private equity investors expect annual returns of 11% or more from the asset class over the next five years, according to a survey by Coller Capital.Almost half of the 110 limited partners (LPs) questioned plan to grow their target allocations in the next 12 months, Coller reported.Jeremy Coller, CIO at Coller Capital, said: “Faced with ever-growing liabilities, high levels of volatility and a low-return world, many insurers and pension plans are finding it hard to make ends meet.“They do have one great advantage, however – long-term investment horizons. Making full use of the illiquidity premium offered by alternative investments is one good way of closing the gap.”
The researchers found that implementation costs per participant varied widely, even at pension funds of equal scale. In addition, they found that the smaller the pension schemes were, the bigger the cost differences were.Administration costs at the smallest schemes averaged €575 per participant, against €50 at the largest (sector) pension funds.As costs at the smaller pensions funds ranged from a couple of hundreds of euros to €1,000, the study concluded that there was much scope for improvement.According to the researchers, costs at occupational pension funds were 53% higher than at company schemes, “as they have to cash in contributions from all individual participants”.They also concluded that pension funds with defined contribution arrangements incurred 12% less costs than schemes with defined benefit plans.In contrast with the reporting recommendation of the Pensions Federation, Van der Lecq, Bikker, and Alserda also included deferred members in their calculations.As a result, the costs they found were significantly lower than posted in pension funds’ annual reports.Earlier surveys have suggested that asset management offers less scope for cost reduction through scale and that asset management costs are six times higher than administration costs.One of the causes is that large pension funds are often invested in more expensive asset classes, such as infrastructure and private equity. Dutch industry-wide pension funds incur 40% lower costs when compared with company schemes, according to a survey commissioned by supervisor De Nederlandsche Bank (DNB).The survey, conducted by Fieke van der Lecq, Gosse Alserda, and Jaap Bikker, attributed the difference to the usually more complex arrangements of individual company schemes, as well as their higher service level.Bikker, a professer of banking and financial regulation at the School of Economics at Utrecht University, told IPE sister publication Pensioen Pro that DNB agreed that industry-wide schemes usually have simpler arrangements and were less likely to outsource board support.He added that the cost differences had been corrected for scale.
The €10bn pension fund of Dutch telecoms giant KPN said it would offer its participants the option of variable benefits at retirement.The move will allow retirees to avoid having their full pension rights converted into annuities, which have dropped in value in recent years due to low interest rates.In its annual report, the KPN scheme said participants with defined contribution (DC) arrangements would be able to choose between traditional fixed benefits from an annuity or payments that could vary over time.The choice was made possible by new legislation (Wet Verbeterde Premieregelingen) introduced in September 2016 that allowed for continued investment of part of a members’ accrued pension assets after retirement. KPN is one of a small number of schemes to introduce this option of variable benefits.Many pension funds, including the Pensioenfonds PostNL and BpfBOUW, have said they won’t introduce variable pension payments.Under the new legislation, participants in a DC plan have the right to shop around when their pension fund merely offers a single benefit option, which is almost always a fixed payment.As a consequence of few pension funds taking up the new rules, participants who want to continue investing have to turn to insurers, including Aegon, NN, Delta Lloyd and Allianz, which offer variable benefit arrangements.The KPN scheme said its decision was triggered by 8,000 deferred participants of the former pension fund of ICT firm Getronics – taken over by KPN in 2007 – who joined the Pensioenfonds KPN last year.At the Getronics scheme, which liquidated last year, many participants had accrued pension rights under DC arrangements.