Currently, the Financial Conduct Authority (FCA) regulates insurance DC provision while The Pensions Regulator (TPR) oversees trust-based schemes.From April 2015, insurance companies will also have to have independent governance oversight on their DC scheme offerings, making requirements more in line with trust law but leaving capital requirements solely on insurers.Mattingley sits on the board for both master trusts and insurance-based contract DC schemes but said the FCA’s claims that regulations were being aligned did not really compute.“Governance requirements for insurance companies could be positive for members and the industry as a whole, but the system needs to be balanced, and it is not,” he said.“If master trusts meet governance requirements to offer drawdown, it questions the need for capital reserves [on insurance companies].”However, he conceded that the most likely outcome was balanced regulations for both master trust and insurance offerings including governance and capital requirements.Mark Baker, legal director at law firm Pinsent Masons, said several insurance companies had set up master trusts in the wake of auto-enrolment, which could see them bypass capital requirements.“It might be we live with the situation rather than there being commercial reasons for the government to iron out the arbitrage,” he said.Baker agreed with Mattingley and said master trusts were likely to be treated more like retail insurance offerings, as the market began to use them more as such.“If the regulators do [regulate master trusts like retail products], it would capture this concern,” he said.Baker said TPR and the FCA – rather than merge regulations entirely – could change the way they operate, adding retail requirements to master trust products.“Trusts and contract products cannot ever really be aligned – they are just two different legal models, and there will also be a difference,” Baker added.“Over the longer term, the difference will be more clear and the idea of alignment less prominent.” The “regulatory arbitrage” between insurance company contract defined contribution (DC) schemes and master trusts is a recipe for market distortion, a senior industry figure has warned.Roger Mattingley, former president of the UK Society of Pension Professionals (SPP), said the fact insurance companies had to hold capital reserves against income-drawdown products – but that master trusts did not – skewed the competitive environment against the former.Income-drawdown solutions are expected to become more widely used from April 2015, when government plans to remove compulsory annuitisation are realised.However, Mattingley told IPE the lack of consistency of income-drawdown products was another example illustrating that the two parallel regulatory systems for DC providers were not aligned, even as the industry prepares for savers to be allowed full access to savings.
Sweden’s AMF is to invest in UK wind farms, committing to an offshore wind fund managed by the Green Investment Bank (GIB).The SEK550bn (€59.5bn) pension provider participated in the second close of the fund, which attracted £355m (€478m), bringing total fund assets to £818m.As IPE reported in June, the £15.7bn Strathclyde Pension Fund committed £50m to the second close.It is understood that the remaining £305m from the second close comes from AMF and a third, unnamed northern European investor. Shaun Kingsbury, chief executive at GIB and executive chairman of its fund management subsidiary, said he was delighted by the “calibre” of investors attracted to the offshore fund.He said Strathclyde and AMF were “leading the way” when it came to green infrastructure.The second close coincided with the acquisition of GIB’s 10% stake in the Gwynt y Môr wind farm in Liverpool Bay, increasing the number of wind farms held by the fund to three.Peder Hasselev, CIO at AMF, said the provider committed to the offshore wind fund as it proved a responsible investment, and good returns went “hand-in-hand”.Paul Rooney, councillor at Glasgow City Council and chair of the pension fund, noted that the scheme was following on from its involvement with other GIB projects with a “globally significant” investment in offshore wind.“We are confident it is one that will deliver not only sustainable and secure energy infrastructure for the future of our communities but a sustainable and secure future for our members who are saving for retirement,” he said.The offshore wind fund’s first close previously attracted commitments worth £463m from investors including UK local authority funds and a sovereign wealth fund, believed to be the Abu Dhabi Investment Authority.Earlier this year, the UK government announced a “staged privatisation” of GIB, which would see a majority stake in the currently state-owned bank sold by 2020.
While investors may have a high regard for the current administration, history cannot be forgotten. In the last 100 years, Argentina has defaulted many times – so much so that Argentinian economic history has become a subject in its own right. There is the “Argentine paradox”: how can a country that at one stage in the early 20th century was perhaps the richest in the world on a per capita basis experience such a deep and prolonged reversal?For Adrogue, the fundamental problem with Argentina is that it does not have a good institutional framework to deal with a commodity-driven economy. It became the richest country in the world after the UK had opened up global trade, and the revolution in refrigeration technology enabled the transportation of soft commodities such as meat. Argentina benefitted from being in the right place at the right time, but it did not necessarily have the right policies. Once that came to an end, the country began a long decline.Adrogue argues that one fundamental problem is that the population has a misplaced belief that the country is rich. The standard joke about Argentinians is that they are Italians who speak Spanish but think that they are English. But if everyone believes they are richer than they really are, the sum of total demand becomes larger than the supply available in the country. This gets reflected in large and persistent fiscal deficits, which never get adjusted and eventually lead to defaults.The current president, Mauricio Macri, may be successful for a time until the population changes its mind and realises that there are limits to the supply of resources and the population needs to share the resources that are available.For Adrogue, the bigger issue is not the type of government that Argentina has but the institutional framework that gives the president too much power and therefore takes away the requirement to negotiate with congress to reach compromises and agreements. Those who achieve power have no constraints, which leads to big swings in economic policy. The last swing, under Cristina Fernández de Kirchner, was to the left. Under Macri we are seeing a swing back. It is very difficult contain those swings because the president has so much power relative to congress.Argentina copied the US constitution but gave the president too much power. It started with the assumption that the underlying institutional structure was similar to the US – this was incorrect. In the US, the individual states were created prior to the formation of the country itself. In Argentina, the provinces were created after the country got its independence. This, combined with a commodity-based economy, made it very difficult for the population to separate good policies from luck. When commodity prices go up, no matter who is in charge, the population always perceives them to be a great government. When commodity prices are low, no matter how good the government is, the population perceives them to be bad. Barings is not buying the 100-year bond. The company likes to look at countries in which fiscal dynamics are somewhat independent of the ability to access credit – it doesn’t abandon or change its story on fiscal policy just because it has access to credit. This can cause problems and ultimately defaults.Argentina just issued $3bn (€2.6bn) of debt that the government said it didn’t need. For Barings, that is a bad sign. The market could end up having to discipline the government, when governments should have self-discipline. Argentina just issued a 100-year bond. Despite a history of defaults over the past 100 years, investors seem happy to try their luck for the next 100. Are they being wise or foolish?One factor in favour of investors is that the yield on the hard-currency bond when it was issued was 7.9%. If recoveries after defaults are expected to be 40%-50%, they will not have to wait many years to break even.Ricardo Adrogue, head of emerging market debt (EMD) at Barings, and himself an Argentinian, believes that the country should not have issued a 100-year bond.His rationale is quite simple: Argentina is rated B by credit agencies, while Barings would give the country a BB rating by their internal measures. If economic conditions are improving in the country such that Argentina would be able to issue debt at a lower coupon in five years’ time, why not just issue a five-year bond and then roll over the debt at a lower coupon?
Hanna Hiidenpalo, CIO, EloCIO Hanna Hiidenpalo said: “The return on equity investments fluctuated strongly during the year and turned to a steep decline at the end of the year. The main drivers were the tightening of monetary policy, increasing uncertainty over the development of economic growth, and trade disputes.”She said Elo had decreased its risk level during the year by divesting from emerging markets and shrinking the equity weighting in its portfolio, before the major equity market falls in the last quarter.Of Elo’s unlisted investments, private equity generated the strongest return at 16%, compared with 14.9% in 2017. Other unlisted equities returned 10.6% last year.Within real estate, direct investments generated a 5.7% return versus 7.4% in 2017, and investment funds returned 6.3%, compared with 8.2% the year before.The fund said the real estate investment market was active, but steep increases in prices in Finland over recent years had come to an end.Despite a slight dip in the size of the portfolio – from €23.1bn in 2017 to €22.6bn at the end of 2018 – Elo’s funding position held up, with solvency capital at 1.6 times the solvency limit at the end of the year, unchanged from 2017.VER CEO laments lack of hedging optionsFinland’s state pension fund posted 3.4% loss for 2018 – a year that the buffer fund’s chief said presented scant opportunities for hedging the portfolio.The investment loss represented a steep fall from the 6.6% gain the fund in 2017. Elo, the third largest of Finland’s pensions insurance companies, lost 1.4% on its investments last year but added significant new business.The €22.6bn provider described 2018 as “two-fold” because of its success in winning business. Premiums written for private-sector earnings-related pensions – Elo’s main category of pensions provision – increased to €3.24bn in 2018, from €3.1bn, the firm reported.Chief executive Satu Huber said: “The year was a success in terms of customer transfers. Customers who transferred to Elo from other pension insurance companies increased our premiums written by almost €36m.”Last year marked five years since Elo was created from the merger of LocalTapiola and Pension Fennia, and in each of these years it had increased market share, Huber said. Elo’s investment loss compared to a gain of 7.4% produced in 2017. The firm’s average five-year nominal return was 4.5%, it said.Huber said 2018 was a challenging year for investors, marked by increasing uncertainty in international investment markets.While listed equities lost 10.2%, Elo said that Finnish equities performed the best of any region, despite difficult markets. Timo Viherkenttä, CEO, VERChief executive Timo Viherkenttä said: “The opportunities for hedging the portfolio were poorer than normal because most returns on equities and fixed income instruments were negative.“Finally, a sharp fall in share prices in December swept away the returns for the year as the markets did not recover until early 2019.”In real terms, the fund said its investments made a loss of 4.5%, compared to a positive real return of 6% in 2017.According to Viherkenttä, returns on illiquid fund investments were strong but allocation within the portfolio was limited due to regulations governing VER’s activities.Liquid fixed income investments declined by 1.9% in 2018, compared to a 2% gain the year before, while listed equities fell by 7.4%, after an 11% gain in 2017.The fund, designed to balance out Finland’s central government pension expenditure, reported private equity as its highest returning asset class, generating 13.4%. Infrastructure funds and unlisted real estate investment trusts gained just over 11%.VER said it received €1.4bn in pension contributions last year, and transferred €1.9bn to the government budget. The Helsinki-based pension fund contributes 40% of the state’s annual pension expenditure to the budget every year.The fund’s total investments fell to €18.5bn by the end of last year, from €19.6bn at 2017’s close.
“Insurers or their general pension funds [APFs] are keen to implement arrangements for industry-wide schemes, but can’t compete because of mandatory participation,” said Maatman, who is also a professor of asset management and pension issues at Nijmegen’s Radboud University.Mandatory participation should remain, Maatman said, “because it is a valuable thing, as it ensures that most working people accrue a pension”.“But this goal could also be achieved by shifting the mandatory participation from the sector scheme to a pensions contract separate from the pension fund, enabling industry-wide pension funds, insurers and APFs to compete for a mandatory pension plan,” he explained. This would mean the social partners, when discussing pension arrangements, would have more options for mandatory pension arrangements, including insurance companies and APFs.The lawyer argued that, without the requirement to join a sector scheme, the industry-wide pension funds could implement other pension offerings, which could in turn make consolidation easier and cheaper.However, Maatman said he didn’t expect the social partners to prompt a major switch from pension funds to insurers once they had the option. “They won’t just leave if they are happy with their scheme,” he said. Maatman claimed that, under the current arrangements, “pension funds tend to put innovations on ice out of fear that the insurers will dispute them”.He cited arrangements for contributions outside of tax-friendly pension accrual, and the right for pension funds’ members to shop around for options for defined contribution savings at retirement.He also highlighted the fact that sector schemes currently cannot offer ring-fenced compartments for collective pensions accrual, as is the case for APFs, pension consolidation vehicles typically offered by insurance companies. Regulatory restrictions between industry-wide pension funds and insurers in the Netherlands should be abolished as they limit innovation, a pensions lawyer has argued.René Maatman, partner at law firm De Brauw Blackstone Westbroek, said the separation of competences between the two kinds of organisation would not be needed if the requirement for employers to participate in an industry-wide scheme was replaced with mandatory pension contracts.Currently, the roles of pension funds and insurers are legally separate in order to prevent mandatory industry-wide schemes competing with insurers on additional products and activities.In an interview with IPE’s Dutch sister publication Pensioen Pro, Maatman argued that participants would benefit if the legal boundaries were removed “as the separation was only meant to prevent conflicts between pension funds and insurers”.
The parent company of Google will hear investor calls for it to lead the way in the responsible development and use of artificial intelligence (AI) at its annual general meeting on Wednesday. Chow said: “The power Alphabet possesses has never been greater, and its responsibilities have never been heavier. Investors are looking to the company and its Board to display leadership in the responsible use of AI and the minimisation of societal risks.”Alphabet is one of the biggest technology companies in the world with a market cap of $753bn.Carbon pricing accord at Vatican summitMajor oil and gas companies, asset managers, and asset owners signed an accord on carbon pricing at the conclusion of a two-day gathering held in Vatican City last week.They agreed that governments should set “reliable and economically meaningful” carbon pricing with the input of the energy sector and investors.According to Vatican News, the Catholic church’s official news outlet, the Pope said carbon pricing was “essential if humanity is to use the resources of creation wisely”.The gathering also produced agreement on a statement about transparency in reporting climate risk, encouraging companies to work with investors on the “evolving” recommendations of the Task Force on Climate-related Financial Disclosures.Investor signatories included the chief executives of BNP Paribas Asset Management, Hermes Investment Management and State Street, as well as José Meijer, vice chair of major Dutch pension investor ABP, and Barbara Novick, co-founder and vice chairman of BlackRock.BP, Exxon and Shell were among the corporate signatories.Vanguard Group and Japan’s pension reserve fund, the Global Pension Investment Fund, put their names to the accord about climate risk transparency, but did not sign the statement about carbon pricing.A spokesperson for Vanguard said: “While Vanguard does not seek to prescribe an approach to carbon pricing, we commit to continued monitoring, engagement, and support for constructive and long-term oriented solutions to mitigate the risks of climate change to our clients’ investment success.”Investors still calling for better environmental reporting More investors have backed a campaign targeting several hundred companies in a bid to get them to change how they report on their environmental impact.This year 88 investors – including asset managers such as Candriam and asset owners such as the Environment Agency Pension Fund – are targeting 707 companies for not reporting certain information with regard to climate change, water security and deforestation.The companies targeted include ExxonMobil, BP, Chevron and Amazon. They are being asked to report the requested information through CDP, an non-governmental organisation that runs an environmental disclosure platform used by investors.CDP said this was the first year it had reported publicly on its disclosure campaign, which had been running for four years and had been successful in driving more transparency from companies.Last year 75 investors took part in the campaign, and 57 took part in 2017. More companies were targeted this year than in previous years: 707, compared with 622 in 2018 and 416 in 2017.Companies targeted in last year’s campaign were more than twice as likely to disclose to CDP than those that were not included in the campaign, according to CDP.Emily Kreps, global director of investor initiatives at CDP, said that although some companies might point to their sustainability reports as disclosure, investors wanted “transparency in the form of consistent, comparable and relevant metrics that are easy to access, compare and benchmark”.“And as for companies that say their investors do not care about these issues, this campaign demonstrates that is simply not the case,” she added. Christine Chow, director of Hermes EOS, Hermes Investment Management’s engagement arm, will address the meeting to call on the company to strengthen board oversight of its use of AI. Hermes EOS’ clients have more than $5.7bn (€5.1bn) invested in Alphabet.Hermes EOS also said it would ask Alphabet to “improve the internal governance structure overseeing AI technologies to harness employee/stakeholder ethical insights” and “regularly monitor and report on the human rights impact for content reviewers and provide sufficient support to staff and contractors”.
UK listed companies and large asset owners will be expected to report on climate change risk by 2022, the government announced today.The reporting should be in line with the recommendations made by the Financial Stability Board’s Taskforce on Climate-related Financial Disclosures (TCFD), and could become mandatory depending on the work of a joint task force of UK regulators.Unveiling its green finance strategy today, the government said the task force, which it would chair, would “examine the most effective way to approach disclosure, including the appropriateness of mandatory reporting”.According to the government’s strategy document, The Pensions Regulator (TPR) has jointly established an industry working group to produce guidance for pension schemes on “climate-related practices” across several areas, including disclosure, and expects to consult with the industry later this year “with a view to putting it on a statutory footing” during 2020 as part of the governance code. The government also indicated it would more formally integrate climate change into the mandate of the country’s regulators. In the case of TPR, for example, the government said it would be including climate-related financial issues in its annual budget, “with a view to embedding considerations in other documents when the opportunity arises”.In a joint statement, TPR and the country’s financial regulators said they welcomed the action being taken to ensure a coordinated approach to climate change.Charles Counsell, TPR’s chief executive, said: “Climate change is a risk to long-term sustainability pension trustees need to consider when setting and implementing investment strategy, while many schemes are also supported by employers whose financial positions and prospects for growth are dependent on current and future policies and developments in relation to climate change.”UK defined contribution schemes are already facing new reporting obligations relating to investment and climate change, and their arrangements with asset managers. Last year the Financial Conduct Authority proposed that asset managers and other financial services firms be required to report publicly on how they manage climate risks. Green Finance Institute and other initiatives Rhian-Mari Thomas, CEO, Green Finance InstituteAs part of its strategy the government also announced it would jointly fund a new Green Finance Institute with the City of London “to foster greater cooperation between the public and private sectors, create new opportunities for investors, and strengthen the UK’s reputation as a global hub for green finance”.Rhian-Mari Thomas, former head of green banking at Barclays, has been appointed as the institute’s first CEO. She said the new organisation was “thoroughly committed to identifying and unlocking barriers to the mobilisation of capital towards impactful, real-economy outcomes”.The government also announced an education-targeted initiative to ensure financial services-related qualifications included developing practitioners’ knowledge and understanding of green finance.It also said it was working with international partners “to catalyse market-led action on enhancing nature-related financial disclosures”, which would complement an upcoming global review of the economics of biodiversity by economist Partha Dasgupta.A missed opportunity?The government’s announcement was welcomed by several investors and observers, but they also cautioned it was insufficient or missed a potential opportunity. Steve Waygood, chief responsible investment officer at Aviva Investors, said the new requirements were “welcome first steps in beginning to fundamentally change corporate behaviour”.“That said, it is imperative for the government to ensure this results in meaningful action by businesses and the expectations are seen as a minimum threshold to surpass, rather than an aspirational goal,” he said.Ben Nelmes, head of public policy at the UK Sustainable Investment and Finance Association, described the strategy as “a good first step”, adding: “But as we enter the age of climate consequences, the strategy is just the beginning, and we look forward to working with the government to make all of finance sustainable.” Without a carbon price the UK is unlikely to achieve its ‘net zero’ ambition, says Impax CEO Ian SimmHowever, Mark Thomas, ESG specialist at asset management consultancy Alpha FMC, said the government’s strategy “misses a potential opportunity to really challenge organisations on their carbon emissions and to help them improve”.“It is clear there is still uncertainty around how organisations will disclose climate risks and consultation is needed, but it would be helpful for the government to define this important requirement with greater speed and clarity,” he said. “Companies and asset owners will be waiting for specific steps from either the task force or the institute on how to fund the significant cost estimates of delivering the initiatives that will lead to a low carbon economy.”Ian Simm, founder and chief executive of environmental solutions specialist Impax Asset Management, warned that the green finance strategy could prove ineffective in delivering on the government’s goal of reaching net zero carbon emissions by 2050.“Without the correct price on greenhouse gas emissions, particularly carbon dioxide, many of the investment decisions taken over the next decade could significantly undermine the UK’s ability to achieve its ‘net zero’ ambition,” he said. “Although the UK has shown international leadership in this area, for example through the Carbon Price Floor on energy generation, a much more comprehensive approach to carbon pricing is now required.”
I had the privilege of spending a few days in June in San Diego with Harry Markowitz, joint winner of the 1990 Nobel Prize for economics, founder of modern portfolio theory and still going strong at the age of 91. We had some great discussions on a number of subjects in the company of another innovator in finance, Yves Choueifaty, founder and CEO of TOBAM.One of the areas we touched upon was environmental, social and corporate governance (ESG) risks. Some might put it down to a generation gap, but Markowitz’s views on ESG seem to mirror those of another Nobel Laureate in economics, Milton Friedman, who argued in 1970 that companies’ sole responsibility was to maximise profits.However, Markowitz’s views are also similar to those voiced more recently by Henrique Schneider, an economist and vice president of the Swiss SME association SGV/USAM. It is an argument that advocates of ESG in investment – and I am certainly proud to be in that category – need to tackle head-on.Speaking last month at an industry event, Schneider said it was “dangerous to want to change the world with other people’s money”, and argued that Swiss Pensionskassen should integrate ESG principles only if it became legally binding for them to do so – which he claimed was unlikely. Nobel prize-winning economist Milton Friedman‘Physics envy’The Friedman viewpoint on ESG is attractive because it has the certainty and simplicity behind it akin to the laws of physics. Isaac Newton’s law of gravity states that any two objects exert a force on each other directly proportional to the product of their masses and inversely proportional to the square of the distance apart. That law can be verified experimentally, and even Albert Einstein’s general theory of relativity simplifies to Newton’s laws in less than extreme environments.Economics, however, is not an experimental science – despite the tendency for economists to experience “physics envy”. Economics ultimately is the study of human behaviour. It is messy, can change with time, and includes ideals such as altruism and long-term time horizons.Friedman’s views influenced generations of academics and corporate executives. If a company were to take ESG criteria into account, it would – according to Friedman’s analysis – be in direct conflict with the duties of company management.“What does it mean to say that the corporate executive has a ‘social responsibility’ in his capacity as businessman?” he wrote. “If this statement is not pure rhetoric, it must mean that he is to act in some way that is not in the interest of his employers.”He went on to question whether an executive should “make expenditures on reducing pollution beyond the amount that is in the best interests of the corporation or that is required by law in order to contribute to the social objective of improving the environment”.Friedman’s viewpoint would mean that, if the law did not keep pace with industrial activity, corporations would have a license to pollute since it was both within the law and in their interests not to spend money on reducing pollution. Shareholders would not lose, even if it cost society much more to remove that pollution and deal with its consequences.Celebrated economist Adam Smith is widely regarded as the father of capitalism. Yet even he, according to a biography by Jess Norman, believed that “markets are sustained not merely by incentives of gain or loss, but by laws, institutions, norms and identities, and without those things they cannot be adequately understood”.It is also worth bearing in mind that, as well as writing The Wealth of Nations with its famous concept of the “invisible hand” of self-interested traders directing the economy for the common good, he also wrote The Theory of Moral Sentiments. Morality, he stated, was natural and built into us as social beings. Smith saw no contradictions between his two major works and, by some accounts, regarded The Theory of Moral Sentiments as the more important of the two.Perhaps the proponents and opponents of incorporating ESG into decision making need, as Norman argues, the wisdom to follow the thoughts of Adam Smith in their full implications. The crucial debate with which ESG advocates must engage relates to whether or not the interests of shareholders should trump those of all other stakeholders in a company. That debate has not yet been resolved – and it needs to be. Friedman promoted the idea of the supremacy of shareholder value maximisation over all other objectives. In his 1970 article in the New York Times, he argued that “there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”. That philosophy is reflected in Harry Markowitz’s view that it is up to the state to set the legal framework under which companies should operate.Are Markowitz, Friedman and Schneider all wrong? This is a fundamental question for ESG advocates, and one that is too often swept under the carpet by investment firms claiming to incorporate ESG into their investment criteria – and I have yet to meet a firm that tells me it does not incorporate ESG into its investment process.
Gerard van Olphen, the chief executive officer of the €531bn Dutch pension asset manager APG, will leave his post in spring 2021.Van Olphen, who had been in charge of APG since 2016, had signed a new four-year contract as recently as February.In a video message to staff, Van Olphen said he used the coronavirus lockdown period to reflect on his work-life balance, concluding he wanted to give more attention to his private life.In addition to citing private reasons, Van Olphen said he sees APG’s new 2025 strategy as “a natural moment” to make way for a successor. As part of its new strategy, APG is now once more open to taking on new pension fund clients. Pieter Jongstra, chair of the supervisory board of APG Group, said he respected Van Olphen’s decision, adding he “would have liked to make longer use of the committed chairman of the board that Gerard has been for APG.”Van Olphen committed to staying on as CEO until spring to ensure a smooth succession. APG’s supervisory board has started the procedure to find a new CEO, hoping to announce the appointment of a successor by spring.Under Van Olphen’s leadership, APG sold off its insurance arm Loyalis and its administration platform Riskco which were no longer seen as core activities.APG also hailed Van Olphen as having presided over an improvement of the execution of the pension administration.To read the digital edition of IPE’s latest magazine click here.