“Loans in general and private credit in particular, will play a more significant role and become a key component of Nordic institutional portfolios, in various shapes and forms,” he said.“Infrastructure and real estate, with its key income-generating attributes, is set to grow, as a natural substitute for fixed income.”The study found notable differences between the four Nordic countries in the ways that institutional investors allocated assets.Whereas Danish and Finnish investors are already heavily invested in credit, that has not generally been the case in Norway and Sweden.“For those investors in the traditional fixed income countries, who have been invested in various parts of the credit market for many years, the interest in alternatives and real assets appears to be growing,” Kirstein said in the report.But on the whole, there is very little interest among investors in extending the duration of nominal bond portfolios as a way of solving the problem of the low interest rate environment, it said.In Denmark and Finland, experienced fixed income investors are now moving towards private credit, the survey found.Interest is strongest in senior bank loans and real estate debt, it found, with nearly half of these investors saying they expected to increase allocations to private credit.Interest in real assets and alternatives as a way of increasing income is relatively high among the region’s institutional investors, according to the survey.They showed the greatest preference for real estate and private equity, while interest in infrastructure is more fragmented, Kirstein said.“Danish investors indicate the strongest preference for real estate and infrastructure, with more than half of Danish respondents expecting to increase their allocation to these asset classes,” the firm said in the report.Almost half of Swedish investors questioned expect to increase their allocation to real estate, it said.Although shifting allocations to equities as a way of improving yields is a less interesting strategy for survey participants, Kirstein said that, overall, the survey did suggest a high level of interest in equities.Investors are particularly keen to capture equity risk premia, while lowering volatility by using value and quality strategies, according to the study. Nordic institutional investors are more interested in making up for low interest rates by shifting to credit from high-grade bonds, and to alternatives and real assets from bonds than in turning to equities, according to a new study.Changing allocations to equities from bonds is only the third most interesting option for addressing the low interest rate environment, the survey among Nordic institutional investors on higher-yielding alternatives to high-grade fixed income found.The research was conducted by Kirstein Financial Market Research for JP Morgan Asset Management (JPMAM).François Xavier Douin, head of Nordic institutional business at JPMAM, said in the report that equities would continue to play a role in contributing to returns for Nordic institutional investors, with heavier emphasis on capturing risk premia defined in a more granular way.
It questioned more than 100 institutional investors around the world, including pension funds, endowments and foundations, with around $1trn (€730bn) in total assets under management.Its other key findings include:Chasing alpha is out of favour. Investors are placing greater emphasis on achieving absolute return targets, instead of outperforming a market benchmarkInvestors plan to increase their allocations to alternatives over the next five years, to improve diversification and potentially help with downside riskThere has been a re-awakening of risk awareness. The risk management procedures in place when the 2008 financial crises happened are widely perceived to have been insufficient, leading to a subsequent drive for more effective, holistic risk managementAnalytical tools based on risk/return analysis and performance attribution continue to be the most commonly used tools for modelling, analysing and monitoring investments – total plan/enterprise risk reporting tools are becoming popularInvestors want to avoid unintended bets – they are being driven towards solutions offering greater investment transparency to avoid unintended leverage and acquire a better understanding of underlying investmentsRespondents also said the market events surrounding the 2008 financial crises and subsequent recession represented their biggest motivator when it came to focusing on risk.More than 60% said increased management awareness of the growing field of risk management had caused their firm to institute risk management practices.Markowitz said: “The crisis of 2008 was different. So will be the next crisis. The moral is that one will never be able to put the portfolio-selection process on automatic.”He added: “The trusted quant team needs to constantly evaluate the current situation. It should also make sure higher management understands what assumptions are being made, how and by whom any exotic asset classes being used have been evaluated, and what the vulnerabilities are of the general approach that is being taken.“Furthermore, the push to integrate risk control at the enterprise level, rather than at the individual portfolio level, should be continued.”A similar study from BNY Mellon was carried out in 2005, again with input from Markowitz.In a significant shift from the previous results, respondents to the new survey rated “under-achieving overall return targets” and “underperforming versus liabilities” as their two most important risk policy measures.Between the two surveys, these two measures increased more than any other response within this category.According to Debra Baker, head of BNY Mellon’s global risk solutions group, risk management has been a puzzling proposition for many institutional investors.She said: “Just when they think most risks have been measured, managed and mitigated, new ones emerge and old ones evolve.“We see the need for a collective risk management framework that incorporates all areas of risks, their impact on each other and one’s overall investment programme.”She added: “Using some form of quantitative scoring across major risk categories may be the next frontier of risk management.”The survey may be downloaded here. More than four-fifths (80%) of institutional investors expect risk management to play an even greater role in their investment decision process in the future, according to a new study.The research, published by BNY Mellon in collaboration with Harry Markowitz, the Nobel Prize-winning economist, also found that, over the next five years, 73% of investors expect to spend more time on investment risk issues, while 68% expect to spend more time on operational risk issues.Yet only 25% of respondents have a chief risk officer.The report – New Frontiers of Risk: Revisiting the 360º Manager – examines a broad array of risk-related topics, including market risk, performance versus liabilities, credit risk management, alternative investments and best practices.
The UK regulator is to launch an investigation into seven pension schemes over mass irregularities in their member data, as the body moves forward with its push to rid the industry of poor data.The Pensions Regulator (TPR) has been working on its push for better member data in UK schemes since 2010, when it introduced strict requirements on quality.In June 2010, the requirements laid down gave schemes two and a half years to have 95% accuracy for past common data, which include member names, addresses and dates of birth, and 100% accuracy for any data collected from that point onwards.Since the deadline passed at the end of 2012, the regulator has been investigating the industry to see whether its requirements have been met. It began a thematic review in the middle of last year, which involved an in-depth investigation into 237 of the UK’s most vulnerable schemes, to test the extent of which they had adhered to its requirements.With its findings expected to be published later this month, the regulator announced it has launched investigations into seven of the schemes it reviewed.In its thematic review, the regulator said it found 201 examples of good member data, and gave strong recommendations to a further 29 schemes on how to improve.With the seven schemes, however, it said it encountered a lack of engagement in its review, examples of trustees “passing the buck” on data quality and a significant impact on members.However, it said it also found examples of schemes building in risk management tools for poor member data, and cost-effective ways of keeping member data up-to-date.In its full review findings, the regulator will lay out to the industry how well schemes have taken on board the strict requirements brought in.It also confirmed the thematic review undertaken in 2013 was not a one-off, with another procedure taking place later this year.
It will only consider actively managed products, with any index or multi-manager propositions not of interest.Allowing for a “suitable” tracking error, the portfolio is expected to outperform the chosen benchmark by at least 2% each year.Kirstein said that it was open to talking to new managers without an existing strategy or those that had yet to establish themselves with a track record in excess of 3 years.Once the consultant has completed its analysis, it will present a shortlist to the pension fund client.Interested parties have until 9 January to apply, with further information accessible through IPE-Quest.For any questions regarding the IPE-Quest search, please email email@example.com. For full information, please go to IPE-Quest. A Danish pension fund has tendered for a small cap equity manager, using IPE-Quest.According to search QN1418, which is being conducted by Kirstein Finans on behalf of the unnamed scheme, the fund is looking to invest in both US small and mid-cap companies.It said that the mandate should seek to outperform a relevant benchmark, but did not tie itself to any one specific index, with the scheme open to core, growth and value strategies.While it ruled out investing in pure large or mid cap products, Kirstein said that the fund would allow a small exposure to large caps within the portfolio.
Its triennial valuation revealed the deficit rising from £934m in 2011 to £2.8bn by 2014, leading to the new funding plan.On an IAS 19 basis, the group’s overall pension scheme deficits increase to £3.9bn from £2.6bn, despite what Tesco described as “strong asset performance”.Tesco said an 80 basis point fall in real corporate bond yields affected the discount rate, resulting in the deficit spike.In other news, Barnett Waddingham analysis of UK defined benefit schemes with more than £1bn in assets showed the use of alternative investment strategies has declined slightly, with the proportion of assets classed as ‘other’ moving to 18% from 22%.The ‘other’ category, the consultancy said, is normally classed as hedge funds or derivatives, or where allocations between Gilts, equities and property cannot be distinguished.Data was taken from public accounts for the accounting year ending October 2014.The survey also found the average deficit recovery plans was around £94m per annum.However, the companies ranged between £7m and £400m. Barnett Waddingham said it made little impact, with funding levels remaining stagnant at 94% from 2013.The large DB schemes paid an average levy to the Pension Protection Fund of £3.2m, around 0.03% of assets.Barnett Waddingham said investment fees were still the largest cost factor, with the average among the funds working out to 0.2%. Tesco has approved a new £270m (€375m) per annum deficit-reduction plan with its pension scheme after the triennial valuation revealed a nearly 200% rise in its deficit.The UK high-street supermarket, which revealed an overall £6.4bn annual loss after significant write-downs, has been suffering recently, restating accounts after reporting its quarterly profit to be £250m higher than realised.It now faces investigations from the UK’s Financial Reporting Council (FRC) and Serious Fraud Office (SFO), as well as a potential lawsuit from institutional investors over allegedly misleading financial statements.The £8.1bn Tesco Pension Scheme is now likely to be closed to future accrual after the supermarket announced a consultation earlier this year.
The commitment from GMPF comes as the England’s largest LGPS fund grows its infrastructure and real asset exposure.Councillor Kieran Quinn, chair of GMPF, said the fund was pleased to be able to support community projects in renewable energy.“ACP will play a key role in this regard as the pressure to diversify beyond carbon-based energy sources becomes even greater,” he added.The scheme, which pays pensions of council workers in Northwest England, last week announced it was part of a global consortium investing in agriculture via TIAA-CREF, as US asset manager.GMPF, alongside Swedish fund AP2 and fellow LGPS the Environment Agency Pension Fund (EAPF), will invest in farmland across North and South America and Australia.The fund also joined AP2 in TIAA-CREF’s timber investment fund, each committing $50m to a new company called Global Timber Resources.Strathclyde’s earlier £10m commitment to ACP came as part of the fund’s New Opportunities Portfolio (NOP) which allows the scheme to make experimental investments in real assets opportunities.The scheme has over £100m in the fund and invests in social infrastructure, residential real estate and real estate credit.Strathclyde chair, Councillor Paul Rooney, said it came as no surprise GMPF was now involved in the project.“There is clearly a strong and growing appetite among forward-thinking pension funds to diversify their portfolios into this exciting sector,” he said.“Manchester is one of those funds, so it is no surprise to be working with them and the Green Investment Bank to provide funding for innovative, community-focused infrastructure.” The Greater Manchester Pension Fund (GMPF) has backed a community renewable-power generation project with a £10m (€13.6m) commitment to Albion Community Power (ACP).The £13.2bn local government pension scheme (LGPS) has backed ACP which primarily invests in UK-wide projects developing community-scale renewable energy. GMPF joins the £14.4bn Strathclyde Pension Fund and the UK’s Green Investment Bank (GIB) as investors in the ACP fund.ACP has now raised 70% of its desired funding of £100m as it announced a further £3.3m investment in a hydro-electric scheme in the Scottish Highlands.
The Electricity Supply Pension Scheme (ESPS) has seen the longevity risk associated with 4,000 of its members passed to Abbey Life after one of its sponsors struck a £1bn (€1.2bn) de-risking deal.The transaction, agreed by Manweb Group, one of the £32bn industry-wide scheme’s sponsors, is structured as a tri-partite insurance policy between Electricity Pension Trustee Limited, Manweb and Abbey Life, which itself is a subsidiary of Deutsche Bank.The deal is the second in a year to pass on longevity risk with its pension provision, following a £2bn longevity swap for the ScottishPower Pension Scheme, also part of Manweb.Andrew Ward, head of longevity risk management at Mercer, which acted as lead adviser on the latest transaction, said the consultancy was “delighted” to have completed the first such de-risking deal for ESPS. “We worked closely with the trustees to achieve a successful outcome for all parties, thus allowing the group and ScottishPower to continue to reduce the long-term volatility of their pension costs in an efficient manner.”Ward said the transaction showed that such risk-management practices were still possible in the wake of the UK’s decision to leave the European Union, which he said had created much uncertainty.“Graham Wardle of BESTrustees, who acts as Manweb’s trustee chairman, noted that increases in life expectancy had seen UK liabilities increase in recent years,” he added. “By implementing this longevity swap, the group has taken a major step in removing this risk in the future.”The deal was announced days after Legal & General passed on some of the longevity risk associated with its bulk annuity business to Prudential Retirement Insurance and Annuity Company.In a statement, Prudential also referenced the vote to leave the EU, noting the ability to transfer risk was “unaffected by this momentous event”.The parties did not disclose the size of the transaction, which was the fourth reinsurance deal completed.
Ireland’s parliament has voted in favour of a bill forcing its sovereign wealth fund to divest from fossil fuel companies.On 26 January, the Daíl Éireann voted 90 to 53 to reject an amendment to the Fossil Fuel Divestment Bill 2016 that would have negated its primary objective, to reduce the €8bn Irish Strategic Investment Fund’s (ISIF) exposure to carbon-heavy companies.The bill instructs the National Treasury Management Agency (NTMA), which is responsible for the ISIF, to sell its holdings in fossil fuel companies “direct or indirect” within five years.Thomas Pringle, an independent politician who tabled the Fossil Fuel Divestment Bill, introduced the debate earlier this month with a strongly worded condemnation of the new US government’s stance on climate change. Speaking a day before US president Donald Trump’s inauguration, Pringle said: “We should not associate ourselves with Trump-era politics. His administration and its public display of affection for big oil is representative of the industry’s fading legacy and its last attempt to hold onto power.”He accused the oil industry of “buying political influence and deliberately concealing and manipulating the science of climate change” for more than a century.Divesting the ISIF from fossil fuels will help Ireland meet its emission reduction promises under last year’s Paris agreement on climate change, Pringle said.“Today offers an opportunity for us not only to catch up with the pace of climate change, but also lead on mitigating its effects,” he added.Earlier in discussions about the bill, Pringle claimed the ISIF lost €22m in 2015 due to the volatility of commodity prices, and “€100m in total over the past three years”.The amendment to Pringle’s bill was tabled by Simon Coveney, minister of state for the Department of Housing, Planning, Community, and Local Government.It argued that ISIF’s fossil fuel exposure was “limited”, and that it had already allocated €800m to energy – “the vast majority of which will be invested in renewables”.The ISIF’s current portfolio includes investments in a “waste to energy” project, an onshore windfarm, and forestry.Coveney further argued that, “because of its progressive record in these matters, ISIF’s investment options do not need to be underpinned in statute”.However, following last week’s vote the bill will now be assessed by the Irish parliament’s committee on finance, public expenditure, and reform.A spokesman for the ISIF said its holdings in fossil fuel companies included legacy assets purchased by its predecessor fund, the National Pensions Reserve Fund.“Such legacy investments are being sold off on a phased basis in line with ISIF’s new mandate to invest on a commercial basis to support economic activity and employment in Ireland,” the spokesman said.“The fund is committed to investing in the energy sector in a manner that is consistent with the state’s commitment to make the transition to a low carbon, climate resilient and sustainable economy,” he added.
A lack of honest feedback from consultants to trustees on governance could be harming pension scheme member outcomes, according to Chris Hogg, chief executive of the Royal Mail Pensions Trustees.Speaking at a conference of the UK pensions trade body in Edinburgh last week, Hogg said that effective governance can generate incremental returns – much-needed in the prevailing low return environment – but in a survey carried out by the Royal Mail scheme, well over 50% of consultant and professional trustees ranked a scheme’s governance capabilities as “acceptably equipped” or below.“So there’s clearly some work to be done,” said Hogg.The survey also showed that although professional trustees and consultants tend to think that giving honest feedback is important to highly important, this feedback is uncommon. He concluded that “member benefits are at stake so we need to try to find a way” to address the issue.Paul Richards, director of strategy at consultancy firm Redington, shared the stage with Hogg and said “cold hard economics” was one of the factors behind consultants’ reluctance to provide frank feedback to clients.In a survey of consultants, 67% said the risk to the client relationship could stop them giving “critical/developmental” feedback, while 69% worried giving this type of feedback would negatively impact their ability to work effectively with the client.However, according to Redington, 86% of those surveyed said establishing that critical feedback would not affect the relationship between trustees and consultants would increase chances of doing this effectively.Richards said frameworks were needed to “build feedback into the system” and help overcome some of the concerns that were holding back consultants from giving more critical feedback.During the panel he presented an approach called “radical candour” that consultants could adopt. He said it was important that consultants introduce their chosen framework “intelligently” and that they seek permission to do so.The trustees, meanwhile, should find someone they consider a “critical friend” or a trusted adviser and also find and introduce a framework for feedback with which they feel comfortable. Research conducted on trustees and consultants found that 95% agreed that “honest dialogue” was essential for identifying and rectifying areas of weakness in scheme governance. However, nearly one in five respondents had seen no instances of consultants delivering developmental feedback, while nearly six in 10 (58%) had observed this on between just 1% and 20% of schemes they worked on.#*#*Show Fullscreen*#*# Hogg said the survey results “quite powerful” – if not necessarily surprising.The lack of feedback represented “wasted value” and suggested that “there’s a lever that perhaps isn’t being pulled in a way that could be,” he said.#*#*Show Fullscreen*#*#
ABP’s holdings in fossil fuel companies increased by €2bn to €10.4bn last year, despite the scheme’s pledge to reduce its carbon footprint by 25% by 2020, a pressure group has claimed.Responding to ABP’s annual report on responsible investment, ABPfossilfree – which includes participants of the Dutch civil service scheme – suggested that the increase could not be attributed just to rising equity markets.It said that it had based its conclusions on ABP’s quarterly statement of its holdings of equity, bonds and convertible bonds.The action group said the value of equity and convertibles in coal-related firms dropped by €77m, but ABP’s credit investments in the sector rose €304m in the same period. It also argued that 7 percentage points of the 31% growth of the scheme’s stakes in oil and gas could not be explained by rising valuations.ABPfossilfree further noted that the approximately 80 coal-related companies still in ABP’s portfolio had plans for the construction of coal-fired power stations with a combined capacity of more than 50 times the that of coal-fired plants in the Netherlands.The €389bn civil service scheme still had a €4bn stake in the coal industry, the campaign group said. It argued that the coal sector was “the largest climate polluter”.“By remaining invested in the fossil fuel sector, new coal mines, pipelines and power stations will be added and subsequently kept in use for decades,” said Chris Roorda of the pressure group. “Large energy companies pay lobbyists enormous amounts to block climate policy and spread disinformation. If we keep investing in fossil fuels, we will never get rid of them.”In a response to the pressure group’s claim, Asha Khoenkhoen, spokeswoman for ABP, indicated that it was likely that the scheme’s stake in fossil fuel companies had increased last year thanks to improving equity markets.However, she could neither confirm nor deny whether the pension fund had also made new investments. “Based on the currently available data we can’t untangle this,” she said. ABP’s investments are managed by APG.Khoenkhoen emphasised that ABP’s policy was focused on reducing carbon emissions across its entire investment portfolio, including property.She added that the pension fund had only gained a clear view on carbon emissions halfway through last year, when APG introduced a tool for measuring carbon output from the portfolio.“Only then could we start steering properly, and therefore it is possible that our investments at 2016-end were not reduced relative to the previous year,” Khoenkhoen said. “Because of our scale, we are a kind of supertanker which responds slowly to input. Moreover, we are still refining the measurement tool for emissions.”She added that ABP’s primary goal was not to divest from fossil fuel firms, “as other players would step [in] after we have left”. Instead, the pension fund prefers to reduce its carbon emissions through engagement Khoenkhoen said: “After all, it is the fossil fuel companies that must make the energy transition work.”In its sustainability report, the pension fund said it had reduced annual carbon emissions from its equity portfolio by 7m tonnes last year, and that it had increased its stake in renewable energy by one-quarter to €2.8bn through investments in local wind farms and solar panels in India and the US.It also claimed to have decreased its carbon footprint by 16% in 2016 relative to 2014, thanks to energy firms RWE and Eon largely divesting their fossil fuel subsidiaries, as well as significantly reducing CO2 emissions from its property holdings.Since the pension fund announced that it would double its target investments against social and environmental problems to €58bn in 2020, it has raised its actual allocation to €41bn.New investments largely comprised green bond and sustainable property, ABP said, and it recently added investments in mortgages for energy-efficient residential property in the Netherlands.ABP said it would keep engaging with companies on environmental, social, and governance issues and said it was fleshing out an “inclusion policy”, aimed at assessing and selecting the most sustainable firms.In an interview with financial news daily Het Financieele Dagblad, Corien Wortmann-Kool, ABP’s chair, recently said the pension fund would hold back on exclusion, “as returns remain key and we want to keep our investment universe as large as possible”.Recently, ABP was ranked in fifth place in the Global Climate 500 Index of the Asset Owners Disclosure Project (AODP).