However, given the fund’s efforts to address climate change and carbon risk, Mansley said, companies in the coal and oil sector are unlikely to fit into the EAPF’s definition of a sustainable equity portfolio.He said: “Essentially, we are looking for people who understand the whole sustainability space and the risks. In the energy and resources sectors, we expect managers to be very selective at best when it comes to creating this portfolio.”The allocation is likely to be around £100m.The EAPF would like to see the following three questions answered by asset managers – referring to learning, the scope of sustainable investment and integration with financial analysis:Firstly, what lessons have you learned from key events of the recent past and how has your investment process evolved? Three key events stand out, but asset managers may wish to consider others:The Financial Crisis itself (many sustainable investors did not really appreciate the risks of the unsustainable growth in lending pre-crash)The Renewables Crash (growth has been there, but not profits or share-price performance)BP and the Macondo oil spill (the importance of reporting the right metrics)Secondly, what should the scope of sustainable investment be in this new world? How can we consider issues such as local economic growth, income inequality, tax avoidance, etc, as well as the established sustainability issues, such as environmental impact, climate change, labour standards and good governance? And what is the evidence that such a broader approach will deliver enhanced investment returns?Finally, on integrating sustainability with financial analysis, can you demonstrate its impact on the portfolio and the performance? Is it important to have a consistent process and underlying philosophy – across financial and non-financial criteria? Is it sensible to be somewhat pragmatic with ESG issues – moreso than with financial criteria? We have noted that ESG integration seems to have fared best when combined with a quality style bias – companies with good returns on assets/equity, low debt and strong cash flow. While a quality bias is better than many, is this inevitable or desirable? Can sustainability be successfully integrated with, for example, a value style, perhaps to identify value traps?More broadly, the EAPF is interested in understanding the process of learning itself – a key component of the best managers. How do they refresh their ideas and evolve their process more broadly? In particular, how do they avoid the perils of framing – believing the world must be the way your models say?The EAPF would welcome responses to any of these questions.In addition, managers that have interesting products/strategies are invited to send summary details of them to email@example.com. The EAPF has so far had 12-15 responses.The formal tender is expected to take place at the end of this year or early next year.The pension fund also has a strong sustainable component in its real asset portfolio, which includes property, infrastructure, forestry and agriculture, and is analysing the integration of sustainability in its bond space. The UK’s £2.2bn (€2.6bn) Environment Agency Active Pension Fund (EAPF) is looking for the sustainable equities “mandate of the future”.EAPF CIO Mark Mansley told IPE: “We have had an allocation to sustainable equities for eight years. The time has come to renew this allocation by reflecting the best industry practice, which is why we are surveying the market to identify opportunities. We want to have a dialogue with the various managers before going to a formal tender.”The preference is for global equities, which may or may not include emerging markets, and the focus of the fund is likely to be on well-managed companies able to contribute positively – in the broadest sense – to environmental and social challenges over the long term.Mansley said: “Essentially, they should have superior long-term growth prospects and lower risks. Simple screening or engagement-only products are not of interest.”
The report said: “[The LPFA should look] at the options for managed divestment and responsible reinvestment of its funds from, at least, those companies for which a significant proportion of their business consists of fossil fuels.”The 25-seat Assembly, which has 12 Labour members to the Conservative’s nine, said it hoped the LPFA would find reinvestments that delivered appropriate returns.However, the report did acknowledge analysis showing that, while a trend is building behind fossil fuel divestment, the value of assets held in stocks cannot all be accommodated in renewable energy or green projects. The conservative mayor of London, Boris Johnson, has also pushed back against the Assembly earlier this year, suggesting he had no control over the LPFA’s investments, and that it was not possible for the fund to offer a “fossil-fuel-free scheme”.The LPFA is accountable to the mayor, but the scheme’s governing board makes investment decisions.A spokesman for the LPFA said it took all recommendations into consideration when devising a strategy but that it still had a fiduciary duty to prioritise investment return.“Our key aim must be to ensure we can continue to pay pensions as they fall due,” he said.“Thus, the obligation of the LPFA board is to make investments that provide the appropriate risk/return trade-offs.“Screening out stocks for investment or divestment on ethical grounds only is in conflict with the fiduciary duty if the decision risks significant financial detriment to the fund.”The pressure on London’s local government pension scheme (LGPS) comes after its counterpart in Edinburgh rejected similar calls for divestment from its council.The £5.1bn Lothian Pension Fund said the cost of divestment was too high – as much as £2.5m from around £150m in fossil fuel investments.Other LGPS, such as the Environment Agency Pension Fund, a renewable energy advocate, have called for engagement over divesting, suggesting it would achieve better results.Norway’s sovereign wealth fund, however, was recently ordered to divest fossil fuel stocks, a decision that could lead to €6bn in equity sales. The London Assembly has recommended the London Pensions Fund Authority (LPFA) divest from coal as part of a wider push to protect the city’s economy from climate change.The Assembly, which forms part of the Greater London Authority (GLA) and scrutinises decisions made by the mayor, said the city’s leader should shift fossil fuel investments to more responsible positions.It called on the £3.8bn (€5.4bn) LPFA, the pensions body spun out of the GLA, to explain how it would support London’s plans to diversify from coal and invest in the “green economy”.In a report looking at the impact of climate change on London’s economy, the Assembly said governing bodies were doing too little to prepare for the impact of climate change.
LD, which manages a non-contributory scheme for Danes based on cost-of-living allowances for workers granted in 1980, said total assets grew to DKK56bn, up DKK1.6bn from the end of December last year.It said this was a level not seen since 2007. Danish pension fund LD has reported an overall return for January to June of DKK3bn (€402m), corresponding to a 5.7% return.This compares to 5% for the same period last year.In its interim report, LD said equities generated 16.2%, while combined corporate bond and sovereign bond portfolios returned 0.7%.Its main balanced fund, LD Vælger, which is used by 90.9% of scheme members, returned 4.9% in the six-month period, while the equities fund produced 26.7%.
AG Barr, the Scottish soft-drinks manufacturer, has completed a £35m (€40.1m) bulk annuity deal with Canada Life for its pension scheme, covering more than 50% of the scheme’s pensioner liabilities, and focuses on those who have recently retired.The deficit for the AG Barr (2008) Pension and Life Assurance Scheme doubled from £13.7m at the end of July 2015 to £25m a year later, with the scheme’s defined benefit section closed to future accruals from 1 May 2016.The buy-in was primarily funded with Gilts, with the trustees taking advantage of good pricing to optimise their low-risk assets.Lead adviser to the trustees was Hymans Robertson, with Shepherd and Wedderburn providing legal advice. James Mullins, partner and head of risk-transfer solutions at Hymans Robertson, said: “This deal is illustrative of the excellent value the market for pensioner buy-ins represents at the moment.“This is being driven by new entrants to the market such as Canada Life. It’s therefore highly likely we’ll see an increasing number of schemes go down this route, taking them a step closer to fully securing benefits.”In other news, the Merseyside Pension Fund (MPF), the pension scheme for public sector employees in Merseyside, northwest England, has reported an investment return of 1.2% on its £6.8bn portfolio for the year to 31 March, compared with its bespoke benchmark return of -0.4%.This takes average annualised returns to 6.5% for the three years, and 7.1% for the five years, to the same date.The previous year had seen a return of 12.6%, compared with 10.9% for the benchmark.During 2015-16, equities in all geographical regions except North America made negative returns, but other asset classes were all in positive territory, with property by far the best performer, returning around 10% (specific figures are not published).There was little change in asset allocation year on year.The strategic allocations are 30% in overseas equities, 23% in UK equities, 20% in alternatives, 19% in fixed interest and 8% in property.However, councillor Paul Doughty, chair of the fund’s pensions committee, said that, as anticipated in the previous year, volatility in financial markets was picking up, and the fund had been positioned cautiously.With the next triennial valuation to be made as at 31 March, the MPF’s estimated funding level is around 76%, the same as for the previous valuation.
German insurer Frankfurter Leben-Gruppe (Frankfurt Leben) has bought the €3bn multi-employer Pro bAV Pensionskasse from AXA Germany.No purchasing price was disclosed but both companies emphasised in press releases that the 260,000 contracts would be transferred without changes to guarantees or benefits.“Changes in the market and the regulatory framework have considerably slowed down new business and also led to shrinking membership numbers in the Pro bAV Pensionskassen,” AXA said in a statement.The company said it wanted to focus on other offerings in the occupational pension sector, such as direct insurance contracts and reinsurance. AXA also said the sale would help the Pro bAV Pensionskasse avoid having to raise costs for members.“Given its fundamentally different business model the Frankfurt Leben group can achieve a lower cost level for its clients,” AXA said.In Germany, Pensionskassen are insurance-based vehicles that are subject to similar regulations and maximum guarantee rates as insurers. The regulatory regime of Solvency II does not apply to them, however.In a statement, Frankfurt Leben confirmed it would offer “considerably reduced costs” and keep this level “over the long term”.The deal is subject to approval by BaFin, Germany’s financial regulator.The insurer was founded in 2015 to take over life insurance assets of German insurer Basler Versicherungen.Last year Frankfurt Leben bought another life insurance company, ARAG München, raising its assets to just over €5bn.So-called ‘run-off’ sales have led to an often heated political debate in Germany. Such deals involve insurers selling off life insurance contracts that have become more expensive and less attractive to handle in the low interest rate environment.The conservative CDU party had considered a legal provision obligating insurers to get clients’ consent before selling life insurance contracts.All debates have been put on hold during ongoing coalition talks as chancellor Angela Merkel attempts to form a new government.
Dutch pension funds aren’t sufficiently in control of data security and outsourcing risks, according to regulator De Nederlandsche Bank (DNB).In its newsletter it said that they must evaluate security more often, stop information leaks more quickly and be more alert regarding outsourcing risks, in particular the use of cloud storage.DNB checked an unspecified number of pension funds for 54 criteria.The supervisor noted that, compared to 2010, pension funds had improved on safety in programming software, increased the risk-awareness of their staff and improved co-operation on cybersecurity expertise. However, it emphasised that pension funds must increase their investments in the quality of IT risk management, the monitoring of outsourced tasks, the testing of adjustments and “patch management”.IT risk management needed more frequent evaluation and maintenance, DNB said, to prevent falling behind on “continuously changing cyber-risks”.DNB found that no more than 60% of software security patches were installed within two days of being issued, and that full cover was only reached in 60 days, which it deemed “too long”.The regulator announced an additional survey into data security, which would include an assessment of how quickly a pension fund was able to return to business as usual following a hack.Drawing on another survey, the watchdog noted that pension funds and insurers increasingly outsourced data storage to cloud-based providers without a sufficient view on data security, continuity or the quality of the outsourcing partner.It found that pension funds often weren’t aware that their data were stored in the cloud, which must be reported to DNB.The supervisor said its survey had been an eye-opener to the sector, quoting a participating institution as saying that it had changed from “subconsciously incapable to consciously incapable”.
Aon added in a statement that the transaction had been set up to enable follow-on deals for other sections of the AA scheme when pricing becomes attractive.Steve Delo, trustee chairman of the AA Pension Scheme, said: “We are very pleased to implement this key step in our de-risking plan and we are grateful for the excellent advisory support from Aon and Hogan Lovells. This produced a swift end-to-end conclusion to the deal and delivered highly competitive pricing.“This transaction has had a positive impact on the funding of the scheme while producing a reduction in risk.”Richard Priestley, executive director at Canada Life, added that his firm had seen “significant business” in recent months.At the end of August, UK recruitment company Hays bought a £271m insurance buy-in from Canada Life, covering the pensions of all its retired members as of 31 December 2017.This year has already seen bulk annuity transactions break records. Legal & General backed the UK’s biggest single buy-in transaction earlier this month with a £4.4bn deal with British Airways’ Airways Pension Scheme.As longevity data has shifted in DB schemes’ favour and funding levels have neared 100% on average according to several measures, more and more schemes have sought to crystallise gains with insurance contracts. At the same time, insurers and advisers have predicted much more activity to come in the months ahead. The AA UK Pension Scheme has completed a pension buy-in, purchasing a bulk annuity policy for around £351m (€395m) from Canada Life.The insurance covers all benefits payable to 2,510 pensioner and dependant members, the AA said in its interim financial report.The risk transfer to Canada Life took place on 23 August, the AA said, with the defined benefit (DB) obligation being about £47m less than the premium paid.The scheme – which had £2.3bn in assets at the end of January – was undertaking a “gradual de-risking programme”, according to its adviser Aon.
ESMA was planning negotiations with the FCA with the aim of having the agreements in place “sufficiently on time” before the end of March 2019, he said.Earlier in his speech Maijoor had emphasised the particular nature of the data that was exchanged on a daily basis between the UK and the rest of the EU under MiFID II. It was “extensive and granular” and “goes far beyond the data exchange we typically have with third countries”. UK clearing access must continueMaijoor also emphasised the importance of EU-based financial market participants continuing to be able to trade derivatives in the UK in the event of a no-deal Brexit.Central clearing of derivatives was generally considered to be the securities markets area entailing the highest stability risks in the event of ‘no deal’, he said, and EU clearing members and trading venues needed to continue to have access to central clearing houses (CCPs) in the UK.Maijoor said continued access was in line with proposed amendments to the current regulatory regime, for which he urged a “swift conclusion”.This, however, should be “complemented by a transitional provision allowing for the continued access to UK-based CCPs, subject to conditions ensuring that UK CCPs continue to comply with EMIR requirements and [regulators] continue to monitor this compliance”.The FCA has previously said as much as £26trn (€29trn) worth of derivatives contracts could be negatively affected by Brexit. The EU’s financial markets watchdog is working to ensure the bloc’s regulators have agreements in place with the UK’s Financial Conduct Authority (FCA) in the event of the UK leaving the EU without a withdrawal deal.Speaking at a conference in Athens yesterday, Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), said that, in case of a ‘no deal’ Brexit, national securities markets regulators and ESMA itself should have with their UK counterparts the same type of agreements – memoranda of understanding (MOU) – as they had with a large number of regulators in non-EU countries.“These MOUs are essential to meet our regulatory objectives and allow information exchange for effective supervision and enforcement, for example for market abuse cases,” said Maijoor.He added that the watchdog had already coordinated preparations for MOUs with regulators in the EU27 – the 27 member states that will comprise the EU upon the UK’s departure.
Brunel Pension Partnership and Merseyside Pension Fund have said they will vote in favour of the climate resolution proposed by Barclays, but also the one they have co-filed.In a statement, the local government pension scheme (LGPS) investors said the proposal put forward by Barclays’ board was “a significant step forward”, but that the shareholder resolution requisitioned by ShareAction, which they co-filed, would complement and strengthen the bank’s commitments.“While Barclays’ own resolution sets out an overarching 2050-ambition encompassing all financing across all sectors, the shareholder resolution ensures a greater focus on short and medium-term actions needed in order to achieve that goal,” they wrote.Owen Thorne, portfolio manager for monitoring and responsible investment at Merseyside, told IPE the pension funds wanted to pre-declare their voting intention and “to do so in a way that encourages other asset owners, especially LGPS, to vote in support of both climate resolutions ahead of the cut-off for submitting proxy voting instructions”. “The intention is to be sending the company the strongest message possible at the AGM of investor expectations on them to deliver a credible plan in November 2020 for moving the bank toward Paris alignment.”The shareholder resolution in question was led by campaign group ShareAction and co-filed by 11 institutional investors, including Brunel and Merseyside.It directs Barclays to set and disclose targets to phase out its financing of fossil fuel companies within the energy and power sector that are not aligned with the goals of the Paris climate agreement.Barclays followed the filing of the shareholder resolution with an announcement about its own proposal.As per that resolution, the bank would “set an ambition to become a net-zero bank by 2050”, covering Scopes 1, 2 and 3 emissions, and also disclose and implement a strategy, with targets, “to transition its provision of financial services across all sectors to align with the goals and timelines of the Paris Agreement”.According to Brunel and Merseyside, the shareholder resolution “gives a necessary steer to the implementation of the resolution put forward by Barclays’ board”.Barclays’ AGM is on 7 May. Because of the coronavirus situation, it is being held virtually. Brunel and Merseyside said investors would not be enabled to ask questions on the day, which led them to “question the transparency” of the planned AGM.
The COVID-19 pandemic will likely have an impact on the financial sustainability of the Italian pension system, in particular on the Istituto Nazionale di Previdenza Sociale (INPS), the main entity of the country’s public retirement system.Andrea Scaffidi, head of retirement for Italy at Willis Towers Watson, told IPE that the drop in contributions caused by the unemployed, salary cuts, and the increase in expenditure for INPS’ social security pay outs “will certainly generate an immediate effect on the financial stability of the institute, exposed to bigger expenses and lower income”.INPS may see its performance worsen with the need to finance its deficit.In general, Scaffidi added, the consequences of a macroeconomic crisis relate to the financial and the social sustainability of a pension system. Such effects usually progress slowly. INPS’ operating results in 2019 stood at -€7.2bn, with a deficit of €10.9bnFor pension funds, unemployment and wage cuts, among other things, have had and will certainly have effects on assets and net contribution flows.“This will imply a different investment capacity that has led and could lead to a drop in earning opportunities because of a lack of new resources to be used during a phase of reduction in the values of the securities, even if the main markets have had a ‘V shape’ performance” he said.Contributions in Casse di Previdenza, which are linked to salaries and income of self-employed enrolled in the Casse, will suffer a contraction and realistically the number of new members will be further impacted, Scaffidi said.INPS officials did not comment by time of publication.To read the digital edition of IPE’s latest magazine click here. This is true especially for the Italian system, which after its 2012 reform operates as a “contributory” system, Scaffidi added.INPS had already recorded negative results before the pandemic started to hit Italy hard in February and March of this year.Its operating results in 2019 stood at -€7.2bn, with a deficit of €10.9bn, and an allocation for legal reserves worth -€3.7bn, according to INPS’ latest financial statement.Paradoxically, according to Scaffidi, the financial situation at INPS will not in turn have an impact on pensioners.Reductions in pensions contributions during the crisis, however, will generate negative effects “pro-quota” on future benefits for pensioners, alongside a lack of, or limited, appreciation of the individual contributions based on lacklustre GDP growth.Contributions are reassessed annually according to the growth of GDP, and therefore of the country’s economy.“The financial sustainability of INPS is very worrying,” Scaffidi said, adding that aside from general taxation, INPS will need “a different plan for expenditures for pension or welfare benefits”.