Trade unions and universities involved in the Universities Superannuation Scheme (USS) have reached a stalemate as the negotiating committee dismissed proposals as incomplete.The ongoing dispute between the social partners has seen tensions rise, with industrial action threatened by the University and College Union (UCU) and pay-reductions by some employers.However, the joint negotiating committee (JNC) – comprising independents, USS trustees and union and university representatives – saw no concrete proposals submitted at its last meeting, with the social partners to negotiate further until the next formal event in January.A statement said: “The parties have agreed to a series of negotiating meetings between now and the next scheduled JNC to be held in January 2015. “The purpose of these meetings is to close the differences between the stakeholders’ negotiating positions.”The two did agree to discuss postponing industrial action until after the January date.Proposals from both the UCU and Universities UK (UUK) have been dismissed by opposite parties.The UUK’s reforms would see the closure of the final-salary section, shifting all members to the career-average section and a hybrid defined contribution (DC) scheme for earnings above £50,000 (€63,000).The group said this was necessary, as USS’s triennial valuation is expected to reveal a significant deficit of around £11bn for the £41.6bn scheme.In the UCU’s proposed reforms, the union campaigns against the use of a DC scheme and said USS should remain entirely defined benefit (DB) – although it conceded it was willing to negotiate on the removal of final salary.USS’s final salary scheme closed to new members in 2011 with all new starters being enrolled into its career-average section.The UCU also said it was willing to accept a 2:1 ratio for employer and employee contributions, meaning the UUK’s proposed 18% contribution for employers would be met by 9% from members, compared with the current 6.5%.It would also agree to a cap on pensionable salary.The Union, however, continued to argue for changes to the actuarial calculations and assumptions used by trustees, and reiterated its claims the deficit was not as bad as stated.Employer members of the UUK had accused the UCU of working counter-productively.
Cautious investing paid off more than high-risk strategies for UK charity portfolios last year, according to preliminary figures from Asset Risk Consultants (ARC).It is the first time since 2011 that lower-risk portfolios have performed better than their higher-risk counterparts.Graham Harrison, managing director at ARC, said: “With the mainstream equity markets recording returns ranging from marginally positive (UK equities) to circa 9% (US equities), 2014 will go down as a year when the UK bond market unexpectedly outshone its equity counterpart.”While the ARC Cautious Charity Index made the biggest gain – 6.5% – for the year to 31 December 2014, the ARC Equity Risk Charity Index – the riskiest portfolios – gave the poorest return, at 4.5%. The two intermediate indices achieved returns commensurate with the amount of caution in the portfolio.Returns were 5.9% for the ARC Balanced Asset Charity Index, and 5.1% for the higher-risk ARC Steady Growth Charity Index.However, cumulative returns still increase with portfolio risk.Three-year returns (to 31 December 2014) for the indices range from 20.2% for the Cautious Index to 38.6% for the Equity Risk Index.And annualised performance figures since the indices were launched in December 2003 are 5.3% (cautious), 6.2% (balanced asset), 6.8% (steady growth) and 7.2% (equity risk).The ARC indices are calculated from the actual performance (net of fees) of around 1,500 segregated charity portfolios run by 28 asset managers, although for the preliminary figures fourth-quarter performance has been estimated.There are no asset class restrictions: portfolios are classified according to their volatility in relation to UK equity markets.For example, the ARC Cautious Charity Index has 0-40% risk relative to UK equity markets, while the ARC Balanced Asset Charity Index has 40-60% risk.Harrison said: “Going into 2014, few market commentators were predicting returns from government bonds would exceed those from equity markets, but that is what transpired.“Double-digit returns were recorded from 10-year Gilts (both conventional and index-linked) for 2014, as yields moved down from 3% on the 10-year Gilt to end the year at just 1.75%.”And he warned that there was a mathematical possibility that bonds could outperform again in 2015.He said: “If the 10-year Gilt yield were to fall below 1%, double-digit returns would again be recorded for bond indices.“With consensus for UK equity market returns in the 5-10% range, a repeat of 2014 cannot be ruled out.“However, most market commentators expect yields to rise over the course of 2015 and are predicting negative returns from government bond indices.” Harrison also said 2014 had proved to be a volatile but ultimately positive year for most institutional investors.But he said: “Since 2009, government and central bank manipulation of interest rates and bond markets has spilled over into exchange rates, equity markets and real assets, and finding alpha has become more of a struggle.“Institutional portfolios have been moving up the risk spectrum towards an ever-increasing exposure to large international equities with solid dividend prospects.”Harrison concluded: “We believe that 2015 will be a year of ascendancy for actively managed versus ‘passive benchmarked’ portfolios, as financial markets move from being liquidity-driven, and economic fundamentals assert themselves.”
Across 2014, despite fluctuations in asset values, the aggregate value rose by 10%, with schemes ending the year with £1,237bn in assets.However, the PPF said liability increases were at the foundation of the deficit rise, moving from £1,113bn to £1,503bn over the 12 months. Source: PPFAggregate asset vs liability values for PPF 7800 schemesThe 35% increase came after the yield on 15-year UK Gilts fell by more than 1 percentage point in 2014.Joanne Shepard, a senior consultant at Towers Watson, said the PPF figures looked particularly negative compared with other pension schemes as they apply lower inflation-linked protection.“When it comes to the cost of providing full scheme benefits, falling inflation expectations have done more to cushion the impact of lower bond yields,” she said.The PPF’s universe of schemes operating a surplus fell to 1,121 from 2,641 over the year, with the remaining schemes in deficit posing a £300bn funding shortfall for the fund.Shepard said the lifeboat scheme could become swamped if economic growth faltered and companies began to fail.However, PPF modelling suggests it is more than capable of meeting its obligations.Last summer, in its annual report, the PPF said its plan to hold enough assets to cover liabilities, with a 10% buffer for future claims, was 90% likely to be achieved by 2030.Over 2014’s final month, deficit figures rose by 20%, with the average funding ratio now at 82.3%.Despite a significant fall in funding levels over 2014, the surplus seen at the start of the year was an unusual blip in positivity, with the last aggregate surplus seen in July 2011. UK defined benefit schemes saw the end of 2014 significantly impact funding levels, according to the Pension Protection Fund, as deficit levels hit their highest level since 2012.The lifeboat fund’s latest 7800 Index update showed the aggregate deficit for the 6,057 schemes hit £266.3bn (€340bn), calculated on their ability to provide PPF-level benefits.The PPF is the UK’s support pension fund for corporate DB schemes where sponsors face insolvency.The funding-level fall was a dramatic shift over 2014, with the schemes starting the year with an £8.7bn surplus, but slipping into deficit by the end of January 2014.
Julian Poulter, chief executive of the AODP, told IPE the initiative would be led by pension beneficiaries wishing to escalate their engagement efforts with pension funds where managers had so far failed to heed member concerns and begin assessing the risk. “This isn’t trouble-making – we aren’t trying to rake muck here,” Poulter said of the initiative’s focus on lawsuits. “The ideal number of cases is zero, globally. What we want is for people to change their attitude and the journey of managing their risk better.” Asked which pension funds could be at risk of legal action, Poulter declined to single out one. “It’s fair to say the members will likely look at the laggards we report on as being the worst-performing funds, so, naturally, those funds that are managing the risk less well than others are going to be at greater risk.” He said several large asset owners had yet to complete any scenario modelling around climate change, and that they should be looking at the risk of value destruction stemming from political intervention – such as recent action by the US and Chinese governments to cut carbon emissions. “For those funds that say ‘we have faith in our fund managers to trade out of that risk’ well, I think we’ve seen what happens with systemic risks when that happens,” Poulter said. Recent attempts by pension scheme beneficiaries to influence investment strategy have seen the Universities Superannuation Scheme (USS) agree to survey members on their investment beliefs.However, Poulter noted that the UK Law Commission consultation that proposed such member surveys focused more on ethical investment concerns, whereas he viewed climate risk as a material financial risk that should be considered by all investors. Pension funds may soon face lawsuits from their beneficiaries if they fail to account for the risk of climate change, under a new initiative launched by the Asset Owners Disclosure Project (AODP). Teaming with ClientEarth, an environmental law organisation, the AODP launched the Climate and Pensions Legal Initiative to challenge pension managers and trustees to consider the financial risks posed by a changing global climate. Elspeth Owens, a barrister at ClimateEarth said: “Some pension funds are to be applauded for their positive approach to assessing and mitigating these risks. “However, many funds are failing to take any steps, and the gap between the best and the worst is widening. Those funds falling behind may be in breach of their legal duties.”
“It will save hundreds of millions in costs, and, crucially, they’ll invest billions in the infrastructure of their regions.”Osborne’s number of asset pools is in line with proposals published by the LGPS Advisory Board.In documents prepared for a meeting in late September, the board suggested that funds could see assets split across seven pools – six for England and one for Wales – and that LGPS that currently employ in-house managers would not be exempted from mergers.The document suggested the South East region of England – spanning from Norfolk Pension Fund in the north to the Hampshire Pension Fund in the west – would be the largest regional pool, capturing £37.8bn in assets.The Midlands region, including Warwickshire, ranked second, with £35bn in assets, followed by the North East with £33.3bn, which would include the Northumberland County Council Pension Fund.The North West asset pool proposed in the board documents would, at £31.2bn, also capture the assets from the Lancashire County Pension Fund’s partnership with the London Pensions Fund Authority, which chose not to be part of the London collective investment vehicle (CIV).A statement by the UK Treasury said that the newly-pooled assets would “follow international norms” and grow their exposure to infrastructure, potentially through the pools building up internal capability to invest in the asset class.The attempt to encourage a greater focus on infrastructure investment comes two years after investment regulations were amended, doubling the potential infrastructure exposure to 30%.At the time, then-communities secretary Eric Pickles predicted the changes would allow the LGPS sector to “pump a further £22bn directly into job-creating infrastructure projects”.Several local authorities have increased their infrastructure exposure in recent years, committing to a number of renewables funds and investing in an infrastructure fund managed by Hermes Investment Management that acquired stakes in Associated British Ports and Eurostar. The announcement comes alongside a promise from current communities secretary Greg Clark to amend regulations to prevent the politically motivated divestment of Israeli holdings and arms companies, seemingly in reaction to a campaign by union Unison calling for LGPS holdings with activities in the West Bank to be sold.Scotland’s LGPS are exempted from the reform proposals, as it is a matter for the devolved Scottish administration. UK chancellor of the exchequer George Osborne has argued that “British wealth funds” could meet England and Wales’s infrastructure needs.According to the finance minister, pooling the 89 local government pension schemes’ (LGPS) £193bn (€264bn) in assets would allow them to increase their exposure to domestic infrastructure.Speaking at the Conservative party conference in Manchester, Osborne said the current system was expensive and that the LGPS at present invested “little or nothing in [UK] infrastructure”.“So I can tell you today, we’re going to work with councils to create instead half a dozen British wealth funds spread across the country,” he said.
The €200bn asset manager PGGM has entered into a joint venture with American Tower Corporation (AMT) aimed at building telecommunications towers in Europe and leasing out telecom capacity.Boston-based AMT, which already has operations in Germany, will transfer these activities to the joint venture, dubbed ATC Europe, in which PGGM will own a 49% stake.James Taiclet, chairman and chief executive at AMT, emphasised the importance of PGGM’s extensive expertise in Europe for the co-operation.“Together with AMT’s track record in investing and managing telecom property, it is a convincing basis for future investment opportunities,” he said. Frank Roeters van Lennep, PGGM’s CIO for private markets, said: “As a long-term investor, we are keen to invest in Europe’s real economy, focusing on stable long-term returns.“The joint venture offers a unique opportunity to join forces with the world market leader in the sector and to benefit from its enormous experience.”A spokesman for PGGM declined to provide details about the scale of the joint venture or expected returns.He said the venture fit within PGGM’s policy of seeking strategic investment partners as a main shareholder.The asset manager is already in a joint venture with building firm Royal BAM, focusing on the public/private market for infrastructure in Northwestern Europe.It has also teamed up with Legal & General to develop and rent out residential property in the UK.American Tower is an independent developer, owner and manager of multi-tenant property in the communications sector.It has operations in 13 countries across five continents, and its portfolio contains more than 144,000 assets.The €185bn healthcare scheme PFZW, the €9.5bn occupational pension fund for general practitioners (SPH) and the €1.4bn scheme for private security (SPB) have invested part of their assets in PGGM’s infrastructure fund.
Saker Nusseibeh, chief executive at Hermes, said the assumption was that Trump would listen to advice from professionals in the US State Department when dealing with foreign affairs, even though on the campaign trail he showed a clear willingness to dismiss professional advice.“Once again, it is not a stretch to imagine Trump in talking to his home constituency might alienate the traditionally supportive Gulf nations with his Islamophobic comments,” he said.This might in turn strengthen Iran’s influence in the region, which could threaten regional stability and therefore the oil price, he said.“Likewise, Trump’s anti-NATO and pro-Vladimir Putin comments could be taken, if repeated when he is in power, as a green light by the Russian president to intensify its revanchist foreign policy in Eastern Europe,” he said.This, according to Nusseibeh, could lead to rising risk premia for European assets.The biggest risk, according to Neuberger Berman president and equities CIO Joe Amato and the firm’s multi-asset class CIO Erik Knutzen, is that Trump tries to turn some of the more populist rhetoric of his campaign into reality. “Whoever emerged victorious,” they said, “the forces that have led to the rise of the likes of Trump, Sanders, Farage in the UK, Le Pen in France and Wilders in the Netherlands are not going away – and partisan shouting matches, assaults on free trade, an interventionist approach to unsustainable industries and a disregard for the financial robustness of the US are not viable solutions.”They added: “The result could be a tug of war between the deflationary forces associated with lower economic activity and the inflationary forces from higher trade barriers.”There are now likely to be more votes against the establishment in upcoming elections and referendums taking place across Europe, according to Martin Gilbert, chief executive of Aberdeen Asset Management.Markets will settle down in time, however, and this is a time for a calm head when looking at markets, he said.“Trump will not become president until January and between now and then it will become clearer what a Trump presidency will look like. “His acceptance speech was inclusive and will hopefully help allay some investor fears,” Gilbert said.But David Bertocchi, head of global equities at Barings, said the surprise Trump win marked a rare occasion in politics where uncertainty was now likely to increase rather than fall post-election. “For the United States, such a situation is unprecedented,” he said.“Trump’s contentious and anti-establishment campaign has frayed political alliances, which will make it difficult to muster the congressional support needed to advance his policy proposals for a more protectionist and isolationist US.”David Lloyd, head of institutional fixed income portfolio management at M&G Investments, noted that many commentators had argued that Russia and China’s assertiveness on the world stage had been caused by – or at least coincided with – the US withdrawing somewhat under president Barack Obama, from its previous foreign policy stance of projecting US power and influence around the world.“So, a further move towards an isolationist US – perhaps reflected in less-than-convincing commitment to NATO obligations, or a scaling back of US overseas troop deployments – may actually embolden leaderships elsewhere,” he warned. Last night’s victory for maverick Republican candidate Donald Trump in the US presidential election is likely to herald an era of heightened political risk internationally, but there are still reasons why the market’s worst fears may not materialise, investment managers say.Dominic Rossi, global CIO equities at Fidelity International, said: “We are heading into a world of unprecedented political risk that calls into question the pillars of the post-World War II settlement.”It is no surprise, therefore, that investors are now heading for cover, he said.“The immediate sense of bewilderment at the shift rightwards in American politics will need to give way to a more sober risk assessment,” he said.
Introducing personal accounts for the first pillar, to pay out amounts relating to the individuals’ contributions over their lifetime, irrespective of years of service. Returns would be indexed in line with economic growth, but would also be adjusted in line with specific demographic parameters. A state reserve fund would also be set up.More retirement flexibility, including a partial pension for those still working, and incentives for older people to work longer.Mandatory ‘lifecycle’ investing pre-retirement. The BoL said 70% of second pillar participants assumed either too little or too much risk, leading to insufficient returns or loss of funds. Participants were also not inclined to adjust their fund to their risk profile. The BoL has already submitted draft legislation to the Ministry of Social Security and Labour.Encouraging individuals paying 2% contributions for additional pension either to save more or return to SoDra, the social insurance fund. Participants should also be supported in voluntarily increasing contributions.A state pension fund to pay benefits under the second pillar system, thus assuming annuity risk. The BoL said this would incur less risk than using private insurers which might be financially vulnerable, while having a positive effect on administration charges and competition. Participation should be voluntary.In addition, the BoL said it would evaluate whether tax relief on third pillar pension fund contributions succeeds in encouraging retirement saving.Vasiliauskas also called for a long-term political agreement on pension reform.“Short-term issues have been addressed at the system’s expense, and inconsistent proposals have distorted the fundamentals. It is time to put an end to that,” he said.Latvia seeks to boost first pillar savingsMeanwhile, the Latvian state audit office (SAO) has concluded that the decision to create the country’s three-pillar pension system over 20 years ago was correct.It said the system provides stability regardless of economic and demographic changes, while allowing the government to make unpopular decisions such as increasing the retirement age in order to ensure sustainability.However, the SAO’s report highlighted the system’s failure to achieve the first pillar goal of a minimum pension of 20% of the average gross wage.One reason for this is the large number of individuals paying low, or no, contributions, including employees of very small companies and the self-employed. The SAO is seeking ways to ensure that these individuals pay their legal contributions into the system.It also recommended a review of fund management fees for second pillar pension funds, observing that the current level of 1% of asset values means increased charges as funds grow, regardless of the actual cost of the service.The SAO suggested setting up a pension budget reserve to ensure payment of pensions when the ratio of pensioners to working people rises.But it also warned that there was little public trust in the ability of the system to pay individuals a pension dependent on the capital accrued during their working life, and that publicly available information on the pension system was inadequate.The Ministry of Welfare has committed to implementing a number of the SAO’s recommendations by end-2020. “Significant and immediate” reforms are needed to Lithuania’s pension system in order to halt a worsening of future pensioners’ interests, according to the Bank of Lithuania (BoL).The BoL, regulator of the country’s second and third pillar funds, reported in a study that the current pension system model was not viable enough.Vitas Vasiliauskas, chair of the BoL board, said: “The scale of emigration, low birth rate, [and] population ageing suggests that, without pushing through significant reforms in the near future, the state will fail to ensure sufficient income for residents without increasing state debt.”The BoL has accordingly proposed a package of measures to withstand these challenges, including:
Source: Avon Pension Fund Avon Pension Fund has shifted more than 15% of its portfolio into two multi-asset funds, scaling back holdings in traditional equity and fixed income funds.The £4.6bn (€5.2bn) local authority scheme has allocated £485m to Loomis Sayles to run a multi-asset credit mandate, and £226m to UK boutique Ruffer’s diversified growth fund.To fund the new allocations, the scheme raised £165m from selling out of regional passive equity funds for Europe and Asia Pacific, run by State Street Global Advisors, according to council documents.During the third quarter of 2017, Avon also took roughly £60m each from an emerging markets fund managed by Unigestion and a UK equity fund run by TT International, and £132m from a fixed income mandate run by Royal London Asset Management. In a statement announcing its appointment, Loomis Sayles said its “World Credit Asset” strategy included global investment grade and high yield credit, bank loans, securitised debt and emerging market debt.Chris Yiannakou, managing director at Loomis Sayles, added: “We already have a strong track record of working in partnership with local government pension schemes [LGPS] in the UK and we are very much looking forward to continuing this with the Avon Pension Fund.”In its 2016-17 annual report, Avon said its investment portfolio gained 17.2%.Avon is one of 10 LGPS funds in the Brunel Pension Partnership, one of eight asset pools established by UK local authority funds and due to open for business by 1 April next year.Ruffer has been a significant beneficiary of LGPS pooling, having been awarded a diversified growth fund mandate by the London CIV. As of 31 March it ran more than £400m on behalf of five of London’s LGPS funds through the CIV pool.Avon Pension Fund’s asset allocation (30 September 2017)
Iceland’s pension funds should be forced to be more transparent over how they manage their ownership stakes in the country’s businesses, according to a working group appointed by the country’s government.The task force – chaired by Gunnar Baldvinsson, chief executive of the Almenni Pension Fund – has published a report recommending a series of measures to address the economic and competitive risks resulting from pension funds’ now wide-scale ownership of domestic companies.Iceland’s pension fund assets amount to around 150% of the country’s GDP — making its pension system one of the largest in the world relative to the size of its economy. Since the severe financial and economic crisis which hit the country in 2008, Iceland’s pension funds have increased their ownership of businesses in various sectors of the economy. This was partly due to the collapse of major banks but also because of foreign capital controls imposed by the government. The controls were only fully lifted last year, and had forced pension funds to invest their comparatively large asset bases domestically. Baldvinsson’s group has advised that pension funds should increase their target allocations to foreign assets in their long-term investment policies in order to reduce risk.Funds should also be required to establish policies outlining their roles as owners of enterprises, the group said.It went on to recommend that pension funds be obliged to publish a report at least once a year with information about their communication with companies in which they invest, including information on how they vote at shareholder meetings.The group also urged the government to consult on allowing a portion of an individual’s pension contributions to be allocated to housing savings.Baldvinnson told IPE the working group did not consider it necessary to propose any changes to Iceland’s Companies Act, but “rules should be imposed that require pension funds to establish a formal strategy about ownership policy”.Such a strategy should include articles about corporate governance for pension funds as shareholders; articles about competition issues and what pension funds intend to do to ensure competition in the market; and articles on communication with companies and participation in decisions at shareholders’ meetings, he said.Last June, Iceland’s then prime minister Bjarni Benediktsson appointed the working group, in consultation with the Council of Ministers for Economic Affairs, to examine the role of pension funds in the structure of the economy.Apart from examining the economic and competitive risks in pension funds’ high level of corporate ownership, the group was to say whether rules should be put in place or legislative changes made to corporate ownership and the involvement of pension funds in the management of commercial enterprises in order to reduce the funds’ stakes and ensure market competition.