In absolute terms, AP2 made a net result for 2014 of SEK34.3bn (€3.6bn), up from SEK30.1bn.The 13.3% return on the total portfolio excludes commission costs and operating expenses, which amounted to around two percentage points of last year’s return.Assets under management grew to SEK293.9bn in 2014 from SEK264.7bn, and rose further in January this year to pass the SEK300bn mark, the pension fund said.Halvarsson said all asset classes had contributed to 2014’s “strong results”. “Our active portfolio management has generated an excess return of 0.5%, contributing SEK1.1bn to the national pension system,” she said.Net outflows to the national pension system were were SEK5.1bn in 2014, down from SEK6.9bn the year before.Having calculated the annual carbon footprint for its equities portfolio for the second time, AP2 said these investments represented 2.2m tonnes of carbon, corresponding to 17 tonnes for every million kronor invested.Read more about China and other emerging markets in IPE’s recent Special Report on the matter Sweden’s buffer fund AP2 plans to invest an additional $200m (€175.5m) in Chinese equities after getting permission from local authorities increase holdings in a region where it generated investment returns of 59%.Presenting its 2014 annual report, which revealed a rise in total return to 13.3% from 12.8% in 2013, AP2 said it had received permission last month to invest $200m in the equities listed on China’s domestic markets.It had already received its first permit for the same amount in 2013, and the decision comes after the fund had decided to boost its exposure to emerging market equity and debt over the course of 2014.Eva Halvarsson, chief executive of the fund, said: “It is […] highly positive that we have been granted a permit for further investment in listed Chinese equities, given the fact that this portfolio generated a return of no less than 59.1% in 2014.”
Jetta Klijnsma, state secretary for Social Affairs, is currently exploring the possibility of allowing at least part of pension rights to remain with the pension fund at retirement, allowing participants to keep benefiting from investment returns.According to Van Meerten – who is also a professor of international pensions law at Utrecht University – if this were to become an option, it should also be applicable to the PPI vehicle.“If the mandatory participation of companies in industry-wide pension funds were to be abolished, the option of placing pension rights with a PPI would become even more attractive,” he added.Van Meerten claimed that support for mandatory industry-wide pension funds was dwindling and that solidarity was losing its significance, as risk was shifted increasingly towards individual participants.He said the impact on PPIs would depend largely on the details of Klijnsma’s proposals, due later this year.Nearly a dozen PPIs have been launched since January 2011. PPIs are managed by insurers, banks, asset managers and pension providers, which work together in varying capacities within the vehicle. The PPI implements collective DC plans in the second pillar and accrues pension assets for its participants, but they do not carry any risk. Initially, the vehicle was established to enable the implementation of cross-border arrangements. The expected end of mandatory annuity purchases for defined contribution (DC) pension schemes at retirement in the Netherlands could be a “watershed moment” for the new PPI vehicle, according to pensions lawyer Hans van Meerten.Explaining the marked increase of assets under management at PPIs, Van Meerten noted that an increasing number of Dutch companies were closing their pension funds in favour of the low-cost vehicle. According to figures from regulator De Nederlandsche Bank (DNB), the combined AUM in PPIs increased by 226% to more than €1.2bn last year, following a 189% increase over the course of 2013.In the Netherlands, participants in a DC scheme must buy an annuity from an insurer at retirement date, but this requirement has come under increasing fire, in light of the continuing low-interest-rate environment.
Eastwood became vice-chancellor of the University of Birmingham in April 2009. Former posts include chief executive of the Higher Education Funding Council for England (HEFCE), vice-chancellor of the University of East Anglia (UEA) and chief executive of the Arts and Humanities Research Board.He was originally appointed by the Universities UK organisation, the representative group for USS sponsoring employers.Retired Harris joined the UK’s largest scheme as a director in April 1991, when he served as vice-chancellor of the University of Essex.He became deputy-chair of the £41.6bn (€57bn) pension fund in 2004, taking over as chairman two years later.In his final months as chair of the scheme, Harris oversaw a debate between the employers group and trade unions over the future of the scheme.The current proposals, set to be implemented by the USS board, include fully closing the final salary section of the DB fund and moving all members’ future accrual to career-average benefits.USS opened a career-average section for new employees in 2011, accounting for one-third of the scheme’s members.In addition to dropping final salary benefits for academics, the fund will become a hybrid scheme with defined contribution accrual for all entitlements above a £55,000 earnings cap. The Universities Superannuation Scheme (USS) has appointed a chairman after the retirement of Sir Martin Harris last week.Sir David Eastwood will now move from being a director on the trustee board of one of the UK’s largest defined benefit (DB) schemes to chairman.Harris stepped down at the end of March after nine years as chairman and 14 years on the board.Eastwood, vice-chancellor at the University of Birmingham, joined the USS board in 2007 and will now be replaced by Anton Muscatelli of the University of Glasgow.
The €800m Dutch pension fund of publishing company Reed Elsevier (SPEO) is to liquidate itself and join PGB, the €20bn scheme for the printing industry, at year-end. In a letter to its participants, the board said it took the decision following a survey on its future, which concluded that continuing as an independent scheme would not be in its best interests.It said the number of active participants in the relatively small scheme was decreasing, which would lead to falling income from contributions while costs continued to rise.According to the pension fund, the employer agreed with its central works council (COR) to introduce a new pension plan that the scheme could not implement properly. The company, which declined to reply to questions about the details of its new scheme, has been pushing for individual defined contribution arrangements since 2013.The Stichting Pensioenfonds Elsevier-Ondernemingen has 1,700 active participants, as well as an equal number of pensioners.The scheme’s board and the employer have been at loggerheads over future pension arrangements for some time.The employer – recently re-named the Relx Group – had indicated for several years that it wanted to get rid of its Dutch pension fund.SPEO’s proposals to introduce collective defined contribution arrangements were rejected by the company, which argued that this would not fit witin its human resources policy.Funding at the Elsevier scheme, 97.1% at the end of July, is lower than PGB’s coverage, which stood at 103.1% at August-end.However, according to the board, the employer has promised to plug the funding gap at the end of this year.Filling the current difference in coverage would require an additional contribution of €50m.The pension fund said it refrained from placing its pension plan with an insurer, “as this would be too expensive”. It added that it had also been in merger talks with another industry-wide scheme.However, it declined to reveal the pension fund’s name.
A regional court in the Netherlands has ruled that Aon is not obliged to cover the funding gap at its Dutch pension scheme if its ‘works council’ (OR) continues to resist plans to relocate the fund to Belgium. Local financial news daily Het Financieele Dagblad, citing the as-yet-unpublished verdict, said the Rotterdam court decided that covering funding shortfalls was not part of the actual pensions contract, on which the work council has the right of approval. Aon’s OR has opposed the company’s plan to move the pension fund to Belgium due to governance and regulation concerns. The company said it would stop meeting any funding gaps if the OR persisted in resisting the move. In Aon’s pension plan, contrary to many other company schemes in the Netherlands, an additional contribution is not mandatory but a part of the contract for provision.According to the FD, the court sided with Aon’s position that the contract for pensions provision was not subject to the OR’s right of approval. Aon’s OR could not be contacted for comment.René Mandos, chairman of the Aon scheme, previously argued that the Belgian option would be the most beneficial for the pension fund’s participants. The court ruling comes as Jetta Klijnsma, state secretary for Social Affairs, tables a Bill to grant ORs right of approval for cross-border moves. In such cases, pension arrangements would become subject to another supervisory framework, which would alter the pension plan, she said.The concept legislation focuses on the pension contract rather than the pensions provider.It will not, however, affect arrangements made as a result of negotiations between employers and workers, such as those for mandatory sector-wide schemes, Klijnsma said.
The European Commission should offer pension funds an indefinite exemption from clearing derivatives, the UK’s industry body has argued.According to the Pensions and Lifetime Savings Association (PLSA), pension funds should be offered more than time-limited exemption from central clearing, until such a point as the industry develops “satisfactory” ways to enable clearing.Pension funds are currently exempt from clearing until 2017, the second exemption offered under the European Market Infrastructure Regulation (EMIR). However, the wording of the law only allows for two exemptions, leading the PLSA to urge that the exemption be maintained indefinitely. The European Commission is currently working on a number of ways to facilitate central clearing for pension funds but has yet to set out a definite solution.The idea of an indefinite exemption is not shared by all pension funds, and the Dutch pension provider PGGM suggested recently that it was in favour of a “robust” central clearing framework that functioned well when markets were under stress.The PLSA’s call for an indefinite exemption comes after the UK Investment Association urged further action around clearing for pension funds.In its own response to the European Commission’s consultation on the current regulatory framework for financial services, which closed at the end of last month, the industry body for UK asset managers warned that if pension providers stopped using derivatives, they would end up increasing their risk exposure.The association’s submission noted that pension funds needed to liquidate holdings to meet the margin calls, as they were not traditionally invested in cash.“This would increase liquidity risk within the market, especially at times of stress, and could force pension funds to sell out of assets when asset prices are likely to be falling,” it said.The submission also questioned the risk associated with the requirement that only half of collateral for non-cleared trades be from a single sovereign.It argued that it left UK pension funds, and other non-euro member state investors, at a disadvantage, as they would be forced to employ collateral from a second currency.The association said the arrangement would leave investors exposed to increased currency risk.
The pervasive fear of nuclear radiation leaks is misguided, argues Joseph MariathasanUK prime minister Theresa May’s decision to delay a final decision on the Hinkley Point nuclear power station is another stumbling block for nuclear power. Yet it can be argued nuclear power represents an invaluable source of energy that has been misrepresented in the public perception.The Fukushima Daiichi radiation disaster in March 2011 epitomised the problems countries face in their attitudes to nuclear energy. The disaster led to all nuclear plants in Japan being shut down and 100,000 people being evacuated. There was worldwide news coverage and huge blame placed on the operator, TEPCO. Other nations such as Germany panicked and shut down their nuclear power plants, despite the absence of any problems. Subsequent German policy became to cease the use of nuclear energies.Yet, despite the considerable escape of radiation, ranked in the most serious category in the Fukushima Daiichi radiation disaster, there has not been a single death, nor even a single health casualty, attributable to the leak. This, as Oxford professor Wade Allison argues in his book, “Nuclear is for life – a cultural revolution”, calls for an explanation.  2005: Dose-effect relationships and estimation of the carcinogenic effects of low doses of ionising radiation. French National Academy of Medicine The key message is that society’s attitudes to acceptable levels of radiation are massively out of kilter with the actual reality of the risks and the behaviour of radiation damage on living things. Allison’s argument is that the current approach to the impact of radiation on life is based on a fallacy. This is the idea that the damage caused is a linear function of the exposure – if you double the exposure, the damage is doubled. Clearly, when exposures are large enough, people and animals die of radiation sickness. But what if the exposure is millions of times smaller, close to background levels of radiation or less?The current approach is the Linear No-Threshold (LNT) model of the relationship between radiation exposure and damage to health, which says a low dosage will cause commensurately less damage but still some damage. Allison argues this fallacy arose through the impact of Hermann Muller, an American geneticist. His work on the impact of X-rays on fruit flies led to the LNT model. But his lowest dose was 4,000 mGy – a dose high enough to have killed fire-fighters at Chernobyl. Other work has shown that the LNT model does not fit low-dose data for fruit flies.The LNT model leads to the conclusion that if millions of people are exposed to radiation, no matter how low a level, there is an expectation there will be a certain number of deaths arising directly from the radiation exposure, and the number will be a function of the dose. Current approaches to nuclear safety are based on the LNT model. This leads to the objective of ensuring radiation is As Low as Reasonably Achievable (ALARA).The adoption of the LNT and ALARA as the guiding principles of safety means radiation levels are set within a small fraction of naturally occurring levels. This is unrelated to any risk but comes from a political wish to say that the effects of radiation have been minimised. Allison argues that this analysis is fundamentally wrong because it misunderstands the impact of radiation on living things.Life, as Allison argues, evolved in the presence of radiation, and the framework of living things reflects the necessity throughout the evolution of life to be able to deal with low levels of radiation. The impact on life comes in two stages. The first is that radiation impacts the atoms and molecules of which living tissue is made. This damage is linearly proportional to the amount of radiation energy absorbed.The second stage is how that tissue responds to the trail of broken molecules if it is still alive. This is not at all linear. At high levels, it can destroy the ability of a cell to service itself, called cell death. If too many cells are killed, the entire organism may be at risk from Acute Radiation Syndrome (ARS). At low levels of radiation damage, most cells with damaged DNA are either repaired correctly by enzymes within hours or repaired with errors, such that they are no longer viable and fail to be reproduced.ARS can be fatal within a few weeks. Otherwise, recovery is complete usually, once the cell cycle has been re-established. However, a few of those that suffer double strand breaks (DSBs) are incorrectly repaired and survive. These mutations may persist in abnormal chromosomes, whose behaviour is kept in check by the immune system. It is predominantly the failure of the immune system that gives rise to cancer. The process is the same whether the error was initiated by radiation or another source of chemical oxidation.It is difficult to argue with Allison’s assertion that the treatment of radiation exposure has become confused as a result of political and historical events overwhelming the actual scientific evidence. There have been no deaths arising from radiation exposures in the Fukushima disaster, and, Allison argues, none is ever likely to arise. The public fear over anything relating to radiation levels has become so ingrained that a massive educational effort is required to change attitudes. In 2005, the French Academy of Medicine set out a full academic case for a complete change in the regulation of radiation. That has still to be acted on.If climate change arising from the burning of fossil fuels is the existential threat facing mankind, then ignoring the one source of power that can actually supply all of mankind’s energy needs out of misplaced fears would be the height of folly. You may not agree with Allison’s assertion that, even if there were another accident at a nuclear power plant, there would be no human radiation disaster. But that debate still needs to be conducted.Joseph Mariathasan is a contributing editor at IPE
“With the new benchmark indices, we wish to encourage our portfolio managers to place even greater emphasis on sustainable companies in their investment decisions,” Mursula said.Ilmarinen said it also had its own sustainability ratings, which it has integrated into its investment decision making.He said the pension fund would still be able to invest in companies outside the ESG index when they have a high enough sustainability rating.“Now the benchmark indices are also more in line with our own sustainability ratings and our criteria for responsible investments,” Mursula said.Ilmarinen emphasised that responsible investment was part of risk management and did not mean compromising on return targets.“A sustainable company also has access to better financing opportunities, which contributes to making it a profitable investment,” Mursula said.“A company that operates sustainably is a better investment in the long run, and, by investing responsibly, we will secure the best possible return for Finnish pensioners.”The company, which provides earnings-related pensions, said that, by adopting the new benchmarks, it aimed to be “a forerunner in responsible investments”.Mursula described the benchmark indices as a logical step for Ilmarinen after adopting sustainability ratings in 2015.“Many investors have already implemented indices and funds that focus on sustainability, which is a very good thing,” he said.“However, it is still quite rare for institutional investors to use ESG benchmark indices on this scale.” Ilmarinen, Finland’s second-largest pensions insurance company, says it is adopting sustainability benchmark indices in it investment operations on a “broad scale” and with the move aims to be a leader in responsible investment.Under the new approach, stock choices will be compared with the indices – based on sustainability ratings produced by MSCI – which Ilmarinen says include the most responsible companies in each sector and geographical area.Mikko Mursula, Ilmarinen’s CIO, said: “The performance of the portfolio managers will be compared against the benchmark index, and their incentives will be tied to it.”By adopting the new benchmark indices, Ilmarinen is taking sustainability a step further in its investment operations, he said.
Source: Getty ImagesThe Bank of England bought £435bn of Gilts during its QE programme“It’s a nice story for us, to have someone else to blame,” Waugh said. “But… what if we hadn’t had QE? Suppose we’d had disinflation. Disinflation is probably the worse scenario for our pension funds – we may have had rates where they are now without the growth on the asset side of the balance sheet.”In addition, Waugh hinted that QE had likely reduced the number of company bankruptcies and therefore the number of calls on the Pension Protection Fund (PPF), the lifeboat scheme for UK DB funds.He said: “How many would have [entered the PPF] if we’d had a disinflationary or depression scenario in the UK? Would the PPF have been to survive that scenario?”The RBS pension chief also challenged the perception that the Bank of England’s bond-buying programme had forced schemes to take on more risk.Citing PPF data on DB scheme allocation, he said fixed interest holdings had increased from 37% to 56% between 2009 and 2017, while index-linked investments had increased from 12% to 26% of total portfolios.“So QE has had the inverse effect,” Waugh said. “As rates have fallen our deficits have got larger, we’ve worried about our risk, we’ve had to hedge more, we’ve bought more Gilts, and we’ve forced the price down further, hence increasing our deficits.”PPF data indicated the combined deficit of UK private sector DB pension funds was £51bn at the end of January. Pension funds and economists have cast doubt on the UK central bank’s ability to reverse the extraordinary monetary policy measures brought in since 2009.Speakers at the Pensions and Lifetime Savings Association’s (PLSA) investment conference in Edinburgh last week told delegates that the Bank of England was unlikely to be able to follow the Federal Reserve’s expected path of multiple interest rate increases this year.Megan Greene, chief economist at Manulife Asset Management, said UK government bond markets had “too much priced in” and warned that economic indicators were beginning to turn away from conditions that supported a higher base interest rate.The Bank of England’s Monetary Policy Committee (MPC) is widely expected to raise its base interest rate from 0.5% at its next meeting in May. David Miles, Imperial CollegeSpeakers in Edinburgh also addressed quantitative easing (QE): the Bank of England has pumped £435bn (€490bn) into the economy through purchasing Gilts since 2009, with similar action taken by the European Central Bank and US Federal Reserve.David Miles, professor of financial economics at Imperial College Business School and a former member of the MPC, said the Bank’s balance sheet would “remain very big for rather a long time, and there won’t be in a meaningful sense a complete reversal of QE”.He highlighted that many UK banks had begun holding more reserves with the central bank since the global financial crisis – as much as £400bn, compared to roughly £25bn before the crisis.“That’s the new normal for them – they don’t want to go back to where they were in 2007,” Miles said. “If that’s true, and I suspect it might be, the Bank of England’s balance sheet will be much bigger virtually permanently.“What assets does the Bank want to hold against sterling liabilities that pay interest, which is what reserves are? Answer: probably Gilts.” Megan Greene, chief economist, ManulifeManulife’s Greene added: “The Bank of England might stop buying things but probably won’t engage in quantitative tightening for years to come – if at all.“There is no actual economic or financial reason to shrink your balance sheet. The Fed is doing it for political reasons: they don’t want to be under the Treasury’s thumb.”Earlier in the conference, Marks & Spencer pension fund CIO Simon Lee highlighted interest rate increases as among the main risks faced by schemes in the near future.While this could help reduce defined benefit (DB) liabilities, the impact on other elements of funding could be more problematic, Lee said.“If you’ve got a bank as a sponsor a little bit of a rise in rates is probably slightly helpful,” he said. “Interest margins could expand, and a steepening yield curve could help with maturity transformation, which [could] create profitability.“But if you’ve got a retailer as a sponsor it’s slightly more challenging because a rise in rates in a largely indebted nation tends to suppress consumer demand.”How QE really affected pension fundsDuring a panel debate on Thursday, RBS’ Waugh also argued that QE by central banks in response to the global financial crisis was not universally bad for pension funds.The CIO said the “counterfactual” outcome without central bank intervention would have been far worse. Robert Waugh, CIO at the Royal Bank of Scotland Pension Scheme, added: “Interest rates are no longer driven by free markets. We can’t just analyse the economics and come to a conclusion… and, let’s be honest, the pension industry has not been particularly good at predicting interest rates anyway.“Relying on higher long-term rates through quantitative tightening is not an answer to your pension fund questions.”The central bank cut its base interest rate to 0.5% in March 2009, the end of a series of cuts in response to the crisis that began in December 2007 when the rate was reduced from 5.75% to 5.5%. The MPC reduced the rate again in August 2016 in the wake of the UK’s vote to leave the European Union, to 0.25%, but this was reversed in November 2017.
Matti Leppälä, PensionsEuropeIn accordance with the notion that pension funds should only be subject to minimum harmonisation, it was left to member states to further specify the rules as part of their implementation of the legislation. The deadline is January 2019, although some countries have already drafted legislation.Now, however, the Commission has proposed to amend IORP II to empower it “to adopt delegated acts specifying the ‘prudent person’ rule with respect to the consideration of ESG risks and the inclusion of ESG factors in internal investment decisions and risk management processes”.Leppälä said the Commission’s plan “would fundamentally change the IORP II as adopted by the co-legislators”.“Risk management was specifically and deliberately left outside the competence of EIOPA and the European Commission to regulate it with delegated acts,” he said.He told IPE the association would need to examine the Commission’s proposal with its members, but that the view was generally that it should be up to member states to decide on the specifics of the rule.The Commission also referred to the need for delegated acts in IORP II to “provide for means to equally safeguard consumer protection and a level playing field between IORPs and other financial market participants”.The Commission’s legislative proposal on investors’ disclosure of sustainable investments and sustainability risks also concerns legislation covering asset managers and insurers.Leppälä said he disagreed with the Commission’s thinking about placing pension funds on a level playing field, saying that they did not operate across borders.“It gives the wrong perception of what IORPs are,” he said.PensionsEurope was otherwise positive about the Commission’s proposals.“[The] measures are an important step towards creating clarity on which investments can be considered environmentally sustainable,” said Leppälä in a statement. “Pension funds will be able to better understand and measure how green assets and funds are, which helps to improve their communication with members and beneficiaries.” A proposal from the European Commission on sustainable investing rules would subject European pension funds to an unprecedented level of prescriptiveness, according to PensionsEurope.The proposed regulation would allow the Commission to create Europe-wide requirements within the new EU pension fund legislation – the IORP II Directive – by way of a delegated act.Matti Leppälä, secretary general/CEO of PensionsEurope, said: “Pension funds have not yet been subject to such a level of prescriptiveness.“We have always believed national supervisors are best equipped to oversee how pension funds manage ESG risks, in order to take account of local governance structures and sustainability preferences.” Delegated acts allow the Commission to set out the details of a law instead of leaving more detailed regulation to individual member states. They were kept out of the final IORP II Directive by the European Parliament and the European Council following lobbying from occupational pension associations.The IORP II Directive, which came into force in January 2017, was generally seen as placing consideration of environmental, social and corporate governance (ESG) matters more firmly on pension funds’ agenda.It included provisions on ESG, such as requiring pension schemes to have a risk management system that covers, among other things, “environmental, social and governance risks relating to the investment portfolio and the management thereof”.