The UK government has announced plans to overhaul the tax treatment of defined contribution (DC) pension funds and the way savers can begin the decumulation of pension pots.Following in the footsteps of the Australian DC market, the UK government has removed the tax surcharge for DC members wishing to withdraw their full savings, charging only the normal income tax rate.Previously, savers wishing to access their full DC pot were subject to a 55% tax charge, with only 25% of the value of the pot allowed tax-free.The government, which previously had capital rules in place on allowing savers to access retirement products other than annuities or capped drawdown, has also removed these restrictions. It said the new system would offer consumers greater flexibility to choose between retirement options of annuities or drawdown, or to use a combination of the two.However, it also said it recognised expanding the choice meant consumers might struggle to navigate retirement finance markets, and committed to providing a guarantee for all DC savers to receive free, impartial guidance at the point of retirement.The government is also set to consult with the UK pensions industry on whether the flexible and more open at-retirement reforms should be extended to members saving in defined benefit (DB) vehicles.It admits it will need to proceed on this option with caution and that, in most cases, DB savers are likely to benefit by remaining in their scheme.Budget documents said the government expected little impact on the investment strategy of DC schemes, but it added that the stock of assets held by DB schemes would be affected if members were permitted to transfer.“Given that the stock of defined benefit liabilities and assets exceeds £1.1trn (€1.3trn), even relatively small changes to this stock could have a significant impact on financial markets,” it said.“The government is concerned that a large-scale transfer (or anticipated transfer) of members of private sector DB schemes to DC schemes could have a detrimental impact on the wider economy.“Whilst the government would, in principle, welcome the opportunity to extend greater choice to members of private sector defined benefit pension schemes, it will not do so at the expense of significant damage to the wider economy.”With any impact on DB schemes still to be determined, the government said it would also consider legislating to remove the right for DB members to transfer into a DC scheme entirely, barring exceptional circumstances.The UK chancellor, George Osborne, announced the reforms in his annual Budget speech to Parliament.He said the transformation of DC tax treatment would bring it into the modern world, and rejected the argument that UK pensioners could not be trusted with their own savings.“There will be consequential implications for defined benefit pensions upon which we will consult and proceed cautiously, so the changes we announce will not today apply to them,” he said.“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any time they want.”The reforms will require an Act of Parliament, which will be presented before the next general election and be in place by April 2015, the Chancellor confirmed.
“I don’t see why we in Sweden should have a heavier impact than the rest of Europe – it seems very odd,” he added.“Taking into account that IORPs are purpose-built, small organisations that should be super-efficient at handling pensions for members, there is no additional money you can draw on, so the impact would be an additional cost on pensioners.”He said the new rules, effective from 2016 after the previous regime for pensions institutions (UFL) was phased out in 2011, was effectively an interim arrangement until the Commission amended the single market’s rules in a few years and that it would only lead to additional costs for all involved.“I don’t see why it should be done if it’s delayed in Europe,” he said.“I see it as a very inefficient way of doing something that is already taken care of under the traffic-light system.”The current traffic-light system, less than a decade old, serves as a warning system to FI if pension funds experience asset price or rate volatility.Hansson was nevertheless adamant the SEK24bn (€2.6bn) SPK would not need to change its asset allocation, only recently put in place after several years of work.“We are well prepared,” he said.“We have a solvency ratio of 140% – there will not be a problem for us.”He added that it was “crystal clear” SPK was an IORP and would therefore register to become one of the new pensions vehicles proposed by the government. Introducing capital requirements for Swedish pension funds – despite the European Commission’s decision not to include similar proposals within the IORP Directive – is “inefficient” and will result in an unnecessary cost burden for schemes.Peter Hansson, head of occupational pension association Tjänstepensionsförbundet and chief executive at banking industry fund Sparinstitutens Pensionskassa (SPK), criticised the proposed new regulatory framework that seeks to establish two distinct regulatory arrangements – one for insurance firms and one for providers of occupational pension benefits.However, Hansson’s complaint was not with the separate regime but with the capital requirements that would soon be imposed on IORPs as a result, despite the revised IORP Directive dropping similar considerations.He questioned why the government would request that Sweden’s regulator Finansinspektionen (FI) put such a system in place “when the whole of Europe struggles with it”.
The value of UK medically underwritten buy-in market reached record levels in 2014, backed by tremendous growth in the final quarter and predictions it will reach £1.5bn (€2bn) by the end of the current year.Medically underwritten buy-in insurance contracts reached nearly £600m over 2014, with close to three-quarters of deals being completed in the final quarter, figures from UK consultancy Hymans Robertson showed.The figure compares to just just £91m in deals during 2013 – when the first medically underwritten transaction first took place.Medically underwritten insurance products account for individual members’ health status, with insurers refining pricing with greater understanding of risk and no need for prudency margins. Overall, the bulk annuities market – of which medically underwritten is a tiny fraction – grew significantly over the last year with pensioner buy-in pricing being cheaper than matching payment liabilities with UK Gilts, due to the competitive market and Gilt prices increasing.Hymans Robertson partner James Mullins said the number of bulk annuity deals completed in 2014 stood at an estimated 180, of which 22 were medically underwritten. However, in terms of value, the market accounted for just 5% of all deals.Mullins said the firm’s experience was medically underwritten buy-ins were pricing around 5% below traditional contracts, often closer to technical provisions.“This means that pension schemes could exchange Gilts for a medically underwritten buy-in and get a matching asset without any cost implications, nor any need to increase company contributions,” he added.Consultancy Aon Hewitt said it saw medically underwritten pricing value pensioner liabilities using a discount rate of Gilt yields plus 0.6% – sometimes 10% below traditional pricing.Hymans Robertson said it expected somewhere between £500m and £1bn of medically-underwritten business in 2015, around 10% of total bulk annuity value, with insurer pipelines looking strong.The market is split between two providers, Partnership and Just Retirement, both firms known in the medically underwriting space, particularly for providing individual annuities.However, since the UK Budget removed compulsion around purchasing annuities from April 2015, both firms have pushed to grow their bulk annuity business.Hymans Robertson said traditional bulk annuity market leader, Legal & General (L&G), was among other providers looking to enter the medically underwritten space.“Given the rapid growth in the area, insurers are increasingly active and interested in this part of the market. We expect to see other insurance companies offer medically underwritten buy-ins during 2015,” Mullins said.In the aftermath of the 2014 Budget, IPE reported insurer LV= was investigating the possibility of entering the UK medically underwritten bulk annuity market after expecting a severe hit to its individual business.Last year also saw the first medically underwritten buyout deal which covered deferred members and pensioners, with Hymans Robertson anticipating further growth in this space.Overall, 2014’s bulk annuity market reached a record £12bn in transactions amid competitive pricing from insurers and a boost in funding levels from 2013’s equity performance.It hosted record-breaking deals in both product spaces with a £3.6bn buy-in arranged by the ICI Pension Fund, and the TRW pension fund handing over £2.5bn in liabilities with a buyout.A recent report from L&G said close to half of UK pension funds would use insurance products to sure-up liabilities within the next five years, two-thirds of which would be a bulk annuity.The findings concluded expecting significant growth in the market, as insurer pricing tension increased after the Budget hit individual annuity business, and scheme’s liability management allowed better access to markets.To read more about the pricing power balance between UK pension funds and insurers, click here
“If China were a traditional market economy, the risk of a financial crisis with a big fall on the housing market and in investments would be imminent,” Henriksen said.For the time being China’s leaders had managed to keep the crisis at bay, he said, but despite this, investors probably had to adjust to a gradual slowdown in China in the coming years.“Chinese growth indicators are at a lower level than before and so we expect that growth in China will drop in the next few years,” he said.“This is one of the reasons we are underweighting emerging markets shares in our portfolios,” Henriksen said.He said PFA had been underweight in emerging markets equities for a long time.PFA Pension, which has total investment assets of DKK400bn (€53.6bn) has DKK2.7bn invested in Chinese assets, primarily through Hong Kong, with DKK2.5bn of this in equities and DKK200m in bonds.The pension fund invests in China primarily through external managers and does not have an QFII License to invest directly in Chinese financial markets.After a year of strong price rises for Chinese equities, shares fell significantly in June and July of this year, and the Chinese authorities had taken a number of different steps to try to halt this slide, Henriksen said.Interest rates and banks’ reserve requirements have been cut several times over the last year, and the authorities in July also intervened to stop trade in some shares and prevent large shareholders from selling their stock.Last week, the People’s Bank of China also devalued the renminbi to bolster Chinese competitiveness, Henriksen noted.Although the Chinese leadership had demonstrated once again that it was ready to use all means to prevent an economic hard landing, the question was whether this could continue, he said.“The Communist party has a monopoly on political power in China, but that monopoly could be threatened the day China is hit by a serious economic crash,” Henriksen said.Meanwhile London-based investment advisers CrossBorder Capital, commented that while China’s decision to devalue currency may look like a small token move, the parallel acknowledgement that the rate would in future be more determined by market forces was significant.“It surely acknowledges what many of us have feared that world markets are in a currency war,” it said.However, Jan Dehn, head of research at investment manager Ashmore dismissed the argument that China had joined the global currency war and would export deflation to the rest of the world. Instead, China was pursuing a far more constructive, rational and forward-looking strategy, Dehn said.“This strategy involves, amongst other things, achieving global reserve currency status in the near-term.”Dehn said: “For this reason, China has absolutely no interest in abusing its own currency via competitive devaluations.” Denmark’s biggest commercial pension fund PFA is remaining underweight in emerging market equities due to of the continuing uncertainty surrounding Chinese economic growth.Henrik Henriksen, chief strategist of PFA Pension, said China would be the key risk facing investors over the medium-term.“The biggest risk for the global economy in the next three to five years, is a hard landing in the Chinese economy,” he said.Since the financial crisis there had been a hefty increase in debt in the Chinese economy, he added.
Direct secondary deals, stemming from the liquidation of secondary funds, were also slightly down last year over 2014, with private equity accounting for $9.2bn of the $10.2bn in deals.“Although overall direct volume was down 7.3%,” Setter Capital’s volume report for 2015 said, “supply appears to have increased, as respondents felt that more managers attempted to liquidate or restructure older funds.”Setter also suggested its figures could be misrepresenting the size of the market – while its findings were presented in US dollars, transactions occurring in euros would have been impacted by a 12% devaluation of the single currency compared with the dollar.Large buyers, acquiring stakes worth more than $1bn, dominated the market, accounting for nearly two-thirds of all deals, up by 2.2 percentage points compared with 2014.The report added: “Buyers continued to diversify their secondary focus, with about 17% of participants buying other alternative investment types for the first time.”The impact of diversification saw buyers acquire stakes in real estate, infrastructure and other asset classes. The UK’s Universities Superannuation Scheme recently completed a sizeable secondaries market transaction, selling £640m (€868m) worth of stakes in more than a dozen private equity funds. The secondary market for property was the sole “bright spot” over the course of 2015, as hedge fund secondaries saw deals fall by two-thirds, according to a wide-ranging survey of the market.Setter Capital said 2015 saw the end of two consecutive years of what it deemed breakneck growth, with secondary market transactions only increasing marginally from $49.3bn (€61.9bn) to $49.6bn.It added that while the value of the overall market increased, the experiences of different market segments was not uniform – with private equity, infrastructure and hedge funds all down, to varying degrees.While hedge fund secondaries suffered the steepest drop, at 66.7%, infrastructure transactions were also down by 15.6%, and private equity fell by 0.5%, to $37.7bn.
Chief executives of two Icelandic pension funds have resigned after being embroiled in the Panama Papers scandal.Kári Arnór Kárason and Kristjáns Arnar Sigurðssonar, chief executives at the ISK157bn (€1bn) Stapi pension fund and the ISK171bn Sameinaði pension fund, respectively, stepped down following an investigation by RÚV, the Icelandic public broadcaster.The investigation by news programme Kastljós revealed both were named in the so-called Panama Papers, a cache of millions of documents from Panamanian law firm Mossack Fonseca initially leaked to a German newspaper.In a brief statement released 27 April, Sigurðssonar said he had decided to resign but claimed he had always acted with integrity and taken care to comply with existing laws and regulations. In a separate statement, Sameinaði said the fund’s director of operations, Ólafur Haukur Jónsson, would fill the vacancy left by Sigurðssonar’s departure until a permanent replacement could be found.Kárason offered greater detail in his statement, saying he had notified Stapi’s board of his decision to resign but emphasised that he had not profited from either of the companies he was linked to in the leaked files.The outgoing Stapi chief executive said one of the companies, based in Luxembourg, was set up in 1999 by Kaupthing Bank, and that he gave the bank’s staff “full and unreserved power of attorney” to conduct its business.He said he believed the company was eventually wound up, and that its investments proved unsuccessful, and that he was not in possession of any documents relating to its activities.“Although it is difficult to be sure of events occurring 16, 17 years ago,” Kárason continued, “I am nevertheless fairly certain I never invested any funds in this company and received no payments from it.”The second company, launched by MP Bank at Kárason’s behest in 2004, was paid an initial fee of ISK305,200 (€3,500), but never went into operation.“[The investment] was included in tax returns, valued at the amount of start-up cost and amortised three years later, as a total loss,” he added.“Thus, I earned no gain or yield from these companies, and they bear no relation to tax evasion.”Kárason said there was “no doubt” he should have informed his superiors at Stapi of both companies’ existence.“Although the serious nature of the events I have described here is surely a matter of opinion,” he added, “my assessment of the current social discourse with regard to offshore companies and tax havens is that it cannot be regarded as acceptable for a man in my position – that is, in charge of an establishment responsible for managing public pension savings – to have been associated with business operations of this kind.”Kárason has been with Stapi since its launch in 2006, when Nordurlands Lifeyrissjodur, where he was managing director, merged with a second pension fund.
It also raised concerns about conflicts of interest when investment managers provide fiduciary management services, and said it was proposing to introduce greater standardisation of price and performance of fiduciary managers.It said the performance and fees of fiduciary managers “appear to be among the most opaque parts of the asset management value chain”.It added: “A lack of publicly available, comparable performance information on fiduciary managers also makes it hard for investors to assess value [for] money.”The FCA’s comments were welcomed by Richard Dowell, head of clients at Cardano, who said the FCA’s plan for better disclosure of fiduciary management performance was “a much needed and positive step”.“Much work has previously been conducted around costs and charges, but little focus has been placed on the transparency of performance,” he said, calling on the FCA to agree a standardised approach to performance measurement.“This will help to ensure trustees can easily and accurately compare, review and select their providers,” he said.James Trask, partner at pensions specialist Lane Clark & Peacock, said the FCA’s concerns about conflicts of interest in fiduciary management came as no surprise.“The conflict is clear,” he said. “In a fiduciary relationship, the consultant is ‘marking his own homework’, as it was put to me recently. Clients really must get independent advice on the performance of their fund manager.”However, he questioned some of the findings and associated recommendations reported by the FCA, such as that consultants are infrequently changed and that there should be compulsory re-tendering of mandates.He also challenged the FCA’s finding that consultants did not help smaller institutional investors negotiate on investment management fees, saying that LCP “frequently negotiate[s] favourable rates to apply across our client base”.Danny Vassiliades, head of investment consulting at actuary and actuarial consultancy Punter Southall, did not address fiduciary management but welcomed the FCA’s attention to competition in the investment consulting sector, suggesting that, to increase competition, the FCA should “consider in more detail ways in which schemes can assess the performance of their consultant and determine whether their fees have been justifiable”. Big player pushback Some of the largest investment consultancies said they welcomed the FCA’s interim report but also defended their work.Tim Giles, senior partner and head of the UK investment consulting practice at Aon Hewitt, named by the FCA as one of the players dominating a concentrated market alongside Mercer and Willis Towers Watson, suggested the FCA and Aon Hewitt had the same aims and that “[t]herefore, anything that encourages competition to ensure investment advice delivering better outcomes has our wholehearted support”.He acknowledged Aon Hewitt had a large share of the market but said “that is because clients have decided to work with us, as they recognise our size provides the range of services and choice that may not be available elsewhere”.He added: “Our clients choose between us and a wide range of competitors in the market.”On conflicts of interest, Giles said “[all] providers and decision makers in the market have potential conflicts” and that Aon Hewitt “[takes] all possible steps to understand our clients’ needs and to manage our potential conflicts”.He said: “We note that the FCA has not found any evidence of failure to manage potential conflicts.”Ed Francis, EMEA head of investment at Willis Towers Watson, said the company welcomed the FCA’s interim findings but cautioned that “any further regulation” should not impose higher costs on investors.He said advice on portfolio strategy should be regulated “to help trust-based pension funds to get a minimum standard of advice on these matters”, and that this advice could have a bigger impact on a pension scheme’s finances than advice on manager selection.On fiduciary management, Francis said the firm was “acutely aware of the need to provide clients with an unrivalled level of transparency on fees and performance” and that it “fully support[s] transparency, measurement and the reporting of meaningful performance figures for fiduciary managers”.He noted steps taken by Willis Towers Watson to disclose figures showing the performance and track record of mandates run on a fiduciary-management basis, saying that these “clearly demonstrate” the materially positive impact fiduciary management can have on pension scheme’s financial health. Some of the largest investment consultants to UK pension schemes have welcomed efforts by the Financial Conduct Authority (FCA) to encourage competition in the market but also defended themselves in response to concerns raised by the regulator about fiduciary management services. The regulator today presented the interim findings of its study into the asset management market, as part of which it said it had found concerns about the way the investment consultant market operated.It has provisionally decided that there should be a market investigation into competition in the sector and also called for it to be granted regulatory powers over investment consultants.The regulator said “an in-depth investigation” was required given the potential detriment arising in this part of the value chain, the impact this advice has in determining future returns, the lack of regulatory oversight and the difficulty institutional investors face in assessing this service.
He said that for Sweden, which has a large financial system relative to the economy, international agreements on banking, insurance, and securities were crucial.Thedéen was in Washington and New York last week to meet representatives of the US Securities and Exchange Commission (SEC), the Federal Reserve, and the International Monetary Fund.US draft legislation in the form of the Financial Choice Act was presented to the House of Representatives at the end of April by Republican congressman Jeb Hensarling.The proposal aimed to re-write the Dodd-Frank Law, a wide-ranging set of rules for the American banking system introduced following the last financial crisis. The proposal was also designed to free up access to capital markets for small businesses.However, it has attracted criticism for removing rules that protect consumers and shareholders.“The picture that emerges is that they want to circumscribe the American authorities with more restrictions,” Thedéen said. “This will reduce their room for manoeuvre in international negotiations.”Thedéen also expressed concern that the US would make big changes to how banks dealt with crises.“It is a lesson from the financial crisis that you must have orderly management of banks in crisis,” he said.Thedéen said there was a lot of uncertainty about what would materialise from the draft legislation, and about the key positions in the state apparatus.“My impression is that the US will reduce its commitment internationally, but the question is how much,” he concluded. US president Donald Trump’s plan to reduce financial sector regulation is worrying and could even pose risks for Sweden, according to the head of the country’s financial regulator.Erik Thedéen, director of the Swedish Financial Supervisory Authority, told Swedish business daily Dagens Industri: “It is surprising that someone is prepared to make such big changes barely 10 years after the very deep financial crisis.”It was crucial to have a global foundation network for financial regulation, he said.“Should the US as a dominant player choose a completely different line, in the long run, it could affect Sweden and stability,” Thedéen said.
Candriam scored the countries based on how well they manage their four main resources: human capital, natural capital, social capital and economic capital.Each of these four domains in turn incorporated a wide range of environmental, social and governance (ESG) issues, as well as the UN’s Sustainable Development Goals.Russia scored below the 35 points an emerging market needed to be considered eligible for investment under Candriam’s methodology. The country’s score was almost unchanged from last year, but the manager ranked its management of natural and economic resources lower.Large-scale deforestation and slow development of renewable energy sources counted against Russia’s ranking, as did the impacts and implications of its economic recession in 2015-16.Turkey was considered eligible for investment in last year’s assessment, but its move towards an authoritarian system of government meant this changed, Candriam said.For an emerging economy, China is still “median” from an ESG perspective, according to Candriam.The country scored zero on “social capital” given its one-party system, lack of media and religious freedom, discrimination of ethnic minorities, and other activity falling foul of international democracy and anti-corruption standards. The full list of countries deemed ineligible for investment can be found below, and the full Candriam report here. China, Russia and Turkey are among 49 countries that are “non-investable”, according to an analysis of their potential for long-term sustainable development by Candriam.Of the 35 advanced economies analysed – based on the definition used by the International Monetary Fund – only Greece came out as non-investable. Out of the 88 emerging economies, 48 were classified as non-investable.This means that Candriam would not invest in these countries as part of its socially responsible investment (SRI) funds, subject to big developments during the year that could affect the countries’ scores. It is free to invest in them for its other funds.Currently 26% of Candriam’s assets under management is “engaged in SRI screening processes”, a spokesperson told IPE. This is up from 21% at the end of 2016. Source: Candriam
The nine Austrian Pensionskassen managed to generate a performance of 6.13% on average for 2017.This result brought the annualised average to 5.55% since the country’s second pillar system was incepted in 1991.Funds mainly profited from a high equity quota, the country’s pension fund association FVPK noted at a press conference in Vienna today.The average equity quota over all different risk portfolios offered under the life-cycle model stood at 37.6% at year-end 2017. Two years previously it had been just over 28%. “Equities have played a very important role for the performance over the last few years,” said Andreas Zakostelsky, chairman of the FVPK.For 2018, he expected “definitely no further increase in the equities quota” but a “continuation at a high level”.In the bond segment, which made up just under 55% for the first time in years, Zakostelsky predicted a slight increase in corporate bond exposure. He added: “But only slightly, because the spread has come down but returns are still better than those from European government bonds.”Other sources of return would come from emerging markets, the FVPK said.Austrian Pensionskassen manage €22.6bn in total, according to the association’s figures.Zakostelsky called on the new Austrian conservative-right wing government, which came to power only a few weeks ago, to allow Pensionskassen separate investment quotas for infrastructure and investments in residential real estate projects. Currently, these fall under the equities quota.Overall, the FVPK was optimistic about the new coalition between ÖVP and FPÖ, as the two parties put the goal of “strengthening supplementary pensions” in their coalition agreement, including ideas for tax incentives.Zakostelsky confirmed that the new tax proposal the association devised with academic backing in late 2017 had been presented to the government but not discussed in detail yet.