Coruña tramway
JUNE saw the inauguration of a 4 km tramway in the Spanish city of A Coruña, linking the castle of San Antón and the Tower of Hercules. A 15min interval service is provided by two ’heritage’ trams built in the 1920s which have been rebuilt by CAF at Zaragoza.The line cost Pts4·6bn, with civil works contracted to Comsa and electrification to Cobra; both firms worked on the conversion of Valencia Line 4 to light rail. Whilst aimed at tourist traffic, the route is intended as part of a 12 km light metro network. An extension to Playa de Riazor will form the second phase. o
The Western United Group Pension Scheme has begun its wind up process by insuring its remaining liabilities in a £280m (€350m) bulk annuity buyout with Rothesay Life.This is the third and final arrangement struck between the two parties, as Rothesay previously insured £220m of the scheme’s liabilities through buy-in contracts.The scheme is sponsored by the Vestey Group, which has supported the insuring of liabilities for the 14,000 member, £500m scheme.The scheme used a liability-driven investment (LDI) transition fund, operated by F&C Asset Management, which allowed the scheme to make the move from the pooled LDI holdings, reducing exposure to market risk and transaction costs. Independent chair of trustees, Peter Thompson, of BESTrustees, said securing the full buyout with Rothesay so soon was not on the agenda earlier in the year.“We were pleased that Rothesay Life was able to move very quickly to deliver a comprehensive solution and provide security for our members well ahead of schedule.”Vestey Group’s head of reward, Ben Fowler, added: “Less than two years ago we could not have envisaged securing a full buyout over this timeframe.“It requires a great deal of preparation and collaborative effort to complete these deals and we have been fortunate to have a committed group of trustees.”In other de-risking news, the trustees PGL Pension Scheme, 12,000 member scheme with over £1bn in assets, have arranged a longevity swap for around £900m of the scheme’s liabilities.The arrangement was agreed with Phoenix Life, an insurance company within the scheme’s sponsor company, Phoenix Group.Martin Bird, senior partner at Aon Hewitt, advisers to the trustees, said the deal highlighted the innovation within the longevity risk market, particularly around the use of associated insurers to access the reinsurance market.This mirrors similar deals done by the Aviva Pension Scheme which transferred £5bn of longevity risk to the reinsurance market, via its sponsor Aviva.The BT Pension Scheme set up a wholly owned insurer to directly access the reinsurance market for its £16bn deal last month.Matt Wilmington, partner in Aon Hewitt’s risk settlement business, said: “The arrangement was a win-win for trustees and Phoenix Life, reducing risk in the scheme and allowing the insurer to structure its capital arrangements more efficiently. “We also expect a number of other insurers who are in a similar position with large defined benefit pension schemes to consider a similar type of arrangement.”Law firm CMS Cameron McKenna advised the trustees.Partner, James Parker added: “Disintermediation is at the very cutting edge of developments in the longevity market and this transaction is strong evidence of a growing trend.”
Pension funds regard themselves as long-term investors but disagree on what factors should define the ideal time horizon, according to a survey by IPE magazine.One-quarter of respondents to the Focus Group survey for the November issue of IPE said 3-5 years constituted a ‘long-term’ view, while nearly 78% of respondents considered themselves to be long-term investors.Only one respondent rejected the label outright.One UK pension investor pointed to the need for a long-term approach based on long-term liabilities, while an Austrian pension fund argued that it was important to take a generational view – at least when managing the assets of beneficiaries up until 45. There was less agreement among the 36 European respondents, managing nearly €290bn in combined assets, as to what constitutes ‘long term’ when investing in public market assets.More than one-third of pension investors said taking a 7-10 year view was long term, whereas nearly 14% believed the better definition was considering investments over the course of a business cycle.One-quarter of funds said a 3-5 year time horizon was adequate, and 17% argued in favour of a generational view, spanning 15-25 years.One respondent, a UK local authority scheme, said the long-term perspective manifested itself in asset allocation decisions, pointing to the development of emerging markets over the course of a generation.The fund added: “Stock selection does tend to take a shorter view, and this is probably dysfunctional.”A second UK corporate fund questioned whether the idea of long-term investing in public markets was compatible.“The idea that long-term investment should be public market inherently seems to be at odds with long-term investing,” it said.“Public markets are driven by short-term liquidity and [mark-to-market] ideology, which is anathema to long-term investing, which is about long-term, sustainable cash flows.”Despite this, nearly half of respondents did not see a problem in finding external public market asset managers “willing and able” to invest for the long term, and only 9% rejected the notion out of hand.One-quarter of respondents said asset managers could be found, but only for certain asset classes.A Swedish investor blamed the regulatory environment, not asset managers.“[The] main hassle is the short-term view of the regulator and new regulations where you value your liability against a short-term model,” it said.A second Swedish investor concurred.“If anything,” it said, “regulation is a problem – in particular, its tendency to change radically every 5-10 years.”When asked which factors prevented long-term investing, 24% cited the regulatory environment and 21% the maturity of their liabilities.Only 20% said the asset management industry’s unwillingness or skill was at fault.One respondent cited the career risk of misguided long-term investments.For more details on October’s Focus Group, see the current issue of IPE
The Netherlands’ new financial assessment framework (FTK) is facing yet another a setback as the Dutch Senate has postponed the reading of the bill, initially scheduled for next Monday.The Upper House said it was unconvinced of the need of stricter rules within the FTK proposals and “demanded answers” from the Dutch government on a number of pension issues. As a result of the expected delay, the scheduled introduction of the FTK on 1 January could be in jeopardy.The Senate’s criticism of the FTK has caught many in the industry by surprise, as the Lower House has to date widely supported the bill, meant to protect the pensions system against market shocks. But Joris Backer, a senator for the Liberal Democrats (D66), pointed out that, during a recent hearing on the subject, the Senate had been “taken aback” by the new FTK proposals. Reflecting broad concern among pension funds and unions, Helma Kneppers-Heijnert, a senator for the Liberal Party (VVD), asked: “Are the proposed financial buffers really necessary? And will this all be feasible within European legislation?”In their opinion, the proposed rules within the FTK are unnecessarily strict and would hurt pension fund participants and pensioners’ purchasing power. Like many senators, Backer wondered why pension funds must discount their liabilities against a stricter rate than the one the EU has prescribed for insurers. He also said he was unsure whether the FTK proposals would give pension funds enough space to create tailor-made policies. The Dutch Pensions Federation said it was prepared to accept a delay in the introduction of the FTK, if the proposals were strengthened.However, in this case, it will call for the implementation to be delayed, its spokesman said.The Ministry for Social Affairs – responsible for the FTK bill – declined to comment.
The £4.4bn (€5.3bn) Lothian Pension Fund has created a new £300m in-house global equity portfolio to focus on valuation and volatility beta strategies – adding to the fund’s exposure to high-dividend and low-volatility alternative beta portfolios.The UK local government pension scheme (LGPS), which provides benefits to public sector workers in Eastern Scotland, said the new portfolio was shifted from its exposure to Asia Pacific equities.It also said the actuarial valuation ending 31 March 2014 had been completed but left its scheme with a growing funding deficit.Despite seeing assets rise by over 25% between 2011 and 2014, the scheme, which remains open to new members and future accrual, saw liabilities increase by one third. It now hosts a funding deficit of £417m and a ratio of 91.3%, down from 96.1%.Lothian placed blame at the feet of falling bond yields – which have remained low in the UK as record-low interest rates remained and quantitative easing distorted the central bank’s issuance.“Since the 2014 actuarial valuation, investments have performed well and employer contributions have been greater than the cost of new benefits being accrued,” the fund said.“However, falls in bond yields as well as the improvements in longevity have caused the funding level to fall.”The LGPS fund also said its newly-established investment company had been created in February.Edinburgh City Council had agreed to allow the 11-strong in-house investment staff to be located in a wholly-owned separate entity, in a bid to remove investment staff from council pay restrictions.The city of Edinburgh hosts a number asset management firms with members of the board becoming increasinly concerned investment staff turnover was affecting the fund’s ability to implement its strategy.Lothian said it was finalising the structure of the entity, enabling it to develop the in-house team further.In line with this, the fund said it would be submitting its proposal to the Financial Conduct Authority (FCA) by the end of April.Should the LGPS fund become FCA authorised, it would be allowed to make investment decisions without consultancy approval, as well as manage investments for third parties.“Regulated activities will be limited to those required in operating the pension funds; such as certain derivative use, developing investment strategies for employer(s) and informal investment collaborations with other pension funds,” the fund said.As part of its investment strategy change, Lothian said it had saved £200,000 in transition costs by running the exercise via its in-house team, using futures contracts to manage market exposure risk.“The market conditions at the time were favourable and resulted in a much better outcome than expected in terms of market impact,” it said.
The scheme also made a €72m profit after exchanging swaps with an expensive coupon for instruments with a cheaper coupon, an adjustment made when the market value of the swaps exceeded 5% of its balance sheet.However, the Ahold Pensioenfonds lost 4.5% on its 78% currency hedge through forward contracts.It reported a 12.6% return for its overall equity portfolio, with a 28.3% return on US holdings.European and emerging market stocks returned 7.3% and 13.1%, respectively.Fixed income generated 15.3% in total, while euro-denominated government bonds and global credit returned 13.7% and 18.3%, respectively.Last year, the pension fund put in place a dynamic hedge of 40-60% of the interest risk on its US dollar-denominated corporate bonds through listed interest forward contracts.However, because US interest rates fell, it incurred a loss of 0.8 percentage points.According to Erik van den Heuvel, the scheme’s director, the pension fund applied a dynamic investment policy based on a Risk Grid, which linked the ratio between equity and fixed income portfolios to the scheme’s coverage ratio.As a consequence, equity investments are to be reduced if funding falls below 130%, or if it increases to more than 150%.The annual report also showed that property investments returned 16.2%, with listed real estate delivering 31.6% and non-listed property 4.3%.Private equity returned 17%.The pension fund attributed a 8.3% loss on commodities to falling oil and metal prices.The scheme spent €70 per participant on administration and 0.37% and 0.12% of its assets under management for asset management and transactions, respectively.It said it was trying to cut costs by increasing efficiency through merging portfolios, reducing the number of asset managers and increasing passive investments.“We are also assessing how we can reduce costs by increasing the minimal scale of portfolios, as well as by reducing our diversification,” said Van den Heuvel.Without the additional costs for increased transparency on its 1.7% private equity holdings and its interest hedge on credit, combined management costs would have dropped by 0.07% percentage points to 43 basis points last year, the pension fund said. The €4bn pension fund of retailer Ahold returned 24.1% over the course of 2014 but saw its funding increase by less than 1%.Despite a 0.7% increase in funding to 116.7%, the scheme said it still planned to grant all participants full indexation.In its annual report, the pension fund cited a steep increase in liabilities due to falling interest rates.However, because it hedged 55% of its interest risk through swaps, it achieved a positive return of 14.5%.
Credit and hedge-fund holdings took the brunt of the return portfolio’s downscaling; in August, the scheme offloaded its remaining 3.6% hedge-fund allocation.The pension fund, which closed to new entrants in 2013, said matching and return portfolios of 75% and 25%, respectively, would produce sufficient returns to meet its target of inflation-proof pensions.The annual report also indicates that the pension fund postponed the creation of separate schemes for staff of ING Bank and asset manager/insurer NN Group.In 2013, ING, its parent company, was divided into the two new companies, whose staff have since accrued new pension rights in separate collective defined contribution schemes.The ‘old’ Pensioenfonds ING still offers defined benefit arrangements.The ING scheme, which returned 32.4% in 2014, reported a 1.2% return last year.It attributed the performance chiefly to the 10% gain on its return portfolio, noting that developed-market equities – and low-volatility equities in Europe in particular – had produced the best results.Private-equity holdings returned 20.4%, on the back of “a large number of IPOs as a result of high valuations”, while real estate returned 18.3%, with non-listed holdings returning 19.1%.As a result of rising interest rates last year, the scheme incurred a 1.7% loss on its matching portfolio of government bonds, credit and swaps.Credit holdings produced a more or less neutral result, “as the direct return was offset by the depreciation of loans caused by rising interest rates”.It reported administration costs of €265 per participant and said it spent 0.35% and 0.03%, respectively, on asset management and transactions. ING’s €25bn pension fund – one of the better-performing pension funds in the Netherlands, boasting a coverage ratio of nearly 140% – is planning to ramp up its inflation-risk hedge to protect the pensions of its 71,500 participants.According to its 2015 annual report, over the next four years, it plans to increase its inflation cover from 8.5% of real liabilities to 25%.As part of the strategy shift, it will also increase its matching portfolio allocation from 70% to 75%, at the expense of its return holdings.Last year, the pension fund reduced the interest hedge of swaps, bonds and loans from 92.5% to 85% and re-invested the proceeds in German, French, Belgian and US inflation-linked bonds.
Denmark’s ATP reported a 6.7% return from its investment portfolio for the first half of this year, representing a big leap from the meagre 0.4% it was able to generate in the first quarter after it was boosted by a one-off profit from its private equity investment in DONG Energy.In its interim report for January to June, the statutory pension fund said its total assets had now increased to DKK800bn (€107billion) from DKK705bn at the end of December.Carsten Stendevad, chief executive of ATP, said: “ATP’s investment portfolio posted a strong return in 2016, driven mainly by bonds, alternative investments and private equity, including the investment in DONG Energy.”In absolute terms, the return on the investment portfolio was DKK6.9bn, with DKK2.9bn of this relating to the return ATP made on its investment in the Danish energy firm. In the second quarter alone, ATP said returns from the investment portfolio stood at DKK6.4bn.DONG Energy’s June IPO yielded a big profit for ATP on the investment it initially made in 2014. The pension fund said it had made and aggregate return of around DKK4.0bn on the private equity investment, including the DKK2.9bn relating to 2016.ATP’s assets are divided between an investment portfolio which consists of the fund’s bonus reserves and is invested on an absolute return basis, and a much larger hedging portfolio composed on long-dated fixed-income instruments, designed to back the pension guarantees it makes.Despite the return it made in the first half, the investment portfolio shrank by the end of the first half to DKK96.9bn from DKK101.2bn at the end of December, largely because DKK9.9bn was transferred from the portfolio to the hedging portfolio in provisions for a greater-than-expected increase in life expectancy.The transfer is almost three times as much as the DKK3.7bn of extra provisioning the pension fund made during the whole of 2015 as part of its life expectancy update.The hedging portfolio grew to DKK703.2bn at the end of June from DKK604.0bn at the end of December.This was despite the portfolio of long-term hedging strategies used to protect against inflation increases, which consists of swaptions, suffering the biggest loss in the investment portfolio in the first half, losing DKK3.5bn. ATP said this was due to long-dated European swap rates having finished the reporting period lower than they had started it.In the first half of 2015, ATP made a 12% return on its investment portfolio, and went on to produce a 17.2% return for the full year 2015.In the first half, the hedging portfolio generated a return of DKK92.3bn after tax, while due to falling interest rates in the period, ATP’s provisions for its guaranteed pensions, rose by DKK93bn, the pension fund said.The result of the hedging portfolio in total, therefore, was a loss of DKK700m, ATP said, adding that this was “considered satisfactory” given that it was less than 0.1% of the guaranteed pensions.Within the investment portfolio, bonds generated a return of DKK3.9bn, listed Danish equities made a loss of DKK100m, listed international equities lost DKK700m, and private equity produced a return of DKK3.0bn.Credit investments returned DKK1.5bn, ATP said.
The UK’s Financial Conduct Authority (FCA) should take into account the role of trustees as it conducts its asset management review, according to the chief executive of HSBC’s pension fund.Speaking at the IPE Conference in Berlin today, Elizabeth Renshaw-Ames welcomed the regulator’s recent wide-ranging review of the asset management sector but called for real solutions for pension-scheme governance challenges when the FCA completes its work next year.Renshaw-Ames said: “My personal belief is that good governance of pension schemes will deliver better outcomes for members. The UK occupational pension system is fraught with challenges, many of which arise out of an increase of lay people as members of trustee boards.”Such trustees – typically employee or pensioner members – have ultimate responsibility for the governance of pension schemes, including some legal responsibilities. For smaller pensions without internal expertise, they will often make asset allocation and manager selection decisions with the aid of consultants.The lack of support for many trustees means “the asset management industry that services these clients is therefore a relative beneficiary of some of these governance challenges”, Renshaw-Ames argued.She called for regulators to “grasp the nettle and come up with solutions to improve governance of schemes” to help trustees hold asset managers to account.The FCA’s interim review, published earlier this month, proposed consolidation among UK pension funds to increase their resources and access benefits of scale.The regulator also highlighted governance shortfalls within asset management companies, which meant investors found it difficult to judge value for money.It also criticised a lack of transparency and competition among investment consultants.
NEST, the defined contribution vehicle set up to support auto-enrolment, will not be permitted to develop post-retirement products, the government has announced.The government last year consulted on potential new powers for NEST, but in a document published this week the Department for Work and Pensions (DWP) said it was satisfied that there was sufficient innovation in the industry to cater for consumer demand for post-retirement products.In 2015 the UK brought in new rules allowing consumers more flexibility with their defined contribution (DC) savings when they retire. Providers are working to come up with investment and drawdown products as alternatives to annuities.“Given the reassurance we received from the industry their intention to innovate, government does not propose that NEST should begin to offer additional decumulation services at this time,” the DWP said. “However, we will continue to monitor the market, including reviewing the conclusions of the FCA’s retirement outcomes review later this year. If it is not clear that the market is developing in line with the needs of NEST members, we will consider the most appropriate response, including enabling NEST to offer a fuller range of solutions in the future.” NEST’s own response to the government’s consultation set out a “blueprint” for a core retirement product. The DWP said it would encourage NEST to keep working on this with other industry players to aid product innovation.Frances O’Grady, general secretary of the Trades Union Congress, criticised the DWP’s decision, saying it had “caved in to vested interests”.“Pension savers have been ill-served by the traditional pensions industry for decades, being shoe-horned into inappropriate products, often with high fees that have left them worse off,” she said. “The announcement that ministers won’t allow NEST to help savers who need it means the risk that government just stands by while more workers reaching retirement fall victim to rip-off products and outright scams.”NEST is expected to be one of the biggest pension schemes in the UK by membership when the auto-enrolment process is complete in 2018, the government said.Meanwhile, the Work and Pensions Committee has published details of the Pensions Regulator’s (TPR) feedback to the committee’s review of defined benefit provision.The review concluded last year with the publication of a document calling for TPR to have more powers – including the ability to apply “nuclear deterrent” fines onto sponsors if they do not fund their schemes properly.TPR’s response had not been published previously, but the committee of members of the UK’s lower house made it public yesterday after the regulator earlier this week announced a £363m settlement for the BHS pension schemes.TPR told the committee that it was prioritising speeding up its operations, as well as focusing more effort on how it monitors different types and sizes of pension schemes.In a letter to the committee, TPR chief executive Lesley Titcomb said: “We note the Committee’s observations about the need for TPR to be nimbler. We can assure the committee that this is a key focus of our ‘TPR Future’ work and its review of our regulatory approach. However, we are not waiting for the outcome of that work and have already taken a number of actions to speed up elements of our work in relation to the funding of DB schemes and the use of our powers more generally. This will remain a priority for the foreseeable future.”In a statement yesterday, Frank Field, chair of the committee, praised TPR’s work on BHS but emphasised that “had TPR been equipped and prepared to take a more active interest in BHS, earlier, we need never have gone down this path”.“What is vital now is that the regulator follows up these promises of change with firm and sustained action,” he added. “We will be monitoring progress closely.”