The regulator’s Technical Report on Standard Formula Design and Calibration for Certain Long-Term Investments under Solvency II, published in late December, could discourage insurers from investing in CMBS, which would be “unfortunate, both for insurers and for the CRE sector and wider economy”, the response added.The associations admitted CMBS was a fairly new instrument to the European market and said it had suffered due to “inconsistent alignment of interests” between issuers and investors, as well as inaccurate disclosure on the assets backing any securities.The response said they were “acutely aware” of the problems, which were currently being addressed, but that EIOPA’s report risked undermining their efforts.However, the associations were also keen to stress the importance to financial stability in allowing insurers to invest in the market in greater volume, noting that the over-realiance on bank funding proved problematic when there were “peaks and troughs” in the economy.“This proved to be a source of material systemic risk within the EU and for the global economy,” they said.“Improving diversity in sources of finance would help build market resilience and support financial stability. EIOPA’s revised proposal is likely to have precisely the opposite effect.” Placing stringent Solvency II capital requirements on all types of commercial mortgage-backed securities (CMBS) risks the stability of the commercial real estate (CRE) market, INREV and the Commercial Real Estate Finance Council (CREFC) have jointly argued.The industry associations said allowing insurance companies to easily invest into CMBS would diversify the sources of funding for the European CRE market, currently “dominated” by banks.Responding to a report on long-term investing by the European Insurance and Occupational Pensions Authority (EIOPA), the bodies added: “The result is a market that lacks resilience, as too many debt providers react to market signals in the same way at the same time, exaggerating the peaks and troughs of the cycle.”The response argued that certain types of CMBS should qualify for the less arduous ‘Type A’ capital treatment “by reference to objective criteria, and not to condemn all CMBS, regardless of their actual characteristics, to ‘Type B’ treatment”.
It would not be “progressive” for the £2.2bn (€2.7bn) Environment Agency Pension Fund (EAPF) to divest its fossil fuel holdings, an independent analysis of its portfolio has found.The fund, which is part of the Local Government Pension Scheme (LGPS), asked consultancy Trucost to calculate its exposure to stranded fossil fuel assets via its existing investments.EAPF already integrates the consideration of environmental, social and governance issues in its investment decision-making process.Trucost, however, analysed the extent at which the EAPF portfolios are exposed to carbon stores that may be embedded within listed companies. It found none of the EAPF’s nine portfolios were significantly more exposed to these stores more than the relative benchmark index.One of the fund’s portfolios, however, had a 15% exposure to fossil furl extractive companies, but this was still ten percentage points lower than the FTSE 100 index.The report from Trucost also provided a range of recommendations for the fund, in order to assess and manage the risks associated with embedded carbon emissions.It said those asset owners exposed to the fossil industry should not consider divestment, suggesting it is neither industry leading nor a progressive approach.Funds should be part of the conversation and influence decisions, the report said, and reducing capital exposure does not precipitate a reduced prevalence of the industry.“An asset owner the size of the EAPF, would be unable to affect the values put on the future cash flows of fossil companies simply by divesting its holdings in those companies,” the report said.“Even a coordinated action by the entire universe of university endowments and public pensions funds would unsurprisingly be rapidly corrected by neutral investors eager to take advantage of a temporary depression in market sentiment.”Trucost also said investors should lobby for disclosure from fossil fuel companies, suggesting its own analysis on the EAPF’s exposure was hampered by the lack of ready information from organisations.It said not enough companies disclose data which allows for robust analysis, and only a distint minority make reserves data, broken down by fuel type, available.This makes accurate emissions profiling of companies, and portfolios, statically inadequate, Trucost said, and funds should engage to ensure comprehensive data is publically available.Investors in indices and fossil companies should also engage with the management to ensure, and understand, plans on the development of new fossil fuels, and the shift to a lower carbon economy.They should also raise awareness of stranded assets in fossil companies, encouraging governments to legislate for said transition.Chief investment and risk office at the EAPF, Faith Ward, said the fund had identified key actions based on Trucost’s analysis.“The EAPF has made considerable progress in addressing climate risk,” she said, “but there are still opportunities to further reduce the financial risk to the portfolio and potentially increase the returns of the fund as a shareholder.”
Stock markets were weaker than before because of mild disappointments in economic development, particularly in the US, he said.Asset allocation in VER’s investment portfolio tipped slightly towards private equity and away from fixed income during the period, with the former rising to 3% from 2% and the latter falling to 51% from 52%.Quoted equities made up an unchanged 40% proportion of the portfolio at the end of March.The State Pension Fund’s market value of investments rose slightly to €16.5bn as of the end of March from €16.3bn at the end of December. Meanwhile, pension insurer Varma reported a 2% return on investments for the first three months of the year, and said it was keeping its equity weighting stable since there were no better alternatives.All investment classes made a profit in the quarter, according to the interim report.The overall investment return in the period undercuts the 3.4% return achieved in the same period last year.Risto Murto, president and chief executive of the company, said: “The recovery from the financial crisis has been strong.”Assets under management increased in value to €38.7bn at the end of March from €36.2bn at the same point in 2013.Solvency capital increased to €9.6bn, or 32.9% of technical provisions, versus €8.4bn and 30.1% a year before.Fixed income investments performed unexpectedly well, it said, returning 1.4% in the quarter compared with 0.6% in the same period in 2013. Despite being affected by the crisis in Ukraine, worries about the economic growth in China and expectations the US Fed would trim debt stimulus measures, share prices increased between January and June, Varma said.Its equity investments generated a 2.6% return, down from 7.6% in the first quarter of 2013, while property returned 2.1%, up from 1.3%.Investment allocations were broadly unchanged in the three-month period, with equities remaining the largest asset class in the portfolio with a weight of 38%.Chief investment officer Reima Rytsölä said: “Hardly a single investor feels entirely confident about opting for equity overweight. Right now, however, it’s difficult to find a better alternative to equities and, in that respect, the situation has not changed since the turn of the year.”In other results from Finnish pension funds, Veritas reported a 1.8% return for the first quarter but warned it had muted expectations for profits over the rest of the year.Equities returned 2.6% and fixed income investments 1.8%, the pension insurer said in its interim report.The overall investment return was down from the 2.4% posted in the first quarter of 2013.Niina Bergring, investment director, said: “The first quarter was strong, and we are pleased with the performance. However, the expected return for the rest of the year remains moderate.”Fixed income returns were helped by positive development in corporate bonds and falling interest rates, she said.Valuations in equity markets were now somewhat high, she added.She said Veritas had lowered the level of risk in its portfolio slightly and was following developments in China particularly closely.Solvency increased to 28.6% of technical provisions by the end of the quarter, up from 27.6% at the end of December 2013.Assets under management rose to €2.52bn at the end of March from €2.45bn at the end of December. Finland’s State Pension Fund (VER) made a return on investments of 1.5% in the first three months of this year, down from the 3% it generated in the same period a year ago.Quoted equities returned just 1.4% in the period compared with the 7.4% they produced in the first quarter of 2013, but fixed income investments returned 1.5%, up from the year-earlier return of 0.2%, the pension fund said in its interim report.Timo Löyttyniemi, chief executive at the fund, said: “The development of returns at the beginning of the year was reasonable despite the strong fluctuations in the markets.”He said the markets had shown no clear direction, even though the Ukrainian crisis had added colour.
Future European stress tests of the pension sector are set to examine climate-related risks, following a recommendation by the European Systemic Risk Board (ESRB).Pension funds could also face upper limits on their exposure to high-risk carbon assets, if regulation were adapted in the wake of any stress test results, the board said.The ESRB examined the potential risk resulting from a late low-carbon transition, arguing that belated awareness of the importance of reducing emissions could see an “abrupt” introduction of constraints on the use of high-carbon energy sources.It also suggested that such a shift would increase systemic risks due to the decline in value of carbon-intensive assets and the impact of sudden changes in energy usage. As a result, the report – ‘Too late, too sudden: Transition to a low-carbon economy and systemic risk’ – proposed that future stress testing of the financial sector by the European Supervisory Authorities, such as the European Insurance and Occupational Pensions Authority (EIOPA), incorporate the risk of its ‘hard landing’ scenario.“In particular,” the report adds, “the ESRB macroeconomic scenario [drafted for future stress tests] could incorporate an upward shock in the price of non-renewable energy sources, causing a negative impact on aggregate demand while at the same time ‘turning off’ any positive balance-sheet effects for energy producers and accounting for country specificities.”It also suggests that dedicated carbon stress tests could be conducted to determine the most important systemic risksAs a way of dealing with the risks associated with carbon emissions, the board suggested investors subject to capital charges could see tailored capital surcharges based on the carbon intensity of their holdings, or that there could be upper limits on assets “highly vulnerable” to a rapid transition.EIOPA’s inaugural pension fund stress test exposed the defined benefit sector to two scenarios, including one looking at the impact of a commodities shock.The supervisor’s chairman, Gabriel Bernardino, said it planned to conduct further stress tests in two years, allowing the ESRB to devise its next potential scenario in 2017.,WebsitesWe are not responsible for the content of external sitesLink to ESRB report ‘Too late, too sudden’
Matt Richards, actuary at PIC, said: “The trustee has moved proactively and in a considered manner to achieve a strong outcome. This transaction is part of a long-term de-risking strategy undertaken by the trustee, which allowed them to take advantage of a window of favourable pricing.“The trustee should be congratulated for acting in a decisive manner to reduce risk across all pensions, not just those that have been insured.” David Ellis, UK leader for bulk pensions insurance advisory at Mercer and adviser to the GKN trustees, praised the scheme for its willingness to innovate.“This latest transaction is testament to the long-lasting benefit of taking proactive action to manage pension risk,” he said.GKN’s main defined benefit schemes in the UK, the US and Germany had combined liabilities of more than £4bn at the end of 2015, its annual report said.The GKN Group Pension Scheme’s liabilities were £848m, primarily relating to pensioner members.GKN’s trustees completed two buy-ins with Rothesay Life in 2014 and 2015, worth £123m and £53m, respectively.The scheme also enacted a pension increase exchange in 2015, agreeing to raise benefits for members in exchange for their giving up guaranteed increases. Engineering firm GKN has agreed a £190m (€222.7m) buyout with Pension Insurance Corporation (PIC) and begun to wind up its pension scheme.The transaction covers 20% of the GKN Group Pension Scheme’s liabilities, which were £848m at the end of 2015, according to the company’s annual report.Remaining members of the scheme will be transferred to a new fund, allowing the legacy pension scheme to be wound up.Members with small pension pots will be offered a lump-sum transfer to exit the scheme altogether.
Kempen – Gerard Roelofs is to join Kempen Capital Management as director of client solutions as of 30 January. He is to succeed Jan Bertus Molenkamp, Kempen’s director of fiduciary management. As part of Kempen’s management team, he is to focus on extending the asset manager’s international proposition, including fiduciary management. Previously, Roelofs was on the management team of NN Investment Partners and head of European investment at consultancy Towers Watson. Prior to this, he was managing partner for the Netherlands at Watson Wyatt, as well as country head for the Benelux region at Deutsche Asset Management.Global Impact Investing Network – Ashley Elliot has been appointed global liaison for East Africa. GIIN cited Elliot’s longstanding commitment to impact investing and deep knowledge of the region. In addition to his work with the GIIN, he is a managing partner at research and strategy firm Sofala Partners.International Accounting Standards Board – Prof Tom Scott, a Canadian academic, is to become a member of the IASB. He will join the organisation in April for an initial five-year term. Scott has been an academic in the field of accounting at various universities in Canada since the late 1970s. Most recently, he acted as a director and Prof of Accounting at the School of Accounting and Finance, University of Waterloo.Financial Reporting Council – Phil Fitz-Gerald has been appointed as director of the Financial Reporting Lab, which aims to bring together companies and investors to support improvement and innovation in reporting. Fitz-Gerald has been at the FRC since 2009. The FRC has also appointed Jennifer Sisson as senior investor engagement manager. She will join on 27 March from PwC, where she held a similar position. PFA Pension, Industriens Pension, Nordea, Appolaris, Horeca & Catering, Kempen Capital Management, NN Investment Partners, Global Impact Investing Network, International Accounting Standards Board, Financial Reporting Council, PwCPFA Pension – Kristian Lund Pedersen has been appointed as head of press at Denmark’s PFA Pension and is leaving his job as head of press at Industriens Pension. He will be replaced by at Industriens by Laurits Harmer Lassen, who is joining the labour-market pension scheme from his role as senior press officer at Nordea. Harmer Lassen has worked at Nordea since May 2015 and before that spent 12 years as a business journalist for several national media outlets including Berlingske Business. He will start his new job on 1 February.Appolaris – Danny van Wijk has started as manager of external managers at Appolaris, the administration provider for the €2.5bn pension fund for pharmacy workers in the Netherlands. He joins from Horeca & Catering, the €7.7bn sector scheme for the hospitality industry, where he has been investment manager in 2016. Prior to this, Van Wijk was senior investment consultant for fiduciary advice at the €200bn asset manager PGGM, senior portfolio manager at Univest Company and fund manager for private equity and European equities at the €114bn asset manager MN.Profond – Laurent Schlaefi is the new head of benefits at the CHF6.1bn (€5.7bn) Swiss multi-employer pension scheme as of the beginning of this month, replacing Martin Baltiswiler. He will jointly manage the scheme with CIO Christina Böck, who was appointed to the new role in May last year. Schlaefi has spent his entire career in the insurance industry, having held positions at Winterthur Versicherungen, AXA Winterthur, Zurich Insurance Group and others. Baltiswiler left Profond at the end of 2016.
Investor body Shareholders for Change (SfC) has criticised telecoms giant Vodafone for its tax policy, in one of the group’s first actions since launching last year.True to SfC’s promise to “name and shame” one large company on tax policy, the collaboration of small European institutions published a report on the European telecommunication industry at its winter meeting in Paris.In the aptly named Bad Connection report, Vodafone was lauded for reporting country-specific data on its profit sources. Such a regional breakdown has been recommended by the OECD to counteract multi-national corporations minimising their taxable base and shifting profits between jurisdictions.While Vodafone’s transparency on that front was welcomed by the shareholder engagement group, it criticised the company for reporting most of its profits in Malta and Luxembourg, low-tax countries where Vodafone has the fewest employees. “A lack of transparency and shifting profits are a risk for all investors as this puts companies at risk of fines and investigations by tax authorities,” said Rainer Ladentrog, engagement manager at the Fair-Finance Vorsorgekasse, the Austrian founding member of SfC.He added that these tax policies had “deeper ethical repercussions” as they “often drastically reduced tax income both for emerging markets as well as developed countries”.Ethos joins SfCTwo new members were welcomed by SfC: Switzerland’s Ethos Foundation and the Friends Provident Foundation from the UK.Ethos is itself a shareholder engagement platform for around 230 Swiss pension funds with combined assets under management of CHF260bn (€231bn).In a statement Ethos, which was founded by pension funds in 1997, said joining SfC was an opportunity to “increase engagement activities with European companies on topics important to Swiss Pensionskassen” in their investments in international equities.The other new joiner was the Friends Provident Foundation with £33m (€36.6m) in assets under management and a 15-year track record of engaging with UK companies.SfC was founded in 2017 by seven smaller institutional investors from Germany, Italy, France, Spain and Austria, with around €22bn of assets under management in total.The platform wants to help smaller investors to be heard at annual general meetings or other engagement forums.
Sweden’s third biggest pension fund bucked the trend last year to produce a 1.3% gain on its investment portfolio, according to preliminary full-year results just released.AMF reported that its real estate allocation produced a gain of 12.4% for 2018.The total return of 1.3% is lower than the previous year’s 7.9% gain, but comes at a time when many other pension funds are reporting losses.Chief executive Johan Sidenmark said: “In light of the late autumn’s sharp fall in stock prices, I am pleased that we could secure a positive return for the full year.” Sidenmark said AMF had worked actively with its allocation to increase the proportion of assets that did not correlate with the stock market, such as real estate and infrastructure.“The year was characterised by signs that a slowdown was beginning, while trade wars and political concerns created uncertainty in the financial markets,” he added.The fund’s average annual return over the past five years was 6.8%, and 7.6% a year over the past decade. Total assets dipped to SEK590bn (€56bn) at the end of December 2018 from SEK596bn a year earlier.AMF said its property portfolio generated the strongest return of any asset class during the year, with a return of 12.4%, while the return on alternative assets was 4.1%.Both equity and fixed income incurred losses over the course of the year, it said.AMF’s solvency ratio fell to 182% from 196%, the provider reported, after SEK11.2bn was allocated to a reinforcement of guarantees during the year.
Between them, the two funds have approximately 18,300 members, according to their respective websites.“The FSA judges that the pension fund has not proved that it is objectively justified from the point of view of the members to undertake the change through a collective ballot, that groups of members will not be disadvantaged by change, and that the aim of the change cannot be achieved by offering members an individual choice,” the regulator wrote.Funds consider appealMette Carstad, chairman of AP, said: “We take note of this, but are currently considering whether we should appeal the decision to the Danish FSA, because we still believe that a collective transition to market-rate is the most appropriate and value-creating way to change product, both for the pension fund and for the individual member.”PJD chairman Erik Bisgaard Madsen agreed, adding that there had been more than a year and half of “intensive work and an ongoing dialogue” with the FSA before the ruling.“We think that a collective transition to market-rate is a solution in the collective interest with a fair distribution of profits which safeguards all members in the same way,” Madsen said. “No one is disadvantaged or loses money through a switch, and all members achieve a more appropriate investment profile and better opportunity to adjust their savings risk individually.”Both chairs said they did not understand why the regulator would not permit this decision to be made at the AGM.In recent years, a number of pension providers in Denmark have been shifting to market-rate or unit-linked products, in which an individual’s savings balance is directly affected by financial market performance. These have gradually replaced average-rate or with-profits products, where the risk is borne in a more collective way and returns are smoothed from year to year by the provider. Some average-rate products have traditionally involved return guarantees.Some providers have opted to switch only those individuals who have actively chosen to do so, while others have shifted only future pension savings to market-rate. Providers such as Industriens Pension have made a more comprehensive move and changed the basis of all existing and future savings to market-rate in one go.Ulla Brøns Petersen, director of the FSA’s consumer affairs and financial intermediaries division, told IPE that the authority had looked into several cases of pension companies wanting to make such wholesale shifts.It had developed some criteria that must be met in order for pension companies to fulfil their obligation to act in an honest and fair way to the scheme members, she said. Two Danish pension funds have been blocked by the regulator from shifting all pension savings to a market-rate basis, from the current average-rate investment method.The pension fund for architects, AP (Arkitekternes Pensionskasse) and the pension fund for agricultural academics and vets, PJD (Pensionskassen for Jordbrugsakademikere & Dyrlæger), said they did not understand the decision and could appeal it.The schemes had planned to hold a collective vote on the proposal at their respective annual general meetings (AGMs) by way of consent, but the Danish FSA (Finanstilsynet) said they would be violating good practice if they failed to obtain individuals’ consent.In letters to AP and PJD dated 26 March, the FSA said the funds – which are both run by the DKK290bn (€38.8bn) pensions provider Sampension – would be contravening rules on good practice for insurance distributors if they decided to transfer members with a conditionally guaranteed, average-rate product to a market-rate-based, lifecycle product without allowing each of their members an individual choice.
The European Commission has launched tenders for studies on sustainability-related products and services and on the integration of environmental, social and corporate governance (ESG) risks by EU banks.The studies were provided for in the Commission’s sustainable finance action plan from March last year. Implementation of that has so far mainly focused on the legislation that the Commission proposed and the related work of the technical expert group.According to the tender documentation, the study on “sustainability ratings and research” is supposed to:Describe the state of play of the sustainability-related products and services market;Establish an inventory and classification of actors and sustainability products and services available on the market;Explore the use and quality of sustainability-related products and services; andProvide the Commission with recommendations and best practices to stimulate demand and improve the quality of supply. Sustainability-related products and services included ratings, scores, scenario analysis, raw data, ESG benchmarks, and second opinions on green bonds, and were offered by a number of specialist and traditional providers, according to the Commission.One of the aims of the study, it said, was to “design a coherent legal and economic classification” of the products and their providers.The general objective of the other study was to “explore the integration of ESG risk considerations into the EU banking prudential framework and into banks’ business strategies and investment policies”.The findings would feed into the work to implement the Commission’s sustainable finance action plan and could be taken into account by the European Banking Authority.The EBA has been tasked to assess the potential inclusion of ESG risks in the reviews and evaluations carried out by supervisors. It is supposed to deliver a report on its findings to the Commission, the European Parliament and the EU Council by 28 June 2021.