A KPMG survey has found that unhedged defined benefit (DB) plan sponsors in the UK are at risk of major losses from a future market shock.The key findings of the survey are that gross assets and liabilities at a historic high, leaving deficits highly geared, and that any future market turmoil could leave plan sponsors without hedging strategies in place nursing significant losses losses.The survey also points to a substantial herd effect in the selection of key assumptions.The report’s author, Narayan Peralta, a director at KPMG, told IPE: “KPMG has been analysing this market for 10 years now, and each year’s survey brings something different. “But rather than significant trend changes in the assumptions themselves, this year we have seen the influence of IAS19R’s new disclosure requirements, which has led to a tighter pack of assumptions.”He added that increasing pension liability to market cap ratios had heightened interest among corporates about the impact of pensions on their accounts.The KPMG survey looks at trends in accounting assumptions across 295 KPMG clients with UK DB obligations.The report takes in companies reporting under IFRS, UK GAAP and US GAAP at the 31 December 2013 year-end. The sample also reflects practice among major players in the UK actuarial consulting market.According to the report: “Many UK companies will have seen balance sheets improve over 2013 as strong asset growth offset slightly tighter real discount rate assumptions.“Despite these improvements, balance sheets remain significantly exposed to pension risk, highlighted by the volatility seen across the year. Therefore, adopting the right risk-mitigation strategies, on both asset and liability sides, is key.“The choice of assumptions remains as important as ever and influences not simply the company balance sheet but also pension strategy such as the impact of implementing benefit changes or member options.”KPMG also warned that pension liabilities in the UK remain highly geared, with recent windfall equity returns masking the risk of heavy losses for unhedged liabilities in the event of a market shock.“Real discount rates, based on the difference between AA corporate bond yields and assumed RPI inflation, reached a new low over 2013, hitting as low as 0.5% in April 2013 and finishing the year at closer to 1.1%. The corresponding rate just before the financial crisis was 3.3%.”One the asset side, stellar returns from equities – UK equities pulled in gains of 20% during 2013 while globally returns hit 25% – have counterbalanced the negative outlook on the liability side.KPMG said: “Since the start of the financial crisis in 2008, a typical pension fund portfolio invested in a combination of equities (UK and overseas) and bonds (both government and corporate bonds) is likely to have returned closer to 45% including reinvestment of dividends and coupons.”It also warned that changes to UK GAAP in 2015 – largely aligning it with IAS19R – could see “some companies facing issues around distributable reserves or dividend payments”.UK pension liabilities have increased by 65% on an IFRS basis since the financial crisis hit in 2008. Change to IAS19R (2011)For companies reporting under IAS19, the 2013 year-end marks the first full year of reporting under the new standard.KPMG found that most of these companies “will have seen a jump up in P&L charges for 2013 due to the new requirements”.Under changes to IAS19 unveiled in 2011, DB plan sponsors must disaggregate or split pension costs on the face of the income statement into service cost, net interest on the net DB liability or asset and remeasurements of the net DB liability or asset.The changes also removed the corridor option, the opportunity to report in net income a credit for an expected return on plan assets and the ability to present pension items in a separate statement of recognised income and expense (SORIE).They also mean that companies must now disclose more information about the risk and uncertainty caused by pensions on the sponsor, together with more detailed sensitivity requirements about the key assumptions. Assumptions As for the application of the big-three reporting assumptions under the new standard, KPMG found that “the market is more closely packed around the median than it was in our survey last year”.In particular:61% of sponsors used a discount rate within 15 basis points of the 2012 median, with the figure climbing to 81% this year75% of companies used an inflation assumption that falls within 15bps of the median in 2013 rather than 65% in 201280% of companies used a longevity assumption within a three-year range, marking an increase of 4%KPMG said: “Part of this apparent trend may be linked to the increased size of pension liabilities versus market capitalisations, and therefore increased scrutiny from auditors, shareholders and analysts on the disclosures.”
The last-minute rush led to technical problems at ZUS offices, the institution’s website and the electronic portal, with many offices extending their opening hours that day.Postal declarations that trickle in subsequently, including those from Poles abroad, will be counted if the Polish postal registration date is no later than end-July.With the choice restricted to the 14m-odd workers with more than 10 years left till retirement, the share equates to around 12%, well below the 20% predicted by the Finance Ministry.In terms of the actual share of contributions, the figure could reach 15-17%, said Paweł Cymcyk, investment communication manager at ING IM Poland, as the higher paid have been more likely to choose the second pillar than low-waged workers.Given that some 16.7m members were this year contributing 2.92% of their gross wages, the loss of inflows will be considerable.In the first six months of 2014 alone, according to the Polish Financial Supervision Authority (KNF), contributions totalled PLN6bn (€1.5bn), boosting OFE net assets to PLN153bn.Following the removal of all Polish state and state-guaranteed bonds this February, when net assets fell by 48% over the month, the next asset shrinkage starts in October.Under the so-called ‘slider’, the funds have to transfer the relevant proportion of all the assets of members with 10 or fewer years left until retirement to ZUS, which under the new law takes responsibility for second-pillar, as well as first-pillar, payouts.ZUS president Zbigniew Derdziuk told Polish radio that some PLN4.2bn would flow into the first pillar this year.As a result, the funds will have to ensure they have sufficient liquid assets such as cash to meet their obligations, mainly at the expense of their equity holdings.This development does not bode well for the Warsaw Stock Exchange, where pension funds account for a significant share of turnover and capitalisation.Small-cap stocks are particularly at risk because of their low turnover, said Cymcyk.“If there is a significant small-cap sell-off, their prices will go down,” he warned.The next decision window is in 2016, and every four years thereafter, by which time it is unlikely many of the 12 OFEs will be around.“We predict around half that number through mergers and acquisitions,” Cymcyk told IPE.As he explained, with no way to increase assets, only the bigger ones, with their economies of scale, would be able to generate the profits and the results to keep their clients. Contributions to Poland’s second-pillar pension system are set to shrink dramatically as the majority of workers have elected to direct their future open pension fund (OFE) contributions to the Polish Social Insurance Institution (ZUS).As of 31 July, an estimated 1.7m-1.8m members had opted into the second pillar.The Polish reforms, signed into law this January, turned the former mandatory second pillar into a voluntary one.While the decision period started on 1 April, most left it till the last minute, with the number signing up on the last day not far below the April-June total.
The scheme’s 19% equity allocation, including share options, generated 2.8%, leading to a year-to-date result of 11.8%, according to the pension fund.It said that equity emerging markets produced the best results, chiefly thanks to its currency component.“The euro depreciated compared to almost all other currencies, in particular the US dollar, resulting in negative results of the currency hedge,” it explained.The Pensioenfonds PostNL further said that the Japanese equity markets performed relatively well, while European equity fell short of expectations.The pension fund further reported a 0.7% yield of its 7.1% property portfolio. However, it incurred a 13% loss on its 3.1% commodities holdings.In other news, the €2.9bn scheme of technical research institute TNO announced a quarterly result of 4.6%, leading to a year-to-date return of almost 14%.It said during the first nine months, all asset classes generated positive results. However, during the most recent quarter it lost more than 1.4 percentage points due to the complete hedging of the currency risk on its liquid investments in US dollars, British pound and Japanese yen.In contrast, declining swap rates during the first three quarters resulted in a positive contribution of more than 3.8 percentage points to its year-to-date result, it added.The TNO scheme said that its fixed income holdings returned 4.4% during the third quarter. It said that following “undiminished strong demand” for secure German government bonds, ten-year interest rates had dropped to 0.75% mid-October, compared with 1.93% at year-end.The pension fund further announced yields of 4.6%, 3.5% and 3.3% on its equity, property and private equity investments respectively. It closed the third quarter with a funding of 110.7%.Elsewhere, the €18bn pension fund for private road transport, Vervoer, and the €6.4bn scheme of chemicals manufacturer DSM, PDN, reported quarterly results of 5.8% and 3.2% respectively, with coverage ratios of 110.7% and 108.4% respectively at September-end.Dutch schemes have been warned to expect a decline of at least 3 percentage points in funding due to falling interest rates. The country’s largest pension funds, including ABP, PMT and PME, recently confirmed a further decline in their coverage ratios. The €6.8bn pension fund PostNL saw its funding drop 2.9 percentage points to 110.5% in the third quarter, despite a quarterly result of 3.3%, which took its year-to-date return to 12.4%.A funding drop of 6.7 percentage points directly caused by the sharp decline of interest rates – the criterion for discounting liabilities – was in part offset by the combination of a 2.2% result on the interest hedge on its liabilities and returns on investments of 1.1% during the past three months, it said.The Pensioenfonds PostNL, which reported a 1.7% result on its 65.5% fixed income portfolio, noted that returns and risk premiums of the various fixed income categories had varied strongly.“Credit performed better than German government bonds,” it said, adding that risk premiums for high yield and emerging markets debt rose during the third quarter.
Skandia and Vattenfall said this was the first time a Swedish pensions company was directly financing the construction of a Swedish wind-power facility.Magnus Hall, chief executive of Vattenfall, said: “The joint investment with Skandia will allow (wind power) expansion in Sweden to take place at a faster rate.”Skandia and Vattenfall will be equal owners in the new company.The four wind power projects are Hjuleberg, in the municipality of Falkenberg; Höge Väg in Kristianstad; Juktan in Sorsele and Högabjär-Kärsås, also in Falkenberg.The other wind farms are being built by Vattenfall and will be handed to the new company in the first quarter of 2016.In other news, Denmark’s Unipension has announced an account dividend for members of its traditional with-profits pensions of 4.25% for 2015, unchanged from this year.But it warned that the level of payout could fall in years ahead.Unipension said it was awarding an account dividend of 4.25% after tax in 2015 for members of the three professional pension funds it runs: the Architect’s Pension Fund (AP); MP Pension, which covers academics in Denmark; and the Pension Fund for Agricultural Academics and Veterinary Surgeons (PJD).However, Steen Ragn, Unipension’s chief actuary, warned: “We must be realistic, too, and say that our expectation is that, in time, the returns will become lower, and that the account dividend must also be expected to fall alongside this in time.”He said the pension provider had to look at the long-term prospects, and that the level of interest rates looked as if it would stay very low.Account dividends – the rate of return on pension savings set in advance – are set according to a pension provider’s overall financial strength. They can be changed over the course of the year if necessary.Meanwhile, Danish teachers’ pension fund Lærernes Pension said it was hiking its account dividend to 6.5% in 2015 and predicted it would pay good dividends in the next few years, even if investment returns diminished.It said: “Lærernes Pension is well cushioned, and members can reap the benefit of this.”The pension scheme went on to say that its forecasts showed members could look forward to a good account dividend in the coming years as well, even if there were some years where the investment return was poor.Separately, Norwegian public sector pension fund Oslo Pensjonsforsikring (OPF) said it was creating the new role of head of property, and now looking for a candidate to fill it.It said its direct property portfolio was worth NOK9bn (€941m) and invested in some 30 properties and property joint ventures.Advertising the job, OPF said the head of property would work in a team with the fund’s portfolio managers and report to the investment director. Swedish pensions group Skandia is teaming up with Swedish power company Vattenfall to invest nearly SEK2bn (€209m) establishing four wind farms in the Nordic country.The wind farms are to have a total output of 141MW when completed and will be run by a new jointly owned company.Bengt-Åke Fagerman, Skandia’s chief executive, said: “Vattenfall is a strong operating partner, and wind power is a sector with good growth.”Skandia had been investing more and more in infrastructure over the last few years because the asset type gives customers a stable and long-term return, he said.
A pension fund is searching for asset managers to run a $150m (€131m) US high-yield bond mandate, according to manager search service IPE-Quest.The unnamed pension fund is looking for a manager employing an active process, using the Bank of America Merrill Lynch US high-yield 2% issuer-constrained index.Managers responding to the quest are expected to have at least $2bn under management for this strategy and $20bn under management overall.It is essential they have experience with managed accounts and segregated accounts as investment vehicles, according to the search. The deadline for data to be submitted is 19 February.Meanwhile, a pension fund is seeking a manager for a $150m global emerging markets corporate bond mandate, also using IPE-Quest.The pension fund is also unnamed, but the deadline is the same – 19 February – for submission of data.The mandate includes investment grade and high-yield bonds, and is to be run with an active process.The benchmark is to be 100% of JPMorgan’s Corporate Emerging Markets Index.Again, managers applying should have at least $2bn under management in the strategy and more than $20bn overall.The investment vehicle for the mandate could be a managed or segregated account or a mutual fund.Tracking error should be a maximum of 4%, and the information ratio at least 0.25 over three and seven years, according to the search.In a third quest with the same deadline, a pension fund is looking for managers to run a €150m mandate for high-yield bonds within Europe, using an active process.The benchmark is to be 100% of the Bank of America Merrill Lynch Euro high-yield constrained index.Managers should have at least €2bn under management in the strategy and €20bn in overall assets under management.
However, despite the final report being due by the end of the year, Burton said any date for the launch of the new system would require careful consideration and be influenced by “a wide range of factors and the presence of a favourable economic environment”.She has previously said the system’s roll-out would be “very gradual”.The URSG, comprising 10 members and a chairman from the Department of Social Protection (DSP), will largely consist of representatives of government departments and agencies.Alongside representatives from four government departments and the office of the Taoiseach, Enda Kenny, the National Treasury Management Agency, Pensions Authority, Central Bank of Ireland and revenue office will join the group.Additionally, one expert in international pensions reform and one expert from a country that has successfully increased coverage will join the group.Moriarty welcomed the formation of the URSG but said the IAPF would have preferred if some of Ireland’s pension funds had figured among its members.“What’s probably more important is not whether people are on it or not but whether they do engage properly with people who do have the experience of running DC schemes,” he said. For its part, consultancy LCP said there was “compelling evidence” Ireland needed to increase coverage.“We hope the establishment of this group leads to constructive action in this regard,” he added. The URSG will now need to consider whether to opt for a DC system with individual accounts or a collective DC model.Additionally, the question of whether it should offer a government-backed default option for savers – similar to the UK’s National Employment Savings Trust or Sweden’s AP7 – will need to be addressed, as well as the level of savings that could be introduced in an auto-enrolment system.Separately, DSP also confirmed the seven members of the Pensions Council, set to advise Burton on future pension reform after an overhaul to address concerns of regulatory capture.The members include two journalists, as well as Roma Burke of LCP Ireland, Kirstie Flynn of Trustee Principles and Sandra Rockett of Irish Life Investment Managers.The Society of Actuaries in Ireland applauded Burke’s appointment and that of several other of its members – Tony Gilhawley, Sandra Rockett and Shane Whelan – as they would contribute a “wealth of skills, knowledge and experience” to the debate, while LCP said it was “very proud” of Burke’s selection.“The Society is committed to contributing to debate on matters of public interest where an actuarial perspective can add value, and we look forward to engaging with the Council in that context,” it added.Until now, DSP had only named the Council’s chairman, Jim Murray, a former director of the European Consumers Organisation. The Irish government needs to engage with the local pensions industry properly if none of its representatives is to sit on a group tasked with increasing occupational coverage, the Irish Association of Pension Funds (IAPF) has argued.Jerry Moriarty, chief executive of the IAPF, questioned the lack of industry representatives or larger pension funds on the Universal Retirement Savings Group (URSG), which will be tasked with devising a roadmap for greater pension coverage by the end of the year.The move was announced by minister for social protection Joan Burton, who said it would be crucial that the design and structure of a new, universal supplementary pension scheme – previously referred to as Shamrock Saver, Celtic Saver and MySaver – secured the confidence of all affected workers.Burton, also Ireland’s deputy prime minister, said the URSG would draft a roadmap for government on the introduction of a system, which would be based around greater access to defined contribution (DC) savings and offer details of cost, the system’s key features and its design.
Equity investments, on the other hand, made a 1.2% loss in the six-month period, the firm said.“Listed shares returned minus 2.2%, while unlisted shares returned 9.2%,” Bergring said.In the first half of last year, Veritas made a 12.9% return on its equity investments, including 13.3% for listed shares and 9.2% for unlisted.Property, which makes up 10.2% of Veritas’ investments, produced a 2.3% return in the first half, down from 5.0% in the same period last year.Veritas said the slowdown in global growth expectations at the beginning of the year had prompted many investors to seek safe havens. This cautious stance had then been reinforced when the central banks’ efforts to revive the economy continued and the fear of Brexit had increased, it added.However, the third quarter had begun on a strong footing, Bergring said.She said market turbulence had died down over the summer and appetite for risk had risen significantly during the late summer weeks.“The European Central Bank’s purchases of corporate bonds caused credit margins to decline,” she said, adding that in the US, the economy had developed better than expected and that this had given markets a boost, particularly in July and August.Veritas’ solvency ratio dipped to 26.8% of technical provisions at the end of June, down from 28.1% at the end of December. Finnish pensions insurer Veritas posted a narrowly positive investment return for the first half of this year, thanks, in part, to bond prices rallying due to actions taken by global central banks.Reporting interim financial figures for January to June, Veritas said investments generated a 0.9% return in the period, up from a loss of 0.4% for the first three months of the year, but still significantly lower than the 5.8% return produced in the first half of 2015.Niina Bergring, investment director at the pensions insurance company, said: “Fixed-income investments produced the best return, at 2.4%, because the level of interest rates sank markedly after the central banks introduced new stimulus measures, and because economic uncertainty continued to increase.”In the first half of 2015, fixed-income investments returned just 1.1% for Veritas.
This figure incorporates both the the reported collective deficit of £180bn and an extra £160bn – which reflects an additional risk premium of around 20% associated with reported underlying pension liabilities of £795bn, it said.John Llewellyn, of Llewellyn Consulting, which published the study, said: “The conclusions show that DB pension schemes continue to be large and extremely volatile elements in company balance sheets.”Even though DB schemes are under so much scrutiny, there is obviously a disconnect between the underlying pension obligations factored in by investors and what businesses are actually reporting, he said.“The overall impact of the liabilities on share prices must raise questions at least about the viability of dividends for some companies,” he said.David Collinson, head of strategy at PIC, said: “As recent examples have shown, there is a material difference between what companies are reporting as pension liabilities and what is required to secure fully those pension promises should the sponsoring company become distressed.”PIC said in its recent written submission to the Department of Work & Pensions Select Committee inquiry into DB pension funds that it did not believe companies were being entirely transparent with their investors about the level of pension risk to which they were exposed.PIC’s main business is selling pension insurance buyouts and buy-ins to DB trustees and the sponsoring companies. Pension liabilities are depressing the share prices of the UK’s 100 largest listed companies by a total of £340bn (€381bn) – almost twice as much as the firms’ reported collective defined benefit (DB) pensions deficits, a study funded by Pension Insurance Corporation (PIC) shows.The research confirms there is a broadly one-for-one effect of pension deficits on the market value of companies but states that this is when the deficit is measured on a consistent “risk-free” basis.The pensions shortfall being calculated on a risk-free basis is basically the same as the market adding an extra risk premium of an average of 20% to the pension liabilities as reported by the companies themselves.PIC said extrapolating this finding for recent pension liability data implied market valuations of FTSE 100 companies were depressed by up to £340bn at the end of this August.
PME has targeted a 25% reduction in carbon emissions from its equity holdings by 2020.The €44.5bn pension fund for the metal and electro-technical engineering sector said it would engage with the 10 companies responsible for the bulk of emissions in its portfolio.PME added that it would consider excluding companies from its investment universum if the dialogue failed to produce results.According to the metal scheme, the reduction target is part of a new sustainable investment policy. The pension fund said that total carbon emissions from its equity allocation – 38% of its total portfolio – had slightly increased to 2.98m tons last year.However, relative to assets under management, emissions dropped from 23.4kg to 21.2kg of carbon dioxide per €100 of invested assets.It attributed the decrease to the termination of a relationship with a manager with a high-emission portfolio.Last October, MN, PME’s asset manager, indicated that it a reduction target was not on its agenda.“We don’t want to commit to such a target, as we don’t want it becoming a goal in itself,” said Karlijn van Lierop, head of responsible investment, in an interview with IPE’s Dutch sister publication PensioenPro.During recent years, the €382bn civil service scheme ABP, the €185bn healthcare pension fund PFZW, and the €54bn scheme for the building industry BpfBOUW also announced concrete carbon reduction targets.ABP and BpfBouw, who share asset manager APG, also aimed to decrease their CO2 footprint by a quarter by 2020. ABP said it expected to divest its stake in 1,500 companies to achieve its target.PFZW, however, was even more ambitious, aiming for a 50% reduction through divesting its holdings in 200 mining and energy firms as well as steelworks.
The €1.1bn pension fund of Dutch engineering firm Arcadis is to move its pension plan to Het Nederlandse Pensioenfonds, the general pension fund (APF) of insurer ASR.In a statement, ASR said that the pension arrangements of the Arcadis Pensioenfonds will be placed in an individual compartment at the APF.The Arcadis pension plan will get its own stakeholders body with representatives of the employer, its 2,100 staff, and 2,600 pensioners. The pension fund also has 3,200 deferred participants.Commenting on the transfer, Bram Mommers, chairman of the Arcadis Pensioenfonds, indicated it was increasingly difficult for a company to keep its own pension fund up and running. “Following increasingly complicated legal requirements, the employer must put in more energy, while risks and implementation costs keep on rising and the options for offering distinguishable pension arrangements are decreasing,” he saidGert Kroon, director of Arcadis Netherlands, said the decision to join the APF was the result of three years of intensive research, during which time all possible scenarios were investigated.“Besides the most matching offer in terms of service, fees and conditions, Het Nederlandse Pensioenfonds also shares our view of the most important values, including independency and individuality, for a pensions organisation,” Kroon said.Earlier this year, the pension fund said it expected “to benefit from the professionalism, lower costs and solidity of a larger organisation, while keeping sufficient say over our pensions”.It also said it preferred an APF of a commercial player to a general pension fund run with other schemes, “as the latter will take up much time and money”.The scheme argued that co-operation between pension funds “has seldom turned out to be successful”.