He advocated revisions in IORP II to encourage the take-up of cross-border operations and asked why European multi-national corporations, unlike their US counterparts, performed so poorly.During a later panel, a senior official from the European Commission was questioned over the current stipulation that cross-border funds should be fully funded at all times.Jung-Duk Lichtenberger of the Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) explained that, if there could be no harmonisation of solvency rules, absence of the full funding rules would result in a “race to the bottom”, likely due to a drive to re-locate to jurisdictions with more relaxed regulation.Lichtenberger questioned whether a minimum harmonisation of the 28 EU member states’ pension regulation was “too much of an administrative burden”. Hayes said the matter of solvency inevitably required not only his attention but the attention of questioners from the floor.He echoed a comment from a recent parliamentary hearing, noting: “Remember, we are dealing with other people’s money – money they are putting aside.”Answering a question later on, Hayes added: “We have to take the responsibility for getting more people to take up pensions, and I don’t see EIOPA’s [the European Insurance and Occupational Pensions Authority’s] involvement as some kind of negative issue.”Separately, he said EIOPA was “an important player, but, at the end of the day, it is the European Parliament and the Council [of the EU] that decides on legislation”.At another stage, he described the Directive as a “minimum act”.“We do not need to strangle member states on the matter of [excessive legislation].”More generally, he said that, “broadly speaking, we are working on a consensus position in the European Parliament”.Hayes also touched on the matter of professional qualifications, a contentious issue in the UK and other member states that allow lay trustees to oversee schemes, and said he was aware of the concerns.He said he expected to have completed his own report to ECON by the end of July, to be followed, by late November or early December, by a final report from the committee. The dearth of cross-border pension funds must be addressed by the revised IORP Directive, according to the MEP in charge of the legislation. Brian Hayes, rapporteur for the European Parliament’s Economic and Monetary Affairs committee (ECON), returned repeatedly to the issue of cross-border during a speech at the PensionsEurope conference in Brussels.The Irish MEP reasoned that the growing number of cross-border workers would warrant the growth of cross-border provision, but also that funds raised to back effective cross-border schemes could benefit the economy as a whole.Hayes said the current cross-border framework was “a heritage nightmare” and “a case of a regulatory framework that is bizarre”, arguing it was a “key issue” that needed to be resolved.
Ireland’s pensions regulator may bar trustees without sufficient experience under proposals put out to consultation this week.The Pensions Authority said it launched the consultation to consider the impact of proposals for professional trustees, tabled by the European Commission in its initial draft of the revised IORP Directive but opposed by EU member states including the UK.The Authority’s consultation asked for advice on how a potential trustee qualification should be structured, as well as what information should be contained within a curriculum. It also asked the industry whether it should allow trustees currently active in the industry to continue working if they can demonstrate sufficient experience. The consultation asked: “If so, how do you think this should be managed – for example, what existing experience/expertise should get recognition?“How long should grandfathering last for? Should there be some form of testing for those with specified experience, such as an online test with ongoing CPD requirements?”The Authority asked for feedback by the beginning of October, with the consultation building on its previous work on the future of defined contribution (DC) funds in Ireland.Brendan Kennedy, head of the Authority, has previously said he would like to see the number of DC funds fall to around 100, which would see a significant reduction in the 200,000 people acting as pension trustees.He has said the ability of the trustees should be “at the heart” of the body’s regulatory work.
Sier, who has been looking into the cost and fee structures of investments in the UK for several years now, called on the asset management industry to become more transparent.“Asset management is a force for good, and it can help the demographic challenge of long-term savings, but asset managers need to do better,” he said.“They need to invest in tools to inform consumers – to explain to them what asset allocation means, for example.“The asset management industry is highly productive and wealthy, but it has abrogated its responsibility towards the consumer.”Ueli Mettler, a partner at Swiss consultancy c-alm, pointed out that regulators such as the Swiss OAK should not set cost limits: “If you act as a prudent investor, you should be free to choose any products you like and negotiate fees as you like – but, for this, you need all the information.“So regulators have to create an environment where information asymmetry is not a problem any more, and, if that is achieved, market forces will decide the fee levels.”Frits Meerdink, manager at PGGM in the Netherlands, pointed out that, from this year, transparency on cost reporting was widened in his country to include transaction costs in commingled funds.“There should be an alignment of interest with the pension funds we serve,” he said.“And we are checking whether there is true outperformance, an ambition the asset manager aspires to – above that, we are willing to pay performance fees.” In a straw poll at this year’s IPE Conference in Berlin, around one-third of delegates said there was no need to cut asset management fees further, while another one-third said fees should be cut by more than 30%.In response to this, Jan Straatman, global CIO at Lombard Odier IM in Switzerland, said: “This is understandable, but it is a knee-jerk reaction because there is no one-size-fits-all solution. A lot of products are way too expensive, and a lot of low-cost products could be more expensive.”Christopher Sier, Prof of Practice at Newcastle University Business School, said: “Although we are on different sides of the fence, I violently agree with Jan – people either want to change nothing or a lot, but what we actually have to do is to understand and explain the problem to them.”He added: “Trust is the main issue, and people do not trust or understand the establishment, and the financial service industry is considered a part of that.”
The €403bn Dutch civil service scheme ABP has announced a contribution rise of 1.8 percentage points to 22.9% in 2018.The increase follows a decision made to annually raise premiums over the period 2017-19, as pensions have become more expensive as a consequence of low interest rates and rising longevity.ABP again refrained from granting indexation, which would only be allowed if its coverage ratio was at least 110%. At October-end, funding was 100.2%.The scheme said it did not expect to be able to grant any indexation for the next five years. It said indexation in arrears – based on the consumer prices index – since 2009 has accumulated to 13.5%.According to ABP, the possibility of pension benefit cuts in 2018 had become slim, but it conceded that the possibility still existed further into the future.If its coverage ratio was still short of the required minimum level of 104.2% in 2020, a cut to pension rights would be inevitable, the scheme said.Earlier this month, the €189bn healthcare scheme PFZW decided to keep its contribution for 2018 at 23.5% of pensionable salary.The three other large Dutch pension funds, the metal schemes PMT (€68bn) and PME (€46bn) and building sector pension fund BpfBouw (€55bn) are expected to announced their contribution rates for 2018 in December.ABP and PFZW were among the schemes highlighted by supervisor De Nederlandsche Bank earlier this month as still in danger of having to cut pensioner benefits.
RBS’ pension scheme is overseen by CIO Robert Waugh (left)According to a spokeswoman for RBS the bank and the trustees had not yet reached an agreement on where the £50bn group pension fund would be housed. The vast majority of RBS’s business will sit inside the ring-fenced bank – around 90%. Lloyds had not commented on its plans by the time of publication.The Prudential Regulation Authority (PRA) has overall responsibility for the ring-fencing project, but banks are encouraged to ask TPR for clearance if their plans to comply with the ring-fencing law are likely to cause material detriment to their DB schemes.TPR cannot force them to ask for clearance, but it can decide at a future date to investigate a bank’s pension scheme.Barclays defends pension decisionBarclays has defended its plans following criticism from Field and national newspapers.“Barclays’ primary objective in its ring-fencing plans has been to safeguard the interests of our pensioners,” a spokesman said. He added that the company believed its agreement with the trustee board and its advisers had achieved this.The agreement means both of Barclays’ operating companies – the bank with the investment banking business and the bank with the retail business – will be jointly liable for the pension fund until December 2025. Frank Field MPIn a statement last week he said: “The whole point of splitting banks in two is to protect the safe retail bank that can’t be allowed to fail from the casino bank that can go bust come the next crash.“I am struggling to fathom how being shackled to the expendable half provides long term reassurance to the pension scheme members.”Although the banks have to follow through with the ring-fencing changes by January 2019, they have until 2026 to ensure their pension schemes are placed in one of either the retail or investment divisions, according to a spokesman for TPR. Most were planning to place their pensions in a division by 2019 and TPR was engaged with the five banks – Barclays, HSBC, Lloyds, Royal Bank of Scotland (RBS) and Santander – with defined benefit pension schemes, the spokesman added.Credit rating agencies have so far judged the ring-fenced and non-ring-fenced parts of Barclays as roughly the same the creditworthiness, although Fitch has assigned the ring-fenced part of Barclays with a rating one notch higher than that of the investment bank.Banks set out their plansA spokesperson for HSBC UK said: “HSBC has been in discussions with the trustee of the HSBC Bank UK Pension Scheme and an in-principle agreement has been reached on the treatment of the scheme.“The defined benefit section of the HSBC Bank UK pension scheme will move to be supported by HSBC UK [the ring-fenced entity], with additional support provided by the HSBC Group.”The £24.6bn HSBC Bank UK scheme is the group’s largest pension plan. At its latest funding valuation in December 2014 the plan reported a surplus of £520m and a funding level of 102%.HSBC agreed to make further contributions to the plan that were expected to amount to £64m in each of 2017, 2018 and 2019, and £160m in each of 2020 and 2021.A spokesman for Santander said: “The Santander UK plc pension scheme will remain sponsored by Santander UK plc – the ring-fenced entity.” Frank Field, Labour Party politician and chair of the UK parliament’s Work and Pensions Committee, criticised Barclays’ decision and asked questions about the Pensions Regulator’s (TPR) involvement in the discussions. At least two major UK banks are planning for their defined benefit (DB) pension schemes to be sponsored by their ‘ring-fenced’ retail businesses after they are forced to split up next year.The news follows criticism of Barclays Bank, which currently plans for its £31.8bn (€36.5bn) scheme to be attached to its investment banking arm, which is perceived to be riskier.Under legislation passed in the wake of the financial crisis, the largest UK banks are required to separate – “ring-fence” – core retail banking services from their investment banking activities by the beginning of January 2019. Part of the motivation is to reduce the need for taxpayer bailouts in the event of an entity going bust.Santander’s and HSBC’s UK pension schemes are both poised to be sponsored by the retail-focused, ring-fenced entity, according to a spokesperson at each bank. Barclays has promised £9bn in contingent assets to its pension schemeAlso, up to £9bn of assets are to be set aside for use by the pension scheme should the sponsor default on its liabilities.The bank had discussed its plans with the PRA, TPR and an independent expert reporting to the UK’s High Court, the Barclays spokesman added.However, IPE understands Barclays has not yet approached the regulator for formal clearance.All banks must have their restructuring plans sanctioned by the court. A Barclays hearing is due to be held on 26 February.Adolfo Aponte, director at covenant advice firm Lincoln Pensions, said focusing on the scheme’s proposed change of sponsor to the investment bank was “missing the bigger picture”.Barclays’ management had proposed a meaningful increase in aggregate contributions to slightly over £8bn by 2026, he said, meaning the real challenge facing the trustee board was “locking down” the risk in the scheme over that period. “Rather than making hyperbolic comments on the investment bank, we should be looking at how the agreed contributions are back-end loaded, with the step up in contributions in 2021 leaving only four years before the UK ring-fenced bank ceases to sponsor the scheme,” he said. “The scheme’s funding position remains volatile, so a contribution schedule that allows the trustee to lock down more of the risk sooner would give the parties more time to adapt and respond accordingly if a meaningful deficit re-emerged in the lead-up to the 2025 cut-off.”
The vast majority of FTSE 100 companies reporting at the end of 2017 used a discount rate in the range of 2.4% to 2.6%, according to the consultancy.Three-quarters of FTSE 100 schemes were using the most recently published life expectancy tables, marking another change in practice. Data from the UK’s Continuous Mortality Investigation last year reported that mortality rates improved by 2.6% a year between 2000 and 2011, but since then improvements have been “close to zero”. Estimated IAS19 funding level for UK pension schemes of FTSE 100 companies FTSE 100 companies reported an overall pensions surplus for the first time since 2007-08 at the end of last year, according to analysis from consultancy LCP.It estimated the schemes’ combined funding level stood at 101% at the end of 2017, up from 95% the year before. This turned a £31bn (€35bn) deficit into a £4bn surplus.There were three main reasons for the increase in funding levels, according to the consultancy: company contributions of £13bn, strong investment growth, and changes in the approach to longevity and discount rate assumptions that largely offset the impact of worsening financial conditions.A majority of companies were using “increasingly sophisticated” ways to set the discount rate, improving balance sheets by an estimated £15bn over the past two years, said LCP. Source: LCP Source: LCPSome companies were also making changes to less well-known accounting assumptions, according to LCP. Retailer Next, for example, reported a change to inflation volatility – “an obscure assumption”, said LCP – which more than doubled its pension surplus.Company profitability did not appear to be a key determinant of the level of companies’ contributions to pension schemes, according to LCP. This was “despite a somewhat contrary regulatory position,” it said.FTSE 100 companies paid around £80bn in dividends in 2017, six times the contributions to their UK pension schemes.The consultancy estimated the companies’ combined pension surplus had increased to more than £20bn at the end of April.Surpluses to be short-lived?However, LCP warned that the aggregate accounting surplus might not be here to stay. This was because of “looming” changes to accounting standards (IFRIC 14) that could cause FTSE 100 companies’ balance sheets to worsen by around £50bn overall and “well over” £1bn for some individual companies.LCP also warned that amendments to international accounting rules for defined benefit schemes (IAS 19) would significantly alter – “in unintuitive and surprising ways” – how some companies accounted for ‘special events’, such as changes to the benefits offered.Phil Cuddeford, LCP partner and lead author of the report, said: “It is essential that corporate sponsors don’t think they’re out of the woods just yet. History has proven that such accounting surpluses can quickly be wiped out by deteriorating market and economic conditions.”Significant pension deficits remained on the funding basis that trustees typically used, he added, and “if balance sheet accounting changes go ahead as feared, the FTSE 100 [companies] are likely in for a nasty shock”.Nearly all FTSE 100 companies have a pension deficit on an insurance buyout basis, noted LCP, and for over a third this was material compared with their market capitalisation.Year-end discount rates were above traditional audit benchmarks
Foreign direct investment in the USSource: US Bureau of Economic Analysis Immigrants have founded half the start-ups in recent years, but – according to a recent study from Duke University and the Kauffman Foundation – the rate of start-ups has declined significantly, primarily as a result of immigration policies in the US. Trump’s isolationist stance is likely to exacerbate this trend significantly.As Posen argues elsewhere (for example, in this article from February this year), if the US continues its retreat from economic leadership, it will impose serious pain not only on the rest of the world but also on itself.Trump puts forth the belief that the US has somehow been taken advantage of by its allies and trading partners in the multilateral US-led post-war world. There may be some truth in the area of defence: the US provides security guarantees to its allies and an umbrella of nuclear deterrence. The US military also polices the freedom of navigation in international waters and airspace. These, as Posen points out, are classic public services provided by the US, essentially on its own, that every country benefits from whether or not it contributes.When it comes to the everything else in the global multilateral ecosystem, many, including Posen, argue that it is the US that has been the one free-riding in recent years. US president Donald Trump’s actions are proving to have the exact opposite effect to his objective of “America First”.In a recent article, economist Adam Posen, president of the Peterson Institute for International Economics, makes the case that the president is actually ruining the US’s attractiveness as a place to do business – a case of putting “America last”.One strong piece of evidence supporting Posen’s view is foreign direct investment (FDI) into the US. According to the US Bureau of Economic Analysis, in the first quarter of 2016 the total net inflow of investments was $146.5bn (€128.4bn). For the same quarter in 2017 it had gone down to $89.7bn, and by 2018 it was down even further to $51.3bn.As Posen makes clear, this precipitous drop cannot be ascribed to changes in Chinese investment, which flow both ways with little contribution to changes in the figures. The falloff, he says, is a result of a general decline in the US’s attractiveness as a place to make long-term business commitments. US president Donald Trump and Canadian prime minister Justin Trudeau at the G7 gathering in JuneCredit: Adam Scotti, Canadian Prime Minister’s OfficeFrom accusations of not paying its dues to international organisations on time, to spending a far smaller share of its GDP on aid than other wealthy countries, according to the OECD, and withdrawing from international efforts to combat climate change even as other countries have begun to shift toward greener growth. Is the world moving towards a post-American era?China’s president Xi Jinping appears to have become the global spokesman for the cause of global free trade and capitalism. Indeed, at the World Economic Forum in Davos in 2017 he declared: “Whether you like it or not, the global economy is the big ocean that you cannot escape from. Any attempt to cut off the flow of capital, technologies, products, industries, and people between economies, and channel the waters in the ocean back into isolated lakes and creeks, is simply not possible. Indeed, it runs counter to the historical trend.”Posen argues that, so long as the US economy remains very large (which it will) and at the technological frontier (which it probably will), and maintains its commitment to globally attractive values, the country will be capable of remaining the leader.However, even he admits that it is worth watching the flows of direct investment, especially of net FDI, into the US as an early indicator of how far the global economy has moved toward a post-American era. The data on flows of both investment and people suggest that Trump’s approach to globalisation is certainly moving the world in that direction. But it may not just be in investment flows that the US is losing its attractiveness. The best and brightest from across the world have always been attracted to its shores and its ability to attract them has been one of its great strengths. Silicon Valley would not be where it is today without Chinese and Indian immigrants.
Steven Maijoor, chair of ESMA, said: “Climate change is a reality. Financial market regulation needs to reflect this by integrating sustainability considerations. Source: ESMA“Climate change is a reality. Financial market regulation needs to reflect this by integrating sustainability considerations”Steven Maijoor, ESMA“To support the European Commission in this area we have advised on the level of sustainability considerations in the credit rating market, indicating that as demand for sustainability assessments increases, so does the need for vigilance on the levels of investor protection.”Last year, in the context of its sustainable finance action plan, the Commission charged ESMA with assessing current practice within the credit rating market concerning sustainability considerations.The watchdog appears to have effectively rejected this task, however, saying in its report to the Commission that credit ratings were not sustainability assessments and that it was therefore “not possible to assess the practice of sustainability considerations in a market that is not measuring sustainability characteristics”.In addition, the consideration of ESG factors as part of a credit rating “does not infer that the credit rating can be construed as providing an opinion on the sustainability or otherwise of an issuer or entity”.ESMA had instead focused on what was possible to assess, it said, namely the extent to which “factors that are classified as either environmental, social or governance factors are considered within CRAs’ credit assessments”.It found that CRAs were considering ESG factors in their ratings but that the prevalence and frequency of this depended on the agencies’ methodology.In addition to releasing its technical advice to the Commission, ESMA published its final guidelines on disclosure requirements for CRAs, which it said should “improve the transparency of CRAs’ consideration of ESG factors in their credit rating press releases and reports”.“This will allow the users of ratings to better assess where ESG factors are affecting credit rating actions,” said ESMA.The Principles for Responsible Investment has been working on an initiative to enhance the transparent and systematic integration of ESG factors in credit risk analysis.Carmen Nuzzo, the organisation’s head of fixed income, said ESMA was right to recommend not to amend CRA regulations to mandate the consideration of sustainability because CRAs had to include ESG factors in their credit rating opinions only when they were material to what the agencies measured, namely credit risk.“Having said this, it is important that CRAs systematically include these factors and signpost clearly when these are relevant and contribute to their assessments,” she added. “ESMA’s conclusion to assess whether there are sufficient regulatory safeguards in place for other sustainability-dedicated products is also important, as at the moment these products are not regulated and their methodology is not very transparent.” Credit rating agencies should not be explicitly required to consider environmental, social and corporate governance (ESG) factors when assessing issuers’ creditworthiness, according to the EU financial markets watchdog.Amending the EU regulation governing credit rating agencies (CRAs) in this way would be “inadvisable” because of the specific role credit ratings continued to play within the financial system, said the European Securities and Markets Authority (ESMA), noting that key pieces of sectoral legislation still contained mechanistic references to credit ratings.However, the EU supervisory authority said it could be useful to amend the regulation governing CRAs to provide a more consistent level of transparency around how they considered ESG factors in their credit assessments, and ensure the CRA regulatory framework kept pace with ESG developments in other areas.ESMA also suggested that the European Commission could assess whether there were sufficient regulatory safeguards in place for products and entrants into the market that were likely to emerge from the EU executive’s ESG push.
Norwegian pensions and investment consultancy Gabler has sold 70% of its shares to private investors including the founder of Denmark’s Norli Pension.The Oslo-based company said the new backing would allow it to expand its business into other Nordic countries.Gabler announced that Thomas Vinge Hansen, the founder of Nordic Insurance Consolidation Group (NICG), and unnamed owners of a Swiss family office bought 70% of the group’s share capital. The remaining equity will be owned by managers and key personnel at Gabler.Aksel Bjervik, chief executive of Gabler, said: “Through strong owners, we can significantly increase Gabler’s ambition. “Gabler will continue to provide high-quality independent services to its customers in Norway, while at the same time Gabler will become a central platform for the new owner’s ambitions in the Nordic market.”Gabler described its new owners as ambitious and experienced in dealing with the challenges facing investors in today’s low-interest rate environment.The completion of the transaction is subject to approval from the Norwegian financial regulator.Vinge Hansen was previously a managing director of Goldman Sachs in London before leaving the bank in 2014. He is a founder and director of NICG and European Insurance Consolidation Group (EICG), according to his LinkedIn profile.NICG formed the Danish pensions firm Norli Pension – which specialises in buying and managing traditional with-profits pension schemes – from Skandia Livsforsiking’s pensions business, which NICG bought in 2015.
And new regulatory reporting times would require regulatory approval. The paper said a co-ordinated approach by European exchanges is needed for the changes to be effective.The proposal follows a recent call from the Association for Financial Markets in Europe (AFME) and the Investment Association (IA), to shorten and harmonise operating hours for European stock exchanges, to between 9am and 4pm GMT.“Our members tell us that a reduction of 90 minutes in European markets would bring significant benefits to the market structure, concentrating liquidity and allowing adequate time to absorb corporate announcements,” the AFME and IA said.They also said shorter hours would improve the mental wellbeing of staff and encourage staff diversity, allowing firms to attract a wider variety of talent.“Anecdotal evidence from members is that trading remains one of the areas of financial services where staff face significant mental health issues,” they observed. “We consider that the excessively long hours play a major contributory part in generating and perpetuating this problem.”Responding to the LSE paper, Galina Dimitrova, director for investment and capital markets at the IA, said: “We are very pleased the London Stock Exchange has listened to traders’ calls.”She added: “We need to call time on the long hours culture, which is detrimental to diversity and mental health, and inefficient for the markets. A shortened day will benefit the markets, those that operate them and ultimately the clients we serve.”Meanwhile, the LSE consultation also aims to strengthen trading in small cap securities, which has seen a reduction in numbers of specialist brokers and advisers. The LSE suggests reducing the number of daily auctions for the Stock Exchange Electronic Trading Service SETSqx platform – on which smaller caps are traded – from five to three.“Almost 57.7% of trading activity on the service occurs during the closing auction,” said the paper. “By reducing the number of auctions, liquidity may become concentrated in the remaining auctions, providing more meaningful price discovery and trading sizes.”The paper also canvasses ideas for improving liquidity during the LSE’s mid-day intraday auction, introduced in 2016 to offer the opportunity to trade block orders at a traditionally low volatility point in the day. Between inception and end-September 2019, these auctions have attracted only 0.1% of value traded on SETS.The consultation closes on 31 January 2020. The London Stock Exchange (LSE) has launched a consultation on potential changes to the market’s structure, including changes to trading hours, as well as plans to improve the liquidity of smaller cap securities, and of intraday auction activity.Five alternative sets of opening hours are suggested for the London exchange, including retaining the existing 8am to 4.30pm arrangement.One major benefit of a change would be to concentrate liquidity within the new trading hours, said the LSE.However, there would be a reduction in overlap with US and/or Asian trading hours, which might hit trading participants in those regions, it said. Changed hours would also – given that major trading desks are pan-European – mean all main European trading venues would need to be aligned, to maximise benefits.