The International Accounting Standards Board’s interpretation’s committee has called a halt to efforts to come up with accounting guidance for companies with non-traditional defined benefit (DB) pension schemes.The plans – dubbed contribution-based promises, or ‘intermediate risk’ plans – have proved to be troublesome to account for under the projected unit credit model found in International Accounting Standard 19, Employee Benefits (IAS19).Since 2004, both the committee, known officially as the International Financial Reporting Standards Interpretations Committee, and the IASB have tried and failed to develop an appropriate accounting approach for this troublesome class of pension plan.The committee’s decision, which emerged during its 29 January meeting, means constituents must now wait for the IASB to add a pensions-accounting project to its work plan. Commenting on the news, Eric Steedman, a leading pensions consultant with Towers Watson, told IPE: “The Interpretations Committee has effectively said the issue is too big for them to solve expeditiously.“Unfortunately, for now at least, this leaves preparers with such plans to carry on ‘doing their best’ with a statement that does not really cater for their situation.”The IFRS IC’s predecessor, the International Financial Reporting Interpretations Committee, published the so-called IFRIC D9 approach for contribution-based promises in a consultation document back in 2004.The committee called a halt to that work, however, when, in 2006, the IASB launched its unsuccessful bid to develop a new accounting methodology to deal with intermediate-risk pensions, or contribution-based promises.But fresh life was breathed into that approach, when the IFRS IC decided to take another look at contribution-based promises accounting.Both D9, and the IASB’s contribution-based promises model, set out to address the accounting challenges that arise when IAS19’s projected unit credit measurement model and discounting approach is applied to non-traditional DB plans.One obstacle to good accounting that is often cited by critics of IAS19 is that the standard forces them to discount projected returns on a pool of equity assets using either a high-quality corporate bond or government bond discount rate.The mood around the committee table during the 29 January meeting was largely downbeat on the committee’s prospects for bringing the effort to a successful conclusion that preparers would welcome.Laurence Rivat, a senior audit partner with Deloitte in France, said she was unclear who would benefit from any guidance that the committee might come up with.Rivat reported that constituents had told her that any guidance that might emerge from the committee would not change what they “are currently doing”.She added: “What we really need is that the board take on a project to review fundamentally IAS19 to deal with those plans where there is risk-sharing between employees and employers.”Similarly, E&Y partner John O’Grady said: “I would be in favour of discontinuing this project because I don’t think we are able to control ourselves when it comes to scope. That has always been the problem with this.“We are trying to solve some fundamental problems with IAS19, which to me is a board project to sort out IAS19 to deal with the modern types of plans that are out there.”As for the long-term outlook for an IASB-level pensions project, IASB director Alan Teixeira said now might be a good time to accelerate the board’s apparent research project on pensions accounting.Speaking during a 16 September 2013 IASB meeting, Teixeira said the pensions research effort was “on the longer-term research plan” but had no staff allocated to it.He also noted that no standard setters had “expressed an interest in the project.”According to information posted on the IASB’s website, the board expects to hold a consultation on the shape of its future agenda in 2015.A feedback statement on the IASB’s 2011 agenda consultation bracket pensions accounting, share-based payments and income taxes together as longer-term priorities.
The current consolidation trend, with hundreds of smaller schemes throwing in the towel, is merely the start, he said. Berendsen, currently a senior partner at consultant Deloitte, said pension funds with less than €10bn in asset under management were unlikely to survive over the long term.“In addition, pension providers that carry out the administration for less than 100,000 participants lack the scale to keep on investing in new systems,” he said. According to Berendsen, who was involved in the division of the old-style ABP into the current pension fund and its provider APG in 2008, small improvements in the system will merely increase complexity, thereby hindering proper governance at pension funds.“We need to design a couple of basic pension plans, also accommodating the AOW, for the large sectors,” he said. “This way, the AOW could gradually be changed from pay-as-you-go to capital-funded, and would remain affordable despite the population ageing.”Berendsen said he also expected that politics would take the initiative.“The pensions sector is too busy implementing a deluge of new legislation,” he said. “Compare it with the review of the care system – that was also an initiave from politics. Although it took longer than one four-year term of Parliament, it has been completed.”Berendsen recommended a basic scheme that would be mandatory for all working people.“This would also serve the increasing number of self-employed, who are hardly accruing a pension,” he said.“For earnings of more than 150% of the average income, people should take care of a pension themselves.”The big advantage of a simple pension plan is that it is more sustainable than the current system, with its hundreds of different pension arrangements, Berendsen said.“It would cause an enormous drop in costs,” he added. “In the current system, it is very difficult to cut costs further. It would be only possible with the large-scale introduction of standardised schemes.” Average-sized pension funds are destined to disappear in the Netherlands once the smaller ones have been liquidated, according to Ton Berendsen, former member of the executive board at the €309bn civil service scheme ABP and its provider APG.Berendsen predicted only “a handful” of pension funds, including the state pension AOW, would remain, carrying out basic, mandatory pension arrangements.In an interview in financial news daily FD, he argued that the Dutch pension system’s current problems could not be solved with minor improvements.“The system must be changed to tackle problems such as the financing of the AOW, as well as the growing group of self-employed without a pension,” he said.
West Midlands Pension Fund has reappointed CBRE Global Investors to manage its £622m (€776m) UK property portfolio and will give the manager more discretion.The existing advisory mandate, which has been in place for seven years, will effectively be replaced at the end of September by a new discretionary one.CBRE Global Investors had to re-tender for the new mandate, which will last for another seven years with an option to extend it by a further three.The outgoing mandate was originally awarded to ING Real Estate Investment Management before the company was merged with CBRE’s investment management business to create CBRE Global Investors. The directly-held UK real estate portfolio of the £10bn West Midlands Pension Fund includes a number of core assets, such as the 270,000sqft Arc Shopping Centre in Bury St Edmunds and the 54,000sqft office at 35 Newhall Street in Birmingham and as of March last year its real estate holdings were worth £838m. Michael Daggett, fund manager at CBRE Global Investors described the three-month re-tendering process as “rigorous” and said the manager would seek to build on “the portfolio’s solid foundations”.
ATP said the result for the first three quarters of the year had been created by high investment returns in the first half of the year, while market conditions had become more difficult towards the end of Q3.“Difficult market conditions continued into Q4,” the pension fund said.For the third quarter alone, ATP reported an investment result before tax on pension savings returns and income tax of just DKK136m, compared with DKK8.73bn for the first three quarters put together.In the first three quarters, equity investments produced a DKK7.7bn return, up from the DKK6.9bn generated in the first two quarters alone. Within this, listed Danish equities produced DKK2.9bn, down from DKK3.2bn at the end of June, unlisted equities returned DKK3.4bn, up from DKK2.4bn, and listed global equities returned DKK1.5bn, up from DKK1.3bn.ATP said three out of the five risk classes in its investment portfolio – equities, interest rates and credit – had delivered positive returns in the first nine months of the year, while inflation commodities made losses overall. Within the inflation risk class, insurance strategies against interest rate increases lost money for ATP, and the commodities loss was due to a drop in oil prices, the pension fund said.With the vast majority of its assets belonging to its hedging portfolio – designed to safeguard the guaranteed pension promises it makes – ATP’s total assets grew to DKK666bn at the end of September, from DKK641bn at the end of June and from DKK592bn at the end of 2013.ATP said its hedging portfolio generated a return of DKK82bn before tax in the nine-month period, equivalent to DKK69.5bn after tax, and just undercutting the DKK70.7bn the pension fund provisioned for members’ guaranteed pension liabilities.As the hedging loss of DKK1.2bn equated to less than 0.25% of ATP’s guaranteed benefits of DKK 564.8bn, it was “considered to be satisfactory”, ATP said. Denmark’s ATP made only the slimmest of investment returns in the third quarter of this year, generating around 0.15% on its DKK100bn (€13.4bn) investment portfolio, due to “difficult market conditions”.The latest figures showed losses on domestic equities had been offset by gains on private equity.Reporting interim financial figures for January to September, statutory pension fund ATP posted an investment return of 9.6% before tax and expenses, or DKK9.2bn, up only marginally from the DKK8.9bn reported at the half-year stage.Carsten Stendevad, ATP’s chief executive, said: “After years with unusually stable returns across asset classes, the financial markets have now become more volatile. That reflects the significant challenges the global economy is facing.”
The use of pension protection schemes (PPS) within calculations for the holistic balance sheet (HBS) has caused disagreements among Europe’s pension funds.A consultation from the European Insurance and Occupational Pensions Authority (EIOPA) on the HBS closed last week, with respondents generally rejecting the idea.However, in its consultation, EIOPA raised the debate over whether pension protection schemes should form part of the balancing items for potential solvency capital requirements – minimum funding levels of risk management tools in four of the proposed six models.The UK’s Pension Protection Fund (PPF) said, in principle, a PPS could be considered as impacting on sponsor support and thus used as a balancing item for the HBS. However, it said, in its case, it should not be used if the HBS is used for solvency or funding purposes.“[The PPF] steps in to compensate members when their pension schemes have insufficient funds to pay the pensions promised following a sponsor’s insolvency,” the fund said.“The trustees should not be running the scheme finances taking into account any compensation payable following the scheme’s disappearance, and to include the PPF on the balance sheet would run the risk trustees and employers came to target PPF levels of compensation.”The scheme also said that, where a PPS was used as a balancing item, a separate minimum level of funding with financial assets or sponsor support should be required.“We would be concerned the incentive for trustees and sponsors to properly fund their pension scheme would be reduced if there were no minimum funding requirement and the scheme’s HBS always balanced,” it added.However, the German pension fund association (aba) and the UK’s National Association of Pension Funds (NAPF) disagreed with the PPF over additional minimum-funding requirements.The aba said a PPS should be included as a balancing item, as it could be seen as collective sponsor support.“In the case of a strong sponsor or a sponsor backed by a pension protection scheme, the pension promise is safeguarded,” it said. “That is the rationale for treating these security mechanisms as balancing items. Thus, an additional separate minimum level of funding with financial assets should not be required.”Aon Hewitt, which took views from consultants across its European offices, said it was unconvinced a PPS should be used as a balancing item at all, unless it covered 100% of benefits.“To do so would create the possibility pension schemes would be under-funded in the event of employer insolvency, and this would then put pressure on the financing of the pension protection scheme itself,” Aon Hewitt said.Towers Watson’s UK office responded by siding with the PPF, but added that it should not come within EIOPA’s remit.“The protection of the PPS will require a separate minimum funding level based on financial assets/sponsor support to protect the viability of the PPS,” it said.“However, this is something that is best determined by the relevant individual member state and its national competent authority.”Consultation respondents also criticised EIOPA over conflicting views in its consultation and called for delays until all key factors were decided by the Authority.
The Belgian government has indicated that it wants to tie second-pillar retirement to the official retirement age for the state pension. It also wants to raise the minimum age for receiving an additional pension from 60 to 63 by 2018, the Belgian business daily De Tijd reported.It said that the plans were part of the budget agreements which were concluded in July.The measure must ensure that a planned increase of the retirement age for the state pension also actually leads to workers retiring later, the paper quoted the government as saying. The cabinet stressed that it didn’t want people to stop working before they had reached the minimum retirement age for the state pension. The state pension is to rise to 67 in 2030.The new proposal would level up the retirement age for the second pillar with the first pillar.The government further made clear that it wanted to outlaw provisions in pension funds regulations that encourage early retirement.That said, the proposed measures still need to be discussed with Belgian social partners.
Performance figures were submitted by so-called ‘closed’ funds, which are generally pension plans for a single employer or group of companies, and which make up the vast bulk of occupational plans.The WTW universe covers around €13bn in assets, which is 80% of the closed pension fund market in Portugal. It incorporates more than 100 pension funds within the figures to end-December 2016, including the five biggest pension fund managers in Portugal.The figures are based on median performance over each timeframe.The final quarter of the year had produced returns which – at 0.6% – dipped below the previous quarter’s, of 1.4%.Guedes said: “The Portuguese pension fund market has a euro bond exposure of roughly 60%. The fourth quarter was poor for euro bonds in general, and slightly worse for eurozone government aggregate bonds. Another factor in these low returns was probably the high exposure to direct real estate and liquidity, giving a significant ‘cash drag’ effect.”He also highlighted the bias normally found in using local asset managers for local assets: “It’s probably worth noting that the PSI 20 [the top 20 stocks on the Lisbon Stock Exchange] had a painful performance, losing 12% over 2016.”According to regulator ASF, debt was still the single biggest asset in Portuguese pension fund portfolios, with 49% invested directly in the asset class as at end-December 2016. Of this, 31% was in public and 18% in private debt.Direct equity holdings were 8% of portfolios, while direct real estate made up 8%. A further 7% was in cash.In addition, investment funds formed 29% of portfolios, but the split between asset classes was not published.However, estimates from the Portuguese Association of Investment Funds, Pension Funds and Asset Management (APFIPP) broke down the investment fund figures to give an overall asset allocation of 57% in debt, 21% in equities and 13% in real estate.The APFIPP sample covered 87% of the Portuguese pension fund market.Guedes said: “The star of 2016 was definitely the US stock market, mostly due to the ‘Trump effect’ which pushed stock prices through the roof during the fourth quarter of 2016. Given the relatively conservative allocation of the closed pension funds market, the gains arising from the strong performers for 2016 (US, China and oil-driven commodities), were somewhat limited in Portuguese portfolios.” Occupational pension funds in Portugal made an average 1.8% investment return for the 2016 calendar year, down from 3.3% for 2015, according to Willis Towers Watson (WTW).The figures brought average annualised returns for the three years to 31 December 2016 to 4.3%, and for the five years to that date, to 5.8%.Gaudêncio Guedes, an investment consultant at WTW, said: “From the general performance indices, we would have expected around a 4% return overall – excluding real estate – for 2016, if we consider the actual asset allocation of the closed pension funds.“However, the first quarter of 2016 was a tough one for financial markets and it may well have triggered a number of difficult decisions by managers regarding the investment strategies to be adopted that set the path for the rest of the year.”
The oil and gas industry is responding to demands from investors about their climate change management and disclosure, although investors still have concerns and should step up their engagement, a director of Hermes’ stewardship and engagement arm has said.Tim Goodman, director, Hermes Equity Ownership Services, made the comments in connection with a report on the impact of climate-focused investor engagement with 10 large oil and gas companies in North America and Europe. The report was published by the four investor networks in the Global Investor Coalition on Climate Change along with climate research provider CDP.According to those behind the report, investor engagement has had a discernible impact on board and executive decision-making with respect to disclosure and management of climate change risks – but there are still laggards and shortcomings that investors want addressed.One target for investors this proxy season, as it was last year, is ExxonMobil. A shareholder proposal co-filed by The Church Commissioners for England called on the company to carry out and disclose an analysis of how its portfolio would fare in a world where global warming is kept to a maximum of 2°C. Hermes’ Goodman said investors were using the 2017 proxy season to try to have their concerns addressed, but emphasised that they needed to become more ambitious about the direction of their stewardship strategies.“We need to apply significantly more pressure using all the tools available, from private dialogue about portfolio resilience and 2°C transition planning, through to more public comment on our expectations for the oil and gas industry,” he said.Shareholder resolutions requesting more company reporting in line with recommendations of the Financial Stability Board’s Task Force on Climate-related Disclosures (TCFD) could in selected cases strengthen these efforts, he added.Investors should step up engagement with oil and gas companies beyond the North American and European majors, according to Goodman.“We must also acknowledge that the oil and gas industry is responding to demand and we need to ensure that we have similar dialogue with other sectors as well about how they are responding to the recommendations of the TCFD,” he said.Earlier this month, Hermes and Wespath Investment Management withdrew a climate change-related shareholder resolution for Chevron’s 2017 AGM, which will take place on on 31 May, saying that its filing had prompted the company to publish a report on how it is managing climate change risks. Although the report didn’t fully meet the proposal’s requests, Hermes and Wespath said the company should be given time to improve its disclosure.
Human capital in terms of the total earnings over a person’s lifetime is, as the World Bank states, clearly the most important component of wealth globally. The World Bank analysis finds that human wealth on a per capita basis is typically increasing in low and middle-income countries. But in some upper-middle and high income countries, stagnant wages are reducing the share of human capital. This has hollowed out middle classes and lies behind the rise of populist parties in Europe and Trump’s rise to power in the US.Women, meanwhile, account for less than 40% of human capital wealth, according to the report, because of lower earnings, lower labour force participation and fewer average hours of work.Whilst the report states that achieving higher gender parity in earnings could generate an 18 per cent increase in human capital wealth, such a statement is misrepresentative. It assumes firstly that women who choose to stay at home to raise families have no value, and secondly that increasing their participation in the labour force would not be at the expense of reducing male participation.The report concludes that growth is about more efficient use of natural capital and through investing the earnings from it into infrastructure and educationBoth assumptions probably merit further thought. For example, a simple thought experiment would consist of two mothers who each employ the other to look after their children. If they pay each other the same amount, there would be no net change in the economic circumstances of each family. However, the World Bank analysis would suggest that each has now accumulated human capital that they otherwise would not have had! This thought experiment suggests that work that contributes to society that is unpaid should still be regarded as contributing to human capital.For low income countries, natural capital accounts for the largest component of wealth. But the World Bank argues that getting rich is not about liquidating natural capital to build other assets – natural capital per person in OECD countries was three times that in low income countries even though the share of natural capital for OECD countries was only 3%.Understanding the drivers of wealthThe report concludes that growth is about more efficient use of natural capital and through investing the earnings from it into infrastructure and education.Sustainably managed, renewable resources in the form of agriculture or forestry can produce benefits in perpetuity. In contrast, non-renewables such as fossil fuels and minerals can offer a one-off opportunity to finance development. But, as the report points out, nearly two thirds of countries that have remained in the low income category since 1995 are resource rich, or fragile and conflict states or both.What is clear is that resources alone cannot guarantee development – strong institutions and governance are needed. Clearly the private sector can play a critical role, particularly if a strong stance is taken on ESG issues.Assessing the value of natural resources raises many philosophical challenges, but the debate needs to be had. By doing so the methodology can only improve, while losing biodiversity and the services it underpins is irreversible. Moreover, Europe faces the challenge of coping with refugees and migrants dying in their thousands attempting to gain entry to its shores.Understanding and encouraging the drivers of wealth outside its borders is a matter of self-interest as well as morality. No single metric is ever ideal for assessing progress.For countries, it is very clear that GDP is a poor metric to use for determining long term policies. GDP is a measure of activity rather than wealth creation. That means that it can give very misleading signals about the health of an economy. An obvious case is where natural resources are depleted which may give rise to a boost to GDP but could result in a long-term degradation of wealth and hence future income for that country.Incorporating the value of natural resources as well as human capital is a key requirement for assessing the health of a nation. At the end of January the World Bank released a fascinating analysis of the changing wealth of nations. Promoting an analysis of changing wealth both in absolute terms and on a per capita basis, as the World Bank argues for, provides a forward-looking analysis of the health of nations. It also emphasises the need for sustainability in the exploitation of natural resources. For investors, it is worth noting that environmental, social and governance (ESG) issues underpin many of the conclusions.How the wealth of a nation should be assessed is both controversial and subject to many assumptions. But just because measurement is difficult does not mean that it should not be attempted. The World Bank’s approach measures wealth in the form of four types of assets: Produced capital and urban land : machinery, buildings, equipment and urban land, measured at market prices;Natural capital : natural resources of all types including energy, minerals, agricultural land and forests;Human capital : measured as the discounted value of earnings over a person’s lifetime; andNet foreign assets : the sum of a country’s external assets and liabilitiesThe key findings are perhaps as would be expected, although the value is very much in the detailed figures for each country.Global wealth grew significantly between 1995 and 2014. Rapid growth in Asia that has enabled middle-income countries to catch up, but inequality persists.Per capita wealth changes show a significantly different picture. Low income countries showed a deterioration primarily driven by population growth outstripping investment, especially in sub-Saharan Africa.
A Swiss pension fund is seeking options for up to CHF3.5bn (€3.1bn) in emerging market debt (EMD) and US high-yield strategies, according to new searches on IPE Quest.The unnamed investor has launched six separate searches, including active and passive approaches and exposure to both hard and local currency strategies.In all cases, managers pitching for the mandates should have at least a five-year track record in the asset class in question, but a 10-year track record is preferred.Performance should be stated gross of fees to 30 June 2019. The IPE news team is unable to answer any further questions about IPE Quest, Discovery, or Innovation tender notices to protect the interests of clients conducting the search. To obtain information directly from IPE Quest, please contact Jayna Vishram on +44 (0) 20 3465 9330 or email [email protected] QN-2548: Hard currency emerging market debt, actively managedThe pension fund is looking to allocate CHF300-400m to actively managed, hard-currency EMD. It currently has CHF700m invested in the asset class split between two active mandates.The benchmark for the segregated mandate is the JP Morgan EMBI Global Diversified index, as priced in Swiss francs.Managers interested in the mandate must have at least CHF5bn under management in the asset class and at least CHF10bn across the whole company. The maximum tracking error for the mandate is 2%.Those pitching for the allocation should have at least a five-year track record, but 10 years is preferred, the investor said. Managers should state performance gross of fees to 30 July 2019.Deadline: 5pm UK time, 30 July 2019Search QN-2549: Hard currency emerging market debt, passively managedThe passive allocation to hard-currency EMD could range between CHF300-700m, according to the search criteria. The benchmark is the same as for the actively managed search.Managers should have at least CHF10bn in the asset class and CHF20bn firm-wide. Maximum tracking error is 0.5%.Deadline: 5pm UK time, 30 July 2019Search QN-2550: Local currency emerging market debt, actively managedFor the actively managed local currency mandate, the pension fund is considering allocating CHF250-350m. It currently has an allocation of CHF280m.The strategy will be benchmarked against the JP Morgan GBI-EM Global Diversified index, priced in Swiss francs.Managers interested in the mandate must have at least CHF5bn under management in the asset class and at least CHF10bn across the whole company. The maximum tracking error for the mandate is 2%.Deadline: 5pm UK time, 31 July 2019Search QN-2551: Local currency emerging market debt, passively managedThe passive strategy’s allocation could also range between CHF250-350m, and will be benchmarked to the same index as the active allocation.The investor is open to passive or “passive enhanced” strategies. Managers should have at least CHF10bn in the asset class and CHF20bn firm-wide. Maximum tracking error is 0.5%.Managers should have at least CHF10bn in the strategy already, and at least CHF20bn across the company.Deadline: 5pm UK time, 31 July 2019Search QN-2552: US high-yield bonds, actively managedThe pension fund is considering options for a CHF500-600m allocation to an actively managed US high-yield bonds strategy. It currently has a CHF1bn allocation to the asset class, split between two mandates.The mandate will be benchmarked against the ICE BoAML US High Yield Master II index, with a maximum tracking error of 2%.Managers interested in the mandate must have at least CHF10bn under management in the asset class and at least CHF25bn across the whole company.Deadline: 5pm UK time, 29 July 2019Search QN-2553: US high-yield bonds, passively managedThe passive option will cover CHF500-1,100m of assets, according to the search criteria, with passive or passive enhanced strategies acceptable.The mandate will be benchmarked to the same ICE BoAML index as the active mandate, with a maximum tracking error of 0.5%.Managers should have at least CHF20bn in the strategy already, and at least CHF50bn across the company.Deadline: 5pm UK time, 29 July 2019