Bulgaria’s government is set to reverse some of the controversial changes to the second-pillar pension system rushed into law at the end of 2014 after the Finance Ministry published a series of amendments on 23 January.Pension fund members will still be able to switch to the first pillar, but crucially this decision will no longer be irreversible.Instead, workers with more than five years left to retirement will have the option, once a year, to change their preference.The funds transferred from the second pillar will no longer go to the PAYG system of the first pillar National Social Security Institute but to the Silver Fund, the stability vehicle set up in 2008 to cover future pension deficits. New entrants to the labour market will have, as was the case before the law was revised, three months to choose a second-pillar fund or be assigned to one.The 2015 law gave them a year from their first period of paid employment to make a decision or automatically default to the first pillar.According to the Finance Ministry’s website, “the amendments proposed will be used as the basis for conducting a useful discussion and a wide public debate aimed at reaching maximum consensus and long-term solution of the pension system issues … by March 31”.Ivaylo Kalfin, deputy prime minister and minister of Labour and Social Policy, will lead a task force to establish this consensus.The government’s about-turn follows wide-ranging objections, including from the Reformist Bloc, a junior member of the ruling coalition.The ombudsman of the Republic of Bulgaria, Konstantin Penchev, who had received numerous complaints from workers concerned about the “nationalisation” of their funds, warned that the pension changes should have followed extensive consultation, and that he would consider exercising his right to refer the matter to the Constitutional Court.Intensive lobbying from the Bulgarian Association of Supplementary Pension Security Companies (BASPSC) also appears to have paid off to some extent.The association sent an open letter to the Parliament, government, president and media refuting the 10 “untruths” being propagated about the second pillar.These included the assertion that, since their inception in 2002, the second-pillar funds have generated a negative real return.BASPSC states that, according to Financial Supervision Commission (FSC) data, between the start of April 2002 and the end of September 2014, the universal pension funds generated a real annual return of 0.464%.Miroslav Marinov, executive director at Pension Insurance Company Doverie, said: “We are the only financial institution to announce a real rate of return, while all the others report only nominal ones.”Marinov expressed disappointment that the new amendments did not cover many outstanding important issues in the second-pillar pensions regime, including returns, guarantees, fees, payouts, investment regulations and the introduction of multifunds.The BASPSC is likely to be pushing for these in the coming weeks.It still faces powerful opponents.Earlier in January, the Parliament’s budget and finance committee drafted its own amendments, including introducing guaranteed returns and slashing fees.The committee is exceptionally hostile to the second-pillar system, with chairwoman Menda Stoyanova recently accusing it of harbouring “bad apples,” a charge refuted by the FSC.For more on recent changes to Bulgaria’s pension system, see Barbara Ottawa’s article on Pensions in Central & Eastern Europe in the January issue of IPE magazine
They said they found that asset managers often declined to provide pension funds with requested data.“Pension funds should therefore ask themselves whether they wish to do business with players that don’t want to provide this information,” they said.In the regulators’ opinion, schemes should make cost-reporting arrangements with their asset managers in advance, as well as evaluate the service provided by their asset managers on an annual basis.The DNB and AFM also urged pension funds to report transaction costs in their annual reports.Although this is still currently optional, they reminded schemes that the new Pensions Act would make the reporting of these costs mandatory.DNB said Dutch pension funds spent approximately €5bn on asset management in 2013 and attributed a 2-basis-point, year-on-year increase in costs to performance-related fees.The watchdog also announced a survey into the extent to which pension funds factor integrity risk into their overall risk analysis.The results of this survey will determine whether additional rules will be necessary, it said.It added that the results would be presented as best practice.The regulator said all pension funds must submit a thorough integrity analysis for 2015, illustrating how they had translated their conclusions into policy. De Nederlandsche Bank (DNB) has ordered Dutch pension funds to make further improvements on the reporting of asset management costs, particularly those involving outsourcing by external managers.Drawing on a 2013 cost survey of more than 240 pension funds, the DNB, together with the communications watchdog (AFM), concluded that schemes needed to understand outsourcing costs fully before they could determined whether or not overall costs were appropriate.The regulators added that they had called on 21 pension funds to provide in-depth reporting on management and performances fees involving private equity, hedge funds and real estate – and that 15 had had to re-submit improved reports.The DNB and AFM looked at asset management contracts, information memorandums and annual statements, as well as pension funds’ own self-assessments.
This increase in regulation – particularly for banks – means the world is “en route to a credit squeeze”, he warned.However, Hartwig Webersinke, an economist at the University of Applied Sciences in Aschaffenburg, argued that the increase in regulation in the wake of the financial crisis was “cyclical”.After 2008, the “clear political aim was to never let this happen again”, and to ensure this, “a flood” of new regulation was introduced.Webersinke argued that many of the new regulatory requirements were contradicting one other and pointed out that many financial service providers were being visited by different supervisors because there had been no final agreement on the remits of different European or local authorities.As a case in point, he cited European Central Bank president Mario Draghi announcing support for banks to lend more venture capital.“One month later, a different authority, under the same roof, told banks they had to improve their accounts because of new stress tests,” Webersinke said. “In a few years, we will be thinking about the costs of this additional regulation and the actual effect it has, and this will change the regulatory environment.“We are only at the beginning, but I hope we will realise how many redundancies are already being created by too much regulation and that it is killing some financial products like the Riester-Rente,” Websersinke added, referring to the German supplementary pensions vehicle set up by the former labour minister Walter Riester in 2002.Regarding a possible financial transaction tax, Schelling said he did not see a sufficient number of EU member states supporting the measure.“Further, it is unclear whether it is actually legally possible to introduce such a tax in only a few member states against the will of the other EU members,” he said. Austrian finance minister Hans Jörg Schelling has warned that institutional investors providing financing for projects and companies could “distort” the lending market because they are less regulated than banks.Speaking at the recent Faros institutional investor conference in Vienna, Schelling reiterated concerns raised by the International Monetary Fund in its October 2014 Financial Stability Report concerning ‘shadow banking’. “Regulation is a cost factor banks have to take into account and other lenders do not,” he said.Schelling said the regulatory situation in Europe was becoming “more and more dramatic”, with some new requirements “actually being pure nonsense”.
Local authority funds in the UK face a “fire sale” of up to half their £230bn (€314bn) in assets if they are reclassified as retail investors under a European Directive coming into force in 2017.Triggered by the transposition of the revised Markets in Financial Instruments Directive (MiFID II), the new rules would do away with MiFID I’s framework allowing asset managers to treat local public authorities automatically as professional clients.Instead, asset managers would be forced to assess whether public authorities, including the administering authorities behind the UK’s 101 local government pension schemes (LGPS), possessed the requisite knowledge to invest in institutional products.In a briefing note sent to funds last week, the UK’s Local Government Association (LGA) warned that the LGPS would be “defaulted to retail client status”, leaving them with a “much reduced pool” of asset managers and consultants with which to work. “Those managers willing to deal with you will offer a restricted range of products, and, due to the extra compliance checks and reporting required for retail clients, those products could cost more,” the note said.“If, when the Directive comes into force (January 2017) you hold assets in products outside of the scope of those available to retail clients, you may find the manager will eject you from that product, resulting in a ‘fire sale’ of assets.”It added: “First estimates are that up to 50% of LGPS assets may be affected.”The LGA said a “fire sale” could be averted if the Financial Conduct Authority (FCA), in charge of drafting the regulation, allowed for a transitional period, during which the LGPS could retain its stakes in institutional products.Alternatively, it noted, funds could ‘opt up’ and be classified as professional clients, requiring every local authority fund to demonstrate to each of its external managers it possessed the requisite experience, expertise and knowledge so it was “capable” of making its own investment decisions.It is understood that the Department for Communities and Local Government (DCLG), in charge of LGPS regulation, is working to address the matter.A source within DCLG said the department would be doing its “level best” to avoid a divestment of holdings, which it said could see asset sales occur at “entirely the wrong time”.“We really must try to avoid that at all cost,” the source added.The LGA could not say how long an assessment to opt up would take, but warned funds not to be surprised if the process was not complete if a significant number waited until late 2016 to start the classification process.The association said it was in discussions with the FCA on ways to make the transition “smoother” for the LGPS, and was also talking with the Investment Association about the development of a standardised process allowing the funds to achieve professional status.It did not say if the rules would impact plans to create LGPS asset pools but said it was talking with both the DCLG and the Treasury about any potential impact.
Solvency II will have a diminishing impact on the price of pension de-risking and eventually boost UK insurance companies’ appetite for deals by up to £5bn (€7bn), LCP has predicted.Contrary to previous estimates by PwC that the price of buyouts could increase by up to 10%, the consultancy predicted the cost of passing on pensioner risk would remain broadly unchanged, while there would be an average increase of 3% when covering the risk of non-pensioner cohorts.However, in its 2015 report on pensions de-risking, LCP said the increased price would vary depending on the insurance company and argued its impact would diminish as insurers modified their new capital requirement models.The report went on to say that next year’s introduction of Solvency II brought several years of uncertainty to a close. But it said that the “more favourable” outcome would help grow the UK de-risking market.The buy-in and buyout market has, nevertheless, already exceeded £10bn this year, compared with £13.2bn of policies written in 2014.The longevity swap market saw a notable decline, from £21.9bn to £9.3bn, but 2014’s figures were boosted by the BT Pension Scheme’s completing a £16bn deal, the single-largest de-risking deal in UK history.LCP predicted a £5bn increase in insurance capacity in 2016, driven by the clarity created by Solvency II’s introduction but also by the entry of two new providers into the market.Scottish Widows last month completed its first deal, a £400m buy-in for Wiggins Teape, while Canada Life in October announced details of its first, £5m deal.Charlie Finch, a partner at LCP, said the increased level of competition would be beneficial to pricing in 2016.He added: “All the ingredients are now in place for the market to break more records and provide cost-effective solutions to help pension plan trustees and companies transfer risk at affordable prices.”But Finch said pension funds would need to compete for capacity with insurers transferring historic annuity business to other insurers.“The delicate balance,” he said, “between supply and demand means that, despite the increase in insurer capacity, demand could quickly outpace supply, especially if investment markets improve pension plan funding levels.”
Brussels-based think tank Bruegel has suggested the European Commission should seek an EU-wide definition of “fiduciary duty”, echoing a call made by Aviva Investors in its response to a consultation the asset manager said could be “a game changer”.In a paper prepared for an informal meeting of EU member state economic and finance ministers (ECOFIN), the think tank warned that the “unsustainable” use of the environment represented an economic imbalance that could lead to financial crisis.ECOFIN ministers met over two days, with “sustainable finance” being the topic of a session chaired by Klaas Knot of the Dutch financial regulator, De Nederlandsche Bank (DNB).A Commission briefing note for the meeting discussed the financial-stability risks linked to the ongoing efforts to limit global warming and how the financial policy framework could contribute to an orderly transition. DNB recently warned of the risks to local pension funds if the Netherlands were to shift too quickly to a carbon-neutral economy. Bruegel, for its part, identified various policy solutions to the financial risks posed by climate change, including that the European Commission “could provide greater stability through an EU-wide definition of fiduciary duty” and “join investors in their call for the Organisation for Economic Cooperation and Development (OECD) to consider a convention on fiduciary duty and long-term investing”.As acknowledged by the think tank, these positions are shared by others, with Aviva cited as an example.Indeed, the call for an EU-wide definition of fiduciary duty and the involvement of the OECD is one of five key recommendations Aviva Investors set out in its response to a European Commission consultation on sustainable and long-term investments.The consultation “could be a game changer”, said Steve Waygood, chief responsible investment officer at the asset manager.“The EU now has a window of opportunity to turn sustainability rhetoric into reality by shifting how the markets deliver sustainable growth,” he said.Aviva Investors, in addition to calling for action on fiduciary duty, which it said could often be misinterpreted, said the EU should:adopt a more coordinated and centralised strategy on sustainable capital markets for Europe in partnership with industry and the wider financial community;create comparative public benchmarks of corporate environmental, social and governance (ESG) performance;develop greater standardisation across stock exchanges for corporate disclosure of sustainability performance, which could be led by the International Organisation of Securities Commissions (IOSCO); andrequire credit ratings agencies to consider long-term ESG ratings in their bond ratings, on a comply-or-explain basisSeveral of the recommendations were backed by Bruegel in its paper and are shared by others in the institutional investment community.The UN-backed Principles for Responsible Investment, for example, is drumming up support for an initiative on credit ratings before it launches a statement on ESG in credit ratings in May. As at 15 April, 14 investors had signed, mostly asset managers but also France’s €36.3bn national pension reserve fund, Fonds de Réserve pour les Retraites (FRR), and MN, the €114bn asset manager and pensions provider for the Dutch metal schemes PMT and PME.
APG, Mercer Germany, KGAST, CPPIB, Davidson Kempner, Natixis Global Asset Management, AXA Investment Managers, DWPAPG – Mark Boerekamp, chief operating officer at the €443bn Dutch asset manager APG, is to leave as a member of its executive board, as large projects on communication, pensions administration and ICT are nearing their completion. Boerekamp, who joined APG’s executive board in 2012, said he wants to focus on a new career in digital transformation processes and technological developments. APG said Boerekamp helped lay the foundations for cutting the cost of pensions provision and making operations more efficient. Boerekamp was also the driving force behind Brightlands Smart Services Campus, a co-operation between APG, Limburg county council and Maastricht University. APG said it would nominate Boerekamp as its representative on the supervisory board of the campus. Boerekamp’s tasks within APG’s executive board will be temporarily taken over by its chairman Gerard van Olphen.Mercer – The consultancy has announced that Martin Haep has been appointed to lead the new business division, Wealth, at Mercer in Germany. The new business area combines Mercer’s retirement and investment divisions so that these dovetail better, it said. Haep joined Mercer in 2007 and was most recently head of the multinational client group in Europe and client growth leader for Mercer in central Europe. Uwe Buchem and Herwig Kinzler, who have been leading the retirement and investment divisions, have been appointed chief operating officer and chief investment officer of the new wealth division respectively.KGAST – Alexandrine Kiechler, chief executive of the Credit Suisse investment foundation (Anlagestiftung) has been elected the new president of KGAST, the Swiss conference of heads of investment foundations. She replaces Hanspeter Kampf, chief executive of the J. Safra Sarasin Anlagestiftung, who remains a member of the KGAST board. Kiechler joined the board in 2015. The board was expanded by two new members, Sonja Spichtig, chief executive of the Swisscanto Anlagestiftungen, and Tobias Meyer, head of the the UBS Anlagestiftungen. CPPIB – Derek Jackson will be joining Canada Pension Plan Investment Board’s principal credit investments team as a London-based managing director in May. Jackson joins from Davidson Kempner, where was a managing director since July 2009. He focused on European event-driven and opportunistic credit investing and managed a sub-portfolio. Before that he was at Alcentra.Natixis Global Asset Management – Jean Raby has been appointed CEO of Natixis Global Asset Management. He will join the firm on 20 February and, as CEO, will be in charge of its asset management, private banking and private equity businesses. Raby was most recently the chief financial officer of French telecommunications company SFR Group. Before that he was chief financial and legal officer at Alcatel-Lucent, and before that he worked at Goldman Sachs for around 16 years, becoming head of its Paris office and then co-CEO of its activities in Russia. Raby replaces Pierre Servant, who has been appointed senior advisor to Laurent Mignon, CEO of Natixis. He remains on the Natixis senior management committee. Axa Investment Managers – Isabelle Scemama has been appointed CEO of AXA IM Real Assets, replacing Pierre Vaquier with immediate effect. Heidi Ridley has been appointed CEO of AXA IM Rosenberg Equities, and Kathleen Houssels global chief investment officer, both effective 1 March. They succeed Jeremy Baskin, who, like Vaquier, is leaving AXA IM. Scemama and Ridley join the management board. Scemama was previously CEO of Axa REIM SGP, the French regulated entity of Axa IM Real Assets. Ridley has been global COO and chief of staff for AXA IM Rosenberg Equities since 2011 and Houssels has been head of research and investment models at AXA IM Rosenberg Equities since 2012. Department for Work and Pensions (DWP) – Three members of the UK pensions industry have been appointed chairs of an external advisory group that will work with the government on its 2017 review into automatic enrolment. Ruston Smith, trustee director at Peoples’ Pension, will lead on the theme of engagement. Jamie Jenkins, head of pensions strategy at Standard Life, will be the chair for the theme of coverage. Chris Curry, director of the Pensions Policy Institute, will lead on contributions.
Allocations to hedge funds outweighed redemptions in the second quarter of 2017, after six consecutive quarters of net outflows, according to data firm HFR.The firm reported inflows of $6.7bn (€5.8bn) between April and June, offsetting redemptions of $5.5bn.The most popular strategy was global macro, HFR said, with investors adding $5.2bn in the second quarter. In the first half of 2017 global macro funds experienced net inflows of $6bn.Within this sector, systematic and CTA strategies attracted the most attention, with $3.1bn inflows in the second quarter and $7.9bn net new money since January. Event-driven funds – particularly special situations funds – led the redemptions. Special situations funds experienced net withdrawals of $2.2bn, HFR reported.Kenneth Heinz, president of HFR, said: “While the capital-raising environment has improved, it remains challenging with low implied and realised volatility creating a performance-moderating headwind for managers.“Allocation trends reflect the forward-looking nature of investors, focusing on quantitative and trend-following strategies, despite these not being top performing areas, as well as on equity and fixed income beta-reducing exposures.”Heinz added that funds positioned to navigate a low-volatility environment would likely continue to dominate inflows in the second half of the year.Hedge funds’ total assets under management rose to $3.1trn by the end of June, according to HFR.However, figures from rival data firm eVestment painted a different picture for inflows and outflows.Focusing just on the month of June, eVestment reported a net outflow of roughly $7bn across the hedge fund sector.The company also reported a tough month for macro funds, in contrast to HFR’s quarterly data: the sub-sector lost $6.4bn in net outflows.Long/short equity funds led the net inflows, eVestment said, adding $1.6bn in June.Some pension schemes have reduced their hedge fund exposure in recent months, or exited the sector altogether.Most recently, the Dutch sector scheme for doctors, SPH, said it planned to cut all its hedge fund holdings due to high costs and complexity. SPMS, the Dutch scheme for medical consultants, reduced its allocation last year following disappointing performance.However, a survey of more than 1,000 investors by consultancy firm Mercer, published last month, found that allocations to hedge funds grew by 4.6% year-on-year.
The UK government should seek an urgent transition deal to head off chaos in the financial services sector resulting from Brexit, according to a committee of peers in the House of Lords.Baroness Kishwer Falkner – chair of the House of Lords’ EU Financial Affairs Sub-Committee, made of members of the UK’s upper house of parliament – wrote to chancellor Philip Hammond to issue a stark warning on the possible impact of the UK exiting the EU.In a public letter to Hammond, Baroness Falkner wrote: “[F]or the financial services industry to be able to continue the orderly servicing of cross-border clients, a transition period needs to be agreed by the end of the year.“The clock is relentlessly ticking. Witness after witness told us that the financial services industry won’t be able to continue servicing cross-border clients after 2019 if a transition period is not agreed by the end of this year.” The chancellor has already conceded the need for a swift deal. In evidence to the Treasury Select Committee, he said a transitional arrangement was “a wasting asset”.He explained that, although it was currently valuable, by next summer “its value to everybody will diminish significantly”.Baroness Falkner’s intervention follows a hearing of the committee she chairs on 1 November, at which Sir Jon Cunliffe from the Bank of England warned financial institutions in London were preparing for the worst.He said: “They are saying, ‘Until I know what happens, I will assume no European authorisations other than [World Trade Organisation rules], and no transition,’ and that is necessary for the management of stability risk as a whole.”Sir Jon said financial institutions needed not only to have the time to make an orderly transition but also to have clear sight of the final destination.“What is important for us is that firms know where they are going, where they have to go to, and they have the time to get there in an orderly way,” he said.Although a transition deal would buy time, Sir Jon contonued, it would not address what he called the “only adjust once” criterion.Meanwhile, Sam Woods, chief executive of the Bank of England’s Prudential Regulatory Authority, sounded the alarm over the status of trillions of pounds of derivatives and insurance contracts.He told the Lords’ committee that the issue was not the rupture of the contracts themselves, rather that the exercise of rights and obligations under them were regulated activities that would become illegal in the event of no deal being reached.‘No deal’ would mean it was illegal for insurers to pay out on some claims, he added.Woods said: “If the UK exits the EU and you have a customer who, say, has bought a policy from a UK insurance company but is in the EU27 and wants to claim, it may well then be illegal for the company to pay that claim.”The Lords’ committee also heard that a communique regarding any potential transition deal from the European Council might lack legal force. Witnesses have already told the committee they want a transition agreement to be legally binding – perhaps through a ‘memorandum of understanding’ deposited at the United Nations.Sir Jon said: “I do not see any way that the European Council could make a legally binding commitment until it either has a treaty between the UK as a non‑EU member and the EU, or some other legal means.”
Almost 5m UK public service pension savers are in plans that do not have a complete set of basic governance features in place, the Pensions Regulator (TPR) has warned.Although 58% of the 191 schemes that responded to TPR’s annual governance survey – out of a possible 207 – have all of its key processes (see below) in place, 29% have yet to adopt them fully, the regulator added.As a whole, the sector provides pensions for more than 16.7m civil servants, teachers and other local government workers, including the police, armed forces and members of the judiciary.Speaking at the annual Pensions and Lifetime Savings Association (PLSA) local authority conference in Gloucestershire this week, Lesley Titcomb, TPR’s CEO, said the annual survey had found “a number of gaps around good governance”. It was not all bad news, she said: “We’ve been able to see significant improvement fairly quickly around data management, communications and internal controls.”The Local Government Pension Scheme – which accounts for a significant portion of the UK’s public sector pension system – was a leader in terms of governance standards, Titcomb said, and urged conference attendees to “stay ahead of the pack”.According to TPR’s public service governance and administration survey, more members received their annual benefit statement on time in 2017, with 60% of schemes meeting deadlines – up from 43% in last year’s survey.However, TPR expressed “doubts about the commitment shown towards scheme governance”. The report revealed that 43% of schemes held fewer than four meetings a year between scheme staff and pension boards.“We don’t think that provides sufficient opportunities for pension boards to effectively carry out their role,” Titcomb told the conference.Many schemes had “solid governance processes in place”, she said, “and we would like to see all adopt robust systems, which need to be operated, adhered to and maintained”.Titcombe said it was “disappointing” that monitoring record-keeping remained problematic. “Compliance remains patchy,” she added.Almost a fifth of legal breaches last year among public service pension schemes were caused by a failure to maintain records or rectify errors.In her closing remarks to the PLSA conference, Titcombe emphasised that the regulator wanted to be “a critical friend and not a wagging finger”.“But if it’s needed, we will be tougher,” she warned. “We will not shy away from punitive action when it is required.”The Pension Regulator’s six defined contribution principlesPrinciple 1: Essential characteristicsSchemes are designed to be durable, fair and deliver good outcomes for membersPrinciple 2: Establishing governanceA comprehensive scheme governance framework is established at set up, with clear accountabilities and responsibilities agreed and made transparentPrinciple 3: PeopleThose who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them outPrinciple 4: Ongoing governance and monitoringSchemes benefit from effective governance and monitoring through their full lifecyclePrinciple 5: AdministrationSchemes are well administered with timely, accurate and comprehensive processes and recordsPrinciple 6: Communications to membersCommunication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savingsSource: The Pensions Regulator