“But it is important to air these issues and start a debate. We want to see the IASB or the International Financial Reporting Standards Interpretations Committee look at this question and reach a position on it.”IPE has also learned that Jardine Lloyd Thompson (JLT) has raised the possibility of using a yield-curve valuation method.Executive director Hugh Nolan said: “We don’t see this becoming mainstream because of the potential risks, and smaller companies might find that the expenses outweigh any gains. As a result, the population of sponsors that might seek to benefit from this approach is very limited.”The IASB published its revisions to IAS 19 on 16 June 2011. The changes focus on three areas of pensions accounting – recognition, presentation and disclosure.As a result, from this year, DB sponsors must apply the net interest approach to disaggregate and present items of pension expense.They must also report service cost as a component of profit or loss, net interest income/expense on the total DB asset/liability, and pension plan remeasurements as a component of other comprehensive income.But new doubts over the wording in paragraph 85 of IAS 19 have brought into question the basis on which companies should calculate the net interest income/expense line item.Until now, the mainstream understanding has been that sponsors will calculate the net interest cost/credit by multiplying the balance sheet liability/asset by the discount rate.In its November client briefing, Mercer notes that, although this “simplified approach” is one possible interpretation of the standard, another is to use “a full-yield curve valuation using market-implied discount rates for each individual future year.”The impact of any change in the net interest calculation under current market conditions could lead to a substantial reduction in a DB sponsor’s P&L charge.“While the yield curve is upward sloping,” Mercer said, “a yield curve valuation may also lead to a lower service cost as it will use, on average, the higher discount rates at the longer end of the curve.”On the current shape of the yield curve, any entity adopting the alternative approach could expect to use a one-year forward rate running at less than 1%, with typical discount rates of around 4.5%.The approach is not, however, without its opponents.Simon Robinson, an employee benefits consultant with Aon Hewitt, told IPE: “IAS19 is quite vague in this respect, which is why some people are interpreting it as allowing this approach.”Robinson, who also chairs the Association of Consulting Actuaries’ Accounting Committee, added: “Looking at paragraph 85, it says the discount rate should reflect the timing of the projected benefit payments, but then goes on to say a practical approach is to use a single weighted average discount rate.“So it appears to suggest that the theoretically correct approach is to use more than one discount rate, but a practical expedient is to use a single discount rate.”Early signals suggest any DB sponsor planning to adopt the new approach could run into opposition from their auditors.Audit sources close to the issue, who spoke to IPE on condition of anonymity, signalled a lack of support for the idea among auditors.Securities regulators have also put pensions accounting under the enforcement spotlight.A spokesman at the European Securities and Markets Authority told IPE that, although enforcers have not yet addressed the specific question of yield curve valuations, “employee benefits are included as part of European Common Enforcement Priorities for 2013 year-end”. Mercer has raised a question mark over the calculation of net interest costs on defined benefit pension funds under International Accounting Standard 19 (IAS 19), Employee Benefits.In an online update to clients, the consultancy said it might be appropriate in some circumstances for DB sponsors to calculate their profit or loss charge on the basis of a one-year forward rate in place of the more traditional approach of using the IAS 19 discount rate.In current market conditions, a company showing a deficit on its DB fund could expect to reach a better P&L result were it to make the switch.Deborah Cooper, a partner with Mercer’s UK retirement resource group, told IPE: “On the one hand, this is a legitimate reading of the standard, but, on the other, practice is entrenched, and there is a lot of inertia against any change.
Dutch pension funds must significantly decrease their estimates for the future returns on AAA government bonds, the Cabinet has decided.Following the recommendations of an advisory committee, the Cabinet agreed to lower the maximum bond-return estimate from 4.5% to 2.5%. Dutch pension funds use these parameters to draw up recovery plans and calculate pension contributions.The committee concluded that the expected returns for AAA government paper should follow the forward curve. “Following current interest levels is not only more realistic but also improves consistency in rating liabilities,” said the committee, which set the maximum estimate for other fixed income investments at 3%.The parameters committee also recommended that the maximum estimates for listed equity, other securities and property remain at 7%, 7.5% and 6%, respectively.However, it said the maximum estimate for commodities should be lowered by 1 percentage point, due to the economic outlook and current commodity markets.Pension funds can continue to use a price inflation estimate of 2%, according to the advisory body, which also suggested the maximum estimate for salary increases should be lowered from 3% to 2.5%.The committee said it expected the changes to reduce estimated coverage ratios at Dutch pension funds.The funding of an average scheme with a current coverage of 105% would be 100% under the current rules, it said.The new parameters are expected to come into force as of 1 January 2015, together with the expected introduction of the new financial assessment framework (FTK).At the moment, the FTK proposals are in the finishing stage.
SPT, the closed pension fund for dentists and dental consultants in the Netherlands, is to adjust its investment policy to safeguard pensions over the short term and grant indexation over the long term. In light of its low investment target and low risk tolerance, the pension fund is to shift its overall portfolio to 65% European government bonds of at least AA rating – also intended as a hedge of the interest risk on its liabilities – and 35% equities and other securities.The €1.6bn scheme said its new return portfolio – half of which is allocated to developed market equity – must allow for an indexation of 0.85%.But it also stressed that the new investment mix was liquid and therefore easily transferable to another pensions provider, in the event that SPT ceased to exist. According to SPT, of its current 7,400 participants, approximately 45% have already retired.The pension fund expects this percentage to increase to 77% over the next decade, while the number of participants will fall to 6,600.This means the fund’s investment horizon – as well as its recovery period in times of trouble – will become increasingly shorter.Last year, SPT had to pay €53m in pension benefits, but it predicted that, within 11 years, this amount will rise to €80m.Until now, SPT’s investment portfolio has been 25% securities, 60% fixed income and 15% derivatives.The pension fund said that, under its new investment policy, it will avoid “high-cost” investments, as well as asset classes with “unclear sources of return and risk”, such as hedge funds and private equity.This also goes for investments that are illiquid or carry a possible obligation to additional payment, it said, as well as investments “without a reliable market mechanism”, such as property and infrastructure.SPT has also excluded investment classes focusing on active currency positions.The pension fund said its new investment policy was based on the existing financial assessment framework (FTK) from 2007, noting that a new FTK could trigger further changes.
Four years of debate on the Dutch Pensions Agreement and the proposed Financial Assessment Framework (FTK) have not been worth the effort, according to Peter Gortzak, one of the architects of the 2010 pensions agreement between the social partners and the government.In an interview with IPE sister publication FD Pensioen Pro, Gortzak – previously vice-chairman of union FNV and now policy head at asset manager APG – said: “What’s on the table now is exactly what we tried to prevent in 2010.”Elements of the planned FTK, such as an increase in buffer requirements, had already been proposed by the pensions regulator in 2009, he said.“This was the reason why I and Kees Oudshoorn of employers’ organisation VNO-NCW started the discussion about the Pensions Agreement, as we realised those DNB proposals would turn out to be detrimental for the pensions outcome and/or lead to a significant increase in contributions,” he said. The 2010 agreement was meant to end nominal guarantees and give pension funds leeway for inflation-proof investments.This ‘real pension contract’ is not to become law.Gortzak, while acknowledging that the exact FTK proposals are not known yet, stressed that the essence of the accord – offering an alternative for the required nominal guarantee of 97.5% – “disappeared”.As a consequence, Gortzak’s initial fear that failure of the Pensions Agreement could stifle indexation for as much as a decade may yet be realised, he warned.“The buffer increase in the new FTK is a wave pushing forward the indexation options,” he said. But Gortzak said there was still hope.“The Ministry of Social Affairs has told me it has succeeded in eliminating the investment dilemma of offering nominal guarantees while generating sufficient returns,” he said, immediately adding that he questioned how this could be achieved.“It seems to me there is hardly any margin for this, as the 97.5% nominal guarantee remains in the proposals,” he said. In the opinion of the former union boss, the failure of the Pensions Agreement and the real pensions contract is a consequence of the “unfortunate framing of uncertainties” that would come with it.“The parties involved kept on insisting the nominal framework meant certainty, but look at all the right cuts that had to be applied,” he said.He also cited fear of lawsuits over ownerships rights.“However,” he added, “it is clear that merging existing and new pension rights would not have caused a problem.”
Net new money from institutional clients slowed a bit last year from CHF8bn in 2012 to CHF7.2bn, yet overall assets under management continued grow to CHF109.6bn, an increase of 11% year on year.In the first half of 2014, however, Vontobel saw an “anticipated” slowdown in net new money, with inflows and outflows also from institutional investors balancing themselves out.In its half-year report, it said: “Some global investors have reduced their allocation to the emerging markets – the impact of which was felt in the asset management industry.”With the realignment of the business model, the bank said Vontobel Asset Management’s “efficient and modern” organisational structure would “take account of global competition”.The new division will operate under the name Vontobel Asset Management AG, pending the approval of the Swiss regulator and Bank Vontobel shareholders. Swiss bank Vontobel is spinning off its asset management business into a separate legal entity to increase its international competitiveness.It pointed out that the independence of asset managers was assigned “high importance” in most asset management markets and a “key selection criterion” applied by international consultants and clients.Asset management is one of the major contributors to Vontobel’s bottom line and has been growing in importance for the bank in recent years.As of the end of 2013, profits from this segment of the business stood at CHF103.3m (€84.3m), a 37% year-on-year increase, while overall group net profit amounted to CHF122.3m.
SPW, the €10bn sector-wide pension fund for Dutch housing corporations, has extended APG’s contract for asset management and pensions provision for an indefinite period.APG will also continue as SPW’s adviser on communications, as well as legal and actuarial matters.The industry-wide scheme has been a client of APG and provider Cordares, which merged with APG in 2008, since 2006.APG and SPW said the focus of their continued co-operation would be to improve service quality and lower costs. SPW chairman Jim Schuyt highlighted the “high degree of satisfaction” among participants and cited “good returns on investment, APG’s considerable knowledge of the housing corporation sector and excellent communication”.SPW has 400 affiliated employers and manages the pension rights of 67,000 pensioners.As of the end of February, its official ‘policy’ funding ratio stood at 108%.APG recently announced that SPMS, the €9bn occupational scheme for medical consultants, extended its contract for pensions provision and advisory services on communication, legal and actuarial matters until 2021.SPMS has been with APG since 2011, following its departure from provider Doctors Pension Funds Services (DPFS), jointly owned with SPH, the €9.5bn pension fund for general practitioners.At the time, SPMS placed its fiduciary asset management with BlackRock.In 2013, PGGM, the €182bn provider of the healthcare scheme PFZW, took over DPFS and took on SPH as a new client.
The companies caught by the new guidance could be using either UK GAAP or International Financial Reporting Standards (IFRS).Both UK GAAP and IFRS have broadly similar going-concern requirements.Major listed companies with a premium listing will continue to apply the UK corporate governance code rather than the new going-concern guidance.Separate guidance also applies to UK-listed banks.The FRC’s latest actions have their roots in the June 2012 recommendations of the Sharman Inquiry on going concern and liquidity risk.Going concern is a fundamental assumption in accounting and the basis on which financial statements are prepared.It works on the premise that a business will continue to operate in the foreseeable future without being wound up or significantly reducing its activities.The issue has been a worry for investors in recent years given the trend for auditors to sign off on a company’s accounts as a going concern one minute only for the business to go under the next.Among its recommendations, Sharman called for clarification of the accounting and stewardship purposes of the going-concern assessment and disclosure process and the related thresholds for such disclosures.Second, Sharman proposed a review of the FRC’s 2009 Guidance for Directors to make sure the assessment of going concern was integrated within the business-planning and risk-management functions.Third, Sharman wanted to see companies move away from a disclosure regime where a company’s financial statements might fail to flag up concerns about its longer-term viability.Investors have in the past complained that the only indication they had that a company was in difficulties was when it tipped over into insolvency.Since the release of the report, the FRC has published two consultation papers seeking views on the implementation of Sharman’s findings.The FRC describes the guidance as “non-mandatory, best practice guidance for all companies required to make disclosures on the going-concern basis of accounting in their financial statements”.The focus of the disclosures is on the “principal risks and uncertainties within their strategic report”.But one leading critic of the accounting regime for UK companies said he was unconvinced the new guidance would have any tangible impact.Tim Bush, head of governance and financial analysis at Pensions & Investment Research Consultants, told IPE: “Adopting the going-concern basis of accounting first and foremost depends on the company’s having net assets rather than a deficit.“The flaws in the IFRS model can mask that, and this guidance does not address this. It’s wallpapering over the crack.” The UK Financial Reporting Council (FRC) has issued guidance for directors dealing with the going-concern basis of accounting.The FRC’s executive director, Melanie McLaren, said: “The FRC encourages companies to take a broader longer-term view of the risks and uncertainties facing their business. We have seen an evolution in corporate reporting in recent years.”She added that directors had welcomed the move.In addition to going concern, the guidance also covers two other matters disclosed in companies’ strategic reports, namely solvency and liquidity risks.
Liability management deals for mid-sized UK private sector defined benefit (DB) pension schemes are becoming more viable and may very well contribute to what is anticipated to be a strong year for de-risking transactions, according to Barnett Waddingham, an actuarial and consultancy services provider.The company published the findings of its fourth annual survey* of DB schemes in the UK with more than £1bn (€1.3bn) in assets, noting that only 3% remained open to new members.Fewer schemes have a deficit on a company accounting basis, down to 67% from 75%, Barnett Waddingham said, noting that schemes with a lower or no deficit “may be more able to secure their liabilities with an insurance company”.Andrew Vaughan, partner at the consultancy, said activity among the largest private sector schemes, such as the removal of longevity risk and liability-driven investment strategies, “will inevitability work its way down to smaller schemes”. He added: “Only a handful of big defined benefits schemes remain open to new members, and the number closed to future pension accrual is increasing year on year.“Many of these will ultimately be looking to the insurance market to transfer risk through buyouts or buy-ins, medical underwriting and longevity risk transfers.“We have seen a significant amount of activity in these markets in the last year, and we expect this to continue.”Barnett Waddingham expects more than £20bn in longevity risk transfer deals this year.Longevity swaps have in the past been the preserve of the largest pension schemes, but they are becoming more accessible to mid-sized schemes due to “growth in reinsurer appetite, efficiencies and innovative structures”.Aon Hewitt has said this year is likely to bring another record for bulk annuity and longevity swap deals.Releasing its 2016 risk settlement market report, the company noted that risk settlement transactions exceeded £30bn last year compared with £22bn in 2014.Martin Bird, senior partner and head of the risk settlement group, said Aon Hewitt was “confident 2016 will again be a bumper year for the risk settlement market”.He added: “Volatility in stock markets in 2015 and continued low yields posed challenges to funding levels, but once market conditions improve, pension schemes will start de-risking, and there will be a market of £20bn or more required for bulk annuity transactions alone.”*The survey covers 160 schemes and is based on publicly available data up to 31 October 2015
The UK regulator has called for the government to remove barriers to pension scheme pooling in a bid to improve governance and transparency.The Financial Conduct Authority (FCA) made the recommendation today as part of its Asset Management Market Study. It said the Department for Work and Pensions (DWP) should seek to remove regulatory and perceptual limits on consolidation.The regulator said: “For DB schemes, we agree that some schemes might be able to benefit from pooling through lower fees and wider choice. However, there are barriers to DB pension scheme pooling, in relation to complex rules concerning changes to existing benefit structures as well as the responsibilities on trustees and sponsors and certification requirements…“We have found that removing some of these barriers could encourage the practice of asset pooling, allowing smaller pension schemes to benefit from economies of scale and exert greater pressure on asset managers. This would require changes to legislation and the issuing of further guidance to trustees.” The FCA also recognised existing opportunities for pooling, including the DWP’s ongoing work on merging defined contribution schemes. Some respondents to the regulator’s interim report, released in November, highlighted fiduciary management as one method of pooling assets.The regulator said it would not make consolidation mandatory due to complexities and existing work being undertaken by the DWP and other parties.The Pensions and Lifetime Savings Association (PLSA) welcomed the regulator’s stance. The pension sector trade body has been seeking support for consolidation for several months, and has suggested the creation of “superfunds” to pool resources for smaller schemes.Graham Vidler, director of external affairs at the PLSA, said the FCA’s report reflected work undertaken by the trade body’s Defined Benefit Taskforce, which proposed the superfunds idea.Vidler added: “We also believe that common governance arrangements, where schemes are brought under the supervision of fewer but more experienced trustees, could also mean schemes are better able to scrutinize and hold their asset managers to account.”However, others have warned that consolidation should not be seen as the only way forward for pension schemes.Dan Mikulskis, head of defined benefit pensions at Redington, said: “The industry can do a lot without needing consolidation. There are plenty of ways in which schemes can get fully funded without the need for consolidation. It would be wrong to think of it as a panacea.”Earlier this year, the Investment Association stated in its response to the FCA that “no evidence has been presented to suggest that increased scale alone will lead to better asset allocation decisions, a highly significant driver of returns for any investor”.Enhanced governance was also important, the asset management trade body said. The FCA also sought to address in its market study, recommending more independent board members at fund management companies and an expansion of the Senior Managers Regime to increase individual accountability.The Asset Management Market Study is available here.
Dutch pension funds should have a much bigger property allocation than the current 9% industry average, Ortec Finance has argued.During the annual research seminar of the Association of Institutional Property Investors (IVBN) and real estate investor VBA in Amsterdam last week, Loranne van Lieshout, senior consultant and partner at Ortec Finance, said property usually scored very high in scenario analyses of asset-liability management studies (ALM) for a strategic investment mix.Drawn on ALM outcomes, a 20% or even 25% stake in property would be justified, she concluded. Real estate offered added value for the short term in particular, she said, with the benefit levelling off over the long term.Van Lieshout presented the outcome of a mini-poll of seminar participants, which suggested that liquidity and the limited availability of quality assets and locations were obstacles for larger allocations. According to regulator De Nederlandsche Bank (DNB), Dutch pension funds have invested 9% of their portfolios in real estate on average.Sector schemes usually have a bigger allocation than company pension funds, with more than 6% on average.The consultant emphasised that property had proved to be significantly less volatile than equity – 7% for property versus 20% for equity – during the past 30 years, adding that fluctiations in property value were also decreasing.She also cited the low correlation with equity, but noted that correlation increased over time, as both asset classes were driven by the same economic factors.Van Lieshout said that the correlation with inflation was also more favourable than with equity, and improved further with a longer investment horizon.However, she emphasised that real estate was not suited for day-to-day interest-rate management “as the expected cash flows as well as risk premium on property were too uncertain”.“The value of property is affected by many more factors than just interest rates,” she explained.The 16 respondents in the mini-survey had indicated that a lack of reliable historical data, insufficient transparency and concerns about concentration risk were reasons for institutional investors to not further extend their property holdings.Van Lieshout underlined the importance of diversification across assets and regions and made clear that diversification decisions must be taken in the context of the entire investment portfolio.The Ortec partner put the liquidity argument into perspective by pointing out that most pension funds could finance their liabilities with income from contributions.However, she acknowledged that liquidity was necessary as collateral for interest rate derivatives.“This is to become even more urgent as soon as the EMIR regulations for central clearing are also to apply to pension funds, as collateral must be deposited in cash rather than government bonds,” said Van Lieshout.