Investors at this week’s PRI in Person event have thrown down the gauntlet to the UN-backed Principles for Responsible Investment (PRI) initiative on its future.After praising the work the initiative has done over the years, Paul Clements-Hunt, founder of the Blended Capital Group, said at the event in Cape Town, South Africa: “The PRI has to continue asking the toughest questions on economic and political power. If it doesn’t do that, and it doesn’t stand up, all [it has] done is create a country club, which is inward looking.“That is my contention in terms of asset owners at the moment. You have to go back to the question ‘why did we lose 30% of pension assets in one week in September 2008?’“A lot of asset owners and a lot of asset managers did not ask the questions in a timely manner. And we have got to keep revisiting that, even if the markets pick up.” Clements-Hunt said part of the problem with the financial sector was the transition of financial investment from a model of relationships to transactions and finally to a trading culture.As trading culture dominates across the markets, it presents a huge challenge for asset owners anywhere in the world“Culture in financial investment corroded over the last 25 years in terms of globalisation and super computers, and the dominance of data replacing wisdom in the market is another facet,” he said.“We have seen in the OECD countries, the major markets, a normalisation of models of remuneration, which are completely unsustainable. And it goes on – misaligned incentives, principle agent problems.“Globalisation may have raised hundreds of millions out of poverty, but it can intensify inequality at any level in every country, and it then drops people back into poverty.”He said that while Nordic pension funds, for example, understood the growth story of Africa, they were put off by its headline risk.“The PRI needs to look back in 2023 and ask itself whether it has moved the dial in terms of concentrated private capital flowing into productive investments in Africa alongside the South African Government Employees Pension Fund, alongside the Nigerian Pension System [and others], or whether it is a country club,” he said.Jay Youngdahl, trustee at Middletown Works Hourly and Salaried Union Retirees’ Health Care Fund (US), said many trustees – at least in the US – have continued to purchase opaque and complex vehicles despite the damage those vehicles had caused in the past.He told the audience: “We trustees face serious value issues, and we have the greatest fiduciary duty and are ultimately responsible for values.“And we often allow political pressure or opulent wining and dining to produce a kind of institutional corruption that can cloud our ability to focus solely on our beneficiaries as we should, and many former trustees are hired by service providers solely to secure access to decision-making, certainly a corrupting activity.”He said the PRI was under pressure from the divestment strategies of many college campuses in the US.“Disinvestment is on the rise,” he said. “Given the recent findings of the Intergovernmental Panel on Climate Change, can we really say our style of sustainable finance and engagement with companies whose activities harm the environment matches the scale of the problem? Is the PRI approach effective?”The PRI launched its new reporting framework at the conference in Cape Town.For the first time, its signatories, which collectively manage $34trn (€25trn) in assets, will be required to report publicly on their progress towards implementing the PRI’s six principles each year across a wider range of asset classes and investment activities, including voting and engagement, manager selection, appointment and monitoring and the integration of environmental, social and governance (ESG) factors into investment decision-making processes and ownership practices.By mid-2014, the PRI expects nearly 800 of its signatories to have used the reporting framework to disclose their policies, processes and performance in these areas in an objective and systematic way, using a common language to describe what they do.This transparency will enable investment managers, asset owners, beneficiaries and the broader public to make their own judgements about the degree of each signatory’s commitment to responsible investment.Signatories that fail to report will be delisted from the PRI in the second half of 2014.
The new rules, which follow a consultation earlier this year allow charity trustees to treat all investment returns – capital gains and income – as a whole, allocating the total return so as to best further their charity’s aims now and in the future.They will be able to do this by passing a resolution to adopt a total-return approach. At present, they must obtain permission from the Charity Commission.The new power hinges on the so-called ‘unapplied total return’, defined as the portion of the total investment return from the charity’s investment fund that has not yet been allocated to either the income fund or the investment fund.Once the resolution has been passed, unapplied total return may be allocated between capital and income as the trustees consider appropriate.There is, however, a cap on the amount of unapplied total return that can be added to the investment fund.This will be determined by the investment fund’s value at a specific date, indexed in line with inflation.The regulations aim to provide robust safeguards to respect the principle of permanent endowment, while allowing trustees the opportunity to take this new approach to managing their investments.For example, trustees of endowed charities will also be able to allocate a limited amount of their capital – up to 10% of the value of the investment fund – to the income fund.But this amount will have to be repaid over a reasonable period of time.And trustees must be able to demonstrate that they have acted with caution in taking a total return approach, including taking advice where appropriate.Charities that choose not to acquire the new power may still opt to apply for authorisation from the Commission to remove restrictions on spending permanent endowment.Heather Lamont, director of client investments at the CCLA, said: “It’s helpful that endowment trustees will have more flexibility to manage the distributions they make and won’t have to get Charity Commission approval on the details.“However, the arithmetic around transfers between capital and income can get pretty complicated, especially if the trustees want to take advantage of that flexibility to ‘borrow’ from the endowment, or if they later decide that they don’t want to use a total-return approach after all.”She added: “Many trustees may decide that they’ll be more confident of balancing the current and future needs of the charity if they just follow an investment strategy that will generate a reliable and sustainable income stream.“That way, they won’t have to decide how much capital is ‘safe’ to take out of the pot without eroding the real spending power of the endowment.”Peter Knapton, director of charities at M&G, said: “Many trustees dislike the total-return approach, under which any shortfall in income is topped-up by sales of capital assets.“These trustees prefer to monitor income and capital separately so as to ensure the charity does not overspend and that the capital value of the endowment at least maintains its spending power in the face of inflation.”And he warned: “Under a total-return regime, when economic recession hits, any reduction in distributions is topped-up by sales of capital assets at what will, almost certainly, be very low stock market levels.”The regulations and guidelines are available here.The Charity Commission will review the working of the regulations in five years’ time. New guidelines have been published by the Charity Commission – the independent regulator of charities in England and Wales – to enable charities to adopt a total-return approach to investing their permanent endowment.The guidelines accompany the Charities (Total Returns) Regulations 2013, which come into effect on 1 January 2014 and amend the Charities Act 2011, allowing trustees of permanently endowed charities to use a total-return approach to investment without previously seeking permission from the Charity Commission.Normally, capital gains on investments of endowed charities are retained within the charity’s investment fund to provide a permanent source of income.Only investment income such as dividends or rent can be allocated to the income fund for use on the charity’s activities.
European regulation that would introduce Key Information Documents (KIDs) for investment products should be revised to remove second and third-pillar pensions from its scope, PensionsEurope has said.The lobby group called for a “full and unambiguous exemption” for pension funds from the regulation proposed for packaged retail investment products (PRIPS), arguing that it would be wrong to classify occupational pension funds as a financial product.Concerns that occupational funds would be forced to publish KIDs were raised by the German pension fund association (aba) last year, after the European Parliament’s Economic and Monetary Affairs Committee (ECON) revised the draft regulation first published in 2012 – a draft that made clear occupational funds should be excluded.PensionsEurope said any information document aimed at pension fund members should provide “tailor-made and comprehensive” information, and argued that the emphasis solely on information regarding investments would be insufficient. “Therefore, it should be clear that, although we fully support the provision of transparent and clear information on occupational pensions, the proposed PRIPS regulation is not the suitable vehicle to achieve this,” the organisation’s position paper said.It further took issue with the approach of implementing the new rules through a Regulation, rather than through a Directive, as it would have a “direct and immediate impact” on EU member states’ labour laws – in violation of existing treaties specifying that social policy is a matter for individual member states.“In those areas that do not fall within its exclusive competence,” the paper said, referencing social policy issues, “the EU should regulate through a Directive, which gives the necessary flexibility to implement EU laws into member states’ social and labour laws, and not through an immediately binding and hence inflexible Regulation.”Echoing concerns previously raised by the aba, PensionsEurope also said the European Parliament should not seek to adopt any legislation for occupational pensions without consulting the Employment and Social Affairs Committee.However, it also said existing and forthcoming pensions legislation – namely the revised IORP Directive, as well as the former Portability Directive – would form an “adequate layer of protection” for those participating in occupational pension funds.,WebsitesWe are not responsible for the content of external sitesPensionsEurope position paper on PRIPS
The €186m Stichting Co-op Pensioenfonds in the Netherlands has outsourced its administration, board support and pensions communications to Syntrus Achmea as of 1 January.Theo van Gameren, employer’s chairman of at the Co-op pension fund, said: “Syntrus Achmea offered the best price/quality ratio.“Also culture-wise, the deal connects very well, as Syntrus Achmea’s operations are based on a cooperative philosophy. Therefore, we are very confident about the future cooperation.”The Co-op scheme has approximately 9,000 participants, and provides pensions for former employees of Co-op supermarkets and Cuvo funeral services. In other news, SP VNU, the €440m pension fund of publishing company VNU, and Aon Hewitt have signed a contract for outsourcing its pensions administration.Aon Hewitt has already taken over the management of participant and benefit administration, as well as financial administration, including the annual reporting.The administration of SP VNU will be incorporated in Aon Hewitt’s standard platform Lifetime.The pensions adviser will also support the scheme’s board.According to Johan van der Tas, executive director of benefits administration at Aon Hewitt, the scheme’s choice showed the consultant was on track to achieve its growth target.“Over the last three years, we have welcomed 12 new clients,” he added.SP VNU is pensions provider for more than 5,600 former workers at media company VNU.Lastly, Buck Global Investment Advisors (BGIA), the investment practice of Buck Consultants, has been appointed by the Pirelli Common Investment Fund to monitor and evaluate services provided by its fiduciary manager.Under the terms of the mandate, BGIA will be responsible for independent, objective monitoring and evaluation of its fiduciary manager, including customised reporting.BGIA launched its Fiduciary Management Evaluation Service in May 2013.
Switzerland’s regulator – the Oberaufsichtskommission, or OAK – is to unveil in the coming months a catalogue of minimum risk standards to be applied by all Pensionskassen from next year. Speaking at the annual BVS conference, the regional supervisory body for the canton of Zurich, André Tapernoux, head of risk management at the OAK, confirmed that the regulator would decide on the standards “over the next few months”. The introduction of a unified risk-assessment catalogue has been under discussion by pension fund representatives, industry experts and regional supervisory authorities for the last year.One of the chief proponents has been BVS director Roger Tischhauser, who has argued that regional supervisors need a standard by which to measure Pensionskassen. At the conference in Zurich, Tapernoux agreed, acknowledging that regional supervisory bodies required “reliable individual figures” for each Pensionskasse.He said the OAK had therefore concluded it was “useful to make it mandatory for Pensionskassenexperten to calculate certain key figures”.Tapernoux told IPE the regulator had not yet decided which parameters the new catalogue will include, but he did say they would be taken from existing guidelines issued by the SKPE, the chamber of pension fund experts.In those guidelines (FRP 5), the SKPE included a ‘tool kit’ of risk factors to consider with respect to the financial security of the pension plan, its recovery potential, regulatory requirements and ongoing financing.Among the proposed calculations were changes to the funding level, with additional contributions during recovery periods, or a more holistic view of expected returns from assets in view of liabilities.Martin Wagner, drawing on his experience as managing director at the Credit Suisse Pensionskasse, told delegates that trying to increase a funding level by 100 basis points would entail a 700bps increase in contributions from salaries.In his role as president of the SKPE, Wagner added that the FRP 5 guidelines helped pension funds calculate possible scenarios before acting on them.At the OAK, Tapernoux stressed that Pensionskassen would “only have to calculate figures relevant to their pension plans”.He added that the supervisory body was aware of the extra effort and costs involved but pointed out that the OAK would discuss “useful solutions” for smaller Pensionskassen.Wagner pointed out that some lay trustees at Pensionskassen would need guidelines to “help them along”, and argued that mandatory calculations were “not a corset but an aid”.He said the FRP 5 guidelines had been set up using “key figures that any expert can calculate easily, without too much additional cost”.Reacting to audience comments regarding further consolidation in the second pillar, Tapernoux said it was “not the OAK’s intention to speed up this process by introducing these risk parameters”. See the latest issue of IPE magazine for more on individual investment choices in the Swiss second pillar
The NHI would offer institutional investors mortgage bonds under the existing national mortgages guarantee scheme (NHG), at the same time relieving some of the pressure on banks’ balance sheets, allowing them to increase corporate lending. Two years ago, proponents of the NHI suggested it could cut mortgage interest rates by 0.5 percentage points. But the European Commission has demanded that Dutch banks pass on any financial benefits to mortgage takers.For their part, the banks claim this would be impossible, as they would finance their NHG portfolios partly through the NHI and partly through more traditional means such as savings deposits. Perhaps the most important benefit for investors in NHI bonds would not be the additional guarantee but the improved marketability of NHI bonds, as well as increased transparency.“Apparently,” Blok said, “financing of mortgages under NHG guarantee is too complicated for investors.”Another potential problem, the FD suggested, is that Eurostat – the EU’s statistics bureau – may add the NHI’s mortgages to the national debt. If this were the case, it said, the Dutch Treasury would block the initiative.Recently, the National Investment Institution (NHII), another initiative to boost the local economy, was launched with combined investments of €400m in small and medium-sized companies by insurers and pension funds, including the €20bn pension fund for the printing industry PGB and the €65bn metal scheme PMT.However, the NHI has the potential for much larger investments, as current mortgages issued under NHG guarantee less than €180bn in total.Although current mortgages cannot be issued through the NHI, it is an indication of the scale of the market.The FD, citing anonymous sources, said interest in the initiative was fading among investors and banks due to repeated delays and the fact that alternative means of financing are now cheaper due to low interest rates. Stef Blok, the Dutch housing minister, has conceded the government’s plans for a National Mortgages Institution (NHI) are still in limbo due to the European Commission’s ongoing concerns the initiative is a form of state support.Speaking at the IIR Securitisation Event in Amsterdam for bankers and investors, Blok said he was still waiting for the “green light”, according to local financial news daily FD.“I am still keen on getting the NHI off the ground, but the Commission is anxious about government support,” he said.The Dutch government has been in talks with Brussels on the matter since the summer of last year.
Opening shots were fired two weeks ago when 15 influential business organisations – including the Romanian Pension Funds Association (APAPR), the Foreign Investors Council (FIC), and trade unions – presented the government with a letter arguing for the preservation of the second pillar.The letter attacked the government’s “short-term thinking”, saying any changes would have negative economic and social effects.Romania’s second pillar was introduced in 2008, the legislation enshrining a gradual increase in contributions to 6% of gross salary by 2016.Not only has this level never been attained – contributions eventually rose to just 5.1% – but in 2017, the new centre-left (PSD) government lowered contributions to 3.75%.The open letter said that the second pillar had not only supplemented a state pension system increasingly under strain, but had also been a crucial player in developing local financial markets.It said: “The pension funds invest more than 90% of their assets locally, thus helping public debt financing, economic growth and job creation. At the Bucharest Stock Exchange, the pension funds hold approximately €1.9bn, amounting to 15% of the market’s liquidity.”It continued: “About 40 Romanian companies benefit from additional funding through the involvement of the second pillar, and market institutions, including the rise of corporate governance, have grown robust throughout this time.”On 20 May, the government website published proposals to suspend contributions to the second pillar from the second half of this year, diverting payments instead to the state pension fund in order to reduce budget deficits.The next day, the Bucharest Stock Exchange’s blue-chip BET index plummeted.Although the government later said the press release had been published “in error”, and that no second-pillar contributions would be suspended, Romania’s president Klaus Iohannis weighed into the controversy, calling for more clarity from the government and warning it not to touch second-pillar savings, as citizens were losing trust in the pension system.Meanwhile, European lobby group PensionsEurope came out in support of the Romanian pensions industry.“We have heard alarming reports that in the upcoming months further actions could be taken by the government to overhaul the design of private pensions,” it said. It also called on the government to safeguard the schemes’ design and legislative framework.The lobby group pointed out that Romania’s demographic challenges were worse than for most other EU countries, having experienced a population decrease of 3.5m people over the past 30 years. A further 4.7m decrease was projected by 2070. This would lead to a dependency ratio of 56.9% in 2060, according to Eurostat – more than double the 2015 figure. PensionsEurope said: “The fact that fewer active people will have to support an increasing number of retirees puts an extreme strain on the public finances of the country and requires measures aimed at ensuring the long-term financial sustainability of the Romanian pension system. Private pension saving should be encouraged to compensate for potential lower state pension benefits.”According to the OECD, Romanian pension funds – along with those in Poland and Croatia – were among the top performers of the EU’s newest member states during 2016.PSD leader Liviu Dragnea told Reuters last week that the government would continue to cut taxes while raising state pensions until 2020, in order to improve living standards.Membership of the second pillar pension system could also become voluntary, he added. Romania’s coalition government will publish new proposals for the country’s private pensions system at the end of June or early July, the country’s finance minister said last week.Eugen Teodorovici said that discussions would take place over the next few weeks, to include private pension administrators and other stakeholders.He also said state pensions would increase as planned by 10% from July.The commitment comes after a media skirmish between business groups attacking rumoured plans to weaken Romania’s mandatory second-pillar pension system, and a government with a track record of fiscal U-turns and confusing policy statements.
The FNV has also demanded an improved approach to inflation compensation, as well as mandatory pensions accrual for people in flexible work contracts and self-employed workers.De Volkskrant reported that the cost of the compromise was estimated at €500m. The Dutch government is prepared to slow down its planned increase for the retirement age for the state pension in return for trade unions’ support for reforming the Netherlands’ pensions system, according to a national newspaper.De Volkskrant cited several sources as confirming that social affairs minister Wouter Koolmees had offered to roll back the government’s earlier decision to raise the state pension (AOW) age to 67 in 2021.Instead, the increase would be postponed by four years, to take place in 2025.Slowing down retirement age increases is particularly important to FNV, one of the Netherlands’ largest unions, which had made the issue conditional to its support for system reform. Wouter Koolmees, the Dutch government’s social affairs ministerPreviously, Koolmees had stuck to the government’s decision to increase the AOW age to 67 in 2021, with subsequent rises linked to life expectancy improvements.The FNV declined to comment on the Volkskrant report, with a spokesman highlighting that the minister hadn’t issued an official announcement.“Moreover, the AOW age is part of the current complex negotiations about a new pensions system,” he added.A spokesman for the minister also declined to comment this morning.More hurdles to tackleIf the Dutch government was prepared to slow down the increase of the retirement age for the state pension, it would remove one hurdle to reaching an agreement about system reform.However, the controversial issue abolishing average pensions accrual would remain.The government wants to adopt a degressive accrual approach, meaning younger workers would accrue proportionally more pension rights than their older colleagues. However, it has not made any commitment to compensate older workers as a transitional measure.The costs of a transition from average to degressive pensions accrual have been estimated at between €25bn and €100bn, depending on the degree of compensation.Trade unions and employers have been negotiating a new pensions contract, as the backbone of a new pensions system, for several years.The latest deadline of 1 April 2018, set by Koolmees, passed without a result, meaning the government’s stated aim of bringing a new system in 2020 was unlikely to be met.
This meant trustees should have been paid based on a two-day work week, but instead the scheme based its pay on trustees spending one day a week on the scheme. Trustees were paid €25,000 a year.In contrast, TPRA noted that a number of the newer general pension funds (APFs) paid their board members as if they were a larger scheme.According to Deinema, this made sense given the APFs’ ambitions to pool smaller schemes together. He also suggested that governance was more complicated as the schemes accommodated several pension funds.The research bureau found that the 3.3% pay rise last year predominantly occurred at smaller sector schemes and large company pension funds.“This could be the effect of professionalising, for example through the appointment of external trustees,” Deinema suggested.The survey also found that remuneration varied widely, with combined trustee board pay of €104,019 at company schemes and €464,881 at industry-wide pension funds, on average.In 2011, the Pension Federation suggested that remuneration should be based on on a union’s total employer expenses for board members representing workers.This amounted to €140,000 for a trustee at a large sector scheme (€10bn or more) in a full-time job, €125,000 for a trustee at a medium-sized scheme (€1bn-€10bn), and €100,000 for board members at small schemes (less than €1bn). There is still leeway for a pay rise for trustees at most Dutch pension funds despite a 3.3% increase last year, according to Dutch research bureau The Pension Rating Agency (TPRA).Based on remuneration data from annual reports for 2017, it concluded that pay was 16.5% lower on average relative to the standard set by the Pensions Federation in 2011.TPRA said it based its calculations on the assumption that trustees spent a single day per week on a pension fund with assets of up to €10bn, and two days for larger schemes.As an example of a scheme paying less than the standard level, researcher Michaël Deinema cited the sector scheme for the hospitality industry (Horeca & Catering), which exceeded €10bn in assets last year.
The TCFD, a body established by the Financial Stability Board at the behest of the G20, released its final recommendations in June 2017. According to SASB and CDSB, as at March more than 600 organisations had been registered as “TCFD supporters”.At the same time, in a status report in September last year the TCFD itself acknowledged that more work needed to be done to support follow-through to actual disclosure.According to SASB and CDSB, many companies already disclosed some climate-related information, but “the financial implications are often not apparent, and the related performance and risk metrics are often not comparable”.“Using the CDSB Framework and SASB tools to follow the TCFD recommendations, organisations can provide more effective climate-related disclosures that are comparable within industries and have clear links to material financial impacts,” the organisations said.Talk to investorsAccording to the standard setters’ guide, companies could solicit feedback from engaged investors about the information they needed.“In recent years, the investor community has begun to call for higher-quality reporting of climate-related and other ESG information – particularly in mainstream reports – and to highlight the lack of comparability among the financially material sustainability information reported by peer companies,” the guide stated.“These issues affect investors’ decision-making processes, and reflect on the relationship they create with companies. Engaging with investors will help make the disclosure process more useful for both parties, and will benefit shareholder relationships.”Several large investors have been involved in a pilot project to develop methodologies to analyse their portfolios in line with the TCFD recommendations, and are expected to announce results of this work soon.SASB and CDSB linked their collaboration to a two-year project to drive better alignment in corporate reporting, which they said was aimed at making it easier for companies to prepare “coherent disclosures that meet the needs of capital markets and society”.The European Commission is expected to publish new guidelines on climate-related disclosures by companies by the end of June. The guidelines are intended as a supplement to existing EU rules on non-financial reporting by certain companies.ESMA, the EU financial markets regulator, has encouraged the Commission to consider incorporating in the rules themselves some or all of the requirements currently included in the accompanying guidelines, given the need to improve the comparability and quality of reporting and address the apparent limited use of the guidelines by issuers.The Principles for Responsible Investment recently announced it would require signatories to report how they have considered specific climate change risks in their portfolios from 2020, based on the framework developed by the TCFD. Two major corporate reporting standard setters have created a guide to help companies meet growing demand for more useful information about their exposure to climate-related financial risks and opportunities.The Sustainability Accounting Standards Board (SASB) and the Climate Disclosure Standards Board (CDSB) developed the resource to help bridge the gap between the number of companies that have pledged support for the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD) and those who have been able to follow this up by providing such information.Madelyn Antoncic, CEO of the SASB Foundation, said companies were showing strong interest in managing their exposure to climate-related risk by committing to the TCFD recommendations, but “few have a clear understanding of how to implement those recommendations”.Mardi McBrien, managing director at CDSB, added that the guide would benefit companies as well as investors, as the latter could use the reported information “to allocate capital at the scale and pace required to accelerate the transition to a low carbon and climate resilient economy”.