He said he was now going to apply this experience to complement Lombard Odier’s approach.He said the strategy, which helped the CERN fund to win last year’s IPE Bronze Award for equity investment, aimed to predict not specific events but rather “the distribution of events”.“Lombard Odier has adopted a risk-based framework, and, based on what was accomplished at CERN, they asked me to contribute to the implementation of a risk-based approach,” Economou said.In his new role, he will be chairing the meetings of the investment committee, which is the advisory body to the pension fund.Economou said the CERN scheme had not been compelled to make any changes to its strategy after the European Central Bank (ECB) surprised many by cutting its benchmark interest rate from 0.25% to 0.15% earlier this month.He said it was “clear” the euro-zone was “queued towards further cuts”, and that the eventuality had been factored into CERN’s forward-looking projections.Economou stressed that pension funds could no longer “hide” in cash and sit out a crisis as they once had been able to do – after the crisis in 2000, for example.He added: “If we look at long-term low rates, the opportunity costs become infinite.”On the contentious issue of asset management fees, he said he expected Switzerland’s new rules requiring funds to calculate a total expense ratio would provide more clarity and transparency.He said this new push for transparency was part of the structural reform implemented in recent years, and that it was “a good thing for the industry as a whole”, as it would focus suppliers and boards on “getting the most out of the fees being paid”.However, he stressed that it was also necessary for pension fund boards to “clarify what they are expecting from the fees they are paying – higher returns, a higher quality of returns or both”.He said the answers would not necessarily be the same for all pension funds.”Some pension funds should pay fees for the quality of returns, others should rather be seeking the highest return, depending on the funding, or demographic situation at the fund, etcetera,” he said.At CERN, the investment team focuses on getting the highest possible returns for the minimum level of risk, Economou said. He added that this approach, if broadly adopted, stood to benefit Switzerland’s overall economy. “Increasing the efficiency of capital allocation ultimately directs investments to society’s most productive assets, which works for the greater good,” he said. Industry veteran Théodore Economou has joined Lombard Odier’s pension funds to help with the ongoing development of their risk-based investment strategy. Economou, who still serves as chief executive at the pension fund for CERN, the Swiss research facility in Geneva, was recently appointed chairman of the investment committee for the Swiss private bank’s three pension funds, which have approximately CHF1.5bn (€1.2bn) in total assets.Lombard Odier put in place a risk-based strategy for its schemes in 2009. This strategy was one of the reasons it won the IPE country awards for Best Pension Fund in Switzerland in 2012 and 2013.Almost five years ago, CERN hired Económou to put into practice his ideas on a similar risk-based investment strategy.
The investor calls for actively managed, long-only products; enhanced index or extended products will not be considered.Further, all type of traditional investment styles will be accepted, while minimum volatility and other single-risk-premia strategies will not.For products with active, fundamental, bottom-up approaches, quantitative approaches – “regardless of base in fundamental stock ratios” – will be prohibited, as will be the use of derivatives or leverage.The expected excess return level is 2-4% per annum, with a “suitable” tracking error.Products with a three-year track record “are a must”.The closing date for applications, stating performance to the end of June, is 15 October.If you do have any questions regarding this search, please email [email protected] Questions will not be accepted after 13 October. An undisclosed pension fund based in the Nordic region has tendered a $350m (€219m) US large-cap equity mandate using IPE-Quest.According to search QN1458, asset managers must show they have, historically, “been capable of beating the MSCI USA or similar benchmarks”, independently of the market or own investment style. The manager must also be able to offer the strategy in a segregated mandate, and willing to comply with the pension fund’s SRI policy.The initial size of the mandate is expected to be $350m but with a “potential for twice the amount for the right manager”.
The Dutch government should give the country’s pension funds more leeway in dealing with low interest rates, according to Marcel Andringa, CIO at the €40bn metal scheme PME.“Pension funds should either be permitted to use a higher discount rate for liabilities or be allowed to take more investment risk,” financial daily Het Financieele Dagblad (FD) quoted him as saying.Andringa took pains to explain that pension funds were gradually running out of investment options.“As yields of some German government bonds have even become negative, one could wonder whether it is still sensible from a long-term perspective to keep on investing assets against current low rates,” he said. And because many Dutch pension funds became underfunded at the start of the financial crisis, their risk profile has been fixed.“A snapshot of a situation seven years ago is still decisive for our investment policy,” Andringa said. “For schemes like us, making adjustments is very difficult.”PME’s CIO warned that, if interest rates fell further, the pension fund might have to apply another rights cut.Currently, PME’s coverage ratio is 103%.In other news, the ECB’s monthly bond-purchasing programme is likely to have caused a funding drop at several of the largest pension funds in the Netherlands.The €40bn metal scheme PME saw its coverage ratio fall by at least 1.5 percentage points during the first week of quantitative easing (QE), while the €48bn pension fund for the building industry, BpfBouw, suffered a 1 percentage point drop, according to IPE sister publication PensioenPro.The impact on coverage ratios is caused by the fall in interest rates, the criterion for the discount rate for Dutch pension funds’ liabilities.The 30-year swap rate has already dropped to less than 1%.A spokesman for the €60bn metal scheme PMT said the scheme had noticed an impact from QE but said it could not yet establish the scale of the problem.The large civil service scheme ABP declined to provide details on its current funding.However, Jos van Dijk, ABP’s spokeswoman, acknowledged that the pension fund had “recognised” the calculations of pensions adviser Mercer, which suggested the average funding of Dutch schemes would decrease by 2 percentage points during the first week of QE.Meanwhile, the large union FNV has warned against the impact of QE and called on the government to discuss measures to mitigate the consequences for pension funds.
Greece should consider defined contribution (DC) pensions as part of overall retirement provision now that the foundations of its crisis-driven pensions reform have been laid, according to Greek actuaries.In a paper on the Greek pension reform strategy undertaken by the government between 2010 and 2014, Georgios Symeonidis, executive board member of the Hellenic Actuarial Authority (HAA), said this would let people organise their lives better.Symeonidis said: “It is now time for the government to distinguish between welfare and pension, to educate people on the demographic developments and the utmost importance these play on their pension income when they retire in a few decades.In the paper for presentation at the International Actuarial Association Colloquium in Oslo, he added: “Moreover, DC systems should be taken into consideration by the Greek people when allocating money for third age income as they are by many other Europeans.” This did not mean that the existing safety nets should be abolished, but rather that people should be given incentives to invest part of their third-age income into a different kind of system. “This also increases risk spreading and allows people to organise their lives in a much better way,” Symeonidis said.He said that over the last few years, Greece had come a long way towards laying the groundwork for more sustainable pensions, not only in limiting the superfluous, but also in sacrificing part of what was essential.It had been necessary for Greece to make these changes quickly to avoid bankruptcy, he said.“However, since real people lie behind the numbers, it is vital that adequacy is also guaranteed, so that the people reaching the third age are able to manage with integrity and pride,” he said.In 2010, Greece, under the pressure of mounting public debt, was forced to resort to the tripartite committee referred to as the Troika of the European Commission (EC), the European Central Bank (ECB) and the International Monetary Fund (IMF).The Troika agreed to provide Greece with financial help, on special terms recorded in a Memorandum of Understanding (MoU) between it and the Greek government.Symeonidis said the pension reform had been one of the most important reforms recorded in the MoU, because the Greek Social Security System had long showed signs of unsustainability and insolvency.He said the reforms had not yet finished, and that it was in any case impossible to reform a system in four years, when nothing had been changed for decades. “The administrative changes have been colossal and the way the social security system is now organised is light years ahead of what it was just a few years ago,” he said, noting that a full system record had now been established.“Based on these analytical data, the actuarial valuations provided by the HAA are now more detailed and involve less uncertainty and a reduced margin of error,” he said.
Julian Poulter, chief executive at the AODP, said the leading asset owners needed support to “overcome resistance within supplier communities and the perverse incentives that exist”.“Our new indices will extend the same climate rating criteria to the whole investment chain, showing the leaders and laggards in black and white,” he said. “There can now be no escape from scrutiny further down the chain.”The new Global Climate Asset Manager Index will rate the top 50 asset managers covering 70% of the market and more than $40trn (€35trn) in investments, according to the AODP.It will assess how institutions are managing climate risk, investing in the low-carbon economy and engaging with investee companies on these issues.It will base the ratings on direct disclosure by those being assessed and/or publicly available information.Poulter told IPE it would distribute the assessment templates in the next 2-3 weeks, for asset managers and the other agents.He said a “power shift” had occurred over the past few years as the range of asset owners speaking to their fund managers about issues such as climate change had broadened, and that asset owners would be encouraging their suppliers to provide disclosure for the AODP indices.“The asset owners need this data,” he said.“In fact, we all need this data. Relative data is one of the things that makes a market more efficient. We just need to get some transparency from all of these agents.”Regulators will also benefit from the disclosure and the AODP’s rankings, according to Poulter. Having started to design this new set of indices some 6-12 months ago, the AODP said it was encouraged by the stance taken by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures (TCFD).“Our whole thinking was predicated on the assumption – and we’re delighted it happened – that the FSB would keep the range of agents under its own thinking as broad as it has done,” said Poulter. The taskforce is developing a climate disclosure framework and has said it drew up a comprehensive list of stakeholders that would ensure all parts of the credit and investment chain were covered. In addition to the Global Climate Asset Manager Index, the AODP will be releasing similar assessments that rate other actors in the investment chain on the same criteria – the top 20 investment consultants, the top 20 proxy/engagement advisers and the three main rating agencies (Moody’s, Standard & Poor’s and Fitch).Investment consultants, said the AODP, “are the primary advisers of asset allocation for asset owners”.“They often advise asset owners on choice of fund manager and play a key role in deciding where funds will be invested,” it said. Proxy/engagement advisers, according to the AODP, are “the route through which many asset owners engage with the market, and their votes play a critical role in determining whether companies shift to low-carbon business models”.Rating agencies, meanwhile, “have a vital role to play in assessing the long-term prospects of fossil fuel companies and the sovereign debt of countries that export fossil fuels”.In launching the new indices, the AODP hopes to help “drive change down the investment chain”.This language and focus chimes with a recent report from the UN-backed Principles for Responsible Investment (PRI), which called on the asset-owner community to send clearer signals to the rest of the investment chain about responsible investment/environmental, social and governance issues. The top 50 asset managers and top 20 investment consultants are due to be rated on how well they manage climate risk when the Asset Owners Disclosure Project (AODP) later this year launches a set of indices to “turn the spotlight” on asset owners’ suppliers in the investment chain.In the autumn, the organisation will launch rankings of asset managers, investment consultants, proxy/engagement advisers and rating agencies on their approach to climate risk.The AODP already does this for asset owners, via its Global Climate 500 Index, and the new indices will be modelled on this.The fourth edition of the Global Climate 500 Index will be published in early May.
Denmark’s DKK759bn (€102bn) statutory pension fund ATP is using its clout as a shareholder to keep a lid on rising pay for top executives at Danish companies, saying the right level of remuneration for corporate leaders increases shareholder value.Claus Berner Møller, vice president for Danish equity at the Hillerød-based pension fund, said: “In general, we are experiencing upward pressure because the level of pay is so much higher in, for example, the US and Switzerland.“We are trying to fight against this pressure because we think that generally, the level in Denmark is appropriate.“We are spending quite a bit of time discussing remuneration, because we believe that the right salary package for executive directors and supervisory boards increases shareholder value.” The supplementary labour-market pension fund was also concerned about overly generous recruitment or severance deals for managers, Berner Møller said.“Fundamentally, we don’t think that a severance package should equate to more than two years’ salary. Similarly, we are sceptical about excessively generous stay-on and sign-on bonuses, and this type of thing,” he said.Berner Møller made the comments in an interview with Danish broadsheet Morgenavisen Jyllands-Posten, which were confirmed by a spokesman for the pension fund.Pension funds in the UK have also been vocal on the matter of executive pay in recent months, with industry association the PLSA saying in January that “provocative levels” of executive pay were damaging the reputation of British business.
The UK’s Pensions Regulator (TPR) has urged DB pension fund trustees to take a long-term view of investment risks, governance, and strategy in fresh guidance published this week.The lengthy online document detailed the regulator’s expectations of trustees in charge of defined benefit (DB) pensions, and came as part of a wider push to improve scheme governance.Fred Berry, TPR’s head of investment consultancy, said: “The investment strategy is one of the most important drivers of a scheme’s ability to meet the objective of paying the promised benefits as they fall due, and we expect trustees to set this in the context of their integrated risk management approach.“It’s important to set clear investment objectives for your scheme and to identify how and when they should be achieved. Our guidance states that trustees should focus on areas that have the most impact for meeting their scheme’s objectives, and identify the necessary skills for the board of trustees of their scheme. It also provides some practical guidance on how to get the best from their advisers.” The guidance encouraged trustees to focus on “highest level strategic decisions” and delegating other tasks to third parties, including consultants and fiduciary managers.It also emphasised the importance of establishing policies for stewardship of assets – particularly when this responsibility is delegated to a third-party asset manager – and for long-term risks such as climate change.“Most investments in pension schemes are exposed to long-term financial risks, which may include risks around long-term sustainability,” the regulator stated. “These can relate to factors such as climate change, responsible business practices and corporate governance. We expect you to assess the financial materiality of these factors and to allow for them accordingly in the development and implementation of your investment strategy.”Stuart O’Brien, partner at Sackers, said: “TPR is right to draw out specific elements such as ESG, as trustees need to take an active decision as to whether these factors are financially material for their scheme – something which is not always straightforward in practice.”The regulator also emphasised the importance of cash flow matching and modelling.Calum Cooper, head of trustee consulting at Hymans Robertson, welcomed this, but warned that most cash flow modelling systems “typically don’t allow for the primary reason schemes hold assets: i.e. for income to pay the pensions promised”.He claimed this could put members’ benefits in danger, as trustees would not have a full grasp of the risks of not meeting obligations.Cooper added: “Model misbehaviour matters. Cash flows matter. The models used by schemes should reflect both asset and liability cash flows to improve the chances of paying members’ pensions in full.”TPR’s guidance is available here.
At the end of 2015, wide-ranging plans to reform Sweden’s pension buffer fund system – including closing two of the five funds – were shelved because no agreement could be reached among the many groups and individuals involved.In a recent interview with Swedish newspaper Svenska Dagbladet, Bolund said the structure of the four main AP buffer funds would remain, but the government would go forward with the part of the reform that focused on increased demands for sustainability and free investment.A spokeswoman for Bolund confirmed the minister’ plan for a new proposal, but said it had not been introduced yet.A cross-party parliamentary pensions group has also agreed to work on the sustainability rules and some of the rules for investments, she said. These proposals should be completed by autumn of next year – by the time of the next Swedish general election, which is to be held on or before 9 September 2018.Although many of the proposals contained within the now defunct AP buffer fund reform came in for sharp criticism from the AP funds themselves, they have since been vocal about the need for more regulatory leeway in their asset allocation – which was part of the reform.In February, AP1’s chief executive Johan Magnusson warned it would be hard for the pension fund to keep producing current levels of return given the AP funds’ mandatory 30% investment grade fixed income allocation.Hans Fahlin, CIO of AP2, said the AP funds all felt the investment regulations – which only permit the funds to have 5% in private assets, except real estate – were outdated and should be changed.Fahlin said AP2’s risk-taking should be controlled in a more nuanced way. Sweden’s second national pension fund AP2 says it is positive about the idea of the government changing investment regulations for the country’s pension buffer funds.Financial markets and consumer affairs minister Per Bolund has said he would go ahead with a new proposal on rules regarding sustainability and investment.Asked about Bolund’s intention to free up investment rules for the buffer funds, Ulrika Danielson, head of communications at AP2, said the fund was positive about the prospect of such change.“It’s positive if the investment regulations for the AP funds are changed as the return levels we have had historically will become increasingly difficult to achieve with the [current] applicable regulations,” she said.
The code was therefore modified to emphasise that asset owners needed engage more actively.In the UK, the Financial Reporting Council (FRC) is reviewing its stewardship code. It intends to ask “broad initial questions” about its approach to the review as part of a formal consultation on its corporate governance code that is due soon.Jen Sisson, senior investor engagement manager at the FRC, told the conference that the council was considering adding expectations relating to environmental, social and governance (ESG) issues to the corporate governance code. As the stewardship code is the counterpart to the latter, it was probable that it would also be amended to include provisions relating to ESG. PRI group targets better policy The PRI is launching an expert policy network and looking for policy and regulatory affairs professionals connected to its signatories to join a “global policy reference group”.The group will be designed to allow the PRI and signatories to exchange information on policy and regulation and help “amplify” efforts to achieve clear policy frameworks that require responsible investment.Last year the PRI published a report arguing that much pension fund regulation concerning ESG was poorly designed and gave “weak signals”.Paris climate agreement commitmentsThe PRI and four regional investor climate networks have invited other investors to join an initiative to implement the commitment made in support of the climate change agreement reached at the UN conference in Paris in December 2015.Back then, more than 400 investors representing over $24trn (€20.4trn) signed the Global Investor Statement on Climate Change, which committed them to work with investee companies to get them to minimise and disclose risks and maximise opportunities presented by climate change and changes in climate policy.The Climate Action 100+ initiative is designed to implement this commitment through collaborative investor engagement with the world’s largest corporate greenhouse gas emitters.It is due to be officially launched later this year, and was the result of an idea put forward by Anne Simpson, investment director for sustainability at the California Public Employees’ Retirement System, according to a spokesperson for one of the regional investor climate networks.The spokesperson said the engagement focus was not new, but that “the scale … to coordinate and scale up is”.“The 100 refers to the biggest corporate emitters,” she said. “The ‘plus’ is in the title because the focus list of companies is longer than that, to ensure we pick up companies that are important to investors for other reasons – such as their significance in a region or their exposure to physical climate risks.”Investors can join via the PRI or any of the investor climate networks making up the Global Investor Coalition on Climate Change. Japan’s financial services regulator expects the country’s investors to start working together on engagement with companies, according to the deputy director of its corporate accounting and disclosure division.Speaking at the PRI in Person conference in Berlin this week, Amame Fujimoto said the Financial Services Agency’s (FSA) original stewardship code did not explicitly mention collaborative engagement, meaning some Japanese investors might have misunderstood it to not be permitted.The FSA’s first stewardship code was launched in 2014. It was revised this year to remedy certain perceived shortcomings, including that some investors were felt to be engaging with companies only on a superficial level.The Government Pension Investment Fund – the biggest pension fund in the world at ¥149.2trn (€1.1trn) – was active in this regard, but many Japanese pension funds were not, according to Fujimoto.
“A broader investment universe will thus not automatically mean that the Bank actually invests the fund in unlisted equity,” they said.“If the Ministry does permit unlisted equity investments, the Bank will approach investment opportunities and build expertise gradually, invest via and alongside others in a responsible manner that safeguards the fund’s ownership interests, and share relevant information with the public,” the men wrote.They said the detailed investment strategy for private equity would be set by Norges Bank’s executive board later on, based on more analysis.NBIM agreed with the ministry’s idea that the bank should have responsibility for deciding how much should be invested in private equity, as was the case with the fund’s allocation to unlisted real estate.Real estate was removed from the GPFG’s benchmark index from 1 January 2017, but the asset class remains part of the investment universe, effectively allowing NBIM to decide on the allocation up to a stipulated upper limit.NBIM said the ministry could set an upper limit for private equity too, and suggested this could be about 4% of the fund, or 6% of its equity portfolio.This was the allocation indicated if the fund’s stake in the private equity sector were to equate to its average stake in companies included in the benchmark for equity, it reasoned in the letter.“The Ministry could also choose to set a lower limit,” Olsen and Slyngstad added.The pair said it would “take a long time to build up a portfolio”.NBIM noted in its letter that other SWFs had allocated 8.5% of their capital on average to unlisted equity at the end of 2016, up from around 4% in 2000.Back in August, the ministry appointed two expert groups to review aspects of how the GPFG invests, including one to assess whether it should be allowed to invest in unlisted equities, and the other to analyse the performance of its active management. The manager of Norway’s giant sovereign wealth fund is recommending the government allows the fund to extend its investment universe to include unlisted equities.In a letter to the Norwegian Finance Ministry, the leaders of Norges Bank Investment Management (NBIM) suggested a cap of 4% on any allocation to private equity. This could amount to as much as €35bn based on the Government Pension Fund Global’s (GPFG) NOK8.5trn (€881bn) investment portfolio.The letter – signed by Øystein Olsen, chairman of the central bank Norges Bank, and Yngve Slyngstad, NBIM’s chief executive – was in response to a request from the ministry made at the end of June for the manager’s opinion on whether the investment universe for the fund should be expanded to include investments in unlisted equity.The pair emphasised that NBIM would only make investments if individual deals would help boost the fund’s overall risk-return profile.