The National Employment Savings Trust (NEST) has revealed how it would like to see the defined contribution (DC) market evolve in the wake of changes that no longer require savers to buy an annuity.The state-backed master trust began consulting in November on the future of its offering given the removal of compulsory annuitisation – a change that takes effect in three weeks, after it was announced by chancellor George Osborne in last year’s Budget.Its preliminary findings from consultation responses and external research found most supported the idea, and need, for a default solution turning DC savings into pension income.NEST, set to become the largest DC provider in the UK, said the general consensus among consultation respondents was that individuals valued the choices provided by the Budget, but many would not want to make specific decisions. This led to the organisation drafting six principles default retirement solutions should encompass – although it accepted many of the principles cause tension with one another at different stages.The paper from NEST said the underestimating longevity was a key risk, meaning solutions must adapt to, and account for, changes to longevity.Solutions should also be designed to ensure DC pots are spent in their entirety, and provide incomes that are stable and sustainable, but still offer flexibility where possible.The management of investment risk, NEST said, was crucial given the harmful nature of volatility in income-drawdown solutions, with special consideration for inflation risk that should be managed, but not necessarily hedged.NEST said investment risk will need to be managed to reflect the DC savers desire for investment growth, but minimising the likelihood of running out of money in drawdown solutions.Despite the expected decline of annuity conversion after 6 April, Mark Fawcett, chief investment officer at NEST, said the evidence indicated that mitigating the risk of outliving ones savings should be a key feature in its default solution.“What we are seeing is a strong consensus emerging on good quality default retirement income solutions playing a central role in helping these savers achieve better retirement outcomes,” he added.NEST said without a default solution there was also a risk of conservative savers not utilising their pots, which meant a relatively low-risk investment solution and then annutisation was a positive step.It also suggested the purchase of an annuity could be done on a deferred basis to avoid handing over of a large sum of savings in one go, a psychological barrier to annuity purchase.NEST’s consultation will also see it consider providing income-drawdown in-house and whether it could offer collective DC (CDC) solutions to its members.It said full disclosure of its consultation and decisions on its future structure would be published in the summer of 2015.
The real return after expenses for the latest 10-year period is 4.4%.Over 2015, equities as a whole returned -1.1%, but Swedish equities returned 7.3%, developed countries -3.5% and emerging markets -7.7% (all figures before expenses).Equities made up 32.9% of the portfolio as at end-December 2015.Fixed income, which includes government debt, credit and high yield, and which forms 27.9% of the portfolio, returned -0.4%.The best performing asset class was real estate (11.1% of the portfolio), which returned 23.6%.The fund’s real estate assets are long-term investments, mainly held for rental income, and less for their expected increase in value.Private equity – 5% of the portfolio – made 13.3%.Ossian Ekdahl, head of communications and ESG at AP1, said: “There are two main reasons for us to invest in private equity. The first is that we expect higher long-term returns, and secondly, it will diversify our total portfolio.”Meanwhile, infrastructure – a new asset class for the fund, and which now makes up 2.9% of the portfolio – returned 5.9%.Last year, AP1 – as part of a consortium – purchased electricity distribution company Ellevio from Fortum, the Finnish energy company.Ellevio has already embarked on major investments to enhance delivery performance to customers.AP1 also formed a real estate company, Secore Fastigheter, together with ICA, the Swedish retail chain.“The ambition is to allow Secore to grow further by acquiring further properties in which ICA stores are the main tenant,” said Magnusson.Overall, a chief objective is to create long-term sustainable value.“As a long-term investor, it is natural to incorporate non-financial sustainability aspects into the investment analysis,” said Magnusson.“Last year, we decided on a new overall sustainability strategy, in which we focus on resource efficiency. We expect the use of natural resources, human capital and financial capital to take place responsibly.”AP1 has also continued to strengthen its in-house investment management, believing it will produce better conditions for higher returns. Första AP-Fonden, the First Swedish National Pension Fund (AP1), has announced a 4% investment return after expenses for the 2015 calendar year, down from 14.6% the year before.At 31 December 2015, the fund’s net assets had increased to SEK290.2bn (€31bn), from SEK283.8bn the previous year.Johan Magnusson, chief executive, said: “The return of 4% after expenses in 2015 is a decent one, considering the great market turbulence during the year, and is in line with the fund’s target.”The fund’s long-term goal is a real return of 4% after expenses over rolling 10-year periods.
Norway’s sovereign wealth fund saw continued strong performance from real estate outstrip returns from its equity and fixed income holdings, as 2015 results beat its internal benchmark by 0.5%.Overall, the NOK7.5trn (€796bn) Government Pension Fund Global returned 2.7% – although the 3.8% returned by its equity holdings was dented by the 0.3% result from its fixed income portfolio, which accounts for 37% of assets.Norges Bank Investment Management (NBIM) said developed-market equities significantly outperformed emerging market (EM) equities, with the former returning 4.9% and the latter losing 7%. Yngve Slyngstad, chief executive at NBIM, said 2015’s results were satisfying, despite volatility in returns from quarter to quarter – blaming negative interest rates and currency turmoil. NBIM said falling prices and volatile currency markets were to blame for the losses from emerging and frontier market holdings, which accounted for 7.9% of the fund’s equity portfolio.Despite the losses suffered from EM equity holdings, the fund’s single-largest EM holding, China, performed well, returning 6%, or 5.7% when measured in yuan.Losses when measured in international currency were seen from the fund’s Taiwanese and Indian stocks, while losses of more than 38% from Brazilian holdings resulted in Latin American exposure returning -26.9%.Russian holdings recouped some of the 40% losses seen in 2014, returning 26.1% when measured in rouble.The fund’s sovereign debt holdings, more than half its fixed income portfolio, achieved a return of 0.2% in 2015.Euro-denominated holdings achieved a flat return when measured in euro but lost close to 6% when measured in international currency.Emerging market holdings mirrored the losses largely seen by the region’s stocks, returning -4.9%, while rising interest rates and a weakening real led to losses on Brazilian debt of more than 27%.Real estate holdings, which have risen to account for 3.1% of the fund by the end of 2015, continued their strong performance, returning 10%.While down compared with annual results for 2013 and 2014, it was the third consecutive year property outperformed fixed income, and the third time since 2011 it achieved a better performance than the sovereign fund’s equities.The returns come after a year that saw NBIM complete its largest property transaction to date after it spent $2.3bn (€2.1bn) on a portfolio of logistics assets in the US, part of its ongoing joint venture with Prologis.In November, it also acquired a 45% stake in 11 office assets in New York for $1.5bn.The two deals accounted for more than 70% of the NOK44.2bn invested in unlisted real estate during 2015, only slightly less than the NOK45bn paid into the fund by the Norwegian government.The oil revenue paid to NBIM in 2015 was notably down over the previous year, and accounted for only one-third of the NOK150bn transferred in 2014 – a reflection of the fall in oil prices, which, in 2012, had still seen nearly NOK278bn in oil revenue transferred to the fund by the government.
NBIM said the fund’s market value reached NOK8.02trn at the end of June, up from NOK7.51trn at the end of 2016.Since the end of the reporting period, however, the fund’s value has decreased to NOK7.71trn, according to the rolling figure on NBIM’s website.Trond Grande, deputy chief executive at NBIM, said: “The record-high return is primarily due to the fact that the fund has become so large.”But he warned: “We cannot expect such returns in the future.”Grande said the stock markets had performed particularly well so far this year.In the second quarter alone, equity investments returned 3.4%, fixed-income investments returned 1.1% and real estate returned 2.1%.The results meant NBIM beat its benchmark, generating a total return on investments that was 0.3 percentage points higher than the return on its reference index.In the second quarter, NOK16bn was withdrawn from the fund by the government, it said.Over the quarter, Norway’s currency unit appreciated against the main currencies, which had decreased the value of the fund by NOK32bn, the manager said.At the end of June, the GPFG had 65.1% of assets invested in equities, 32.4% in fixed income and 2.5% in unlisted real estate.Compared to the end of the first quarter, this means the proportion of equities rose slightly, the fixed-income allocation contracted and the real estate allocation was unchanged. Norway’s giant sovereign wealth fund made its largest ever half-year return in the first six months of 2017, according to its latest financial results.The Government Pension Fund Global (GPFG) made NOK499bn (€53.6bn) in the first half of the year in absolute terms, a figure that its manager Norges Bank Investment Management (NBIM) put down to the fact the fund has grown so large.Reporting results for the second quarter, NBIM said the fund returned 2.6% or NOK202bn in the second quarter, bringing the return for the first half of the year to 6.5%.The manager described as the best half-year return in Norwegian kroner terms in the history of the fund.
The Belgian government is on track to obtain parliamentary approval for a law that would allow self-employed individuals to accrue second-pillar pension benefits.A parliamentary committee approved the draft law in late January, and the full parliament is expected to pass it in due course.According to Luc Vereycken, co-founder and CEO of pensions and insurance consultancy Vereycken & Vereycken, the new regime is due to start in July.Currently, self-employed professionals such as traders, notaries or craftsmen do not have the same entitlements to occupational pension benefits as self-employed who are registered as directors of a company. Belgium’s parliament building in BrusselsWith the new law, self-employed individuals will be able to choose to save more for their pension, benefitting from a tax reduction of 30% on contributions. The net tax on the pension savings will be around 12.5% of the contributions.As is the case for self-employed company directors, self-employed individuals will be able to save up to 80% of their taxable salary across the first and second pillar.To sign up for the new regime, self-employed individuals can set up a contract with an insurer or a pension fund.The law was presented to the parliamentary committee by Denis Ducarme, minister for the self-employed and small businesses, and Daniel Bacquelaine, the pensions minister.Bacquelaine said the measure was “an additional step towards the generalisation of supplementary pensions and the harmonisation of schemes”.Complexities aheadVereycken said he thought the new law was a positive development, but that “in Belgium it’s becoming rather complex”.There was a contradiction in that, for budget reasons, the new system for the self-employed was not as attractive from a tax perspective as some third-pillar pension arrangements, he added.Vereycken said that, although the new system had many similarities with private pension arrangements (third pillar), it was officially a second-pillar pension regime because it was governed by social law, and hence was better protected than third-pillar pensions.This was a difference that many people did not understand, he added. Other European governments are seeking to improve pension coverage for the self-employed. In the UK, the government has proposed extending its auto-enrolment policy to cover self-employed workers, while in the Netherlands unions are seeking better benefits and protections for “zzp’ers” from a rising state pension age. In addition to a state pension, the self-employed have been entitled to accrue additional benefits up to a premium of around €3,000 per year. This is known as the “pension complémentaire libre pour indépendants” (PCLI).Since 2004, self-employed company directors have been able to accrue second-pillar benefits, but this was not available to self-employed people that were not company directors.This led to many individuals setting up companies for pension and tax reasons.“The government did not like that, and now, in theory, that is no longer necessary for pension reasons,” said Vereycken.
It said it intended to switch the emphasis from regional to global investments and also improve the balance between its currently overweighted holdings in Europe and its underweighted stake in the US.It added that it also wanted to review its fixed income portfolio.The KLM scheme posted an overall result of 7% for 2017, in particular thanks to a 14.7% gain on its equity investments, which it attributed to active managers in both Europe and Asia Pacific.Fixed income generated 2.5%, largely due to the performance of high yield investments, it said.Its property investments yielded 8.7%. The pilot scheme said it had merged European real estate in its matching and return portfolios in order to achieve a less complex and more efficient European private property portfolio.The pension fund incurred administration costs of €912 per participant and spent 0.48% and 0.20% on asset management and transactions, respectively.It said it was seeking to reduce costs by abolishing the options of a part-time pension as well as additional pension saving. It would also deploy fewer investment pools, it added.The pension fund closed last year with funding of 127.1%, enabling it to grant its participants full inflation compensation. The board of the €8.7bn pilot scheme of KLM is not keen on a new pensions system, its vice chair has confirmed.Evert van Zwol told IPE that the pension fund considers itself ready for the future because of its new collective defined contribution (DC) arrangements as well as its individual DC plan for pensions accrual above the tax-facilitated limit of €105,000.In its annual report for 2017, the board said that “not much needed to change”, and that it would resist “pension adjustments that didn’t fit the scheme and its participants”.Last year, the pension fund agreed with the employer to switch from defined benefit (DB) to collective defined contribution (CDC) arrangements, with KLM paying €194m into the scheme’s indexation pot as a one-off additional contribution. It also introduced a variable investment pension, as the last missing piece in its individual DC plan.“This way we are well prepared for a future with possibly individual pensions accrual and further limits to the tax-facilitated accrual,” the board said.Van Zwol said: “We now have a complete range of pension plans that will be sufficient for a number of years”.“Although we are ready for the pensions contract that employers and trade unions will come up with, it’s not what we need,” he added.“Our participants are satisfied with our current arrangements, and it would be nice if we would be left alone for some time.”Portfolio reorganisation in the pipelineIn its annual report, the pension fund indicated it wanted to reorganise its equity portfolio.
Niklas Ekvall, chief executive, AP4Ekvall’s comments were part of an announcement from the fund that it was joining the United Nations Tobacco-Free Finance Initiative, which aims to highlight financial institutions that have decided not to invest in tobacco companies and encourage others to do the same.“By participating in this initiative, we hope to prove to others that it is profitable to integrate sustainability aspects into investments,” Ekvall said.He said risks existed that were not judged to be properly priced today, and that the shares of tobacco firms were considered to be overvalued.“Over time, tobacco companies are therefore likely to develop worse than the index,” Ekvall said.Other institutions, including France’s FRR and the Church of England, have also signed up to the Tobacco-Free Finance Initiative.In 2016, the US’ biggest pension fund CalPERS extended its tobacco company ban despite evidence that it had missed out on as much as $3bn in returns over 15 years. “Tobacco stocks have thus underperformed by 40% since June 2016,” he said.Fransson acknowledged that, from a longer-term perspective, tobacco stocks had significantly outperformed the global equity index.“But we view the environment as much more challenging for the tobacco companies in the future,” he said. Sweden’s AP4 – one of the country’s four main national pensions buffer funds – has said deciding not to invest in tobacco companies has boosted its financial results.The SEK367bn (€35.7bn) pension fund said it took the business decision not to invest in tobacco companies in 2016, because it assessed that rising long-term risks would adversely affect the tobacco companies’ valuations in the future.Niklas Ekvall, AP4’s chief executive, said: “Our business decision not to own tobacco companies has so far contributed positively to the result.”Tobias Fransson, head of strategy and sustainability at the fund, told IPE that since AP4 sold tobacco stocks in June 2016 from its global equity portfolio – which is benchmarked against the MSCI World index – the sector had fallen by 6% while the index as a whole had increased by 34%.
A recession in Sweden could cost individual pension savers as much as SEK1.2m (€115,000) each in terms of future pension capital, according to research by pension provider Skandia.The figure comes from a detailed study examining the possible effects of a Swedish recession – similar to the one that hit the country in the early 1990s – on pension savings. Skandia said the study was the first of its kind.Mattias Munter, pension economist at Skandia, said: “Tomorrow’s pensioners will be affected more than previously by developments on the stock exchanges. As the occupational pensions and personal savings become more important, coming economic crises also become a major factor for the Swedes’ pension savings.”Skandia said that customers would need to save between SEK1,735 and SEK2,835 a month extra to compensate for such an economic downturn, depending on their salary level. The study examined the effects of three different potential economic crises: one in 2020, resulting in no capital increase for two years; a more serious recession next year with no increase for four years; and a serious crisis hitting in 2030 resulting in no increase for four years.The firm applied these scenarios to four professions in different salary categories, including an assistant nurse, a painter, a senior high-school teacher and a software and systems developer.The results showed that the most serious recession scenario, in 2030, would mean that the highest earner – the software and systems developer – would have to save an extra SEK1.24m to fully compensate for losses on their savings.Munter warned, however, that the future remained completely unpredictable: “Reality is much more uncertain than forecasts. It is clearly difficult to say exactly when an economic downturn will strike or how deep it will be. What we certainly know is that historically one or more economic crises occur during a person’s working life.”This study was based on people born in 1979, established in the labour market and assumed to retire at age 69 having had occupational pension arrangements throughout their whole working life.Further readingBuilding investor resilience in a downturnJP Morgan Asset Management’s Sorca Kelly-Scholte explains that investors need to look at varied downturn scenarios and take new risks into consideration
A Swiss pension fund is seeking to allocate up to $10m (€8.9m) to private equity, according to a new search on IPE Quest.Search QN-2558 is for a $5m-$10m private equity mandate, either global or focused on Swiss companies. The unnamed investor wants a growth-oriented style manager, but not a fund-of-funds.The pension fund has not specified a minimum level of assets, but has stated that managers should have at track record of at least three years.Performance should be stated net of fees to 31 July 2019. The investor has expressed a preference for a bottom-up approach and an “evergreen” structure.The deadline for submissions is 20 August 2019 at 5pm UK time.Two other IPE Quest searches are still open for submissions, with deadlines this week.A “large” but otherwise unidentified Swiss pension fund is looking to allocate CHF200m (€89m), with potential for further growth, to global real estate equity via unlisted funds (search QN-2554, deadline 7 August).Another Swiss pension investor is on the hunt for an FX hedging mandate of around CHF1.5bn (search QN-2556, deadline 9 August).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]
In addition, as a consequence of the regulator’s instruction, it had decided to restrict the asset managers’ freedom to invest. “They won’t be able to quickly and extensively reduce risk in their mandates now,” the pension fund said. The €2.2bn Pensioenfonds Atos has limited the leeway granted to third-party asset managers when implementing its investment policy, following an intervention from regulator De Nederlandsche Bank (DNB).In its annual report for 2018, the scheme said DNB had demanded insight into its investment choices, more detailed calculations for stress testing, and tighter constraints on asset managers.The watchdog also ordered Atos to consult its accountability body (VO) about the scheme’s risk attitude. The VO consists of employee and pensioner representatives and is meant to hold a scheme’s supervisory board to account.In the annual report, the board said that DNB’s additional demands had put pressure on the pension fund’s operational functioning, resulting in the board failing to consult the VO in time. De Nederlandsche Bank’s headquarters in AmsterdamAlmost 72% of its assets are managed by BlackRock. The remainder is run by GMO.At June-end, funding of Atos stood at 104.8%.The closed pension fund also said it wanted to continue independently until at least 2023, when the contract for pensions provision with Achmea Pensioenservices was due to expire.Last year, Pensioenfonds Atos made headlines when it fired two members of its VO for undisclosed reasons.