The survey noted that the low-rate environment had led to “constrained” institutions – classed as those constructing cash-generating investment strategies such as pension funds – re-assessing the level of risk in individual portfolios.“This open-mindedness among investors may well be necessary to meet performance objectives in this loose monetary policy environment,” the survey said.“But the recent shift in risk tolerance is all but certain to negatively affect fund performance if rates rise quickly and unexpectedly, or if investors are ill prepared for managing the dynamics of interest rates as they return to normalcy.”Of the 391 survey respondents, two-thirds said they saw an abnormal price distortion in fixed income markets developing over the last five years as a result of central bank intervention.A further one-third said foreign exchange markets had been similarly affected, and 45% believed equity markets had been distorted.The US Federal Reserve was singled out for its role by a number of respondents.“Large institutional investors interviewed for this report pointed to multiple examples of emerging market economies, and even Japan, that have been negatively affected by the easy liquidity polices of the Fed and the coming tapering of that liquidity,” the survey said.AGI chief executive Elizabeth Corley cited the impact of the looser monetary policy initiated in the wake of the crisis as a concern.“Five years on, we find that, despite sovereign debt [being] at historic levels, growth remains anaemic, and that what was envisaged as first aid has become an enduring support to keep growth afloat,” she said.“As we journey towards a world with less monetary stimulus, the question is, are we facing a bumpy landing or will policymakers be skilful enough to avoid unintended consequences?” Pension funds’ increased risk tolerance is “all but certain” to impact fund returns negatively, as some are ill-prepared for the problems posed by increasing interest rates, Allianz Global Investors (AGI) has predicted.Publishing its annual RiskMonitor – for the first time surveying investors globally – the German asset manager said its nearly 400 respondents were concerned about price bubbles developing in fixed income.Equal numbers of respondents, or 51%, were concerned about the bubble materialising in high-yield corporate debt and developed market sovereign bonds, and 44% also perceived emerging market property as a risky proposition.Developed market real estate was only considered overpriced and at risk of an asset bubble by 24% of respondents, ahead of only commodities, which 23% identified of being at risk due to central banks’ expansionist monetary policy.
This risked even higher costs, she said, as the audit would be difficult and time consuming.“The timing is wrong, too,” Segars said. “This work will hit master trusts just as they are hitting the peak demand from employers because of automatic enrolment.”The ICAEW and the Pensions Regulator should reconsider implementation deadlines, along with the length and number of control objectives, she said. “We believe a shorter framework targeted at the key issues would be more efficient and could be built upon later,” Segars said.Under the draft framework, master trusts are expected to get independent assurance from a chartered accountant every year.It focuses on six areas – main characteristics of scheme design, governance, the people accountable for the scheme, ongoing governance and monitoring, administration and communication to members.The framework includes a number of ‘control objectives’, based on many of the regulator’s DC principles and quality features.The NAPF said the most important thing was to encourage good master trusts and make sure action was taken against poorly run ones.The voluntary audit framework could create extra burdens without solving the underlying problem of poor regulation, Segars said.“We want to see a single regulator, a greater focus on ensuring strong, independent governance and higher barriers to entry,” she said.In its formal response, the NAPF said it has set out members’ concerns over several of the 43 proposed control objectives, including their prescriptive nature and how they would keep up to date as policy changed.Members were also worried expectations or requirements were unclear in some cases, it said. The new draft quality-assurance framework for defined-contribution (DC) ‘master trust’ pensions puts too much of a burden on pension funds – and the timing is wrong, according to the National Association of Pension Funds (NAPF).The association said it had submitted its formal response to the Institute of Chartered Accountants in England and Wales’ (ICAEW) consultation on the draft framework, which the institute set out in October in conjunction with the Pensions Regulator.The NAPF said it had already welcomed the regulator and audit profession’s focus on improving the quality of master trusts, and launched its own Pension Quality Mark READY scheme to support this.But Joanne Segars, chief executive of the association, said: “Our consultation response sets out our master trust members’ concerns about the resources the assurance audits will require and the lack of auditors with pensions expertise to carry them out.”
He said: “We have previously announced that ATP Real Estate will increase its focus on this type of real estate assets in both Denmark and internationally.”The joint venture bought shares in the company that owns the property from listed Belgian group Cofinimmo.Late last year, Nielsen told IP Real Estate ATP was moving away from investments in funds and looking for greater, more direct control over its investments.“We have moved away from fund investment, simply because we find that, by investing directly, we can be in better control – in terms of where we put our money, when we buy, how we manage the investment and when we exit it,” Nielsen said, adding that pricing for core deals – such as North Galaxy – was “getting more and more aggressive”.ATP has a property allocation of DKK4.6bn (€616m), with 40% of this in direct investments in Denmark and 60% of it invested in Europe and the US.Brussels investment volumes rose last year to €2.17bn, up 7% on 2012 and at its highest level since 2008, according to Savills.Despite the city’s high vacancy (9.5%), the office sector has attracted international investors. In a joint venture with Hannover Leasing, Chinese institutional Gingko Tree paid €300m for the Belair scheme development. Danish pension fund ATP has bought a Brussels office property in a joint venture with local institution AXA Belgium.The 90/10 partnership paid €475m for the North Galaxy asset in the north of the Belgian capital, let to Belgium’s Ministry of Finance on a long-term lease.The deal is ATP’s first with AXA Real Estate, which will manage the 151,000 sqm property on behalf of the joint venture.ATP Real Estate chief executive Michael Nielsen said the core investment matched the fund’s pursuit of “long and stable cash flows from well-located properties with low risk”.
This is the second time LD has put out its equity mandates to international competitive tender, with a total of DKK14bn of mandates being awarded this time.LD said today’s portfolio managers actively drew on information from risk managers when making their daily decisions, with risk management having become a strategic discipline.They are not afraid of risk, it said, but rather do not want to be surprised by unknown risks.Anderskouw said equity managers had taken serious account of the wishes of LD customers in the tender.“This is true not only on the risk side but also in areas such as responsible investment practice,” she said.“And it is particularly good to see that equities managers have revised their own bonuses.”She added that the managers were now putting the emphasis on sustainable returns.Earlier this month, MFS Investment Management and Fisher Investments won a global equities mandate and an emerging markets mandate from LD.In March, Carnegie Asset Management and Impax Asset Management won mandates for Danish equities and environment and climate, respectively.LD manages assets of around DKK53.3bn.In other news, Nordic and Baltic banking group Nordea said it reaped a DKK3.5bn gain from selling its stake in Nordic financial payments provider Nets, as ATP’s consortium completed its DKK17bn purchase of the firm.The consortium – comprising Danish pensions giant ATP and private equity firms Advent International and Bain Capital – announced the completion of the acquisition following approval from Danish, Norwegian, Finnish and EU regulatory authorities.Nordea said it was selling its 20.7% stake in Nets Holding to the consortium, gaining DKK3.5bn.Before the completion of the deal, Nets was owned by more than 180 separate banks.ATP and its joint venture partners announced the all-cash private equity investment deal in March.John Helmsøe-Zinck, managing partner at Via Venture Partners – the management company for ATP’s IT investments and a board member of Nets – said the company would now have the financial resources and operational expertise to make the big investment necessary to make sure it remained a market leader.“We are committed to accelerating the company’s growth and enabling the company to strengthen its international position,” he said. Denmark’s Lønmodtagernes Dyrtidsfond (LD) has praised the asset management sector, saying it found a higher quality of investment work and risk management when it conducted the pension fund’s latest DKK14bn (€1.9bn) round of equities outsourcing.Bente Anderskouv, head of equities at LD, said: “There are many particularly skilled equities managers throughout the world, and the most capable have even increased the quality of their investment work over the last few years.”LD, which manages a non-contributory pension scheme for Danes, based on cost-of-living allowances for workers granted in 1980, has recently awarded four equity mandates as part of an exercise to renew the outsourcing of most of its asset management.Anderskouv has spent more than a year working first on establishing LD’s equity strategy and then on the selection of the equity managers the pension fund would work with in future, LD said.
In a statement, the BVK said financing via an institutional investor offered municipalities the chance to transfer debt from vehicles with short maturity to those with a longer maturity, thus diversifying the traditionally short-term debt via banks.For Versorgungswerke, these instruments also offer the possibility of diversifying fixed income portfolios, it said.The transaction was led by SEB AG, which not only operates as an asset manager in Germany but is also one of the main sources of municipal debt financing.In the summer of 2014, it was confirmed that the city of Offenbach in the province of Hessen had received €140m through a debt vehicle issued by an unnamed Southern German Versorgungswerk, and that the deal had been brokered by the consultancy Kandler Gruppe.Offenbach’s mayor had noted that it had not been possible for the city to receive financing with a 10-year maturity via any bank. Germany’s €58.7bn Bayerische Versorgungskammer (BVK) has set up a debt vehicle for an unnamed “large city” in the province of North Rhine-Westphalia.The new eight-figure debt instrument, a “Schuldscheindarlehen”, has a maturity of 10 years, the BVK told IPE.The Versorgungswerk declined to comment on the size of the deal or the share of these instruments in the portfolio.The BVK confirmed it had done “several” similar deals in recent years across Germany, “mainly with large municipalities”, given the size of its own portfolio.
The Lancashire County Pension Fund has made a number of appointments for a transition management framework agreement, as it undergoes a significant review of its investment arrangements over the next four years.The £5.3bn (€7.3bn) local government pension scheme is in the process of creating an “asset-liability partnership” with the £4.8bn London Pensions Fund Authority (LPFA) and launched its tender for transition managers for “significant” asset allocation changes last year.Appointed firms include BlackRock Advisors, Citigroup, Goldman Sachs, Legal & General Investment Management, Macquarie Capital, Nomura, Northern Trust and Russell Implementation Services.The fund will now conduct a mini-competition exercise between the appointed managers as and when it requires transition services. Lancashire had also rearranged its management team in preparation for the partnership with the LPFA.In other news, the Dutch pension fund for the hospitality sector, Horeca & Catering, has appointed Northern Trust Global Investments for a €200m passive, small-cap equities mandate.The new arrangement is in addition to a 2012 mandate between the two for €200m in passive listed real estate.The €6.3bn pension fund provides benefits for around 36,000 members of the hospitality sector, and recently appointed AlpInvest to manage its €500m private equity holdings, around 5% of the fund.Elsewhere, the pension fund for the European Central Bank (ECB) in Frankfurt has appointed Deloitte to provide actuarial and funding valuations alongside actuarial advice.The contract is for approximately three years, starting in 2015 and ending with the actuary’s valuations corresponding to the year 2017.Deloitte beat four other bidders for the pension fund and will now provide valuations on both the assets and liabilities for all long-term and post-employment benefits provided by the central bank.
Nordea Life & Pension in Denmark is in the process of boosting its exposure to speculative-grade credit, or high-yield bonds, to perhaps 35% of its fixed income portfolio within the defined contribution (DC) schemes in a bid for equity-level returns but at lower risk.The Danish pensions division of Nordic banking group Nordea currently has more than 15% of its bond portfolio invested in this type of asset, and has so far sold mainly emerging markets bonds to fund the high-yield buying.Anders Schelde, CIO at Nordea Life & Pension Denmark, told IPE: “We started late autumn last year, three months ago, gradually moving into this segment.”“We’re talking about going from something that was around 10% of our fixed income portfolio to something that’s more than one-third, maybe 35%. “Most of the increased exposure will go into high yield, but we are also upping our exposure to bank loans as part of this move.”Nordea Life & Pension’s overall investment portfolio in DC schemes in Denmark is currently worth approximately DKK50bn (€6.7bn), with the fixed income portfolio holding assets of just over DKK9bn.The move into this type of credit could potentially make a significant difference to returns, Schelde agreed, but he stressed that this was not the investment team’s main scenario.“This year, we don’t think the world will fall into a big dark hole – we don’t think there will be global recession or anything,” he said. “But, on the other hand, there are some quite significant headwinds to the global economy.”In this environment, he said, the returns on equities are likely to be low, at around 5%, or maybe slightly higher on an optimistic view, but he also pointed out that there was also the potential for bad outcome in equities.“We’re looking to see where else we can get the same sort of return around 5-6% and maybe at less risk, and that’s what we feel this investment can offer,” Schelde said.“So far, we’ve been financing this mainly by selling emerging markets bonds more heavily than other things in the portfolio.”On emerging markets, Schelde was quite negative on the risk/return potential.“At least on a relative-value perspective, we feel it’s better to be in speculative-grade in developed markets than in investment grade in emerging markets,” he said.Nordea Life & Pension in Denmark is using up to five external managers to effect the bond portfolio shift.While the shift is now about halfway through implementation, Schelde said the team would continue to monitor markets and the economic situation, and could still deviate from its planned allocation in either direction.“[It depends] on where the market goes and where the economy goes, and, of course, we might change our view on things and feel that it’s an even better idea or may be a bad idea,” he said.“I would say so far it’s not been a brilliant investment because spreads have gone up, and so prices have come down, but when you do a shift of this magnitude, you can never time it, and we still believe in the investment case.”
UK master trusts will soon be subject to stricter regulation, following seemingly successful lobbying by the Pensions Regulator (TPR).Harriett Baldwin, economic secretary to the Treasury, told the House of Commons that plans for further regulation were in the works and would be published “as soon as practically possible”.Baldwin indicated the regulation had already been drafted, saying the government had considered attaching the new rules to the Bank of England and Financial Services Bill currently being scrutinised by MPs, but that it would have been “very late” in the parliamentary process to introduce further amendments.She pledged that the new rules would be included in the next appropriate bill but did not provide any concrete details of the reforms. The government’s commitment comes after months of comments from TPR on the unequal regulatory landscape facing insurance-based pension providers compared with master trusts, which include providers such as Now Pensions, the People’s Pension and schemes set up by Legal & General Investment Management and consultants Aon and Willis Towers Watson.Lesley Titcomb, TPR’s chief executive, previously said the regulator and government were in discussions about the entry requirements for master trust operators, and hinted that a currently voluntary master trust assurance framework could become mandatory.“We need to think very hard about how we prevent more master trusts coming into the market.” – Andrew Warwick-ThompsonSpeaking to IPE in late January, Andrew Warwick-Thompson, executive director for regulatory policy at TPR, noted the “regulatory asymmetry” facing providers regulated by the Financial Conduct Authority (FCA) compared with the regulation of master trusts by TPR.Asked if stricter regulation could see the master trust assurance framework become mandatory, he argued it would be a matter for the UK Parliament to decide.He added: “There is certainly a risk we perceive, and have perceived for some time, that while automatic enrolment is hugely successful in bringing new members and new contributions into the market, some of the master trusts in the market now may not be sustainable.”Warwick-Thompson also hinted that the growing number of master trust providers should be halted.“We need to think very hard about how we prevent more master trusts coming into the market, and what we do with those that struggle to reach any kind of sustainable level of business in the next year or so,” he said. Now Pensions suggested several years ago that the government should have assessed new pension providers by licensing them.According to TPR’s own figures, master trusts have been taking in more than three-quarters of members, nearly 4m, to be automatically enrolled.Steve Webb, former UK pensions minister and now director of policy at Royal London, said it was “good news” the government was considering tightening the rules around master trusts.He added: “Reports of potential conflicts of interest, poor governance and financial instability among small new master trusts are a source of grave concern.”But others were quick to caution the government against onerous new regulation. Helen Ball, head of defined contribution at law firm Sackers, welcomed the government’s acknowledgement of the role played by master trusts.“It will be interesting to see how those drafting the new legislation will strike a balance between consumer protection – which is crucial – and the practical challenges faced by master trusts of significant scale,” she added.“In an ideal world, the final rules will protect members against weak or fraudulent trusts but avoid stifling high quality and innovative arrangements.”Read more about the challenges associated with regulating the UK master trust market in the current issue of IPE
Ogeo Fund – a Belgian multi-employer, first-pillar pension fund – grew to €1.125bn in assets under management in 2015 and posted a return above the average for all Belgian occupational pension funds.The fund posted a return of 5.08% for 2015, compared with an average return of 4.48% for all Belgian workplace pension funds.It attributed its positive performance in 2015 to its real estate investment strategy.In a statement, it said: “The success of Ogeo Fund’s management model lies in its prudent approach, which prioritises ‘bricks and mortar’ rather than paper-based property investments, supported by a reinforced monitoring system and transparent governance.” Ogeo’s assets under management grew by 3.7% last year, to hit €1.125bn.It has grown year on year since it was founded, having had some €600m in assets in 2009 and last year passing the €1bn mark.As at the end of 2015, it had €620m in “overfunding”, up 8.2% on the amount of reserve capital it held in 2014.Ogeo is the fifth-largest Belgian “Organisme de Financement de Pensions” (OFP), the Belgian vehicle for occupational pension funds.This is based on 2014 rankings compiled by PensioPlus, the national pension association.Ogeo also has a second-pillar product, Ogeo Pension 2, giving its affiliated organisations the option of setting up workplace pension schemes for contractual staff and salaried employees in the private sector.Ogeo Fund has a large allocation to unlisted real estate, capped at 25% of total assets.Its property portfolio generated an average return of 5% in 2015.Stéphane Moreau, managing director at Ogeo Fund, said: “Following a turbulent year on the stock market, Ogeo Fund is pleased to have opted for the diversification of our investments and a property portfolio in ‘bricks and mortar’, which provides us with better protection against market fluctuations compared with most other Belgian pension funds.”In April 2014, the pension fund set up a SICAV, an open-ended investment company, “Ogesip Invest”, to group the listed assets of the various companies in the Ogeo scheme.Last year, it achieved a return of 3.88%, below the average for the Belgian pension fund industry.Ogeo noted that the vehicle did not invest in listed real estate and that the pension fund’s investments in private equity and direct property were housed outside the SICAV, which also has an above-average exposure to bonds.Emmanuel Lejeune, a member of the executive committee of Ogeo Fund, said the 3.88% return was in line with the risk profile assigned to the company when it was established. He added: “Ogesip Invest has shown that, by grouping together all the listed assets of the various affiliated companies of Ogeo Fund, these companies can benefit from reduced management costs, while having access to better performing and very diversified financial assets.”Some 65% of Ogeo’s total assets are invested via Ogesip Invest.
According to the PPF, schemes without sponsors “will always pose a higher risk than an otherwise identical scheme with a continuing sponsor, however weak”.The new levy – which is linked to equity market put option pricing – will cover any scheme set up between 1 January 2017 and 31 March 2018.The UK government last week published a wide-ranging discussion paper covering the defined benefit sector, prompted in part by the high-profile BHS case.One element of the paper focused on how to improve the handling of pension schemes with distressed sponsors before bankruptcy becomes imminent. The government wants to explore ways of allowing more schemes to operate independently of their sponsors to avoid pension deficits pulling companies into bankruptcy.Despite the temporary nature of the proposed levy, David Taylor, the PPF’s general counsel said in the consultation that “we do not rule out developing our approach to apply to a wider range of schemes in the future”.A small number of pension funds have successfully separated from their sponsoring employer in the past: Trafalgar House now provides third party administration services for other funds after spinning off from its engineering parent company in 2006. Photography company Kodak’s pension scheme put in place a similar arrangement, known as a “regulated apportionment agreement”, in 2012 when its parent company filed for bankruptcy in the US.BHS settlement reactionWhile TPR chief executive Lesley Titcomb called the settlement with Sir Philip Green “a strong outcome”, other industry commentators have been less positive. The regulator is seen as having settled for a lesser amount in order to avoid a court battle, according to several people.David Everett, partner at consultant LCP, pointed out that a de-risking plan had been discussed before BHS’ sale in 2015 which would have been similar to the arrangement finalised this week – and it would have cost Sir Philip much less.“The winners in all this are the PPF, which is not having to take on two underfunded schemes, and a handful of former BHS employees for whom the PPF’s compensation cap would have bitten very harshly,” Everett added.Darren Redmayne, CEO of Lincoln Pensions, a specialist in covenant advice, said: “While [the BHS settlement] may suggest a ‘third way’, whereby employers can shed their schemes without paying the full buyout liability, in practice the barriers remain high – you only have to look at the select committee investigation, regulatory process and reputational damage Philip Green has suffered, to see this isn’t a path that companies will readily choose unless they absolutely have no other option.”In future, Redmayne added, there were likely to be more sponsorless or “zombie” schemes due to more employers struggling to fund deficits.“As such, it will be for the ‘greater good’ that compromises will be struck,” he said. “These situations remain relatively rare but as the full scale of the defined-benefit deficits issue works through the system in the coming years we will likely see such settlements on a more regular basis.”Rory Murphy, chairman of the Merchant Navy Officers’ Pension Fund, said: “Everyone appears to have won to some degree in this game of high-stakes poker. Each player could have played their hand for more in this negotiation but would have risked losing more – as such, this looks like a decent result for all concerned.”Murphy also questioned the need for greater powers for TPR, which was being discussed in the government’s green paper. He said: “Given TPR with its existing powers can achieve this result, why is there a need to increase them?” The pension scheme for employees of collapsed UK high street chain BHS could be the first to pay a new levy to the Pension Protection Fund (PPF).The Pensions Regulator (TPR) this week confirmed a £363m settlement with Sir Philip Green, whose Arcadia conglomerate sold BHS in 2015, a year before it filed for bankruptcy. The money will pay for a new scheme to be set up, paying better benefits than are available from the PPF.The new scheme will be established in the next few months, according to TPR. This means it will likely become the first – and potentially only – pension fund to pay a new form of levy being introduced by the PPF this year.The lifeboat fund is currently consulting on a new form of levy for funds without a “substantive” sponsoring employer – such as the new BHS scheme. The consultation closes on Monday 6 March.