Towers Watson has launched a service aimed at removing the need for insurance intermediaries when UK defined benefit (DB) funds transfer longevity risk.The consultancy has set up ready-made insurance cells, which allow pension funds to deal with reinsurance companies directly in longevity swap arrangements.Reinsurers only transact with insurance companies or banks, meaning DB funds wishing to hedge longevity risk have to access the market via an intermediary firm.The move by the consultancy comes after its involvement in advising the trustees in BT Pension Scheme’s (BTPS) mammoth £16bn (€20bn) longevity swap, where it transacted directly with a reinsurance company. BTPS created its own captive insurance company to transact directly with the reinsurance market and avoided intermediary fees and complications.Towers Watson’s service, Longevity Direct, will give pension funds access to a “ready made insurance cell”, which it said could write insurance and reinsurance contracts for longevity swap transactions.This, Towers Watson said, would reduce the costs of entering a longevity swap arrangement by cutting the intermediary fee and removing the need for price averaging.It said the costs of a typical transaction of £2bn in liabilities could come close to £30m in intermediary costs, with Longevity Direct having the potential to save “several million pounds”.Shelly Beard, senior consultant at the firm, said DB schemes not being charged price averaging would lead to significant savings.Price averaging occurs when insurers or banks typically engage with several reinsurers to spread credit and counterparty risks, and exposure limits.This means pension funds end up paying several levels of fees, which deteriorate as the intermediary engages each additional reinsurer.However, via a single transaction and where the pension fund is comfortable with a single counterparty, it could select the best pricing in the market.Beard also said the offering was much more stripped out in terms of intermediary costs charged to pension funds, allowing for further savings.Keith Ashton, head of risk solutions at Towers Watson, said: “Pension scheme and reinsurer interests are typically very aligned. A direct agreement can be much less complex than the longevity swaps we have seen in the past.”Longevity swap deals have reached £32bn in 2014 as DB schemes continue to use the insurance market as a prime source of de-risking.BTPS arranged a £16bn deal – a UK record – earlier this year, directly transferring longevity risk to US-based Prudential Insurance Company of America (PICA).It transferred its longevity risk to the newly created and wholly owned insurer, which then transferred the risk to PICA, avoiding significant intermediary fees.The Aviva Staff Pension Scheme also transferred £5bn of longevity risk directly but did this through sponsor and insurance company Aviva.
The €63m Dutch pension fund of US pharmaceutical company Bristol-Myers Squibb is to be liquidated and join insurer Aegon rather than follow the company’s initial plan to merge the scheme with its pension fund in Belgium. The Dutch scheme’s works council (OR) had opposed the plan, citing Belgium’s lower solvency requirements.The scheme’s board, in a letter to participants, said the pension rights in its final salary plan would now be transferred to and guaranteed by the insurer.It added that, as part of the transfer, Aegon would increase pension rights by approximately 1% in a one-off transaction. The pension fund also said its additional defined contribution plan, provided by Robeco, would be transferred to Aegon, and that the insurer would take over pensions accrual for its 80 active participants.The scheme announced its intention to liquidate in 2011, as it sought to merge with the sponsor’s Belgian pension fund. It also considered joining PGB, the €19bn pension fund for the Dutch printing industry. In the Netherlands, the merger of multinational companies’ Dutch pension funds with schemes in Belgium – often initiated by their sponsors – has become a hot topic. Aon Netherlands, for example, is awaiting the outcome of a legal dispute over its work council’s right to block a cross-border merger of its Dutch pension fund.The council raised concerns over participants’ right of say, as well as the quality of Belgian governance.Aon Netherlands has threatened to ignore future funding gaps if the works council fails to approve the relocation.Nestlé, meanwhile, ruled out relocating its €564m pension fund Alliance after the scheme’s works council, citing the quality of governance and fund structure in Belgium, rejected the move.The Dutch pension funds of Johnson & Johnson and Euroclear are among the schemes that have recently relocated to Belgium. Several other multinational companies, including BP, DuPont de Nemours and General Electric, are still weighing options on similar moves.
Local authority funds should be offered an infrastructure clearing house as a means of attracting capital to regional projects, the head of the London Pensions Fund Authority (LPFA) has suggested.Susan Martin, chief executive of the £4.6bn (€6.2bn) LPFA, noted there was still a disconnect between appetite for infrastructure projects and the capital mobilised.Speaking at the recent Local Government Pension Investment Forum, she said: “What’s been interesting in conversations is the number of pension funds that want to invest in infrastructure, and the number of local authorities that have some projects that can’t get that investment.“I know from discussions with a number of funds that it would be good if we had some sort of clearing house.” She noted that it could be set up by the UK’s Local Government Association.PKA, PensionDanmark and Sampension, three of Denmark’s largest pension providers, set up a similar ‘one-stop shop’ in 2012, allowing the authorities to plan, build and seek financing for projects.The European Commission recently launched the European Investment Project Portal to give investors access to a pipeline of projects. The notion of a portal aimed at local authority funds was also proposed in 2012 by the Smith Institute, a UK think tank, which recommended the creation of a clearing house for social projects to attract local government pension financing.Martin said the clearing house could bring together local government schemes with the local authorities seeking project financing, enabling local authorities to put projects directly to funds “so they didn’t have the government going off to overseas investors”.She said pension funds were still interested in infrastructure projects, noting her fund’s recent investment in a biomass plant as part of its £500m joint venture with Greater Manchester Pension Fund.But she also argued that the similarly active Lancashire County Pension Fund had sought opportunities in Portugal, acquiring a stake in a local wind farm project.“For a pension fund, we have to get the return we need to pay our pensions,” she said. “And if that’s not possible within the UK infrastructure environment, we have to go elsewhere.”The UK government has stepped up its focus on infrastructure financing in recent years.Earlier this month, it announced it would set up a National Infrastructure Commission to advise on future infrastructure spending.The commission, to be chaired by Andrew Adonis, today announced John Armitt as one of its seven additional members.Armitt, former chairman of the London Olympic Delivery Authority, in 2013 authored a report recommending the launch of a national infrastructure body at arm’s length from government.Other members include Michael Heseltine, a former UK deputy prime minister; Tom Besley, a member of the Bank of England’s monetary policy committee until 2009; Sadie Morgan, chair of the design panel for the High Speed 2 rail line; Bridget Roswell, former chief economic adviser to the Greater London Authority; Paul Ruddock, chairman of the University of Oxford’s £2bn endowment fund; and Demis Hassabis, an artificial intelligence researcher.
Nellshen said some of the results of these exercises would be “critical” for most German pension funds and called on the European Commission to “abandon the idea” of the holistic balance sheet (HBS) approach with harmonised, EU-wide quantitative capital requirements.He urged the Commission to focus instead on a more differentiated, principle-based approach to capital requirements.Nellshen warned that the outcomes of some QA calculations suggested that financial “gaps” could be avoided only by those German pension funds with “a single, large plan sponsor that has very good credit quality”.For pension funds with several smaller sponsors – perhaps lacking any credit rating – the QA requirements in many of the examples would be nearly impossible to fulfil, he said. Nellshen said the calculations for the whole QA exercise, although “simplified” compared with the quantitative impact study (QIS) of 2012, was still “very complex”, particularly with respect to sponsor support. Bayer PK’s CFO, meanwhile, welcomed ECON member William Hayes’s comments on the IORP II Directive, as they “did not include any mandate for EIOPA to derive EU-wide, harmonised quantitative solvency requirements”.As for the stress test as a whole – mandatory for Bayer PK, being one of Germany’s largest pension funds – Nellshen said it was “logical and stringent”.However, he criticised that some parameters were “far removed from practical market experience”, such as the simulated shock on real estate values of up to 63%.“These assumptions,” he said, “might prevent investors from going into long-term real asset investments.”He also repeated his concerns, voiced after the first quantitative impact study in 2012, that marked-to-market valuation could create “completely false steering impulses” for IORPs and lead to “extremely pro-cyclical investment behaviour”. Stefan Nellshen, CFO at the €8.5bn pension fund for pharmaceutical giant Bayer, has warned that German pension funds will need to close “very substantial financial gaps” if they exposed to the full brunt of Solvency II. Speaking at the annual aba conference, Nellshen said meeting the “full Solvency II impact”-variant of the stress tests – referring to Example 1 in the quantitative assessment (QA) – would be “almost impossible” for most German IORPs.“We cannot swallow enough pills to cure the headaches the application of this variant would give us,” he said.Earlier this year, EIOPA issued stress tests for European IORPs (institutions for occupational retirement provision) to complete on a voluntary basis and added a QA exercise – including several variants on scenarios – to assess possible quantitative capital requirements and supervisory regimes.
The European Securities and Markets Authority (ESMA) has backed granting 16 UK pension providers – from buyout schemes to pooled funds – transitional exemptions from central clearing obligations.The exemptions themselves have to be granted by the UK Financial Conduct Authority (FCA), which has to seek the opinion of ESMA before making its decision.The exemptions the EU supervisory body has come out in favour of are in relation to the obligation to centrally clear OTC derivative contracts under the European Market Infrastructure Regulation (EMIR).Some pension scheme arrangements or entities get an automatic temporary exemption from that obligation, whereas others need prior authorisation. The 16 pension schemes are not named but include a range of occupational schemes such as authorised and contractually based pooled funds, buyout schemes and life insurance providers, as well as defined contribution personal pension schemes.In each case, ESMA backs the FCA’s view that the pension providers would have difficulties meeting variation margin requirements – a cash payment made on a daily or intra-day basis for profits or losses – for centrally cleared transactions.This is because the schemes have limited cash holdings, and because of high costs in the form of lower investment returns or transaction costs, as well as “the risk of inefficiencies as a result of converting assets into cash”, according to ESMA.
For the first half of this year alone, Industriens reported a 2.7% return on investments before pensions tax. Apart from Brexit-related speculation in the third quarter, financial markets were also marked by concerns about economic growth in general, the pension fund said.But strong liquidity support from central banks and a stabilisation of oil prices provided support to the markets, it said.Industriens said accommodative monetary policy and falling interest rates had shown through particularly in the form of high returns in the pension fund’s nearly DKK35bn portfolio of corporate bonds.Traditional government and mortgage bonds also did well over the period.Mortensen said the fund was in a situation where the assets that had produced the most this year were opposite of those that had returned well last year.“This year, it has been the different types of bond that have really pushed the return up, while it was equities in particular that did this last year,” she said.Mortensen said this showed how important it was to have the right spread and composition of investments in an unpredictable market.Corporate bonds produced a return of 10.4% in the nine-month period, having made a 1.8% loss in January to September 2015.Non-listed investments, which make up DKK35.9bn of the pension fund’s investment portfolio, produced a return of 3.9%, down from 13% in the same period last year.Foreign equities, which account for DKK29.7bn of the portfolio, returned 2%, up from a 0.8% loss in the comparable year-earlier period. Denmark’s Industriens Pension has said all its asset classes made positive returns over the third quarter, bringing the return for the first nine months of the year to 5.6%, or DKK7.7bn (€1.04bn), doubling the gains made in the first two quarters of 2016.Laila Mortensen, the pension fund’s chief executive, said: “After the British voted themselves out of the EU on 23 June, we were worried about how the financial markets would react.”But, seen in that light, the pension fund was very pleased it managed to increase returns for all asset classes and doubled the year-to-date return to 5.6%, she said.In January to September 2015, the DKK146.4bn labour-market pension fund for industrial sector workers made a 3.8% return before tax.
Four in five institutional investors are expecting an impact on operations from Brexit, according to a survey conducted by State Street.The company quizzed 111 asset owners and alternatives managers from around the world about their attitudes to the UK’s expected departure from the EU.The survey forms the basis for State Street’s new Brexometer study – a quarterly gauge of views and strategies relating to Brexit.Almost one-third of those surveyed said they would require more help to navigate the regulatory implications of Brexit. Jeff Conway, chief executive for Europe, the Middle East and Africa at State Street, said investors expected Brexit to hit “a range of operational issues”.“Many appear well prepared for Brexit and are proactively putting strategies in place to mitigate any ensuing impact,” Conway added.While almost two-thirds (63%) of investors said they planned to maintain their existing investments in the UK, almost half (48%) said they expected the overall level of investment in the UK economy to fall in the next quarter.Longer term, 31% of respondents said asset owners would cut the amount of risk in their portfolios over the course of the next 3-5 years.However, one-quarter said asset owners were likely to increase risk.Michael Metcalfe, head of global macro strategy at State Street Global Markets, said a weak currency had aided inflows into UK assets in the six months since the UK voted to leave the EU.“Foreign institutional equity investors are particularly strong buyers of UK equities of late,” he added.The FTSE 100 gained 19.5% between 24 June and 13 January, when it hit a record close of 7,337.8.The FTSE 250, which is more domestically tilted, gained 15.8% in the same period.A Fidelity survey of its own regional analysts revealed that 60% believed Brexit would have a “moderately negative” impact on their companies.Almost half (49%) of the company’s European analysts said their companies were “less willing” to invest in the UK over the next two years while the Brexit negotiations took place.This week has seen UK prime minister Theresa May give her first public speeches about her hopes for Brexit negotiations with Europe.EU leaders have warned that discussions will be difficult, and that the UK cannot expect to be better off outside of the union.
Contracts that are currently being negotiated with a London bank will expire towards the end of April. By then, the option would be to strike a new contract with an EU-based office of the same bank.Van Dijk said that legal documents enabling pension funds to trade in derivatives must be copied to the German, French or Irish branches of the bank in question.Achmea IM has hundreds of so-called ISDA/CSA contracts with international merchant banks, half of which are located in London.“During the past year, we have been busy converting these contracts while carefully checking whether clauses would not substantially change at the expense of our clients,” Van Dijk said.Several banks have applied for a licence with Dutch regulator AFM, which would enable Dutch pension investors to keep on trading with companies based in London, he said.According to Van Dijk, only a few US banks have applied for such a licence.He said it was possible that, even with a ‘soft’ Brexit, an increasing number of derivatives transactions would be made through European bank offices.“As long as uncertainty remains about the final conditions of the UK’s departure from the EU, it is sensible to conclude transactions with these European offices,” he said.Van Dijk argued that Brexit would mark a point of no return, regardless of whether it was ‘hard’ or ‘soft’.“Only if Brexit is cancelled do I expect the level of the derivatives trade through London to remain unchanged,” he said.A paper published by the EU in December set out contingency plans for a hard or ‘no deal’ Brexit. It stated that derivatives counterparties based in the UK would be able to continue to do business with EU investors for 12 months after Brexit through a “temporary and conditional equivalence decision”.In addition, UK-based security depositories would get a 24-month reprieve as part of the EU’s contingency plan. Any Brexit-fuelled exodus of the derivatives market from London to the European mainland will start with currency contracts, according to Dutch asset manager Achmea IM.Erik-Jan van Dijk, manager of treasury and derivatives at the €130bn investment house, said currency contracts would likely move from London to Frankfurt, Dublin and Paris, ahead of interest rate swaps.“Currency contracts usually have a duration of three months, whereas interest swaps span a period of decades,” he said.If the UK exits the EU without a full withdrawal agreement – the ‘hard Brexit’ scenario – pension investors could be restricted from dealing with London-based banks for rolling forward existing contracts and concluding new ones.
Citing data from Morningstar, Aon pointed out that smart beta ETFs had $797bn (€724bn) of assets at the end of 2018, having grown at a compound annual growth rate of 29% between 2012 and 2018. However, they still represented 20% of the total ETF market, which stood at $5bn at the end of 2018.By comparison, passive funds at large, including ETFs and mutual funds, went from 14% of the US market in 2005 to 37% by the end of 2018.In terms of valuations, since 2012 the momentum factor has become increasingly expensive compared with the MSCI World, while low volatility and quality have not risen to the same extent, as measured on a price to earnings basis.Given the strong performance of the equity markets, these movements are to be expected, according to Aon, and are not explained by the growth of fund flows into factor strategies.The paper said: “Overall, the evidence for overcrowding is weak. From a flows standpoint, factor-based funds have certainly been popular, but this popularity has been dwarfed by the wider trend towards passive investing and away from active investing.” Despite the significant flows into factor investing strategies, fears about overcrowding are not justified, according to Aon.In a paper titled Factor Investing – Standing out from the Crowd, the consultancy makes the case that the evidence of overcrowding in factor strategies is not strong enough to support the idea that flows into the sector are eroding factor premiums on a permanent basis.Andrew Peach, principal consultant and one of the authors of the paper, said: “Given the growing popularity of factor strategies, clients often ask us, if everyone is doing this, does the benefit go away?“Our principal stance is that these are separately identifiable rewarded risks that exist for structural reasons. Therefore, even if everyone piles in, these risks should not be arbitraged away.” He added: “Each of the individual factors can operate its own cycle. They can be relatively more or less attractive than their peers over the market cap index at any given time. But these premia exist because there are risks that not everyone wants to take.“As a result, these premia for allocating to a risk factor ought to remain on a long-term basis.”It is unrealistic to foresee a situation where factor premiums are wiped out completely, owing to the majority investors allocating to factors, said Peach.“There is always a role for active management in price discovery. At the same time, it is highly unlikely that investors would allocate to factors defined in the same way.”The consultancy used trends in investor flows and relative valuations as a proxy for overcrowding. The growing popularity of factor strategies has to be put into context with the remarkable growth of passive strategies, according to Aon’s paper. “Likewise, from a valuation standpoint, the evidence suggests variability and certainly some periods when a particular factor has become more expensive relative to history and the market cap index. But it does not suggest anything permanent or particularly concerning.”However, the consultancy noted that on a long-term basis, the premiums for the value and momentum factors have fallen. Possible explanations for the erosion of the value premium are the strong weight of financials within value portfolios and the strong performance of the technology sector within market cap indices.The erosion of the momentum factor is linked with the behaviour of the whole market cap index, which has been increasingly momentum-driven, according to the paper.While overcrowding should be a concern, Aon said that the erosion of certain factor premiums must be watched closely.The spread and variability of relative valuations support the case for a multi-factor approach, added Aon.
A new $140 million waterfront project is set to transform a key site at Hope Island on the northern Gold Coast.A new $140 million waterfront project is set to transform a key site at Hope Island on the northern end of the Gold Coast.Fresh from the recent quick-fire sell-out of its $55 million Three72 Marine on the Gold Coast’s Broadwater, Aniko Group, headed by George Mastrocostas, has released an impressive series of apartments, called No. 1 Grant Avenue.The project will take advantage of a shortage of apartments in the Hope Island area and will be strategically positioned near the new Hope Island Marketplace.The development will feature 210 apartments across two buildings with a range of exclusive resort-style facilities.More from newsParks and wildlife the new lust-haves post coronavirus13 hours agoNoosa’s best beachfront penthouse is about to hit the market13 hours agoThe first stage at No. 1 Grant Avenue will have 105 apartments, ranging from one-bedroom, plus study to three-bedroom, plus study residences.Apartments will blend elements of modern yet timeless design, which offer spectacular water views and lush green surrounds. Buyers will enjoy access to a residents’ lounge, expansive pool with sundecks, a fully equipped gym overlooking a children’s indoor play area, zen garden, private media room, barbecue facilities, a pet wash bay and secure basement parking.Aniko will also lodge an application to construct marina berths so owners can enjoy easy access to the Broadwater and seaway.Mr Mastrocostas said the sell-out success of the Three72 Marine Parade apartment project in Labrador pointed to pent-up demand for quality apartment living on the Coast.Apartments will range from 86sq m to 176sq m. Prices start from $369,000. Aniko Group will start construction by mid-year.