He added that this would lead to further re-distributions of assets from active to retired members, as pension payouts that are already running cannot be adjusted in Switzerland.Zanella said the “mistake” had not revealed itself to date because good returns had helped fill pension funds’ buffers.But now, in a low interest and low-yield environment, he said there was “urgent need for action” – both from pension funds and politicians.A recent pension fund survey by Aon Hewitt found that most Swiss pension funds are still using so-called ‘period mortality tables’, where an unchanging increase in longevity is assumed.At the presentation of the study in Zurich, Marianne Frei, actuarial expert at the consultancy, said only a handful of schemes were using generation mortality tables, allowing for changes in longevity assumptions.Ljudmila Bertschi, pension fund expert at Towers Watson, urged pension funds to adjust their longevity assumptions to better reflect the make-up of their membership.She pointed out that highly qualified males, for example, which have higher pension benefits on average, also had a 20% lower mortality rate than the average Swiss male.Towers Watson argued that reducing the conversion rate and introducing flexible pension payouts would initially burden active members.It has therefore called on the government and pension funds to allow a more flexible approach to asset allocation, enabling a ‘dynamic risk budgeting’ that includes longevity risk.In addition, contributions to pension systems will have to increase to cover the gap, it said. Swiss pension funds are miscalculating their members’ longevity by almost 20 days a year, Towers Watson has warned.According to the consultancy’s calculations, Swiss longevity is increasing by 1.74 months per year – not 1.1 months, as most mortality tables currently estimate.This means a woman aged 65 in 2030, for example, might live for another 32.2 years instead of 25.3 years.Peter Zanella, head of retirement solutions at Towers Watson Zurich, said: “For the delta of almost seven years in this example, Pensionskassen do not have enough accrued assets.”
Over the long term (since 2000), both calculations show an average annualised return for Swiss Pensionskassen of approximately 2.6%.Meanwhile, Towers Watson reported an improvement in the quarterly reports of Swiss company pension plans regarding funding levels.Over the second quarter, the average funding level increased by 100 basis points to 100.7% as per end-June.However, the 103% mark reached at the beginning of the year was missed, the consultancy said.Peter Zanella, head of retirement solutions at Towers Watson Zurich, said cutting the conversion rate to 6%, part of the Altersvorsorge 2020 reform package, would give Pensionskassen more flexibility in tackling the “most pressing challenges of this century”, including increasing life expectancy and low interest rates.But he also stressed that the debates have “only just begun”, and that the final wording of the reform package was yet to be determined.“Until then, the possible effects on Pensionskassen will remain unclear,” he said. Swiss pension funds produced an average return of 4.9% over the first half of the year, according to estimates by pension fund association ASIP, while Credit Suisse, using a different sample, calculated a 4% average return in its Pensionskassenindex.One reason behind the differing figures is the allocation to foreign equities, considerably higher in ASIP’s sample, ranging between 12% and 41%. In the CS Index, the average was 17.5% as per year-end 2013.According to the pension fund association, there has been a “significant” shift towards foreign equities in recent years, from an 11% median allocation in December 2008 to 23% in June 2014.The average exposure to domestic equities in ASIP’s sample, 4-20%, is closer to the Credit Suisse average at 14%.
Bruton, who spent five years as the EU ambassador to the US, called on European governments to re-discover the sense of reciprocity – “that you give a little to get a little” – and accept measures that may be detrimental for one country but benefit the Union as a whole.“That sense of reciprocity is what kept the European Union going for 50 years, and I think it’s being lost, progressively, thanks to the national selfishness, the national egoism that has been generated by the financial crisis,” he said.Asked his view on the future of the EU, he predicted a two-tier system splitting those that were part of the single currencies, and those that had stayed outside the euro.“Integration in the euro-zone is not a choice at this stage, unless one is ready to contemplate the collapse of the euro,” Bruton said.The veteran politician, who was first elected to the Dáil aged 22 and stood down as a TD in 2004, took aim at a number of European governments, notably those of Angela Merkel and David Cameron.He said the UK Conservative Party’s desire for a single market without a single set of rules was “impossible” and lamented the loss to the EU were Britain to leave the Union.However, his scorn was reserved for the German government, which he said was least likely to implement structural reforms agreed at European level, despite insisting on them for other countries.Bruton questioned the German approach to fiscal policy and argued it was nonsensical to leave the next generation “a tidy balance sheet if [the] roads are full of potholes”.“That’s not a good legacy to leave your grandchildren,” he said.“Germany is not investing in infrastructure, and if it did, that would benefit Germans, but it’d also […] benefit all over Europe as well.“And it would preserve that great German achievement, the achievement for which the Germans, I think, deserve more credit than anyone else – that great achievement, the European Union.“But without reforms, it won’t happen.”Read all the coverage from the IPE Conference & Awards in Vienna, and watch video interviews with some of its speakers Selfish governments are putting the continued survival of the European Union at risk, Ireland’s former Taoiseach John Bruton has warned, calling for a return to the cooperative approach that initially defined it.Bruton, who headed a coalition government from 1994 to 1997, also said greater integration of the euro-zone was not a choice at this point in time, but inevitable to avoid the end of the single currency.Giving the keynote address at the IPE Conference & Awards in Vienna today, Bruton told delegates they needed to be aware of the risks of climate change and said the issue would impact pension funds’ investment portfolios.“To protect that investment, pension funds have an obligation to contribute to mitigating climate change,” he said, calling for all funds to measure the environmental impact of investments and how investment activity is helping to mitigate climate risks.
In its annual report, AP4 warned about the number of “unresolved” risks within the proposals put forward last month, including greater risk of standardisation of investments, short-sighted behaviour and political interference with the AP funds.The new system would see ownership of the assets transferred to a principal sitting within a newly created National Pension Fund Board, which, in turn, would set investment strategy by setting a reference portfolio to guide the funds.The Swedish government could potentially amend the reference portfolio if it felt the funds were taking on too much investment risk, opening the door to political interference.AP4 also warned that a single board could result in greater standardisation of investments and an approach that would be akin to passive management, “which in time could lead to the risk of lower returns and lower pensions”.The compromise agreement reached by Pensionsgruppen has previously been criticised by Mats Langensjö, who chaired the Buffer Fund Inquiry in 2012.Langensjö told IPE the reference portfolio risked undermining the system’s “strongest competitive advantage” to act as long-term investors.AP4 pointed to the buffer fund system’s most recent annual report, which praised the levels of diversification among the funds, and welcomed a shift to medium and long-term investment strategies.Over the past six months, AP4 said its real estate portfolio – accounting for 6% of assets – was the strongest performer, returning 13.7%.Its Swedish equity portfolio returned 11%, compared with a 4.7% return from non-domestic shares.It suffered a 0.7% loss from its fixed income portfolio, and saw its alternative asset portfolio return 3%.At the end of June, 58% of the fund’s portfolio was in listed equity, 34% in fixed income, 6% in real estate and 3% in alternatives.It achieved a real return of 6.2% over the last decade and 5% since 2001. Sweden’s AP4 has warned that reforming the country’s buffer funds will put the system at risk of political interference and could damage future returns.Managing director Mats Andersson, speaking out as his SEK310bn (€33.1bn) fund announced half-year returns of 6.1%, said it was “disappointing” to face reform proposals that would see the closure of private equity fund AP6 and a second, undecided buffer fund.Andersson said the proposals, yet to be subject to an impact assessment after they were agreed by the cross-party Pensionsgruppen, “disregarded the achievements of the current AP funds”.He added: “There is an obvious risk [the proposals] will destroy an effective organisation that has successfully grown the pension capital [to] SEK1.2trn.”
Denmark’s largest commercial pension provider PFA Pension reported a fall in investment returns for 2015, with the return on market-rate pensions coming in at 6.7% compared with 10% the year before but described them as “solid” given the financial market environment.In its 2015 annual report, PFA Pension reported that returns on its various market-rate pension profiles were between 5.3% and 12.3%, down from 9% to 12.8% in 2014.For its traditional with-profits pensions, the return adjusted by market value was 3.6% compared with the previous year’s 6.3%.Allan Polack, group chief executive at PFA, said: “In spite of the heavy fluctuations on the financial markets, we generated solid returns for our customers – even compared with the best on the market.” The company also managed to attract new corporate customers and raise pension payments, which will benefit all customers by way of economies of scale and reduced unit costs, he said.Total contributions climbed to DKK28.3bn (€3.8bn) in 2015 from DKK24.9bn, and costs per member fell over the year to DKK757 from DKK783.“The strong result was achieved through PFA’s focus on more steady assets and tight risk management,” Polack said.Shares, unlisted investments and property produced the higher returns.In its annual report, PFA said stock picking had been one of the factors driving the equities return, with its PFA Global Equities portfolio, for example, generating a return 6.8 percentage points higher than the general global equity market last year.Danish equities produced a 34% return last year on PFA’s overweight position in the asset sub-class. It said that, after the first half of 2015, it reduced its holding of Danish shares because of the very high concentration risk that had built up as prices had risen, but it added that it still held a significant amount of these assets.Private equity investments returned 18.9% in 2015, and real estate produced a 12.6% return.Mortgage bonds, on the other hand, made a 1.7% loss at the end of a “difficult year for Danish bonds”.PFA Pension’s total assets grew to DKK437bn at the end of 2015, from DKK407bn at the close of 2014.Solvency coverage increased to 290% from 176%.On the business side, PFA Pension reported that pre-tax profit fell to DKK128m from DKK1bn the year before, and after tax, the company made a DKK587m loss for last year, down from a profit in 2014 of DKK431m.The after-tax result was hit by an extraordinary write-down of deferred tax assets of DKK624m, it said.Net profit was lower than expected for this and two other reasons, PFA said.It said it had been unable to recognise the full risk premium, and that its health and accident insurance activities had made a loss of DKK655m.
Mark Burbach has left Blue Sky Group, fiduciary manager for Dutch airline KLM’s pension funds, after eight years as chief investment officer.He has joined Osool Asset Management in Bahrain, which runs government and military pensions as well as social security funds.At Blue Sky Group, Burbach oversaw the investment team responsible for €20.5bn of assets for KLM’s three schemes – for ground staff, cabin staff, and pilots – and a number of other Dutch corporate pension schemes.Prior to joining Blue Sky Group, Burbach spent more than five years as CIO at Pensioenfonds TNO, the €3bn pension fund of the Dutch technical research institute TNO. He has also worked as an investment manager at the former builders’ sector pension fund HBG. It is the second senior departure to hit Blue Sky Group in the space of three months. In March, Kees Verbaas, Blue Sky’s head of fund management, left to join Altis Investment Management, the €50bn fiduciary management subsidiary of NN Investment Partners. He starts at Altis on 1 June.Burbach spoke to IPE earlier this year about how Blue Sky Group was coping with the mounting level of investment-focused regulation facing asset managers. For the full interview, click here.Blue Sky Group had not responded to a request for comment at the time of publication.
British Airways is to consult on plans to close to future accrual the larger of its two defined benefit (DB) schemes, citing the increasing cost to the company of providing future benefits if the scheme were to remain open.The £13.1bn (€16.7bn) New Airways Pension Scheme (NAPS) counts around 17,000 members and had a deficit of £3.7bn in March, according to the company. It said this was despite it having paid £3.5bn into NAPS since 2003 and that the deficit had risen to £3.7bn on the back of record low interest rates and increased life expectancy. The £3.7bn figure is a company estimate, according to a spokesperson for British Airways. The company said this was the largest of all UK company pension deficits relative to the company’s overall financial value. According to the latest formal actuarial valuation of the scheme, it had a £2.8bn deficit as at the end of March 2015.Consultancy Barnett Waddingham recently said the aggregate shortfall across FTSE350 DB pension schemes was equal to 70% of 2016 pre-tax profits at the end of last year.The airline said it will pay £750m in pension contributions this year and has already committed to contribute between £300m and £450m a year until 2027 to address the NAPS deficit.If the scheme were to remain open to future accrual, the cost to the company of providing future benefits to members could rise to 45% of individual’s pensionable pay in 2018, said the company.According to British Airways this was more than four times the typical employer contribution of UK airlines.It said it would be proposing new pension arrangements that “will improve benefits for the majority of UK colleagues”.“The proposed changes would help protect the pension benefits NAPS members have already earned and improve the company’s ability to invest in the customer experience,” it said.The company said it had been exploring options with its trade unions for the past eight months, having told employees in October that it would be consulting on changes to the company’s pension arrangements. In a joint statement, Unions GMB and Unite said British Airways’ announcement indicated their advice had gone unheeded. On behalf of their members they expressed “in the strongest possible terms, both our dismay and bitter disappointment” at the news of the airline’s plans.“Both unions jointly demand urgent talks to discuss both the impact of this announcement, if a solution can be found and, if not, the consequences the airline may face,” they said.British Airways also has a defined contribution scheme (BARP), with more than 20,000 members. Its older DB scheme, the £7bn Airways Pension Scheme (APS), was closed to new members in 1984, when NAPS was introduced. NAPS closed to new joiners in 2003.The consultation is due to be launched in the coming weeks.
Heinz Rothacher, managing director of Swiss consultancy Complementa, counters: “The mandatory minimum conversion rate (Umwandlungssatz) has to be cut as soon as possible.” The conversion rate is used to calculate members’ annual pension payments from the accrued total and it is set upon entering the mandatory second pillar.Legally, Pensionskassen have to calculate mandatory occupational pension payments at a 6.8% rate which – as all experts agree – is too high in the current market environment.However, as most employers in Switzerland are paying more than the mandatory minimum into a Pensionskasse, providers can set a lower conversion rate for these additional assets.Most recently, the UBS Pensionskasse announced a new record cut to 4.42% in an attempt to make the accrued assets last longer during retirement.For Zanella this rate is “very low and only justified if future pension increases in line with asset performance is provided”.Rothacher said this cut “assumes interest rate levels will stay for very long time as low as today, which might not be reflecting the reality in the future”. The new level “might therefore be too low”, he added. Sunset in Zurich, SwitzerlandTrust in the systemRothacher fears the rate cuts by various pension funds “will have a negative impact as savers might start to wonder why they even should be saving in the very rigid second pillar”.He calculates that a conversion rate of just over 4.4% only amounts to a 1.5% long-term return.“The trust in the occupational pension system is at stake,” warns Rothacher.However, for Zanella it “is possible to keep on sailing around the problem of the minimum conversion rate – but why should we?”Instead, Zanella wants to see this technical parameter removed from the law, especially for the sake of people in low-income industries as these seldom pay more than the minimum into a Pensionskasse.“These people suffer the most as pension funds which only work with the legal minimum amount of contributions have to use active members’ assets to pay for pensions,” Zanella explains.Both he and Rothacher agree there should be more transparency to what higher conversion rates actually mean for people – especially for the younger generation, which eventually will get lower pensions.State pension fund facing shortfallThe more pressing issue at the moment, however, is the financial situation of the first pillar buffer fund AHV, which is facing a major dip around 2024 with Switzerland’s baby boomers reaching retirement.Just before Christmas, Alain Berset, minister for social affairs, presented a new reform proposal prioritising the first pillar. This has to be debated and put into a legal draft, meaning it could be a while before any results are seen. In addition, Switzerland has a general elections in 2019.No matter when the reform comes, Zanella hopes “there will not be too many new regulations” increasing complexity.Rothacher emphasises that trustee boards should not wait on the Swiss government but rather make alterations to their technical parameters as soon as possible.See also: Goodbye AV2020 (from IPE magazine, November 2017) Four months after the failed referendum on a comprehensive Swiss pension reform, there is widespread disagreement on how to proceed.On September 24, Swiss voters rejected the Altersvorsorge 2020 reform package, a comprehensive and – as most agree – over-complex proposal for amendments in both the first and second pillar pension systems.Even among second-pillar experts there is no consensus on the urgency of reforming the occupational pension system, the BVG.“Although desirable, a reform of the technical parameters is not urgent, especially at the cost of a new, more complex system,” says Peter Zanella, managing director at Willis Towers Watson Switzerland.
Five UK public sector schemes have teamed up to allocate £250m (€285.6m) to private debt.The pension funds for the London boroughs of Ealing, Havering, Lambeth, Wandsworth and Merton have appointed consultants bfinance and JLT Employee Benefits to design the mandate and conduct the manager search.It is the first time the five funds have allocated to private debt, according to a press release from bfinance. Between them they run roughly £4.5bn.Bridget Uku, manager of treasury and investments for Ealing, said her fund wanted to diversify its sources of returns and “increase the fund’s exposure to assets that derive the majority of their returns from income as opposed to capital growth”. “The fund has benefited from its sizeable equity exposure and on the back of these strong returns it agreed to reduce this exposure and use the proceeds to invest into an asset class where the expected total returns still look attractive relative to many other asset classes,” Uku added.All five schemes are members of the London CIV, set up to pool assets across the city’s 32 public sector funds, but the vehicle has yet to launch a private debt strategy.However, earlier this month IPE reported that the London CIV had appointed managers to fixed income mandates, including Ares Management to run private debt and liquid loans.The appointments were pending the completion of legal work, operational due diligence and contractual arrangements, a spokesperson for the London CIV said.Sam Gervaise-Jones, head of client consulting for UK and Ireland at bfinance, said: “Private debt has seen a steady increase in demand in recent years, aided by an ultra-low yield environment and periods of volatility in Europe’s public bond markets since the financial crisis.“By collaborating with their peers, and combining the benefits of private debt investment with the wide benefits that collaboration can offer, these boroughs can achieve significant cost savings and improved control.”
Frank Field MP“In particular, it would be helpful to have an explanation of why it was not possible to find a solution that would have avoided the pension scheme entering the PPF.“It is difficult to understand why it is possible for JPIMedia to acquire the business, no doubt in the expectation of generating a profit from it, but without taking any responsibility for its pension scheme.“Might I ask whether, in the light of this and similar cases, you consider that adequate protections are in place to prevent schemes being dumped on the PPF, at cost to pensioners and levy-payers?”A TPR spokesman said it would work with the PPF and administrators “to understand the circumstances surrounding the sale and its implications for the Johnston Press Pension Plan and its members at this challenging time”.He added: “Our role at this stage is to assess the terms of the sale of the business to ensure the pension scheme has been treated appropriately. We continue to work closely with the scheme trustee and the PPF.”A spokeswoman for the PPF said it anticipated a formal notice from the company “soon”, and emphasised that scheme members’ benefits were protected.Deficit pressuresJohnston Press’s board put the company up for sale in October as it struggled to finance a £220m debt payment due by 1 June 2019.Its pension scheme was 92% funded with a £47.2m deficit at the end of 2017, according to the company’s latest annual report.Johnston Press has been paying an annual deficit reduction contribution since 2014 as part of a recovery plan agreed with the trustee board. This contribution was £10.6m in 2017 and was due to increase by 3% a year until 2024.An updated formal actuarial valuation was supposed to have been signed off by 31 March 2017, but the company and trustee board missed this deadline, citing “ongoing discussions”.The annual report stated: “The trustees and the plan’s advisers have met with TPR and had regular conference call updates over the course of the year to keep TPR updated on the progress of the discussions.” “It is clear from Johnston Press’s annual reports that it has been engaged in active discussions with the Pensions Regulator for some time now,” Field said. “Might I ask you please to provide the committee with a detailed description of the Pensions Regulator’s involvement to date with Johnston Press? A politician has challenged the UK’s Pensions Regulator (TPR) to explain how a media company was able to be bought out of bankruptcy but offload its defined benefit (DB) pension scheme.Frank Field, chair of the UK parliament’s Work and Pensions Select Committee, wrote to TPR chief executive Lesley Titcomb yesterday after Johnston Press – publisher of several local and regional newspapers – went into administration.The company was immediately bought by a consortium of bondholders, known as JPIMedia, but as it was officially declared insolvent its £561.4m (€631.5m) is expected to enter the Pension Protection Fund’s (PPF) assessment period. At the time of writing, the PPF had not been formally notified of the insolvency, a spokeswoman for the lifeboat scheme said.In his letter, Field challenged TPR over whether there were sufficient measures in place to stop schemes from being “dumped on the PPF”.