Occupational pension funds are unlikely to be impacted by the Key Information Document (KID) proposed as part of the regulation proposed for packaged retail investment products (PRIPS) after the European Parliament and Council last week agreed on a new draft for the law.The latest, and likely final, version of the text offered a revised definition of pension products excluded from the regulation, including IORPs and “pension products which, under national law, are recognised as having the primary purpose of providing the investor with an income in retirement, and which entitle the investor to certain benefits”.Furthermore, individual pension products are excluded “for which a financial contribution from the employer is required by national law and where the employer or the employee has no choice as to the pension product or provider”.Germany’s pension association aba welcomed “the clear exemption of occupational pensions” and its managing director Klaus Stiefermann said the change would be a “relief – not only in Germany”. He added occupational pensions were “not a ‘financial product’ but at core they are a voluntary social benefit offered by employers as part of an employment contract”.Stiefermann stressed information regulations for Pensionskassen and Pensionsfonds were already set down “where they belong” – within the current and recently revised draft of the IORP directives.However, as part of the compromise reached for the PRIPS, it was agreed that the regulation would be reviewed after four years specifically with the intention of broadening its scope.The text states the commission should then assess “whether to maintain the exclusion of pension products which, under national law, are recognized as having the primary purpose of providing the investor with an income in retirement, and which entitle the investor to certain benefits”.IORPs are not explicitly referenced in the review proposal.The review would also examine whether the additional information had actually helped consumers and whether new products had enetered the marketto which the regulation did not apply.
Funded statutory pension funds could be subject to new European regulation, with the European Insurance and Occupational Pensions Authority (EIOPA) to include the sector within an upcoming call for advice on personal pensions.While accepting the matter was sensitive, as it could be regarded as social policy outside the European Commission’s remit, Jung-Duk Lichtenberger of the Directorate General for Financial Stability, Financial Services and Capital Markets Union (DG FISMA) said some of the funded statutory pensions were no different from private pension providers within the third pillar.He told the second-annual pension funds in CEE conference in Prague earlier this week that, as privately owned financial institutions, there could be benefits to a “common approach”, allowing firms to access the European single market.“Basically, [this could be] achieving greater scale, being able to diversify the risks more widely and trying to come up with better, more innovative solutions,” he said. Asked to elaborate on which statutory funded pillars were meant – as the definition could potentially capture Denmark’s ATP and Finland’s pension mutuals, but also the so-called 1-bis mandatory funds set up by a number of Central and Eastern European (CEE) member states – Lichtenberger said it was not only an issue for CEE nations but also Nordic countries and Southern European member states.“This is a very sensitive topic, I realise,” Lichtenberger said, stressing that the Commission was not so far intending to include any new rules within forthcoming private pension proposals, but only asking EIOPA to raise the question.“What we do want is try to see if financial regulation can help to make these funded tiers more efficient,” Lichtenberger added.“Because I think there’s been an issue. In some countries, these systems have underperformed in terms of investment returns for many years, with negative investment returns. I don’t think this is a good service to the citizens.”Justin Wray, head of policy at EIOPA, questioned last year why first pillar funds with similarities to third pillar systems were exempt from disclosure requirements. Speaking earlier in the day, PensionsEurope secretary general Matti Leppälä told attendees the three-month call for consultation would be published by EIOPA in July, with the supervisor aiming to submit advice to the Commission by February 2016.Leppälä said the consultation would likely look at matters including a member’s ability to select the manager behind a 1-bis scheme, if the manager was a for-profit or non-profit entity and owned the assets under management.The call for advice will come after a turbulent few years for pension provision in the CEE region.Hungary in 2010 announced plans that amounted to a nationalisation of pension assets, requiring savers to transfer pots to the state or forego any future state pension.More recently, Poland transferred the domestic sovereign bonds held by pension funds (OFEs) to the Social Insurance Institution (ZUS) and required them to invest 75% of assets in equities.The 2014 transfer halved the sector’s size and is now subject to a class action suit.The Czech Republic has also announced that its voluntary pension pillar will be wound up by 2016.
The advisers were less welcoming, however, of the IASB’s proposed changes to the treatment of so-called special events, with Lane Clark & Peacock partner Tim Marklew slamming the proposals as “unnecessary tinkering”.Alex Waite, a partner with Lane Clark & Peacock, added: “Whether or not a company must show an extra liability on the balance sheet often depends on a ‘legal lottery’ of what the small print of the scheme’s trust deed and rules say, leading to big inconsistencies from company to company.”He warned that such funding liabilities could end up being much bigger than the normal deficit figure calculated under IAS 19.And Aon Hewitt consultant Simon Robinson said he agreed with the view the changes to IFRIC 14 were less onerous than first feared in some quarters.“Initially, references during the committee’s discussions to actions that trustees could take to stop a sponsor from using any surplus suggested that almost no UK pension would be able to recognise a surplus,” he said.“We then saw the committee draw a distinction between a buy-in and a buyout, which reined-in the scope of any adverse impact on surplus recognition because vanishingly few trustees have a unilateral right to buy out benefits.“This is a fairly arbitrary distinction, and, although I can see where they are coming from, economically, the two are virtually the same. It would have to be pretty extreme circumstances for a buy-in and a buyout to have different economic impacts.”The amendment to IAS 19 and IFRIC 14 were developed by the IFRS Interpretations Committee (IFRS IC), responsible for interpreting the requirements of IFRSs such as IAS 19.The IFRS IC’s predecessor issued IFRIC 14 in 2007 to provide guidance on the application of the asset-ceiling requirements of the pensions standard.Paragraph 58 of IAS 19 limits the measurement of a DB asset to the “present value of economic benefits available in the form” of refunds from the plan or reductions in future contributions to the plan.IFRIC 14 also deals with the interaction between a minimum funding requirement and the restriction in paragraph 58 on the measurement of the DB asset or liability.When a DB plan sponsor applies IAS 19, it must first measure the DB obligation using the projected unit credit method on the one hand and fair value any plan assets on the other.This calculation will produce either a DB asset or liability at the balance sheet date.Where a plan is in surplus, the sponsor recognises the lower of any surplus and the IAS 19 asset ceiling.An unidentified source has asked the committee to consider whether preparers should take account of events that might disrupt the plan unfolding in line with the IAS 19 assumptions when they apply IFRIC 14.The IFRS IC explored the issue during its March, May, July and September meetings last year.Based on those discussions, advisers, among them Aon Hewitt, warned of the potential adverse impact of any changes to IFRIC 14 on DB schemes.Alongside the amendment to IFRIC 14, the IASB has also proposed a change addressing the assumptions DB plan sponsors must use in their pensions accounting following a plan amendment, settlement or curtailment.LCP partner Tim Marklew said: “In my view, the proposed new rules will, if adopted, make the calculation of company pension costs more complicated and more unpredictable, without providing any extra useful information. “This looks like unnecessary tinkering with the rules, and we will be urging the IASB to reconsider whether to go ahead with these amendments. “Meanwhile, companies planning changes to their pension schemes should bear in mind the potential impact of these proposals on their future pension costs.”Simon Robinson added: “This change aligns IFRS with US GAAP. It requires you to remeasure the whole of the P&L effect of an exceptional event such as a settlement on a scheme from the date of the settlement going forward.“Although I don’t think this change will make a huge difference, it will be more onerous on sponsors. It will certainly add a lot of complexity. If you have an event like a curtailment that only affects a small number of members, you will nonetheless have to remeasure the whole scheme.”He added that there were also potential issues ahead with a proposed change to paragraph 64 of IAS 19 that forms part of the special-event amendment.“Again, this change is not without its problems,” he said. “If you have a settlement that hasn’t cost the sponsor anything, why should it reduce the company’s balance sheet?“I don’t think it is reasonable to impose a P&L charge on a company for using an asset that IAS 19 tells it isn’t an asset. One way out of this situation would be the old FRS 17 approach under UK GAAP, which allowed companies to offset any unrecognised surplus.”Interested parties have until 19 October to comment on the proposal The International Accounting Standards Board has issued two proposed amendments to International Accounting Standard 19, Employee Benefits (IAS 19) and its related asset-ceiling recognition guidance.The changes address how defined benefit (DB) plan sponsors reflect funding contributions agreed with their trustees as an extra liability on the company’s balance sheet, and assess their accounting assumptions following a special event such as a DB plan amendment, settlement or curtailment.Advisers have broadly welcomed the changes to IFRIC 14 but warn that DB schemes must pay close attention to the proposals.Towers Watson consultant Eric Steedman said: “The proposed amendment addresses a long-standing ambiguity in the application of IFRIC 14 for entities that have an unconditional right to a refund of surplus after a plan has run-off, but that do not have an unconditional right to ensure a ‘business-as-usual’ run-off happens.”
Through the new APF vehicle, Achmea and other life insurers can offer DB schemes under the same prudential rules that apply to existing sector-wide and company pension funds.Switching from the rules for life insurers to those for pension funds will mean insurers can start offering DB schemes financed using more risky investments, while allowing for the lowering of the accrued nominal benefits if coverage ratios drop too low.Premiums in these plans are expected to be lower compared with those traditionally offered by life insurers, which have seen premiums increase by as much as 50% due to the low-interest-rate environment.In addition to Achmea, Dutch life insurers Aegon, NN, ASR and Delta Lloyd have also announced the launch of APFs for next spring.They are expected to try to move a large portion of their existing DB contracts into these new vehicles.Achmea is the first to announce, however, that it will eventually quit selling these contracts completely, to new customers and those who wish to renew existing contracts.It is likely to make the move “some time” after the launch of its APF.Commercial insurance companies receive approximately 14% of the €40bn in annual pension premiums paid in the Netherlands.The rest of the pension market is held by sector-wide and company pension funds.The new legal option may help insurers increase their market share.Insurers, in addition to offering pension plans directly to companies, are aiming to use APFs for buyouts of existing company pension funds.APFs can also be launched by company pension funds themselves, as way to merge with other company funds, while ringfencing the capital of different plans.For now, the number of pension funds planning to do so is very limited compared with what insurance companies have announced so far.Sector-wide funds, which account for the largest share of the Dutch pensions market, are presently excluded from merging with newly launch APFs. Dutch insurance company Achmea will cease offering defined benefit (DB) pension plans through its life insurance arm next year.The company will instead begin selling DB plans through a ‘general pension fund’ (APF), which it plans to launch next spring.According to Achmea, the pension offerings of its life insurance arm “no longer satisfy today’s demands”.With the launch of its own pension fund, Achmea is planning to take advantage of new legislation currently being debated in the Dutch Senate and scheduled for a vote later this month.
An Austrian pension provider is tendering for a fixed income fund wrapper, using IPE Quest.As part of search QN-2152, the Austrian institution said it was aiming to pool part of its fixed income assets and therefore sought an experience provider of fund wrappers to screen €500m worth of assets.“We envisage an initial allocation of €500m in assets to the fund wrapper, which should be able to replicate the entire fixed income and credit spectrum,” the tender states, noting that the wrapper should cover individual securities, sub-funds, structured products including securitisations and all forms of derivatives.Interested parties should answer the provider’s questionnaire in German by 19 February. Meanwhile, the Central Bank of Ireland is tendering for actuarial and consultancy services.The bank’s defined benefit (DB) fund, established in 2008, is inviting up to five companies to apply for the vacant positions, as it seeks to ensure compliance with its reporting obligations and meet best practice standards.Interested parties have until 29 February to apply.In other news, EirGrid is tendering a framework agreement for actuarial and pension consultancy services.The state-owned operator of Ireland’s electricity grid said it was tendering two separate mandates – both concerning its pension fund in the Republic of Ireland, and one covering a DB and defined contribution (DC) fund sponsored by its wholly owned Northern Irish subsidiary SONI.The first lot would be for pension administration and actuarial and consultancy services for the EirGrid Pension Fund and its counterpart sponsored by SONI.The second deals more broadly with consultancy, advisory and actuarial services directly to the sponsor.Both lots would run for an initial term of five years, with potentially three one-year renewals. Interested parties have until 3 March to register their interest.Lastly, Ernst & Young has won a contract from the European Commission to research the approach to decumulation across seven EU markets.The Directorate-General for Financial Stability, Financial Services and Capital Markets, overseen by commissioner Jonathan Hill, launched the tender last August to study the “performance and adequacy” of pension decumulation in Germany, France, the Netherlands, Poland, Slovakia, Spain and the UK.Ernst & Young beat competition from two other bids to win the €75,000 contract.
OFE assets at the end of 2015 accounted for 8% of the PLN1,725bn (€402bn) of Polish household savings.By their nature, they are both a sizeable and stable, long-term source of finance for the Polish economy, in particular Polish businesses.In the context of the plan, the report identifies real estate, especially rental properties, infrastructure and private equity, notably venture capital, as the most attractive investment prospects.Yet they are largely off-limits to the OFEs.In the case of real estate – the most important alternative asset class for pension funds elsewhere – OFEs can only invest indirectly through equity issued by developers and construction companies. There are no Polish Real Estate Investment Trusts (REITs) as yet despite several years of legal debates, while REITs from countries such as Australia and Germany have invested in Poland.PwC points out that a legal change allowing OFEs to invest up to 10% in real estate would release some PLN14bn in project financing.The OFEs have also demonstrated an appetite for infrastructure investment.Before the 2014 pension reform, which banned them from investing in sovereign or state-guaranteed bonds, the funds were big purchasers of long-term bonds issued by the state-owned bank BGK for financing the country’s road development fund.As in the case of real estate, OFE investment in infrastructure is currently indirect, through buying revenue bonds or units in specialist investment funds.A 5% allowance in infrastructure investment would generate some PLN7bn, equivalent to 19.4% of total infrastructure construction expenditure in 2014.Venture capital (VC) investment, a common vehicle for funding innovative companies and start-ups, remains problematic.The VC market in Poland is relatively undeveloped even by CEE standards – the law does not allow for OFE investment into VC commitments, and the fund managers themselves are unenthusiastic.Yet, as the report points out, even a 1% pension fund allowance would double the size of Poland’s VC market. Polish pension funds (OFEs) can play a major role in the government’s recently announced Responsible Development Plan but only if they are allowed to expand their investments, argues a report written by PwC Poland in co-operation with the Polish Chamber of Pension Funds (IGTE).The so-called Morawiecki Plan, unveiled in February by the eponymous development and deputy prime minister Mateusz Morawiecki, is based on five pillars: re-industrialisation, developing innovative companies, capital expansion, foreign expansion (including exports) and sustainable social and regional development.The plan does not discuss OFEs but does mention foreign pension funds as potential sources of capital.PwC believes the OFEs can play a major role in helping fulfil the plan, while strengthening the benefits for future retirees through a portfolio diversified beyond their current 80%-plus holdings in equities.
His remarks likely reference the regulator’s decision to launch an anti-avoidance investigation in the wake of 2015’s sale, due to its concerns over the funding of the BHS schemes.The two schemes reported a buyout deficit of £571m (€729m) when BHS entered administration earlier this year, and are now undergoing assessment by the Pension Protection Fund ahead of their potential entry into the lifeboat scheme.Chappell alleged that RAL was “held to ransom” by both the regulator and Arcadia, despite later during questioning saying Green forbade him, as part of the terms of the BHS acquisition, from directly communicating with TPR prior to the deal finalising.However, Chappell said he was not concerned about the lack of direct contact with TPR prior to the sale, as he had received assurances through lawyers in contact with the regulator that it would approve a proposed restructure of the scheme.The scheme restructure, branded Project Thor and Project Vera depending on its iteration, was also supported by the chair of the scheme’s trustees, Chappell argued.Chappell also dismissed claims by the regulator it only learned of BHS’s sale to RAL from media reports when it was announced.“That’s a nonsense,” he said. “That is an absolute nonsense. They were fully abreast of our positon of buying BHS.”The businessman also rejected calls by work and pensions select committee chair Frank Field, MP for the opposition Labour party, to provide the joint committee with further documents relating to the acquisition of BHS.Explaining his reasons, Chappell said that his lawyers were not inclined to grant the committee’s requests until they had decided whether a court case could be brought against Arcadia Group in general, and Philip Green in particular.Green is scheduled to give evidence to the joint committee on 15 June. The UK Pensions Regulator (TPR) is pursuing a “cavalier crusade” against former BHS owner Philip Green, according to the businessman who bought the now-insolvent retailer in 2015.Dominic Chappell, whose company Retail Acquisitions Limited (RAL) bought BHS from Green’s Arcadia Group last year, said his firm’s ability to successfully build up capital in support of the retailer was undermined by TPR.Speaking at a parliamentary hearing of the joint work and pensions, and business innovations and skills committees, Chappell argued he could have put in place the working capital needed to turn around BHS “had the Pensions Regulator actually left us [RAL] alone”.Chappell said TPR should have agreed an approach with BHS, and then pursued its “cavalier crusade” against Green and Arcadia at a later point .
A consultant has tendered a $10m (€9m) global factoring mandate on behalf of an undisclosed pension fund based in Switzerland, using IPE Quest.According to search QN-2214, the client is looking for “investable commingled fund vehicles predominantly focused on factoring”.Applicants should have at least $250m in assets under management (AUM) in the asset class and a track record of at least two years.Interested parties should state performance until the end of June, net of fees. The deadline for applications is 31 August.Separately, in Quest search QN-2213, Kottmann Advisory is tendering a global small-cap equity mandate on behalf of an undisclosed pension fund based in Switzerland.The mandate is for up to €20m, although this amount could be allocated to a number of fund managers.Applicants should have at least €50m in AUM in the asset class.Interested parties should state performance to 30 June, net of fees.The deadline for applications is 26 August.The IPE news team is unable to answer any further questions about IPE Quest tender notices to protect the interests of clients conducting the search. To obtain information direct from IPE Quest, please contact Jayna Vishram on +44 (0) 20 7261 4630 or email [email protected]
It was to be focused mainly on the high-yield debt and syndicated loans markets, but managers would be free to invest in a range of other predominantly liquid debt assets, with the main purpose of the mandate being to provide exposure to higher-yielding credit market beta. The mandate size was provisionally set at £300m, but, in the end, the pension fund decided to appoint two managers and increase the overall size of the investment management sought – as it had reserved the right to do in the wording of the tender notice.While Glasgow City Council said in the original notice that the preferred approach would be to invest through a segregated mandate, it also said a pooled fund or bespoke mandate within a pooled wrapper would be considered as long as the approach still complied with the requirements of the LGPS regulations.As part of a revised investment strategy set in 2015, Strathclyde Pension Fund is now considering its new credit allocations in terms of, among other things, short-term enhanced yield and credit rather than more traditional fixed income investments.In March, the pension fund awarded £750m of multi-asset credit mandates to Babson Capital, Oak Hill Capital, the Alcentra Clareant European Direct Lending Fund II and the Babson Global Private Loan Fund, as part of the strategic asset allocation revamp.Babson Capital Management announced in March plans to combine its business with that of its subsidiaries Cornerstone Real Estate Advisers, Wood Creek Capital Management and Baring Asset Management into one firm under the Barings brand.For more on the Barings rebrand, see Strategically Speaking in the December issue of IPE magazine Barings and Oak Hill Advisors have won mandates from the Strathclyde Pension Fund, with the Scottish local authority pension fund contracting the two asset management firms to manage multi-asset credit investments.The two have been awarded contracts of £300m (€346m) and £150m, respectively, according to Jacqueline Gillies, chief pensions officer for investment at Strathclyde.In all, the pension fund received seven offers in the tender, according to the award notice on the EU’s TED electronic tenders serviceIn the original tender notice put out by Glasgow City Council on behalf of the pension fund, the council had called for managers to run a multi-asset credit mandate, with the aim of achieving a return of LIBOR plus 4% a year net of fees.
Last July, the fund was worth €25bn, but after the government’s latest withdrawal of €936m in December, just over €15bn is left.Each year, Spanish pensioners receive an extra month’s payment in July and December, which is one of the key reasons for the government’s dipping into the FRSS.However, the influential Spanish newspaper El Mundo has predicted that at the current rate of withdrawals, the FRSS will be unable to fund bonus payments after this summer.The story is just one strand in an animated public debate in Spain over the future of the state pensions system.Luis Linde – governor of the Banco de España, Spain’s central bank – has said the state retirement age might have to be raised beyond the projected level of 67 years in order to ensure the financial sustainability of the public pensions system. The current retirement age is 65 years and five months, increasing to 67 years by 2027. But Linde said further increases could become necessary.He said: “This could be justified by people’s longer life expectancy, their joining the workforce later, the reduced physical demands of most jobs today, and people’s better health at more advanced ages. Any measures that discourage early retirement and allow people to extend their working lives beyond the age of 67 would have a positive bearing on the financial sustainability of the system.”Linde was appearing before the parliamentary committee for the monitoring and assessment of the Toledo Pact agreements.Alberto Nadal, Spain’s secretary of state for budget and expenditure, told the same committee that should the FRSS run out of funds, the government could issue debt to help pay pensions. Spain’s ratio of government debt to GDP is one of the highest in Europe at 99.2%, according to TradingEconomics.com.Nadal also suggested policymakers should search for a balance between taxation and workers’ contributions to finance the pensions system. He categorically ruled out privatising the system.However, Nadal said: “In the long term, our system depends fundamentally on the strength of the Spanish economy. The funding of the pensions system is based on workers’ contributions and the guarantee for a sound system in the long term is stable and growing employment.”Meanwhile, former Spanish prime minister Felipe Gonzalez told a forum on state pensions organised by business newspaper Cinco Dias that the pensions system cannot be guaranteed over the next 30 years.He added: “Those ‘gurus’ who say the situation will be resolved are simply lying.” Spain’s social security reserve fund – which acts as a financial cushion for the country’s state pension system – will be unable to afford bonus payments to pensioners after July this year, according to a recent press report.“Those ‘gurus’ who say the situation will be resolved are simply lying.”– Felipe Gonzalez, former prime ministerThe Fondo de Reserva de la Seguridad Social (FRSS) was set up in 2000 to invest social security surpluses and fund future shortfalls in the state pension scheme.At its peak in 2011, the FRSS portfolio was worth €67bn. Since then, however, its value has fallen substantially, as the government has regularly drawn on the funds in order to top up state pension payments.