Pension funds still have a few years to benefit from the current dislocation of the credit market, according to the head of investments at a £3.3bn (€4bn) UK local authority pension scheme.Speaking with IPE magazine for a special report on credit in the May issue, Mark Lyon of East Riding Pension Fund said that, in 2010, he had initially predicted a 3-5 year period of banks retreating from lending, but now believed the retrenchment could last up to 10 years.“Much of what we’ve done in alternatives has been about taking advantage of the dislocation in credit markets,” he said, noting that the fund had opted to invest in senior real estate debt, but also less commonplace asset classes such as aircraft leasing.“While I wouldn’t class aircraft leasing as credit because the majority of our investments are in the equity part of the capital structure, the drivers of the return opportunity are very similar,” Lyon added. “The banks are no longer there, so that has led to a bit of an outsized return, plus an illiquidity premium and a premium for being a less well-known asset class in the UK.”Lyon, who prior to joining the local government sector worked in corporate finance at BDO Stoy Hayward, was unsure whether the fund would necessarily return to traditional risk-free fixed income allocations once markets normalised, noting that it depended on how much the normalisation diluted returns.“If we go back to where we were in 2006-07, particularly in areas like corporate mezzanine debt – where I have some concerns already that the level of covenant-like deals and leverage ratios that are coming through – then it’s unlikely that a fund like ours would hang in there.”For more on credit investment, see the special report in the May issue of IPE magazine
However, in June, the Norwegian parliament, or Storting, decided there should still be an independent Council on Ethics, but that it should give advice to Norges Bank rather than the Ministry of Finance.It also decided the ministry should continue to appoint the council’s members, but only after having received recommendations from Norges Bank. The ministry has now announced the composition of a new Council on Ethics, issued the new guidelines for the observation and exclusion from from the fund and made amendments to the Norges Bank mandate.It said the changes would take effect on 1 January 2015.Siv Jensen, Norway’s Minister of Finance, said: “The changes in the governing documents are a result of a long-term effort to strengthen the work on responsible investment management in the fund. “Emphasis is put on facilitating better interaction between active ownership and the exclusion mechanism,” she said.The main change is that from 1 January, Norges Bank will be the decision-making authority on matters around observation and exclusion of companies from the fund, rather than the Ministry of Finance.The new Council on Ethics will advise Norges Bank, having been appointed by the ministry, but after receiving recommendations from Norges, the ministry said.Ethical criteria for determining which companies the fund may not invest in will continue to be decided by political authorities, the ministry said, adding that these criteria are unchanged.The five members of the new Council on Ethics, appointed by the ministry, are Johan Andresen — who will chair the council until the end of May 2019 — Hans Christian Bugge — vice chair until the end of May 2017, Cecilie Hellestveit, Arthur Sletteberg and Guro Slettemark.Jensen said the composition of the new council ensured it would continue to have appropriate and broad expertise.The process of changing the former oil fund’s responsible investment framework started two years ago and has included a public consultation process, a proposal from the Ministry of Finance in its report this April and lastly, deliberations on that report from parliament. The Norwegian finance ministry has finalised new guidelines for responsible investment at the Government Pension Fund Global (GPFG), which include setting up a new advisory Council of Ethics.In April this year, the Ministry of Finance said in its proposals on the matter that it was disbanding the existing Council of Ethics, which had been in place for 10 years, and that current ethical exclusion criteria would be integrated into the management mandate given to Norges Bank.The changes had the effect of distancing the former oil fund’s ethical decision-making from direct political intervention.The Norwegian government has frequently said the NOK6trn (€666bn) sovereign wealth fund should not be a policy tool.
The argument must be made that there is a special relationship that ties countries within the EU together, argues Joseph MariathasanThe real test of a special relationship between countries, as in the oft-quoted relationship between the UK and the US, is the belief that one’s ally must be supported under all circumstances, even when you know they are wrong.The UK’s special relationship with the US did see its strength tested during the Vietnam war. The UK’s then-prime minister Harold Wilson managed to avoid any British troops being sent to Vietnam, in contrast to the experience of the Australian and New Zealand governments, despite the pleas of US president Lyndon Johnson, who reputedly begged for at least a Scottish bagpipe band to be sent to show support. The UK’s former prime minister Tony Blair took the special relationship to a new height with the George W Bush administration, since Blair appeared to believe in the wisdom of his actions as he followed the US into the quagmires of Afghanistan and Iraq, whilst a large majority of the country looked on with horror. The idea of a special relationship between the UK and US may have its detractors, but it has also had a body of support that has lasted decades. What, then, of the EU and the countries within it? The argument must be made that there is a special relationship that ties countries within the EU together.That also means a special relationship between Greece and the EU, which also implies the EU supporting Greece even if it disagrees with the actions of the Greek government. Unfortunately, that special relationship between Greece and the rest of the EU looks so frail that one can only speculate how much longer it can survive at all.But, as in Gabriel García Márquez’s masterpiece, ‘Chronicle of a Death Foretold’, are we all bystanders in an unfolding tragedy? Is Greece being allowed to disintegrate to atone for the sins of its past?In February, I wrote that a Greek exit from the euro would inevitably lead to an exit of the EU itself by a desperate Greece, led by a far-left leadership that has strong sympathies with Russia at a time when Russian nationalism itself has become buttressed by its commonality with Greece through Orthodox Christianity. Greece moving into Russia’s sphere of influence supplied with appropriate economic support would be a rational response by both Greece and Russia in the wake of a chaotic Grexit.That article drew a strong response both online and off-line, with disparaging comments about the likelihood of any move by Greece towards Russia. Recent events, however, have proved otherwise, with Greek prime minister Alexis Tsipras announcing earlier this month at the St. Petersburg International Economic Forum that “Russia is one of the most important partners for us”.Whilst modern Greece’s relationship with Russia has been one of failed promises and disappointment, the history of modern Greece is intertwined with that of Russia. Ioannis Capodistrias, the czar’s foreign minister at the Congress of Vienna in 1815, became Greece’s first governor in 1827, while the Filiki Eteria (Society of Friends) based in Odessa led the call in favour of Greek independence from the Ottomans. For Western Europe, seeing Greece seek help elsewhere should not be surprising if the EU cannot find a solution to the impasse.Despite the posturing of Greece’s prime minister and finance minister and much talk about Yanis Varoufakis applying his expertise in game theory to Greece’s negotiations, what does come through is incompetence and intransigence – but not just on the part of Greece.Is the EU confident it can control the aftermath of a Grexit? Or is the outcome of a death foretold now inevitable?The only question may be whether the ‘death’ is that of Greece alone, or at least its existence as an integral part of Western democracy, or whether it is that of the euro-zone and perhaps even the EU itself.Joseph Mariathasan is a contributing editor at IPE
Explaining its decision for the time-limited quota, the central bank said: “Such [overseas] investments represent a benefit to the national economy in that they will enable the pension funds to achieve a better spread of risk in their asset portfolios while reducing the build-up in pension funds’ foreign investment requirements once capital controls are lifted.“By this, the risk of instability in the wake of the lifting of capital controls will be reduced.”The Icelandic pension sector has been limited to investing in the domestic economy since the introduction of capital controls, put in place in the wake of the 2008 banking collapse.While domestic investment opportunities are available, such as the recent financing of a silicon metal plant in the country’s North, pension investors have previously lamented the increased risk caused by such a geographically concentrated portfolio – with pension assets standing at 146% of Icelandic GDP, according to the OECD.The funds have channelled inflows into the mandatory system towards private equity and real estate but were also able to gain exposure to overseas currency through domestic bond issuances denominated in other currencies.The Icelandic Pension Fund Association could not be reached for comment.But the association noted in a statement that the ISK10bn quota had been alluded to as the “first step” to relaxing capital controls by the central bank, ahead of potentially greater liberalisation in 2016.Read more about the long-awaited relaxation of capital controls in the current issue of IPE Icelandic pension funds will soon be able to invest up to ISK10bn (€67.5m) overseas, signalling a gradual relaxation of the capital controls in place since 2008.The Central Bank of Iceland has invited the country’s ISK2.9trn occupational pension sector to request exemptions from the capital controls, although any funds granted an exemption would only have until the end of the year to use up their allocated quota.In a statement, it said the ISK10bn would be divided among the pension investors based on their overall size and annual inflows.The central bank said the asset owner’s total size would be regarded as more important, and be given a weighting of 70%, while annual inflows will be given a weighting of 30% when deciding how much of the quota to allocate to individual funds.
In percentage terms, PFA produced a 10.3% pretax return for traditional average rate (gennemsnitsrente) pensions, though this was lowered to 2.4% after market value regulation.This compares with 1.6% for average-rate pensions in the same period last year.Meanwhile, the pretax return for market-rate pensions was 4.8%, down from 8.8% in January to September 2015.Listed equities produced a return of just 0.2% in the nine-month period, while alternative investments generated 10%.Property returned 1.7%, while bonds gave a 5.1% return in the period, it said.In absolute terms, bonds returned a total of DKK13.4bn in the period, with the highest return within the asset class being from emerging markets paper, with a 10.6% return.PFA said this had been underpinned by falling yields and rising currency values in many growth economies.High-yield and investment-grade bonds also produced high levels of return at 8.6% and 6.8%, respectively, in the January to September period.Danish bonds returned 5.3%, supported by a solid return on mortgage bonds.PFA’s total assets rose to DKK566.8bn at the end of September from DKK545.3bn at the end of December last year.PFA’s figures include assets transferred from Bankpension, whose merger with PFA was approved on 9 June at the general meetings of both institutions.For accounting purposes, the merger took effect on 30 September.The merger meant a transfer of DKK22.9bn of investment assets to PFA, 17,000 scheme members and monthly contributions of DKK77m. Denmark’s PFA Pension, the Nordic country’s biggest commercial pensions provider, reported a DKK30.7bn (€4.1bn) investment return in the first nine months of this year, up from DKK7.4bn in the same period last year, with interest rate and currency hedging contributing almost half of this.In its interim financial report, PFA said these hedging activities contributed DKK13.9bn to the overall investment return.In the report, the pension provider said: “PFA revised its investment strategy at the end of 2015 to take account of the prospect of more turbulent equities markets, a stabilisation of the dollar after two previous years of strong rises and the low level of interest rates.“A lower allocation to equities combined with a larger proportion of corporate bonds and real estate has had a positive impact on returns in 2016.”
“One thing we are clear on is making sure clients are aware of all the risks,” he told IPE. “In fixed income it’s sensible to hedge currency risks as much as possible. In equity it’s a question of measuring the risks and making sure you’re happy with them.”Trump’s victory in November’s US presidential election and the UK’s decision to leave the EU were both unpredicted, as were the reactions of financial markets, Mikulskis added.“We don’t think there’s a lot of value in pension schemes trying to call idiosyncratic events like this,” he said. “Instead we would recommend a spread of risks – don’t have too much riding on individual events.”Tim Giles, head of UK investment consulting at Aon Hewitt, said pension funds with unhedged exposure to global equities had seen “fantastic” performance in recent weeks.“‘Should I lock in those gains?’ is the natural question,” he said.Sterling’s recent weakness had led to it reaching a “reasonable” price, Giles added.“It’s time to take a view about whether or not you want to take that risk,” he said. “We’re discussing this a lot with clients. You want to take the risks for which you expect to be rewarded. If you’re not happy with the potential gains then you shouldn’t be exposed to that risk.”Andrien Meyers, senior investment consultant at JLT Employee Benefits, agreed, adding that most funds’ default position was to hedge 50% of their foreign exchange exposure to “soften” the impact of any movements.The CIO of a large corporate UK pension fund said fully hedging out all currency exposure is “rarely optimal”, as having foreign currency allocations can have a risk-reducing effect on a portfolio.The CIO, who asked not to be identified, also concurred with the importance of setting a policy on currency, and urged investors to ensure it applied to the entire portfolio.“The currency doesn’t know what asset it is hedging,” he told IPE. “You’ve got to look at it holistically.”Switzerland’s hedging lessonsIn January 2015, pension funds in Switzerland were hit by the Swiss National Bank’s sudden decision to cut the franc’s peg to the euro. At the time, Willis Towers Watson estimated that as much as CHF30bn (€27.9bn) may have been wiped off pension portfolios.However, pension funds such as AHV, BVK, and Publica all managed to mitigate much of the negative impact of the decision through currency hedging.In the UK, sterling plummeted from €1.36 to the pound at the start of January 2016 to €1.23 the day after the UK voted to leave the European Union – a decline of 9.6%. In the same period, the UK currency fell 7.5% against the dollar.By 16 January 2017, speculation about the direction and implications of the UK’s Brexit strategy had pushed the pound down to €1.14 and $1.20 – sterling’s lowest recorded level versus the dollar. The next day the currency rebounded slightly following a speech on the UK government’s plan for Brexit negotations by prime minister Theresa May.As of 23 January sterling was trading at €1.16 and $1.25 – in both cases roughly 15% lower than at the start of 2016. Pension funds should see recent volatility in sterling and other currencies as a prompt to review their hedging positions, consultants have said.A measure of weekly volatility of sterling showed expectations about the UK currency last week were at their most uncertain point since the country voted to leave the European Union.The Japanese yen has been weakening versus sterling and the dollar in recent weeks, while the Chinese renminbi is also depreciating. The US dollar, meanwhile, strengthened in the weeks following the election of Donald Trump.Given so much policy uncertainty, pension funds should make sure they are clear on their policies for currency exposure and hedging, said Dan Mikulskis, head of defined benefit pensions at Redington.
Alan Rubenstein is to leave the UK’s Pension Protection Fund (PPF) early next year, the defined benefit (DB) lifeboat fund announced this morning.Rubenstein has led the PPF as chief executive since joining in April 2009, during which time the fund – which takes over the DB schemes of bankrupt companies – has grown from £2.9bn (€3.2bn) to £30bn.Arnold Wagner, PPF chairman, said: “The board is extremely grateful to Alan for his excellent leadership of the PPF over the last eight years and wish him every success in the next phase of his career.“As a result of his achievements as chief executive, the PPF is in a strong position, well placed to continue to protect the millions of people in the UK who belong to defined benefit pension schemes. Our task now is to locate a successor to pilot the PPF through its next phase of development.” Rubenstein added: “After eight hugely enjoyable and successful years with the PPF, I have decided that the time is right to seek a fresh challenge.“I’m enormously proud of the progress we have made during my time as chief executive. The PPF has grown from an organisation whose very survival was in doubt to one which is now a firmly established part of our national pensions fabric. “Above all, between the Pension Protection Fund, and the Financial Assistance Scheme, which we run for government, almost half a million people are now better off thanks to the protection we provide.”Sir Steve Webb, director of policy at Royal London, worked with Rubenstein on many occasions during his five years as UK pensions minister. He described the outgoing CEO as “a giant of the pensions world” and “an exceptionally tough act to follow”“He has overseen a period of rapid growth for the PPF and has helped to ensure that the organisation is on a firm financial footing going forward,” Sir Steve added. “Many hundreds of thousands of current PPF members and many millions of potential PPF members owe him a debt of gratitude. I have no doubt that Alan could have earned far more in a private sector post than the government is prepared to pay someone to run a public body of this sort, and it is to his great credit that he gave his all to the PPF for a sustained period and leaves it in such a strong position.” Alan Rubenstein gives evidence to the government’s Work & Pensions Committee during the BHS enquiry in 2016During his tenure, Rubenstein became the public face of the PPF. He appeared in front of the Work and Pensions Committee – a cross-party group of politicians from the UK parliament’s lower house – on numerous occasions, most recently to explain to politicians the fund’s role in the debate about the BHS and British Steel pension schemes.He was also a driving force behind the establishment of the Pensions Infrastructure Platform. The PPF was a founder member of the platform in 2012.Before joining the PPF, Rubenstein ran Lehman Brothers’ Pensions Advisory Group. He was previously a managing director at Morgan Stanley, and has served on the boards of Dutch asset manager Robeco, the UK’s Institute and Faculty of Actuaries, and the National Association of Pension Funds (now the PLSA). Currently, he is non-executive director at insurance company esure and an investment adviser to the British Coal Staff Superannuation Scheme.During Rubenstein’s tenure the PPF won several IPE awards, including Best European Pension Fund in 2013 – the first UK fund to win this category. It has also been recognised for excellence in real estate investing and liability-driven investment.
Alliott Cole, CEO at Octopus Ventures, said: “Europe has become one of the most attractive locations for technology start-ups. This presents an attractive opportunity for institutional investors looking to support growing companies with momentum behind them.”Octopus Ventures is part of Octopus Group, which currently manages £7.7bn, £1.7bn of which is on behalf of institutional investors. The BP Pension Fund had £26.2bn of assets as at the end of 2017, comprised almost entirely of defined benefit (DB) assets. Around 8% of these DB assets were invested in private equity at that time. The in-house asset manager for BP’s UK pension fund has committed to an £83m (€96m) private equity European technology fund alongside other institutional investors.Zenith III is managed by Octopus Ventures and focuses on high-growth European technology businesses needing capital and expertise for their next phase of growth. Previous funds have invested in companies such as Zoopla Property Group, known in the UK for its property websites, and Graze, a snack company that was bought by Unilever earlier this year.According to Octopus, its Zenith funds offer “long-term investment opportunities in growth companies at a point where venture risk has yielded to more predictable execution risk”.The third institutional fund will mainly focus on the best-performing companies from Octopus’ venture capital fund. Octopus takes a seat on the board of each of its portfolio companies.
Just over one in 10 cross-border UCITS funds comply with incoming rules on performance fees set by German regulator BaFin, according to research company Fitz Partners.The company analysed how cross-border funds would stack up against new restrictions on performance fee structures in Germany and Ireland. It found that 98% of Irish domiciled funds would be compliant with new Central Bank of Ireland (CBI) requirements but only 50% of all funds would satisfy them.A Fitz spokeswoman told IPE that the company analysed 1,062 performance fee structures.According to Fitz, in the past year the Irish regulator has reinforced several guidelines regarding performance fee structures, requesting the introduction of either permanent high-water marks or permanent clawbacks. The central bank is currently consulting on a proposal to introduce compulsory annual crystallisation, bringing in a minimum period of 12 months over which to calculate performance fees. Fitz said 81% of Irish domiciled UCITS funds with a performance fee would also meet this criterion.However, UCITS funds distributed in Germany may struggle to meet similar restrictions, according to Fitz. From December they will have to feature a minimum 12 months crystallisation period, a high-water mark or clawback mechanism running over at least five years, and caps on the total performance fee.Fitz found that 13% of the UCITS funds in its sample would meet this requirement. Ireland-domiciled UCITS were best positioned, with 30% meeting the German regulator’s conditions, while 90% of Luxembourg funds with a performance fee would pass the test.Hugues Gillibert, CEO of Fitz Partners, said: “Local regulators across Europe are certainly entitled to have different views when it comes to performance fee structures, but the creation of different technical local regulations such as these may introduce new barriers to entry to local markets, and more importantly a questionable uneven treatment of investors across Europe.”#*#*Show Fullscreen*#*#
One of the UK’s leading defined contribution (DC) pension providers is to set up its own regulated investment subsidiary in anticipation of rapid asset growth in the next few years.NEST has applied for permission from UK regulator the Financial Conduct Authority (FCA) to become regulated as an occupational pension scheme. Under the UK’s investment rulebook, this would allow the £8bn (€9bn) scheme to set up a wholly owned subsidiary – dubbed ‘NEST Invest’ – to run its investments.Speaking at a press event yesterday, chief investment officer Mark Fawcett said the permissions, if granted, would allow NEST greater flexibility in its investment strategy, including the ability to make co-investments in private markets.Fawcett said: “NEST is going to be responsible for £450m [of] new contributions every month. We’re becoming one of the largest players in the UK pensions market and our investment strategy is evolving to reflect that. “While setting up NEST Invest is an exciting development, it’s the natural next step for a scheme of our size”Mark Fawcett, CIO, NESTA number of other major UK pension providers have their own in-house investment operations, including the Universities Superannuation Scheme, the BP Pension Fund, and the Pension Protection Fund.As well as co-investments, FCA authorisation would allow NEST to direct fund managers to use derivatives to efficiently manage cashflows and risk, NEST said. The FCA is expected to respond to the application later this year.Fawcett said there were no plans to bring investment functions in-house, although he acknowledged that it would “probably make sense” in the long term.The multi-employer scheme has said it expected to hit £10bn of assets by March next year, although Fawcett estimated this could reach £13bn in 2020.This morning NEST announced it had made its first manager appointments for private markets, assigning Amundi and BlackRock to run real estate debt and infrastructure debt, respectively. “While setting up NEST Invest is an exciting development, it’s the natural next step for a scheme of our size. We already have the internal expertise in NEST’s investment team to manage the additional responsibilities.”