For passive emerging market equities, it selected Northern Trust Asset Management’s ESG-focused, market-cap-weighted fund, and HSBC Global Asset Management’s alternative index economic scale fund.Both funds will be blended within NEST’s target date fund and not be offered individually to members.“We will start relatively cautiously – about 1.5% of the growth phase portfolio – and we will build this up significantly throughout the year,” Fawcett said.“If we see severe undervalue, we could go to relatively higher weightings. The neutral position will be about 5% if we have 50% in equities.”Northern Trust AM’s ESG fund screens out around 10% of the global emerging market index based on sector exclusion and ownership structures, which NEST said would provide greater risk-adjusted returns, with a momentum style bias.The fund from HSBC GAM is a fundamentally weighted vehicle based on the economic footprint of companies, which rebalances and provides a small value bias, as well as returns based on what HSBC described as “excess volatility”.Fawcett said the two funds offered different but complementary strategies, and that the blending and rebalancing of the two would provide a momentum and value trade-off, offering additional diversification.A report by consultancy Towers Watson highlighted correlations between ‘alternative beta’ strategies such as value and momentum could provide pension funds with additional diversification benefits, despite being invested for returns.It showed that having an equity strategy against a value strategy within a hedge fund showed returns had a correlation coefficient of -0.22, boosting diversification.Fawcett said playing off the value and momentum strategies offered by the two funds was integral to NEST’s selection.“There will be times one outperforms the other, but we will rebalance between the two for additional improvements in risk-adjusted returns,” he said.He also said the fund was still looking into infrastructure debt funds.However, given the relatively small size of the fund and the initial costs of entry, the team is in no rush to enter the asset class, he said.On frontier markets, Fawcett said NEST would not be looking to invest any time soon.“Ultimately, one of the issues within emerging markets are governance concerns,” he said.“Frontier markets are just another step into that territory, and we are not sure that is right for us.” The UK National Employment Savings Trust (NEST) has begun to shift assets into emerging markets by passively allocating to ESG focused and alternative index funds.The £162m (€203m) defined contribution (DC) master trust will initially allocate 1.5% of its growth phase fund towards emerging market equities.Mark Fawcett, CIO of the fund, said NEST and its managers saw attractive value despite emerging market equities not performing recently.The government-backed auto-enrolment provider said in 2013 it would search for an emerging market manager to boost growth and diversification within its default fund.
The scheme’s board will instead assess whether joining an industry-wide scheme – such as the pension fund for the graphics industry (PGB) with its flexible arrangements – could offer a better proposition.Rietdijk also dismissed the possibility of a closed scheme.“In any case, our participants prefer a collective pension plan,” he said.The GITP board said it was struggling with the added costs of meeting new legal requirements, as well as the falling number of active participants, resulting in less income from contributions.It also complained that stricter governance requirements had hindered its efforts to find qualified trustees.The Pensioenfonds GITP has 830 participants, of whom 255 are active.Its current funding is 107.7%, after consecutive cuts of pension rights of 7% and 4.2%.Last year, the scheme returned 0.5% on investments. The €140m company pension fund of Dutch human resources manager GITP is to be liquidated after the employer cancelled the contract for pensions provision as of 1 January 2015.On its website, the pension fund said it had been unable to secure annual pensions accrual of more than 1.45% with the current contribution of 20% agreed by workers and the sponsor.In the opinion of the social partners, any future pensions provider must be able to deliver better accrual.According to Bas Rietdijk, chairman of the pension fund, joining an insurer would be an “unattractive alternative”.
Italy’s Fondo Pensione Laborfonds has beaten its benchmarks on all four of its investment lines or profiles in preliminary 2015 results, with its balanced line generating 4.13% compared with the 3.71% increase registered over the year in the reference index.The €2.2bn fund, based in the Trentino Alto Adige (South Tirol) region of northern Italy, said had increased asset diversification and that its prudent approach had become even more important given the macroeconomic and geopolitical situation.Laborfonds president Gianni Tomasi said: “All lines achieved returns superior to the respective reference benchmarks and, on top of this, gave yields, in absolute terms, that were really significant, taking account of the way markets had gone and the very high level of volatility during the whole year.”He said the board of directors was very satisfied with the results. The prudent-ethical line produced a net return of 4.51%, 1.4 percentage points above the benchmark, while the dynamic line generated a net return of 3.87%, compared with the 3.72% benchmark yield. The guaranteed line, meanwhile, returned a net 0.90% in 2015 compared with the performance of the reference index of 0.46%.By comparison, in 2014, returns for the balanced, prudent-ethical, dynamic and guaranteed lines were 10.07%, 11.82%, 9.94% and 1.22%, respectively.Ivonne Forno, director general at Laborfonds, said markets were now very difficult and increasingly unpredictable.“Our approach has always been – historically as well – to exercise maximum prudence to protect our members’ assets,” he said. Due to the current macroeconomic and geopolitical context, he said this was even more the case this year.“For this reason, too, we have recently increased diversification while seeking to consolidate the results we have achieved, to limit the risks and – not least – to make investments first and foremost in Italy, such as the Strategic Fund of Trentino Alto Adige, which, apart from being resources for our region’s economy, prove to be more uncorrelated than others,” Forno said.Laborfonds said its membership numbers decreased slightly during 2015. It said it paid significant sums to members in benefits and loans, in connection with “the delicate moment the local economy is going through.” Tomasi said the board of directors had discussed ways the scheme could increase membership numbers, including encouraging trade unions to take more responsibility in promoting membership.Total assets stood at around €2.2bn at the end of 2015.
Kempen Capital Management UK, PwC, Muzinich & Co, Investec, Mobius Life, BlackRock, Aberdeen Asset Management, Transparency Task ForceKempen Capital Management UK – Nikesh Patel has been appointed as a senior investment strategist in London. He will be responsible for advising UK clients on strategic and tactical investment strategy and asset-liability risks. He joins from PwC, where he was an investment consultant. Before then, he worked at BlackRock and Mercer.Muzinich & Co – Grant Davidson has been appointed director of the UK private debt team. He joins from Investec, where he was senior origination director for growth and acquisition finance, responsible for the sourcing and execution of deals for UK mid-market businesses. Before then, he worked at Lyceum Capital.Mobius Life – The institutional investment platform has made two senior appointments to its asset transfer and investment research teams. Steve Robinson joins as head of asset transfers from BlackRock, while Michael Jackson joins as data integrity and research manager from Aberdeen Asset Management. Transparency Task Force (TTF) – Robin Powell has been appointed ambassador for the TTF, a campaign to increase transparency in financial services, including investment costs for pension schemes. Powell is a broadcaster and journalist, and founder of Regis Media, a communications company for the “evidence-based” investor sector. Catherine Howarth, chief executive at ShareAction, and David Pitt-Watson, co-founder and former chief executive at Hermes Focus Funds and Equity Ownership Service, are among more than a dozen TTF ambassadors.
Pension schemes investing in pooled equity funds will be able to reclaim dividend tax under rules proposed by the UK government.Chancellor Philip Hammond included the measure in his Autumn Statement, published today.According to the document, the government plans to “modernise” rules on dividend tax to allow pension funds to reclaim any tax paid by pooled funds in which they invest.Draft legislation will be published in 2017 for consultation. Teresa Owusu-Adjei, a tax partner at PwC, said: “On the positive side, this will give higher investment returns to smaller pension funds that pool together and go through a pooled fund rather than have their own segregated mandates.“However, the vast majority of UK funds don’t actually pay UK tax because of various exemptions and deductions, so, while it will be welcomed, I see it as a small concession.”The full text of the paragraph from the Autumn Statement reads: “The government will modernise the rules on the taxation of dividend distributions to corporate investors in a way that allows exempt investors, such as pension funds, to obtain credit for tax paid by authorised investment funds and will publish proposals in draft secondary legislation in early 2017.”Elsewhere in the Autumn Statement, the chancellor announced an increase in borrowing, with an additional £15bn (€17.7bn) of Gilts to be issued before the end of the financial year.This will bring 2016-17 Gilt sales to £146.5bn, including £43bn of long-dated and £35.4bn of index-linked bonds, which are in particular demand from UK pension schemes.Vivek Paul, director of client solutions at BlackRock, said: “The colossal latent demand from pension funds for long-dated hedging assets far exceeds the additional supply that will stem from today’s announcements. Pension funds cannot rely on rising yields to escape their funding holes.”However, Craig Inches, head of short rates and cash at Royal London Asset Management, described the additional debt as “a mammoth amount” for markets to absorb.“The market will now need to digest two index-linked and one nominal syndication within the next 12 weeks,” Inches said.“The market is placing a huge reliance on price-insensitive investors, such as [liability-driven investment] managers, to close their eyes and buy, but I fear even they may be a little less hasty in an environment where yields are rising.”The chancellor opted to keep the so-called ‘triple lock’ on state pension payments, despite calls from some politicians for the guaranteed increase to be scrapped.In his speech to parliament, Hammond acknowledged the need to “tackle the challenges of rising longevity and fiscal sustainability”.However, David Blake, director of the Cass Business School’s Pensions Institute, criticised the lack of a decision.“Once again, with the serious pension problems that this country is facing, the can is being kicked further and further down the road,” he said.“The triple lock on the state pension is unsustainable – everybody knows that – yet the government is keeping it until the next parliament. All this is doing is passing an increasing burden onto the next generation – and this can only lead to increasing resentment.”John Cridland, former director general of the Confederation of British Industry, is leading a review of the UK’s state pension age.A consultation is open for responses until the end of this year.The Autumn Statement also contained a number of substantial boosts to spending on infrastructure and housing, as reported in full by IPE Real Estate.
In addition, Willie O’Dea, a prominent member of the Fianna Fáil party who tabled the bill, has called for a new method of calculating liabilities to make them less of a financial strain on sponsors.In a blog post on his website on Tuesday, O’Dea said the current calculation method for liabilities was “artificial” and “the chief culprit” behind scheme closures.“At present, the calculation of liabilities of the defined pension scheme is based on a hypothetical situation,” O’Dea said. “The question is: would the pension scheme be able to meet all these liabilities if it was wound up tomorrow? This is a total misunderstanding of the long-term nature of pension provision.”He continued: “Schemes are not designed to wind up tomorrow. They are designed to build assets and meet liabilities over an adult’s lifetime. We need to move to an ongoing funding model that recognises this.”O’Dea’s bill called for the Pensions Authority to launch a study of alternative liability calculations.“New methods of calculating liabilities must be found that would help save the pension schemes we have and create an incentive for the creation of others,” O’Dea said.In a debate in the lower house last month, O’Dea and Willie Penrose of the Labour party both called for greater protections for DB members. However, Leo Varadkar, minister for social protection, claimed that the proposals could destabilise some companies and render others insolvent.“The only legislative changes I will recommend… are ones I am confident will do good and not unintended harm,” Varadkar said. “If Penrose and O’Dea and colleagues from other parties want to come together to put through legislation that could potentially do untold harm to many people, they should by all means do so. However, the consequences will be on their heads.”Consultancy firm LCP warned of several “unintended consequences” of the bill, including the pre-emptive closure of viable schemes by employers wishing to avoid the legislation.However, LCP supported O’Dea’s proposals regarding liability calculations, adding: “we would question the extent to which the other elements of the Bill can be enacted without this element. We can only hope that the outcomes of such an exercise will be constructive.In an update on its website, LCP said: “Overall we welcome the fact that attention is being focused on legislation impacting defined benefit pension schemes and hope for constructive outcomes whether they are based on this bill or an alternative.” Ireland’s main opposition political party has tabled a bill to make it illegal for companies to abandon defined benefit (DB) pension schemes with deficits.Fianna Fáil managed to pass the bill in Ireland’s lower house (Dáil Éireann) last week, despite opposition from the ruling Fine Gael party. It is now being considered by the joint committee on social protection.If passed, the Pensions Authority will have the power to stop employers walking away from their pension funds and to step in to help those companies who are struggling to finance their schemes.Last year, Independent News & Media abruptly chose to wind up its scheme, despite a reported €23m shortfall. Ireland’s current law does not require sponsors to make good on deficits, and it does not have an insurance facility for schemes, such as the Pension Protection Fund in the UK.
PME, the €44.5bn scheme for metalworking and electro-technical engineering, said that MN had made a sensible decision, “as there is no longer a large project running alongside regular operations”.“The focus has shifted to short term and small scale, re-inforcing MN’s grip on the innovation process,” the scheme said.MN said that its initial target of a 30% costs reduction as of 2018 would still be achievable.Both pension funds made clear that the scaling back of the innovation project meant that they no longer had to pay additional costs.The initial plans for MN 3.0 would have cost PMT and PME €17 and €7 per participant, respectively, for several years. This would come on top of the regular annual cost per participant of €81.50.MN said that for 2017 it had reserved €6m for the slimmed down project, which would now focus on re-organisation and IT systems as well as co-ordination within its organisation. The Netherlands’ large metal industry pension schemes PMT and PME say they are satisfied with the decision of their pensions provider MN to scale back its extensive innovation project.On Monday, it had become clear that MN, which is also the asset manager for both schemes, had written off €15m of a €70m project called MN 3.0, as it had largely failed to deliver.“MN has pulled the plug in time and hasn’t continued whilst being aware of the problems,” noted a spokesman for PMT, the €67bn scheme for metalworking and mechanical engineering. “It has shown responsibility and that is important.”In the opinion of both schemes, the €15m write off is not entirely wasted, “as part of it has been used to initiate an organisational change, which has led to cost reduction”. They also said MN had improved technical facilities.
Cowling said: “As Brexit has increased the uncertainty around trade regulations and tariffs, being highly competitive is a key success factor.”He added that “the situation in the FTSE 250 is much more serious than in the FTSE 100 which has only a couple of companies with such a pension burden”.JLT estimated the total deficit across all FTSE 250 company pension schemes at £11bn as of 30 June 2016. Nearly half of companies – 118 – do not have a defined benefit (DB) pension scheme.Former BHS owner under fire (again)UK MPs have accused Sir Philip Green, whose Arcadia Group is the former owner of BHS, of favouring Arcadia’s pension scheme with better funding and higher contributions.The Work and Pensions Committee, a group of MPs from the UK’s lower house, published examples of letters sent to members of the Arcadia Group Pension Scheme and the Arcadia Group Senior Executives Pension Scheme, detailing the results of the two funds’ 2016 actuarial valuation.The figures revealed a combined deficit of £564.6m across both schemes, meaning they were 56% funded on average. However, the letters also showed that Arcadia was to contribute £50m a year to help plug the gap from September 2016 until August 2019. It would then increase deficit payments to £54.5m a year.Frank Field, chair of the committee, said in a statement that the Arcadia plan was “credible”, but claimed that it was “clear from these figures that Sir Philip was long favouring the Arcadia schemes over their BHS counterparts, which have more members.”The 10-year Arcadia plan compares to a 23-year plan that was in place for the BHS Pension Scheme, before the sponsoring employer went bankrupt. This plan included annual deficit payments of £10m. A 2014 valuation of the scheme showed it to be 65% funded with a deficit of £207.6m.BMW workers to strike over pension fund closureSome of BMW’s UK employees could go on strike over plans to shut the company’s DB pension scheme.Workers’ union Unite said 97% of roughly 1,400 employees backed industrial action over the changes, which will see the DB scheme close on 31 May this year.Union representatives were set to meet this week to discuss what form industrial action would take.Unite said it had “urged BMW to reflect on the results” of the ballot and “enter meaningful talks over affordable options to keep the pension scheme open”.Len McCluskey, general secretary of Unite, said: “Unite members have been the driving force behind record sales and a surge in profits. Repaying their loyalty by breaking pension promises and robbing them of tens of thousands of pounds of retirement income is a disgraceful way for BMW bosses to behave.” Nearly 10% of the UK’s listed mid-cap companies would need to pay the equivalent of more than two years’ worth of dividends into their pension schemes to plug funding shortfalls, according to consultancy JLT Employee Benefits.The group found that 23 companies listed on the FTSE 250 index would need to pay £4.7bn (€5.5bn) collectively to close deficits. In addition, 20 constituents of the index have pension fund liabilities greater than their market capitalisation.Charles Cowling, director at JLT Employee Benefits, said such debts could “severely constrain a company’s ability to invest in vital research and development, upgrade its operations, and hire skilled staff, affecting its competitiveness and long term prospects”.FTSE 250 companies are typically more domestically focused than those listed on the FTSE 100 index, meaning mid-cap companies are more exposed to economic risks from the UK’s exit from the European Union.
A majority of ExxonMobil shareholders voted in favour of a climate change disclosure resolution despite the company urging them to oppose it, in sharp contrast to the fate of a similar resolution filed by shareholders last year. The resolution called on the company to report on how its portfolio of reserves and resources would be affected by global efforts to limit the average rise in temperatures to below 2° Celsius. The company said it agreed with the importance of assessing the resiliency of its resource portfolio, but recommended investors oppose the resolution as it already conducted such assessments.However, at the oil major’s annual general meeting yesterday, some 62% of shareholders rejected the board’s recommendation by voting in favour of the resolution, according to the Church Commissioners, which manages the Church of England’s £7.9bn (€9.2bn) endowment fund and co-filed the shareholder resolution along with the New York Common Retirement Fund. The filing also had the backing of a coalition of institutional investors with some $5trn (€4.5trn) of assets under management, including the likes of Dutch pension managers APG and MN.Investors with a further €7trn of assets under management had pre-declared their support for the shareholder resolution.The outcome of the vote had nonetheless been keenly anticipated, in particular to see how major US fund managers such as Vanguard and BlackRock would vote.Last year the same resolution was supported by only 38% of shareholders, with Vanguard and BlackRock having voted against, in line with the company’s recommendation.A source following the ExxonMobil vote speculated that the 62% vote in favour of this year’s resolution suggested all three of the oil and gas major’s largest shareholders – Vanguard, BlackRock and StateStreet – had voted in favour of the motion.Edward Mason, head of responsible investment for the Church Commissioners, said yesterday’s vote was “historic”.“Despite strong opposition from the board, the majority of Exxon’s shareholders have sent an unequivocal signal to the company that it must do much more to disclose the impact on its business of measures to combat climate change,” he said.“We are grateful to all of the investors who supported the proposal, and we call on the company to begin urgent engagement with shareholders on how to bring its disclosures in line with those of its peers.”Mason previously argued that the outcome of last year’s ExxonMobil shareholder resolution underscored the need for a “cultural shift” among institutional investors – especially large US asset managers – to become more willing to challenge management. The vote at ExxonMobil comes after recent majority votes at US fossil fuel companies Occidental Petroleum and PPL Corporation, where a majority of shareholders voted against the companies on climate change disclosure resolutions. At Occidental, the motion was passed by 67%, thought to be a record for a non-management backed shareholder resolution.Raj Thamotheram, CEO at think tank Preventable Surprises, suggested the vote helped make the case that the US’s expected withdrawal from the Paris climate change agreement – which president Donald Trump may announce today – will not meaningfully undermine the investor-backed move towards a low-carbon economy.Thamotheram said: “Investors voting against management at Exxon is a powerful rebuke to the climate denialist policies of this White House. Markets are moving and Corporate America would be foolish to bet so much on the protection from this regime.”Representatives of campaign groups, investor groups, and energy economists also hailed this year’s vote at ExxonMobil as a significant development.Tom Sanzillo, director of finance for the Institute for Energy Economics and Financial Analysis, said the shareholder vote was “an exciting moment in activist-investor history”.Fiona Reynolds, managing director of the Principles for Responsible Investment, said: “More and more investors are facing up to the material risks around climate change and they are not afraid to engage the companies in their portfolios on this issue and demand answers on how these companies are preparing to transition to a low carbon environment and the impact it will have on their businesses.”Catherine Howarth, chief executive of ShareAction, a responsible investment campaign organisation, said the resolution was “excellent news, marking a step-change in investor sentiment for climate engagement”.
High-frequency trading (HFT) can generate strong views. Does it actually perform a social good or is it just a scam?Many academics have come out in support of HFT. Finance professor Venkatesh Panchapagesan argues in this article from 2016 that there is overwhelming empirical evidence that it has been largely beneficial to the markets. Prices have become more efficient, costs have gone down, and volumes have gone up, he says.The argument that high-frequency trading increases liquidity in the market is misleading, however. There are many definitions and measures of liquidity. Being able to trade during sharp market movements is perhaps the most important, but that relies on having a diverse universe of counterparties, with some at least willing to buy when most are selling (and vice versa). High-frequency traders do not provide that.Regulators are faced with responding to criticisms of HFT while ensuring that any regulations they make do not have unintended negative effects on markets themselves. For example, Panchapagesan points out that many studies identify HFT as exacerbating fragile market conditions, but not causing them (unless there is manipulation involved). Given this, he argues that regulators should address volatile periods through special trade rules rather than tightening HFT regulation in general. A good example of this is the SEC in the US. After years of researching HFT, it introduced ‘limit up/limit down’ rules and stock-level ‘circuit breakers’ to lower the possibility of wild price swings without disrupting the normal functioning of the market.Another concern Panchapagesan raises revolves around HFT’s unfair use of market infrastructure, and its faster access to data. Higher system usage, especially when it generates little value, clearly imposes a disproportionate cost on others. But, as he points out, how exchanges develop, maintain and fund their infrastructure should be their concern, provided the regulatory consequences of a breakdown are credible.The driving force behind HFT, however, is getting faster access to information, essentially creating a natural monopoly in market data.Michael Lewis in his book Flash Boys claimed that markets were rigged by traders willing to spend millions of dollars to get an edge in speed of just a few milliseconds. Lewis argues that HFT is essentially front running trades between institutional counterparties. They are not acting as market-makers by taking on opposite positions to counterparties wishing to trade – indeed, they are not taking any positions of their own at all.Everyone apart from the closest trader is working with data that is ‘stale’, in the sense that someone else has been able to benefit from access to it first. Shaving milliseconds counts in this game, leading to the what seems the bizarre focus on spending huge amounts of money to locate computers closer to the exchange to increase speed by infinitesimal amounts.One idea may end this game. Or rather, two: randomising entry times and introducing random order processing delays, known as ‘speed bumps’. Both of these would reduce the importance of time priority, and as a result eliminate the need to beat others on speed alone.As Panchapagesan says, this will ensure some parity among traders, reduce perverse incentives for exchanges, and slow down this ‘winner takes all’ race to the bottom among HFT firms.In India, the regulator is exploring whether this idea should be tested out with a pilot containing a few stocks before rolling it out to the broader market. It may be worth considering such a proposal for European exchanges as they also grapple with the issues around HFT.