But Bernardino went on to stress that the authority’s job was not to replace existing national regulators.“Our job is to promote consistency, to promote convergence,” he said.Significantly, the issue of funding of EIOPA came up.At present the formula is 40% coming from the European Commission, and 60% from member states.“This is definitely not optimal,” said Bernardino.As an EU body, the chairman said he would prefer for 100% of EIOPA’s funding to come directly from the EU.Previous discussions on funding have also seen suggestions from Bernardino and the European Parliament that a levy on the insurance and occupational pensions sector itself could provide financing for the authority – a move the UK’s National Association of Pension Funds previously admitted would be “difficult to resist”.Bernardino also rejected complaints about the proposed holistic balance sheet (HBS), saying: “The HBS is the correct way to achieve a common basis across the EU.” He invited participation in EIOPA’s stakeholder group selection process.Supporting the work of the groups warmly, Bernardino observed: “It is not by hiding things we shall increase trust.” Europe’s ageing population could lead to a generational conflict, the chair of the European Insurance and Occupational Pensions Authority (EIOPA) has warned.The risk was mentioned by Gabriel Bernardino as he outlined the challenges facing the Continental pensions industry, and defended the role played by EIOPA to attendees at the PensionsEurope conference in Brussels. “Of course we are an independent body,” he said. “Our main objective is to promote convergence of supervisory and consistency practice across Europe.”He said it was very important to have a body that could promote these needs, to the entire sector, covering both insurance and occupational pensions.
A German company granting a ‘market average’ interest rate as guarantee for an employee’s pension payout can now use federal zero-coupon bonds as a basis for calculation, according to a recent court ruling.Germany’s federal labour court – the Bundesarbeitsgericht (BAG) – reached the verdict last week, overturning a previous decision by a regional court in the spring of 2015.A former employee sued the company, whose name has not been disclosed.When the employee retired in 2011, he said he expected the company to guarantee 3.55% of the capital remaining in his pension account. The company, however, had employed the yield curve for German and French government bonds as the basis for its calculations and instead offered a guarantee of 0.87%.The regional court in Nuremberg estimated that, based on the returns from some German bunds bought in February 2012, the guarantee should be 2.13%.The BAG, however, has now ruled that the company had the right to its own interpretation of the phrase ‘market-average interest’ set down in the contract.Sascha Grosjean, a partner at law firm Taylor Wessing, told IPE: “It is legally interesting to see the BAG says it is not for any court to decide how this provision of a ‘market-average interest’ set down in the contract is to be interpreted.”The German pension fund association (aba) agreed that it was “positive” the court had confirmed the employer’s right to interpretation.An aba spokesperson added that the term ‘market-average interest’ had not been “defined anywhere”.Mercer’s Thomas Bischopink and Stefan Oecking said German companies could breath a “sigh of relief” over the verdict.“It means that an employer can use low-risk investments to achieve a ‘market-average interest’,” they said. Grosjean said the BAG’s ruling was about the phrasing within a contract rather than the phrasing in law.He added that such contracts were the exception, not the rule, as, in most German pension plans, there is no additional interest guarantee on pension assets remaining with the employer before payout.Bischopink and Oecking said employees would also “thank the BAG” for its verdict.A different outcome, they said, might have deterred companies from offering instalments, and lump-sum payouts enjoy less of a tax advantage in Germany, they added. Grosjean pointed to the wider implications of the verdict, with “the low-interest-rate environment affecting workers directly for the first time”. Under German law, pension plans must come with a guarantee; if the Pensionskasse or insurer fails to fulfil this guarantee, the employer must top up the scheme.At present, there are no so-called ‘pay-and-forget’ models in Germany’s second pillar, but they being debated under proposals for industry-wide pension plans.“But we can already see some Pensionskassen and insurers struggling with the guarantees,” Grosjean said.From 2017, the legal minimum guarantee life insurers must meet will fall below 1% for the first time; it was set at 0.9%, down from the current 1.25%.In recent months, a number of court verdicts – including the BAG’s – have been reached allowing providers to cut guarantees if a company pays the difference.Grosjean said he was convinced the ‘pay-and-forget’ model would come to Germany eventually, in particular to make occupational pensions more attractive for small and medium-sized enterprises.“Just as in this court case,” he said, “it is a question of whether an employer has to increase the accrued assets or merely keep them safe.”Bischopink and Oecking took pains to emphasise that “vague phrasings” such as ‘market-average interest’ were “very often the reason for a dispute between employer and employee and should be avoided”.
Outlining a set of investment restrictions the fund could adopt, they said: “The risk in unlisted infrastructure investments can be restricted by investing in assets in the energy, communications and transport sectors in developed markets in Europe and North America. “Collaboration with partners can be made a requirement, and limits can be set for the fund’s ownership stake.”The central bank also responded to the ministry’s request for it to assess whether unlisted infrastructure investments could be adapted to the new benchmark index for the GPFG – which invests Norway’s oil revenue – which is to consist only of listed equities and bonds, with real estate investments included in the limit for tracking error.Olsen and Slyngstad said the bank thought unlisted infrastructure should be subject to the same kind of regulation as the fund’s unlisted property investments.“This means unlisted infrastructure investments will not form part of the benchmark index but will be included in the limit for tracking error,” they said in the letter. This type of framework would let NBIM manage market and currency risk in the fund at an overall level, they said.If the fund is allowed to invest in infrastructure, the men said the bank would approach investment decisions and build up expertise here gradually – in the same way it had for its first forays into unlisted property.“Infrastructure investments will be small in number but high in value,” they said, adding that, though cost intensive and needing different follow up to listed investments, unlisted infrastructure could be handled by far fewer staff than could unlisted real estate investment.Lastly, Norges Bank told the ministry it would be just as transparent with its unlisted infrastructure investment, as it was with bonds, equities and real estate.“The bank will provide the same detailed information on the fund’s investments in unlisted infrastructure as on the fund’s other investments,” Olsen and Slyngstad wrote.In the 2015 white paper on the management of the GFPG, published in April 2016, the Norwegian government decided that the fund should not be allowed at that point to include unlisted infrastructure in its investment mix, despite NBIM’s recommendation.It is now reconsidering the matter as part of its work on the 2016 report on the fund and has requested input from various parties to support this work, including this latest letter from the fund’s management and a report from McKinsey released earlier this month. The manager of Norway’s NOK7.5trn (€826bn) oil fund has written to the country’s finance ministry suggesting how it could reduce risk in its hypothetical investment in infrastructure, as government decision makers once more ponder allowing the sovereign wealth fund to add the asset class to its portfolio.Norges Bank, the Nordic country’s central bank, and its asset management unit Norges Bank Investment Management (NBIM) – which exists to run the Government Pension Fund Global (GPFG) – said it believed large institutional investors already making private investments in infrastructure managed risk partly by putting limits on what they were prepared to invest in.NBIM chief executive Yngve Slyngstad and central bank governor Øystein Olsen said in the letter: “Little information is publicly available on how these investors manage the risk unlisted infrastructure investments entail. “Our impression is that this risk is normally managed through a combination of concrete investment restrictions, thorough due diligence ahead of investments, and continuous follow-up.”
It is also interested in how scheme boards factor in asset management costs to their investment decisions.The regulator made clear that its focus for mortgage investments would be on managing and estimating risk, including liquidity and credit risk as well as the risk of mortgages being paid off early.Pension funds must also show whether they are sufficiently familiar with the different ways of management, such as an investment fund and a collective mandate, the regulator said.DNB will also assess whether the interests of pension funds and providers are aligned.DNB explained that it wanted to gain an insight into how pension funds pay attention to digitalisation and IT risks as well as – in case of consolidation – transformation risk in their administration.The supervisor further said that it would select a number of pension funds and providers for self-assessment on their cyber security.Last year, a self-assessment of IT risk at the €18bn asset manager SPF Beheer revealed 33 areas for improvement. Dutch supervisor DNB is to scrutinise the costs of asset management and mortgage investments through on-site visits at pension funds and their asset managers.In a newsletter, it said that it would also assess the robustness of pensions administration and schemes’ cyber security measures.According to the watchdog, its surveys come in addition to its regular investigations into investments, governance, and business models.DNB said it wanted to get an insight into pension funds’ frameworks for establishing costs as well as their arrangements with their asset and fiduciary managers.
“Many of PKA’s members will surely think it is hard to understand what the whole thing is about and what the consequences are,” he said.The plan was outlined yesterday as part of the government’s proposal to reduce taxes on work, cars and pensions by DKK23bn (€3bn) called “JobReform II”. The reform was aimed at extending the effects of the country’s economic upturn seen over the last few years.It proposed increasing the amount that can be saved into an old-age pension plan (alderspension) in the last five years before state pension age to DKK50,000 (€6,720).In the new plan, the government detailed how it would use the DKK2.5bn sum had earmarked for resolving the long-standing “interplay” problem in the pensions taxation system. It refers to contributions made later in life that do not pay off because of the way pension payments are offset against state benefits in retirement.In yesterday’s announcement, the government said the DKK2.5bn would be used to increase by 3.9% the tax value of the deduction for pension contributions for people with more than 15 years to state pension age. For those with less than 15 years to go, the increase would be 7.7%.The new system is to take effect from 1 January next year.Per Bremer Rasmussen, chief executive of the Danish Insurance Association, Forsikring & Pension, said: “It is absolutely crucial that we make it attractive for every to save up for a pension. So I am glad the government is doing something about that.”But the association said the new system introduced an extra complication with the new tapered job deduction for low-paid people. This, it said, reduced the incentive for blue-collar workers to save for a pension – therefore creating another interplay problem. The Danish government has unveiled further details of its new tax reform plan aimed at improving incentives for private pension saving – but the pensions industry has highlighted flaws in the proposal.The plan was built on a proposal published earlier in the summer entitled More Years on the Labour Market. It contained measures to increase the advantages of saving for private pensions and reduce the number of people who save little or nothing into a pension.Peter Damgaard Jensen, chief executive of pensions management firm PKA, said: “You could certainly have created more of an effect for the same money by targeting the deduction more towards those people who are hardest hit by the interplay problem.”Damgaard Jensen said it was also unfortunate that the new model was so complicated to understand.
The manager of Norway’s giant sovereign wealth fund has recommended divesting from more than NOK300bn (€31bn) of oil and gas equities.Norges Bank wrote to the Ministry of Finance today, recommending removing oil and gas sectors from its benchmark index.Øystein Olsen, chairman of Norges Bank, and Yngve Slyngstad, chief executive of Norges Bank Investment Management (NBIM), wrote: “In this letter, we conclude that the vulnerability of government wealth to a permanent drop in oil and gas prices will be reduced if the fund is not invested in oil and gas stocks, and advise removing these stocks from the fund’s benchmark index.”The two men said this advice was based exclusively on financial arguments. “It does not reflect any particular view of future movements in oil prices or the profitability or sustainability of the oil and gas sector,” they wrote.NBIM is the arm of the central bank which manages the Government Pension Fund Global (GPFG). The fund was launched to invest the proceeds from Norway’s oil reserves.Norges Bank said its analyses of the oil price risk in Norway’s overall government wealth were based on the government’s future oil and gas revenues, its direct holdings in Statoil and the GPFG. “The investments in the GPFG and the stake in Statoil result in a total exposure to oil and gas equities for the government that is twice as large as would be the case in a broad global equity index,” the bank said.This exposure increased dramatically when the government’s future oil and gas revenues were also taken into account, it said.Oil and gas equities made up about 6% of the GPFG’s benchmark index or just over NOK300bn, Norges Bank said, and 4% of GPFG’s investment portfolio.The bank said that the oil fund accounted for a much larger share of the government’s wealth than it did in previous years, and so was an integral part of fiscal policy.For this reason, NBIM said in its current two-year strategy plan that it would adopt a broader wealth perspective when advising the ministry.
The £12.8bn (€14.3bn) Local Pensions Partnership (LPP) is looking to hire a consultant to help it implement changes that would make its operating model more robust and scalable.The partnership between the London Pensions Fund Authority, Lancashire County Pension Fund and Berkshire Pension Fund wants to bring in new clients in the next few years, a spokesman indicated.It plans to upgrade the systems and processes supporting its regulated investments business, LPPI, and to outsource its middle office function. As part of this, it has launched a tender for a consultant to help with the selection and implementation of portfolio management systems.The consultant would also help implement an operating model based on an outsourced middle office. “The middle office workstream will deliver an enhanced investment operations process, preparing the model for additional clients, instrument and investment types and client reporting needs,” the tender document stated.Middle office tasks include trade processing, reconciliation and data management, an LPP spokesman explained.“This is about planning for the next three to five years, during which period our expectation is that we will broaden our client base across a number of areas in parallel to adding further investment and risk management capabilities,” he said.“This is about planning and ensuring we are ahead of the curve… We need to have a robust, resilient and scalable operating model to support our existing clients as well as any new ones.”LPP launched the tender after carrying out a review of its investment operations systems and processes.According to the tender notice, the review found that LPP could implement changes to its current model “to improve operational risk resilience and delivery of regulatory compliance”.The tender document stated that LPP was seeking specialist support because it recognised its internal resources did not have the capacity or market expertise to deliver on the recommendations of the review.LPP is the collaboration between the London Pensions Fund Authority and Lancashire County Pension Fund. Berkshire Pension Fund is joining LPP, which is due to manage its assets from 1 April. LPP has launched four pooled funds for its members to date. The value of the LPP consultancy contract is estimated at £1.1m, according to the tender notice.
While UK politicians have voted against a ‘no-deal’ Brexit, much uncertainty remains about the outcome with more parliamentary votes to come and the approval of the EU yet to be secured. Hogan Lovells’ Faye Jarvis explores the risks for UK trusteesKey pointsUK trustees have a duty to review the effect of a ‘no-deal’ Brexit and should understand the impact on the sponsor’s businessEU data transfer and overseas payments are potential issuesRestrictions on insurers could affect cross-border paymentsTrustees should discuss contingencies with non-EU managers and advisers if they have not already done soContingent asset claims in EU entities could be complex to enforce in practice DataTrustees should actively consider whether any of their members’ data is transferred to countries in the EU and, if so, seek advice on whether any action needs to be taken to ensure data can continue to flow in the event of a no-deal Brexit. (L-R) Dominic Raab, UK minister for exiting the EU, and Michel Barnier, the EU’s chief negotiator, at a press conference last yearA number of steps are being taken by both the UK and individual jurisdictions in the EU to try and minimise any possible disruption. For example, the UK government has announced that it intends to help EU firms continue to do business with UK clients, at least for a transitional period, by giving them temporary permissions and, more recently, the Financial Conduct Authority has signed a “multilateral MoU” with regulators in the remaining 27 EU member states to facilitate co-operation and information-sharing across areas of financial services including the asset management industry. However, uncertainty still remains.While a no-deal Brexit should not prevent trustees using EU structures – for example a fund domiciled in an EU member state, such as an Irish UCITS fund – in a no-deal scenario, a trustee’s UK investment advisers and managers may be more restricted in terms of the activities they can carry out in the EU.The position may also be different in different jurisdictions, as although EU countries are passing legislation to allow UK financial services companies to continue to carry on their activities in a no deal Brexit, they are not doing so on the same terms. At this stage, trustees should speak to their investment advisers and managers to understand any potential impact. On a slightly separate note, it is unclear whether some pension schemes may have to start clearing derivative transactions and so this is another area that trustees will need to monitor with their investment advisers.Contingent assetsFinally, if we do end up with no-deal Brexit, trustees with contingent assets from a European entity may want to take advice on how easy it will be to enforce a claim against that asset.While a no-deal Brexit should not automatically result in any contingent assets terminating, it may mean that any claim under the contingent asset agreement becomes more difficult to enforce – particularly if there is a dispute and the parties cannot agree which courts should hear the matter.The UK has recently signed up to the Hague Convention on Choice of Law Agreements to ensure that clauses in new agreements granting the English courts exclusive jurisdiction over any dispute continue to be recognised. However, it is less clear what the position will be for existing agreements in the event of a no-deal Brexit.With two weeks to go until the UK’s scheduled departure from the EU and the threat of a no-deal Brexit still looming (albeit reduced), there are several issues of varying complexity and significance for trustees to be aware of and actively engage with.The best advice at this stage may well be to seek advice on how to mitigate against any complications arising from the EU and the UK failing to ratify an exit deal. Faye Jarvis is a partner at Hogan Lovells “Brexit may mean that any claim under a contingent asset agreement becomes more difficult to enforce”Faye Jarvis, Hogan LovellsIn this scenario, cross-border transfers of data between the UK and EU will no longer automatically be permitted. The UK has confirmed that it would continue to allow personal data to be transferred to the EU, although this would be kept under review. This should make it possible to transfer data to a processor in the EU, provided there is a data processing agreement in place.The position is more difficult where both parties are data controllers. The EU would need to grant the UK an “adequacy decision” in order to allow data controllers in the EU to transfer data to the UK, which is unlikely in a no-deal scenario and the EU won’t make a decision on this until after Brexit.In these circumstances, further contractual arrangements would need to be put in place to ensure the flow of data across borders can continue.Overseas paymentsAnother cross-border issue that should be on trustees’ radar is payments to pensioners living overseas. There are two possible areas of concern: payments to pensioners from an occupational pension scheme, and payments to pensioners from a buyout.With regard to the former, in a no-deal Brexit it will still be possible for trustees to pay pensioners living in the EU by payment to an EU bank account. However, these payments may take longer because, post-Brexit, the UK will not be subject to the Payment Services Directive, which requires that all intra-EU payments must be made no later than the next working day. After Brexit, it is possible that payment times might take longer for non-EU institutions. That said, there is no reason why UK and EU banks cannot continue on a ‘next-working-day’ basis. Fees could also rise for payments into the EU.To mitigate potential administrative delays, trustees should keep a close watch and consider alerting overseas pensioners if there are going to be any significant changes to the date of receipt of pension payments.BuyoutMuch has already been made of the fact that, post-Brexit, an insurer authorised in the UK may be prohibited from paying annuities to members living in the EU.A UK insurer would also be prohibited from issuing individual policies to pensioners or deferred members located in the EU, which in theory could make things difficult for schemes looking to towards a buyout.Insurers are already looking at how to address this issue and some EU countries may introduce legislation to allow payments to be made, at least in the short term – but there is no consistent approach.Trustees considering a buy-in or buyout, and with members who are resident in EU countries, should discuss this with their insurer to understand how they will manage this issue.Cross-border providersInvestment advisers and managers, both in the UK and in the EU, are similarly grappling with how a no-deal Brexit will impact on their ability to provide services to their UK pension scheme clients. One of the biggest risks for pension schemes in a ‘no-deal’ Brexit scenario is an adverse impact on the employer covenant. The Pensions Regulator (TPR) recently issued a statement that “trustees should undertake a review of any actions or contingency plans in the context of ‘no deal’, if they have not already done so”. Adopting a ‘wait and see’ approach is no longer an option. If they have not already done so, trustees should engage with employers to understand what impact a no-deal Brexit could have on their business and what plans they have in place to mitigate these risks.
The members of two of the Netherlands’ largest trade unions have endorsed the pensions agreement struck between the social partners and the government earlier this month.The announcement from unions FNV and CNV means that the pensions sector can start implementing elements of the pensions agreement, including adjusting policies relating to benefit cuts and informing their members.The FNV’s member parliament approved the deal based on the support of three quarters of the members who voted. Of its 1m members, 37% participated in the ballot.Of the CNV’s members, 79% voted in favour of the agreement. The smaller unions, VCP and De Unie, are expected to announce their opinions on the agreement later today. Tuur Elzinga, the FNV’s lead negotiator, said he was very pleased with the result: “The heavy burden of years of negotiating has finally come off our shoulders.”In his opinion, the result was also good news for the pensions sector “as much uncertainty has disappeared”.The pensions agreement reached by unions, employers and the government comprised an agreement to slow down planned increases to the retirement age for the state pension (AOW) by three years, to reach 67 in 2024.Currently, the AOW retirement age stands at 66 years and four months.The government promised it would ease the rules for cuts to benefits and pension rights by reducing the minimum required funding ratio for pension funds from 104.2% to 100%.The agreement also provided early retirement options for workers in physically demanding jobs.The parties also agreed to create a dedicated steering group to flesh out a new pensions contract, as well as how the current average pensions accrual method will be replaced with a degressive method.The Dutch cabinet is to debate the pensions agreement on Wednesday.
The pension fund manager said it believed influencing a firm’s actions as a shareholder was more effective that simply divesting stock.Kristoffer Fabricius Birch, LD Pensions’ head of equities, told IPE: “Transparent and credible sustainable development indicators can make companies change behaviour, and Future-Fit is the best framework we have seen.”The partnership reflects changes LD Pensions made to its active ownership policy earlier this year, which put more emphasis on supporting investee companies in acting sustainably and responsibly with regard to the environment and society. The previous policy focused more on minimising investment risks by including ESG (environmental, social and governance) criteria when investing, according to Fabricius Birch.LD Pensions said the Future-Fit foundation offered a practical tool for companies to measure and report their own social and environmental impact. Previously, it said, the industry has lacked concrete data on how businesses can be run lucratively and sustainably at the same time.“Once we’ve educated our managers, we ask them to take this to companies when they meet them on a regular basis,” Fabricius Birch told IPE. “That’s how I think we can have an impact. I don’t believe in just divesting or tilting portfolios towards companies that help the climate.” The pension fund firm launched a tender process last month for a global equities mandate that would be managed to have a positive impact on the environment, called the ‘Positive Pursuits’ mandate. This phrase, coined by the Future-Fit Foundation, refers to any activity with an outcome that can aid the transition to a more sustainable society.However, the new partnership with Future-Fit would apply to all of LD Pension’s investments, Fabricius Birch said.“What we really want to do with every security we own is to encourage and support companies reducing their own negative impact on the world, and become ‘future fit’ as they define it, and that is done by operating within the planetary and social boundaries that we all face,” he said.LD Pensions said that, while it was positive that many companies reported on how they improve the sustainability of their production methods year-on-year, the foundation’s framework examined how such activity related to global limits such as temperature rise and material resources, rather than simply comparing behaviour against past performance. Danish pension fund firm LD Pensions is collaborating with the Future-Fit Foundation to adopt the charity’s framework for sustainable business practices as the basis for its new active ownership policy.According to the UK-based charity, the framework – the Future-Fit Business Benchmark – shows companies how to become genuinely sustainable and generates meaningful data on their effects on society and the environment.LD Pensions has begun a major series of mandate tenders , a process due to take place over the next 12 months or more. When selecting managers, the firm said it would take into account their willingness to take the Future-Fit Business Benchmark directly to prospective companies.LD is preparing to manage up to DKK100bn (€13.4bn) in a holiday allowances fund , established in response to a change to Danish holiday rights law in line with EU rules.