A significant interest rate fall. This may adversely increase the liabilities of schemes insufficiently hedged against interest rate risk.A substantial fall in equity markets. Likely to increase deficits of schemes with large equity exposures and minimal downside protection.Increase in market expectation of future inflation. A sharp increase may materially increase the value of scheme liabilities.Reaching a consensus to re-risk is a difficult journey, one beset with many awkward decisions. For instance, the trustee board may feel uncomfortable about buying in to a falling equity market and metaphorically ‘catching a falling knife’. Furthermore, the adverse market conditions that triggered re-risking may negatively impact the financial position of the sponsor and possibly the strength of the sponsor covenant.However, once an agreement to re-risk has been reached, trustees need to consider the practicalities of implementation carefully. This includes determining an appropriate level to which the scheme should be re-risked. For example, should the scheme be re-risked back to the allocation at the start of the journey plan, beyond this level or just back to the previous point of de-risking?Trustees also need to consider whether re-risking should be an automatic process delegated to their chosen adviser, or if they would prefer trustees, company representatives and advisers to review the position when a re-risking trigger is breached.With de-risking, there is usually a pre-defined agreement that, once funding level triggers have been breached, the asset allocation will be adjusted with a view to lowering the inherent level of risk being undertaken in the portfolio. By contrast, when a re-risking trigger has been breached, the process requires far more discussion and engagement from a wider range of stakeholders, not least the company sponsor. SEI’s Cyprian Njamma highlights some of the pitfalls for trustees during the re-risking process.Journey planning for a pension scheme involves balancing the risk taken in the pension scheme in accordance with the need to take risk. As a result, higher funding-level positions are usually accompanied by de-risking of the scheme’s portfolio to bank gains and protect the future funding level.In practice, this involves regular monitoring of the funding level, and where significant outperformance occurs relative to its expected path, the portfolio is ‘de-risked’ by reallocating a portion of growth assets such as equities to liability-matching assets – i.e. bonds and other liability-sensitive instruments. Funding-level outperformance usually leads to a lower deficit position and typically lower repair contributions required from the sponsor. For these reasons, de-risking has a feel-good factor to it.In contrast, re-risking naturally has anything but a feel-good factor to it. Why? Because it is only necessary to consider re-risking after an adverse market event has already hurt the funding level position of the scheme. Re-risking may be required where the funding level performs below journey plan expectations, and other options such as higher contributions and/or lengthening the journey plan have already been considered. Quite simply, to get back onto the ‘journey path’, higher returns would be required, which invariably entails assuming higher risk. As pension schemes have been made all too aware over the past decade, scenarios can arise that necessitate re-risking, and these include: Execution is keyBoth re-risking and de-risking are amongst the practical techniques trustees can employ to help manage funding volatility in line with the need to take risk along a recovery plan. And although re-risking may conceptually sit uncomfortably with trustees, occasions may arise that warrant its use. As such, it is advisable to incorporate re-risking along with the full range of de-risking and insurance-based de-risking options into a fully bespoke journey plan for pension schemes.Naturally, both re-risking and de-risking require regular monitoring of the funding level together with an ability to react to fast moving market changes. This is hugely challenging for many trustees who are constrained by a lack of resources, be that of their own time or expertise. Market conditions can change rapidly, requiring strategic changes in a far timelier manner than is possible through a quarterly decision-making process.Outsourced solutions such as fiduciary management –otherwise known as ‘implemented consulting’ or ‘delegated consulting’ – can help address these problems by effectively acting as an in-house manager and plugging any resource and knowledge gaps. This includes taking responsibility for continuously monitoring the funding level and de-risking or re-risking along the journey plan as opportunities arise. The beauty of this arrangement is that trustees retain strategic control of the scheme but have the comfort of knowing that day-to-day investment responsibilities are being undertaken on their behalf within clearly defined parameters.Cyprian Njamma is an asset and liability analyst at SEIThis article reflects the views of the individual author and not necessarily those of SEI
“[Six] out of the 17 policies we received made only vague and generic statements, a typical example being: ‘The Trustee expects the investment managers to take steps to ensure environmental, social and corporate governance factors are implicitly incorporated into the investment decision-making process’,” the report, Entrusted with our Future, said.Howarth acknowledged that a number of the DB schemes approached would be shifting away from large equity portfolios as they de-risked their investment strategies.“It’s not hugely surprising some of these big, old DB dinosaurs are very focused on de-risking now and their principle concern is managing quite near-term risk as opposed to the huge need to manage long-term risk, including ESG risk, [important] for younger members in DC schemes,” she said.The chief executive said it was for this reason its survey examined four of the DC funds launched to offer pensions to auto-enrolled employees.The National Employment Savings Trust (NEST), the highest-ranking of the four trust-based providers, would have come in ninth place, behind the Pension Protection Fund, had ShareAction listed both DB and DC funds in the same ranking.The chief executive added that, even if DB funds were slowly lowering their equity exposure, there was still work to be done as far as raising RI issues.She praised work by some fixed income asset managers in integrating ESG analysis and risk into their investment approach towards corporate and sovereign bonds.She added: “We would very much encourage big DB schemes, where they have a lot of exposure to fixed income, to be alert to those issues and to be actively encouraging managers to show how they are managing that risk effectively on behalf of the members.”,WebsitesWe are not responsible for the content of external sitesLink to ShareAction’s research ‘Entrusted with our Future’ Large defined benefit (DB) “dinosaurs” must be aware of the importance of integrating environmental, social and governance (ESG) issues into their fixed income portfolios, the UK’s ShareAction has said.The comments, made by the lobby group’s chief executive Catherine Howarth, come as it published research arguing that while stewardship efforts by the largest UK pension funds had improved over the last five years, a number of funds failed to offer detailed responsible investment (RI) policies.Of the 28 schemes ranked, including two of the UK’s largest in the Universities Superannuation Scheme and the BT Pension Fund, ShareAction found that 17 had drawn up an RI policy.However, it was critical of the level of detail offered in a number of the policies.
The factory, which is now in the process of being built, will produce catalysts to clean exhaust gas from diesel vehicles, the pension fund said.Michael Nelleman Pedersen, investment director at PKA, said: “As well as improving the climate and reducing the harmful effects on the health of ordinary Chinese people, we are also pleased we are helping to boost Danish industry and ensure a reasonable return for our members.”PKA said the increasing air pollution and heavy smog in many Chinese cities had prompted the Chinese government to impose tougher rules on emissions of nitrogen oxides from diesel vehicles, as well as from other sources.This opened up new market opportunities for Haldor Topsoe, it said.The factory, located about 100km east of Beijing in Tianjin, is scheduled to open in 2015.PKA and PBU are investing in the project via IFU Investment Partners (IIP), a trust administered by IFU on behalf of the two pension funds.PKA runs five labour-market pension funds, in the health and social sectors. PBU is the pension fund for education practitioners. Danish labour market pension funds PKA and PBU are investing DKK75m (€10m) in a project to build a diesel engine catalyst factory in China.The plant is being built by Danish catalyst supplier Haldor Topsoe.The two funds are investing in conjunction with the Investment Fund for Developing Countries (IFU), a Danish government-owned fund that co-invests with Danish companies in developing countries.The total investment between PKA, PBU and IFU amounts to DKK140m, and total overall investment in the new plant is DKK900m, PKA said.
She added: “It also matters whether you choose investments in countries with dodgy governments, or instead opt for companies that are developing alternative energy sources.” Kellermann said she regretted the fact that Dutch pension funds rarely consult participants on sustainable investments; she said just over 20% of the larger schemes had asked participants for their opinions on environmental, social or governance issues.However, by involving participants in their investment decisions, she said, pension funds can strengthen their place in society and foster participants’ support for their policies.Kellermann has served as supervisory director of pensions at the DNB since 2007.She will be succeeded by Frank Alderson on 1 November. Joanne Kellermann, outgoing director at Dutch regulator De Nederlandsche Bank (DNB), has said pension funds should ask participants to get more involved in the ethical aspects of their schemes’ investment decisions.Speaking at the DNB’s annual congress for pension funds last week, Kellermann highlighted the impact of schemes’ investment policies on popular opinion.“By investing in companies, pension funds’ participants indirectly become co-owners of these firms, and this comes with both social and moral consequences,” she said.“Is a pension fund, for example, opting to invest in a multinational company that is moving many jobs to low-wages countries? Or is it deliberately investing in local companies intending to stay in the Netherlands and create jobs through innovation?”
RPMI Railpen, the £22bn (€26.3bn) in-house manager for the UK’s Railway Pension Scheme, is one such investor.Its chief executive, Chris Hitchen, said: “As an asset owner, we are very encouraged by the strong stewardship efforts of many of our fellow shareholders to address these issues.”In addition to the mandatory AGM voting items, Sports Direct investors had the opportunity to cast a vote on a shareholder resolution filed by the Unite trade union, which called for an independent review of working practices at the company.The company’s board has urged investors to vote against the shareholder resolution.It recently commissioned a review by its lawyers and committed to having a worker representative on the board, pointing to these steps to illustrate the lack of need for a shareholder resolution.The Investor Forum, a body representing investors with around £850bn invested in UK equities, has also been calling for an independent review of the company’s entire governance framework.Its executive director said it was “highly unusual” for it to make its concerns public.Railpen voted against the entire board – “a serious decision”, said Hitchen – and also backed the call from the Investor Forum, of which it is a member; Hitchen is on the body’s board.He said the issues at Sports Direct “go beyond” the single company.“They relate to the integrity of the UK stock market and the behaviours we expect of all companies to which we provide the capital of our beneficiaries,” he said.Shareholder group the Local Authority Pension Fund Forum (LAPFF) and asset managers Legal & General Investment Management and Standard Life Investments also said they would back the call for the independent review.Kieran Quinn, chairman at the LAPFF, said: “The LAPFF’s hope is that an independent human-capital strategy review will rectify any workplace practices deemed inappropriate and help Sports Direct to move forward from the reputational and financial damage it has suffered.”Standard Life Investments, which owns 5.8% of the issued share capital, voted against the pay report and the reappointment of all the non-executive directors.It also called on the company to carry out a “full and independent” review of governance. Sports Direct announced the results of the 2016 AGM shortly before the time of publication:The shareholder resolution for an independent review of working practices was rejected, with 79% of votes cast against.A majority of the company’s independent shareholders did not support the re-election of the company’s chairman, Keith Hellawell.Legal & General Investment Management called for him to step down immediately.Sacha Sadan, director of corporate governance at LGIM, said: “Following Sports Direct’s recent report on its own shortcomings, as well as the large independent shareholder vote against the chairman’s re-election, it is clear the board needs to enact significant change to earn back shareholder trust. “At absolute minimum, the current chairman should step down immediately and an external, independent appointment made to oversee management and protect the interests of all stakeholders – including employees, suppliers and shareholders.” Concerns over working practices and corporate governance at embattled UK retailer Sports Direct have galvanised a show of what one pension fund investor called “strong stewardship”, as several large investors voted against the board’s recommendations.Sports Direct, a FTSE 350 company, has been in the spotlight in the UK due to concerns over working practices, such as the use of zero-hour contracts and paying below the legal minimum wage, and corporate governance at the company.Its founder, Mike Ashley, owns 55% of the company.Frustration over the failure of engagement with the company to bring about positive change has led several investors to vote against the election of board members and the pay report, and to back calls for an independent review into working practices and corporate governance.
The UK’s pensions association has called for “radical” measures to increase scale, standards and accountability of governance of UK pension schemes, including bringing about consolidation via “an element of compulsion”.It made the comments in its response to a consultation by The Pensions Regulator (TPR) on trustee standards and governance, which closed on Friday.Luke Hildyard, policy lead for stewardship and corporate governance at the Pensions and Lifetime Savings Association (PLSA), said the association was largely supportive of the regulator’s proposals but did not believe “these relatively subtle changes alone are sufficient to achieve a governance structure that will achieve the best possible value for scheme members over the long term”.He added: “Against a backdrop of significant challenges for pension schemes – from an increase in the number of stakeholders brought into pension savings through auto-enrolment, to deficits in the defined benefits pensions – there is a need for radical measures in terms of the scale, standards and accountability of governance structures.” One of the questions asked by TPR was how pension funds with “sub-standard” governance should be dealt with, and, in particular, whether smaller schemes should be encouraged or forced to exit the market or merge with other schemes.In its submission, the PLSA, which has long been in favour of increased scale in UK defined contribution (DC) schemes, cited “well-documented” benefits of scale, such as value for money, an ability to attract higher-calibre trustees and better governance.“In an ideal world, consolidation would occur through market forces, but progress has been slow in this respect,” it said.“As such, an element of compulsion – as has been applied in other markets – would now be appropriate.”Giving the Netherlands, Australia and Denmark as examples, the PLSA said that, “[i]n the countries with the most highly regarded pension systems, numbers are much lower, and policymakers have actively concentrated on reducing them.”The association also raised the question of whether schemes failing to deliver value for money should face compulsion in another area, namely the appointment of professional trustees.Wider benchmarking would determine which schemes were underperforming in this way, it said.Law firm Sackers said it would probably be “impracticable” to deal with sub-standard smaller schemes by forcing them to exit the market or merge with other schemes.New powers would be required to facilitate scheme closures, as this is impossible under current legislation, it said – and “there is the risk that the powers could be deliberately used to offload pension scheme responsibilities more widely”.This would be unworkable for DB schemes, according to Sackers, while for DC schemes it is unclear how the cost of scheme closure and transfer of benefits or consolidation could be met “without taking the money needed to meet costs from members’ accounts”.“As TPR notes through its research,” Sackers added, “it has already identified some schemes as needing additional support.“It may be appropriate for TPR to target those schemes directly, giving specific support on a case-by-case basis.”
PMT and PME, the industry-wide schemes for the Dutch metal sector, are considering plans to inform participants of their individual entitlements to pension assets, with a view to restoring faith in the industry.They said they agreed in principle with union FNV’s call for pension funds to clarify how much money they had “reserved” for each individual participant.The €68bn PMT said it planned to discuss the matter with “two other large sector schemes”, and that it had put the matter on the Dutch Pensions Federation’s agenda, in order to flesh out the concept and agree on a uniform approach.The €381bn civil service scheme ABP and €185bn healthcare pension fund PFZW said that they, too, supported the proposal. PFZW said participants would appreciate the idea, and that it was looking into the best way to present the information, while ABP said it was about to start an experiment among its participants to gauge their response.FNV put forward the idea of calculating a personal share of pension assets – pension rights multiplied by funding – as a potential means of increasing participants’ confidence in the industry.PMT and PME echoed this view, with the latter noting that “participants sometimes fear there will be no pension left the moment they retire”.It added: “By providing them regularly with a personal statement about how much has been set aside for them, we aim to allay their concerns.”David van As – director at BpfBouw, the €55bn sector scheme for the Dutch building industry – said his scheme’s board would also discuss the idea.Contrary to the FNV’s proposal, the Social and Economic Council (SER) is assessing a variant for a future pensions system comprising individual pensions accrual, under which the assets are to be individually owned.The union, however, does not support this proposal.
The ring-fenced section will be entirely tuned to the current situation at the Pensioenfonds Cindu, including its investment policy with 70% fixed income holdings, as well as its contribution policy, said Rita van Ewijk, the scheme’s chair.The pension fund opted not to join one of the APF’s three standard defined-benefit compartments, as chosen by earlier pension fund clients RBS Netherlands and Bavaria, which preferred individual arrangements.RBS was the first Dutch scheme to join an APF, a form of pension consolidation vehicle, announcing its plan in September 2016.The compartment containing the Cindu scheme is open to new entrants to generate benefits of scale. This would also counter the effect of an ageing member population, Van Ewijk said.However, she also emphasised that other schemes joining its section would not come at the expense of Pensioenfonds Cindu.Last year, Cindu decided to join an APF under pressure from DNB. Governance problems had triggered the regulator’s demand for “controlled and honest” management.In order to continue independently, the pension fund faced high costs for professionalising its operations, while other costs would also rise as a result of a decreasing number of active members.At the end of 2017, Pensioenfonds Cindu had more than 1,500 members, almost 1,000 of whom were pensioners but just 71 active. At the time, its funding stood at 121.4%.It cited “the leeway for establishing a compartment together with Centraal Beheer APF” as the decisive factor to opt for the vehicle.It described the new set up as “balance between tailor-made and standard arrangements” against controlled costs. The €173m Dutch company pension fund Cindu is to transfer its assets and liabilities to the general pension fund (APF) of insurer Centraal Beheer.Its decision followed the conclusion of supervisor De Nederlandsche Bank (DNB) last year that the scheme was “vulnerable” because of ageing demographics and difficulties finding new board members.At the Centraal Beheer AFP, the Cindu scheme – set up by company Chemische Industry Uithoorn, which was taken over by Rütgers Resins in 2011 – is to be the first participant in the multi-client compartment.The decision to join Centraal Beheer APF is subject to approval of the pension fund’s accountability board (VO) as well as the supervisor. The scheme said it aimed to complete the transfer in the fourth quarter and to subsequently liquidate the rest of its operations in 2019.
So far the fund, which NEST developed in partnership with UBS Asset Management, has been focussed on investment risks and opportunities linked to efforts to stem climate change. NEST adopted it for its default strategy in February 2017 and, at the end of June, managed £624m of assets.In its first year the fund performed better than the FTSE World Index. NEST acknowledged that this was a short time frame and that the differences were small but said they were statistically significant so far.According to analysis it carried out, one potential reason for the improved performance was that the share price of companies in the fund responded better to negative climate-related news than the benchmark, it said.“We’ve successfully identified more resilient companies, which even in the face of negative climate change news are maintaining their value better”NEST said it took all the important climate-related news stories it could find in major media publications over a six-month period and measured the investment performance of its climate aware fund and that of the FTSE benchmark index and a control fund for five days after each news story was published.“On average, each time a negative news story about climate change was published, the investment value of the control fund and benchmark lost more money,” it said.“This suggests that we’ve successfully identified more resilient companies, which even in the face of negative climate change news are maintaining their value better.”Over a year, added NEST, these small differences added up and contributed to the overall outperformance of its climate aware fund.Compared with the benchmark, NEST’s investment in the fund meant it had about 21% – £133m – more invested in companies that were positioned to benefit from a global transition to a low carbon economy, including renewable green technology companies such as Xinyi Solar Holdings.Conversely, it had withdrawn the same amount from companies not making progress on adapting for a low-carbon future; companies such as Duke Energy, ExxonMobil and Royal Dutch Shell were affected by this.The climate aware fund tracks the FTSE Developed index but over or underweights companies depending on whether they stand to benefit or lose from the move to a low carbon economy. NEST seeded the fund with about £130m and has since increased its allocation to 30% of its global developed equities in the growth phase of its default strategy, and 40% in the foundation phase.‘Members want responsible investment’ Almost three-quarters of NEST members who participated in a survey wanted their pension scheme to invest responsibly, the auto-enrolment provider has said.Just under half of those surveyed – 47% – said it “matters a lot” to them that their pension scheme considers how the companies and markets they invest in are run and how they “treat people and planet”, NEST reported.A further 26% said they agreed with this if it produced better returns, while 12% said it did not really matter to them at all.Research commissioned by the multi-employer scheme also found that savers’ levels of trust, interest and confidence in pensions were boosted by hearing about how their pension was invested responsibly.NEST gave a sample of its membership some information about what it did as a responsible investor, and found that half of those surveyed said the information improved their impression of the scheme. Some 44% said it made them more interested in their pension and 45% agreed it made them feel more confident about saving with NEST.The master trust also found that 63% of savers wanted to hear more about responsible investment from their pension scheme.Diandra Soobiah, head of responsible investment at NEST, said: “A potential £495bn will flow into workplace pensions over the next 12 years, making workers more powerful shareholders with a major stake in how companies and markets are run.“They’re telling us they want this money invested responsibly, which could improve the environment and society they’ll live and retire in as well as their future bank balances.”The scheme said it was encouraged by the survey results. It said it would continue to invest “to achieve good pension outcomes by considering the wider impact of corporate behaviour on people and the planet”.NEST’s latest annual responsible investment report can be found here . The UK’s £3.8bn (€4.2bn) National Employment Savings Trust (NEST), with over seven million members, is to begin considering how physical impacts of climate change may affect investments it has made in its “climate aware” fund, the pension scheme has said.The next stage of the development of the fund would consider how phenomena such as sea level rises, flooding, hurricanes and droughts might influence companies based on their physical location, and hence the value of the scheme’s investments, the multi-employer scheme said in its 2018 responsible investment report.“Impacts might include transport networks in extreme weather regions becoming unavailable, or heavy industry and refining close to the coast becoming unusable,” it said. Schroders recently warned investors against overlooking the physical risks of climate change – as opposed to transition risks stemming from steps to limit temperature rises.
“Climate change presents a disruptive and potentially irreversible threat to the planet,” said Andrew Bailey, chief executive at the FCA.“The impact of climate change on financial markets is uncertain but legal frameworks – at a global, European and UK level – have already begun to adapt to reflect a move to a low carbon economy.”The regulator also sought input in relation to the burgeoning area of green finance, where it noted there were no “universally agreed common, minimum standards and guiding principles” for measuring performance and impact.Bailey said: “The FCA can play a key role in providing more structure and protection to consumers for green finance products and ensuring that the market develops in an orderly and fair way that meets users’ needs.”The FCA also sought views in relation to the information that companies provide to investors about the financial impacts of climate change.“We intend to explore whether greater encouragement is needed to ensure issuers give investors appropriate information, and whether issuers require further clarity over what is expected of them,” it said.ESG rule changes consultation for DC pensionsMeanwhile, the FCA reiterated plans to consult on climate change-related rules for contract-based defined contribution (DC) pension schemes in the first quarter of 2019.The rule changes would require independent governance committees (IGCs) to report their firms’ policies on evaluating environmental, social and corporate governance (ESG) considerations, including climate change; how they took account of members’ ethical and other concerns; and stewardship.The regulator also indicated it would consult on related guidance for providers of the DC schemes it regulates. The guidance would clarify how providers should consider financial factors – such as ESG and climate change risks and opportunities – and non-financial factors, such as responding to members’ ethical concerns when making investment decisions.The FCA first set out these plans in June in a response to recommendations from the Law Commission. It has previously been criticised by politicians in the UK parliament’s Environmental Audit Committee and by campaign groups for not doing enough to clarify contract-based DC schemes’ duties with respect to climate change and other ESG matters.In its discussion paper this week the FCA said climate change “is no longer an ‘ethical’ concern, but a practical consideration for the UK pension industry”.Climate change, it said, was “a material factor in the financial performance of pension funds” because of the long time horizons of their investments.The Department for Work and Pensions recently introduced legislation strengthening ESG-related requirements for trust-based occupational pension schemes.The FCA’s discussion paper was published on the same day that the Prudential Regulation Authority published a consultation on enhancing banks’ and insurers’ approaches to managing the financial risks from climate change. The two regulators are setting up a Climate Financial Risk Forum, which aims to help the financial sector manage the financial risks from climate change and support innovation for financial products and services in green finance.The FCA’s discussion paper can be found here. The UK’s financial services regulator is considering whether to require asset managers and other financial services firms to report publicly on how they manage climate risks.Noting the work done by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), the regulator said there was “an opportunity for us to build on the work of the TCFD to help organisations, including firms, manage the transition to a low-carbon economy and encourage the financial services industry to consider the impact of climate change”.The Financial Conduct Authority (FCA) indicated that, for an asset manager, the public reporting requirement could involve it preparing a report about how it managed the risk to long-term investments “such as pension assets” created by climate change.In a discussion paper published yesterday, the FCA sought views on requiring financial services firms to report on climate risks, and on what type of information could be included in such a report.