BlackRock’s latest internal poll of 100 senior investment staff sees 55% in favour of a ‘low for longer’ scenario for 2014.This anticipates fragile growth, low but stable inflation, low real rates pushing a further hunt for yield and equity-market momentum, with modest revenue and margin growth sitting alongside more share buybacks, rising dividends and corporate bond issuance.The $4.1trn (€2.9trn) asset manager’s 2014 outlook largely favours ‘more of the same’ in economies and markets, with only 20% of senior investors backing a deflationary ‘imbalances tip over’ scenario and 25% voting for the strong risk-asset momentum and M&A boom of ‘growth breakout’.However, after being driven by re-rating and multiple expansion during 2013, the firm warned that equity market momentum depends on earnings growth next year, and it suggested that the worst might be over for emerging markets – the ’dark horse’ of 2014. While BlackRock’s estimate of fair value for 10-year US Treasuries puts the yield at 3.7%, it expects the Federal Reserve to do what it can to keep them expensive.“Because there is still a significant debt overhang, I don’t think anyone – governments, corporate issuers or individual mortgage borrowers – can afford an increase in real rates up to 2-4%,” said Ewen Cameron Watt, chief investment strategist at the BlackRock Investment Institute.Benjamin Brodsky, global head of fixed income asset allocation, added that because the consensus for yields is lower than fair value, interest rate and bond volatility would be high in either of the firm’s two non-pessimistic scenarios, particularly given any break out from the current trading range.Brodsky noted that risk-free rates and emerging markets were both negative in 2013, when the place to be was spread products in developed markets, and that he “reluctantly” continues to hold assets like high yield. “High yield is not held for valuations but for carry,” he explained. “That is always problematic, but at this stage in the absence of rising default rates it is hard to imagine significant underperformance.”Nigel Bolton, BlackRock’s head of European equities, observed that equity market performance has been driven by multiple expansion everywhere except Japan, which had seen meaningful earnings growth.“That is characteristic of a bull market, but we expect that markets can continue to rise, albeit at a slower pace,” he said. “It may be that multiples are de-rated [in 2014], but we expect earnings to grow and deliver a positive return, overall.”Brodsky spoke of a “change in global growth leadership” from the emerging to the developed world. “Emerging markets have been the dog of 2013,” he said. “Emerging economies did turn around a little in the second half of 2013, but growth is still unspectacular. The only rate hikes we will see next year will be from emerging markets – there will be plenty, and this is under-reported.”These hikes, and sovereign credit assessment that is currently too harsh in BlackRock’s view, led Brodsky to suggest that hard currency emerging market bonds could do significantly better in 2014.On the equities side, Bolton noted some evidence of money coming out of US equities and into other markets, particularly Europe, and he also counselled against dismissing emerging markets, especially Asia. “Emerging markets are a bit of a dark horse for 2014,” he suggested.“If 2013 was the year of the equity, 2014 might be the year of the search for a diversifier,” Cameron Watt said. “We may see the persistent lack of correlation between bonds and equities being questioned.”
The Ahold Pensioenfonds said it was also hit by underperforming emerging market government bonds, which it introduced last year as a tactical position of 5% at the expense of global credit.Its asset managers Pimco and Stone Harbor lost 14.6% and 16%, respectively, on these investments, it said.The pension fund reported a 14.3% return on its 23% equity portfolio, with returns from investments in Europe, North America and the Pacific varying between 13.2% and 24.7%.Property (6%) and private equity (3.6%) delivered returns of -1.1% and 11.9%, while commodities (2.1%) produced a loss of 12.7%.Last year, the Ahold scheme replaced its actively managed European listed property portfolio with a passively managed global property mandate, switching from Cohen & Steers to Northern Trust in the process.The pension fund also said the ratio between fixed income and equity in its portfolio would now depend on its coverage ratio.If its funding is more than 130%, it will raise its investment risk through increased investments in securities, it said.This is in contrast with the policy of the €22.5bn Dutch pension fund of Shell, which decided to reduce its equity exposure in favour of fixed income, following a funding increase to 131%.The Ahold Pensioenfonds is to grant a full indexation for the first time in five years, after meeting less than 50% of inflation in 2013.The scheme has 35,130 active participants, 11,600 pensioners and 36,560 deferred members. The €3.2bn pension fund of supermarket chain Ahold saw its 0.7% return on investments last year offset by a 4% loss on its interest hedge, leading to an overall return of -1%.Following a new and dynamic policy for its interest hedge, the scheme had already reduced its interest cover from 75% to 55%, which prevented an additional loss of 0.8%, according to its 2013 annual report.By contrast, the pension fund’s 80% hedge of the main currencies contributed to a positive return of 2.3%, it said.The interest rate increase from 2.53% to 2.84% boosted the scheme’s coverage ratio – which improved from 114.3% to 116% – but had a negative effect on its 64% fixed income holdings, causing a 3.5% loss.
Insurer Prudential has committed to fund a £1bn (€1.2bn) tidal power plant, one of hundreds of projects part of the UK government’s national infrastructure plan (NIP).Investing through its wholly-owned asset management arm M&G Investments, the insurer will act as a cornerstone investor in a project looking to build a hydro-power station in Swansea, South Wales.The completed project is estimated to cost £1bn and aims to become part of a network of tidal plants that could produce 8% of the UK’s electricity requirements.It is expected to open in 2018, with construction scheduled to begin early next year. Commitments from Prudential form part of the UK Government’s agreement with six of the largest insurer’s to spend £25bn on UK infrastructure.The agreement between HM Treasury and the insurers was made after clarifications of Solvency II regulations made the allocation to domestic infrastructure possible, the Government said at the time.Much of the £25bn was expected to be come from insurers’ annuity books, as the firms formed a significant section of the UK individual annuity market.Prudential’s move may alleviate concerns insurers would not be able to stand by their commitment.Three months after the £25bn agreement was announced, Chancellor George Osborne launched radical overhaul of the defined contribution (DC) at-retirement market, removing compulsory annuitisation for majority of savers.The change resulted in more than £1bn wiped off the value of insurers listed on UK stock markets, heavily reliant on the individual annuity business.The £12bn a year individual annuities market was expected to take a significant hit in value with savers now allowed fully withdraw savings as cash, or electing to use income-drawdown.However, alongside Prudential’s investment, Legal & General (L&G) also affirmed its commitment to the plan despite the hit and long-term impact on its individual annuities book.Michael Abramson, head strategic business for bulk annuities at L&G, said the insurer would use its bulk annuity arm to back the commitment as it expected its overall annuity book to grow.The number of insurers using bulk annuity business from defined benefit (DB) schemes to match falling individual writings is expected to grow after the Budget reforms.Legal & General today announced a £129m buy-in with the Unaic Pension Scheme, part of the Unilever group.
The call for the committee to look at the issue came from the European Securities and Markets Authority (ESMA).The decision confirms the position adopted by the committee’s staff at the March 2015 IFRS IC meeting that the committee should not add the issue to its agenda.Any such move by the committee might have involved either the release of interpretive guidance or a change to pensions accounting rules that could have affected the size of a defined benefit (DB) sponsor’s pension liability.Guidance on the application of the asset-ceiling test under International Financial Reporting Standards (IFRS) is set out in IFRIC 14, ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and Their Interaction’.The document, issued in 2008, interprets the requirements of IAS 19.When a DB plan sponsor applies IAS 19, it must first measure the DB obligation using the projected unit credit method and fair value any plan assets on the other to reach either a DB asset or liability at the balance sheet date.Where a plan is in surplus, the sponsor will recognise the lower of any surplus and the IAS 19 asset ceiling – that is, the economic benefits available to the entity from the surplus.This might be as either a refund of contributions from the plan or a reduction in future contributions.In the circumstances described by ESMA, neither a plan wind-up nor a plan closure to future accrual has been decided on at the end of the reporting period.In the UK, practice has tended to be that a company will recognise a surplus under IFRIC 14 as an asset if it can agree with its auditors it has an unconditional right to a refund at the end of the life of the plan.If not, the sponsor might be able to argue that it expects to derive an economic benefit as a reduction in future service contributions.However, IFRIC 14 says that, when an MFR means a sponsor will not derive the full economic benefit from IAS 19 future service cost, it must deduct the MFR future service contributions.The accounting challenge that this presents under IFRIC 14 and IAS 19 is whether the sponsor should book a liability representing, say, a three-year time horizon or the longer timeline for the schedule of contributions.For example, UK sponsors will generally agree a schedule of contributions over a 10-year period or so, and then review the schedule every three years or so.The sponsor might also prepare a new funding valuation and schedule with its trustees because it has benefited from positive investment returns.Aon Hewitt consultant actuary Simon Robinson told IPE: “You could argue that the schedule of contributions says the company has agreed to pay contributions for the next X number of years. The problem is, we all know that is not going to happen.“Although a sponsor might have reached a 10-year funding commitment, the reality of the cashflows under that agreement is that they will only happen until the next funding valuation is finalised. Equally, an employer could force a valuation.”Speaking during a 24 March discussion of the topic, IFRS IC member Tony Debell, a PwC audit partner, said: “You can’t assume the minimum funding requirement disappears simply because the period of the agreement disappears.“We are saying you should continue to apply the principle that underpins the minimum funding requirement to make assumptions that are consistent between the way you measure the DBO and the way you measure the minimum funding requirement.”The IFRS IC noted in its agenda decision that paragraphs 21 and BC30 of IFRIC 14 explain that an entity’s estimate of future minimum funding requirement contributions should take no account of the effect of expected changes in the terms and conditions of the minimum funding basis that arenot substantively enacted or contractually agreed at the end of the reporting period; andequivalent to a legal requirement or contractual agreement.Simon Robinson added that IFRIC 14 is “not sophisticated enough to deal with the very complex situations that arise in practice and so can require a degree of interpretation”.He added: “What it does say, however, rather sensibly, is that companies should consider whether they should recognise an additional liability in respect of additional contributions.” The International Financial Reporting Standards Interpretations Committee (IFRS IC) has confirmed it will not develop guidance dealing with the asset-ceiling test in International Accounting Standard 19, Employee Benefits (IAS 19).The issue is of particular relevance to pension plan sponsors in the UK.Experts say it could also affect scheme sponsors in Ireland and Canada.According to a formal agenda decision published in its official journal, IFRIC Update, the committee said: “On the basis of [its] analysis, the Interpretations Committee determined that, in the light of the existing IFRS requirements … sufficient guidance exists, and neither an interpretation nor an amendment to a standard was necessary and therefore decided not to add this issue to its agenda.”
Investment returns generated by Finland’s earnings-related pension funds in the first half of this year were just above zero, thanks to a positive second quarter, according to Finnish pensions alliance TELA.But near-zero returns for the world’s largest pension funds last year reveal the difficulties in the global investment environment, the organisation said.TELA published data showing that the investment return on Finnish earnings-related pension assets was 0.3% in nominal terms in the first six months of the year.Despite the positive return trend in the second quarter, “modest returns” in the first quarter means the figures for the first half were only slightly positive, it said in the statistical analysis. Earnings-related pension assets totalled about €180.3bn at the end of June, lower than the level reported for the same point last year of €182.9bn, even though TELA said the value of the assets had risen by €2.4bn during the second quarter of this year.TELA analyst Peter Halonen said the situation on the financial markets improved slightly during the second quarter, as central banks continued monetary policy measures to stimulate the economy and reasonably good financial figures were published – in the US and China, for example.“On the other hand,” he said, “the stimulating monetary policy and the resulting low interest rates have kept the investment environment challenging, especially for fixed income investments.“Brexit, in turn, hit equities particularly hard during the second quarter and has increased both economic and political uncertainty.”Returns on earnings-related pension assets in Finland in 2015, however, beat returns produced by big pension funds in other countries, TELA said.But it warned that these weak investment results by the big funds indicated how tough the environment was.Halonen said: “Last year, the returns of the world’s largest pension funds – for instance, in Japan, Norway, the Netherlands and the US – were around zero.“This reflects the difficulties in the global market situation; we operate in the same investment environment.”However, he added that Finnish pension insurers were constantly striving to seek new, profitable investments.“For as long as the return on investments exceeds the growth rate of the wages and salaries sum in the long term, it pays to invest pension assets and to cover some pensions with the returns yielded by the investments,” Halonen said.At the end of June, the proportion of earnings-related pension assets invested in equities and equity-like instruments stood at around 46.3%, or €83.6bn in absolute terms, down from 46.3% at the end of June 2015.Fixed income investments accounted for about €81.9bn, or 45.4%, up from 42.7% at the same point last year, while real estate investments totalled €14.9bn, equating to an 8.3% overall allocation, down from 9.4% 12 months earlier.TELA’s analysis takes in data on the investment of statutory earnings-related pension assets made by pension insurance companies, industry-wide pension funds, company pension funds, the pension liability fund for the employees of the Social Insurance Institution, Keva, the Central Church Fund, the Farmers’ Social Insurance Institution, the Seafarer’s Pension Fund (MEK), the Pension Institution of the Bank of Finland and the State Pension Fund (VER).
Christian Thimann, AXA, chair of HLEGThe group will release its interim report around the time of the G20 Summit, taking place on 7-8 July. It will present its recommendations in December.Sustainable finance building blocksAccording to the minutes of the early March meeting, the HLEG “has identified six key areas in building a sustainable European financial system, all of which rely their own specific institutions, actors and actions but also are inevitably interlinked”.The areas form the group’s work streams.The group says the areas are not exhaustive, but are intended to cover “the largest structural challenges and mechanisms”.Thimann simplifies the six areas into three:A shared vision and understanding;Integration of sustainability into the EU’s regulatory and financial policy framework, such as by “addressing structural obstacles and time misalignments”; andThe mobilisation of capital flows towards sustainable investments, including expanding financial markets for sustainable assets.“The topic of sustainable finance is so wide that we need to develop a shared vision and understanding,” says Thimann. “We have to define the framework and what we mean by sustainable finance.”The Commission’s ambition relates to a financial system that “focuses on systematically addressing societal challenges” such as education, employment creation, the environment, and health, Thimann explains.“The interesting thing – and this is why our topic is so fascinating – is that these challenges are also long-term challenges,” he says.He says that the group is trying to come up with “a little bit more of an analytical framework” about what would constitute a sustainable financial system.“What does success mean in terms of capital costs? In terms of orientation of flows? How can you tell that the financial system is sustainable or contributes to sustainable growth and development? That is what we are trying to do in this area,” says Thimann. There have been countless investor groups and campaigns set up to promote sustainable investment, but Christian Thimann, chair of the European Commission’s High Level Expert Group (HLEG) on sustainable finance, believes the group he leads has a “unique” opportunity to influence regulatory policy. “Our value-add is the link between all the work that has been done before and all the legal texts that govern the financial system,” he tells IPE.Thimann, also group head of regulation at AXA, claims it is precisely “because so much has already been done on the subject” that the group feels “great” about its work. “We are standing on the shoulders of giants,” he says. The group is distinct from all other groups and initiatives that have dealt with sustainable finance, Thimann says, because “this is the first group that is directly supported on a lasting basis by the European Union’s main financial regulator”.“There is now a group on this subject that is working with the support of the regulators, so we’ll be getting serious on sustainable finance,” he adds. “There’s a great momentum in the group, because everyone feels this is a unique chance that has been given to us to work with the regulator.”Comprising 20 individuals from different stakeholder groups, the HLEG is tasked with making recommendations for “a comprehensive EU strategy on sustainable finance as part of the Capital Markets Union”.The expert group has now met twice, and recently published minutes of its second meeting, held in early March. These unveiled its thinking about “the key areas in building a sustainable European financial system” and the framework the group has adopted to guide its work.Several of the issues mentioned in the minutes have been talked about at length in the institutional investment industry, such as the need to “adapt processes, incentives and culture across the investment and lending chain”.
“The subject is difficult to legislate and would require sufficient input from pension funds as well as time,” he said. “However, we are working with Royal Mail to understand its concept.”“The subject is difficult to legislate and would require sufficient input from pension funds as well as time”Julian Barker, DWPHe indicated that parliament was also short of time to deal with the matter.Barker told IPE that there was hardly any demand from pension funds for secondary legislation for CDC.Royal Mail’s Hall said the group would not switch its pensions arrangements to CDC without proper legal backing. It wants to offer a CDC target pension combined with a DB-style lump sum at retirement for the fund’s 142,000 participants.The group’s current pension plan was unaffordable, Hall said, as the employer contribution was set to increase from 17.1% to 50% this year to fund its pension promises.As one of the advantages of CDC, Hall cited a less conservative investment strategy in the years prior to retirement with the potential of higher returns, as well as “less complexity for participants, who don’t have to make investment decisions as required in pure defined contribution [DC] plans”.In 2014 the UK parliament passed primary legislation supporting the concept of defined ambition – also known as CDC – allowing pension plans to provide for arrangements in between the guarantees of DB and the non-guaranteed DC.However, it later postponed indefinitely the full introduction of the concept.During the conference, David Blake, director of the pensions institute of Cass Business School, had said there were no less than 11 separate definitions of CDC.Edit: The DWP has told IPE that secondary legislation for CDC has not been permanently ruled out. The UK’s Department for Work and Pensions (DWP) is not planning to introduce secondary legislation to legally accommodate collective defined contribution (CDC) plans, an official has said.Speaking during a conference hosted by Cass Business School on Monday, Julian Barker, defined benefits strategy team leader, indicated that the DWP would explore existing legislation for ways to provide legal backing for the introduction of CDC. Barker was responding to a presentation by Jenny Hall, head of regulatory engagement at Royal Mail. The postal service group agreed with its union in February that it would explore switching from its current defined benefit (DB) plan to a CDC arrangement.Barker said the DWP had not yet started drafting legislation and could not provide a timeframe for doing so, or predict the outcome.
It cited the stringent conditions attached to a merger, which would have allowed schemes to temporarily keep their assets ringfenced if the coverage ratio differed too much, allowing different funding levels to gradually converge within a five-year period.Several political parties linked their criticism to objections voiced by the sector.In October, the Dutch Pension Federation asked the government to withdraw its bill, because of the multitude of constraints set for a merger between sector schemes.It highlighted the condition that merger partners with assets above €25bn would be excluded from the proposed rules, limiting the options for small pension funds to join larger ones.Speaking to Dutch financial newspaper FD, Pension Federation director Gerard Riemen said that, under the proposed rules, six smaller schemes in the building industry would not be allowed to join the €56bn BpfBouw, the main scheme for the sector.In addition, the planned legislation required potential merger partners to be affiliated and that no more than five pension funds could merge into a new scheme.Moreover, merger partners would have to split up if their funding levels failed to converge within five years.The federation also indicated that the proposed solutions for bridging funding differences between merging schemes, and letting participants benefit from increased scale, were not workable.The Pensions Federation said it was pleased with the minister’s decision to withdraw the bill. The Dutch government has abandoned legislation aimed at enabling mandatory industry-wide pension funds to merge.In a letter to parliament, social affairs minister Wouter Koolmees said he would consider alternatives to achieving benefits of scale for sector schemes that wanted to consolidate.The decision followed fierce criticism of the proposed bill from both the pensions sector and parliament. All said that the legislation – tabled by the previous government – would make mergers needlessly complicated.Last April, the lower house of the Dutch parliament welcomed additional options for consolidation in the pensions sector, but had also made clear that the proposed legislation was the wrong instrument.
Eurofer, the Italian railway workers’ pension scheme, has launched a search for private debt fund managers.The €1bn second-pillar scheme will select one or more closed-end private debt funds, aiming to invest up to €25m, according to a document published on Eurofer’s website.The investment will be allocated to the ‘Bilanciato’ fund, the largest of its three funds (Garantito, Bilanciato and Dinamico) that the scheme offers. The Bilanciato fund had around €886m in assets as of June this year.Eurofer said it wanted funds investing mainly in the European Union or the European Economic Area. Successful bidders would invest primarily in debt financing for infrastructure projects, real estate projects or unlisted real estate companies, the pension fund said.It expressed a preference for medium-term loans to be held to maturity. The scheme intends to evaluate the risk profile and seniority level of the underlying investments. It aims to obtain a net return of between 5% and 8%.The funds must comply with AIFMD rules and have a target size of at least €250m.Consultancy firm Bfinance is assisting Eurofer in the selection process. More information can be found on its website.Eurofer, an industry-wide scheme, was among the first Italian schemes in its category to invest in real estate when it backed a pan-European real estate fund in 2012.In 2016, the scheme added to its alternatives portfolio with an investment in a core infrastructure equity fund.Italian pension funds increased their allocation to alternative assets in general throughout 2017 and managers expect the trend to continue this year.Private debt investments in Italy grew 35% in 2017, according to AIFI, the Italian private equity, venture capital and private debt association. Last year managers invested €641m, bringing the size of the market to over €1.5bn.
Source: DWSAsoka WöhrmannHe has held various other roles at Deutsche Bank and DWS including global CIO for fixed income, equity, and multi asset; global head of foreign exchange; head of absolute return strategies; and portfolio manager for international bonds.In a message to employees today Woehrmann said DWS “needs to show how our asset management business adds value”.Karl von Rohr, supervisory board chairman of DWS Group, said: “Asoka Woehrmann knows our company, our clients across the world and the asset management industry like the back of his hand. This makes him an excellent choice to secure the global, sustained success of the DWS Group.” Asoka Woehrmann has been appointed chief executive officer of DWS Group, taking over from Nicolas Moreau, the €692bn asset manager announced this afternoon.The supervisory board of Deutsche Bank also appointed Woehrmann permanent senior group director for the asset management business.Moreau would cease to be a managing director of the group at the end of the year, Deutsche Bank said, while Woehrmann’s appointment was to take effect immediately.Moreau’s exit comes just two years after he joined from AXA France, where he was CEO. In his tenure at DWS he oversaw a company-wide rebrand and restructure as well as its IPO earlier this year. Woehrmann joined Deutsche Bank in 1998 and was most recently responsible for Deutsche Bank’s private clients business in Germany. Prior to 2015 Woehrmann was responsible for the asset management business’s fund management platform as global CIO. Nicolas Moreau addresses the PRI conference earlier this yearHe added: “Nicolas Moreau has performed a great service over the past two years by leading the transformation at DWS Group. We would like to thank him for resolutely driving the IPO and setting the course for future success.”DWS has also reshuffled its senior distribution staff, creating four regional leadership positions.