The CEPB runs a number of pension schemes, with more than 35,000 current or future beneficiaries, including clergy and church workers.Benefits for pre-1998 service are provided by the Church Commissioners’ £6.1bn endowment fund.In its annual report, the CEPB said 2013 was a year of very good returns for equities, with only emerging markets posting a disappointing performance.Major fixed interest markets were flat over the year, as they were in 2012.At end-2013, the return-seeking pool was made up of 65% global equities, 20% UK equities and 8% property.As in 2012, overseas equities – which returned 23% for the return-seeking pool – outperformed UK stocks, which returned 20.7%.The report said: “Emerging market equities have been disappointing, losing 6.1% over the year, but the allocation to global small-cap equity has worked very well indeed, returning 37.7% in 2013.”The property allocation, managed by CBRE, was increased in spring 2013, while the geographical balance was shifted to 50:50 UK versus overseas holdings.Property will make up 10% of the return-seeking pool once the new commitment has been drawn down by CBRE.The allocation to infrastructure, standing at 1% at end-2013, will reach 8% once commitments have been drawn.During 2013, 8% of the return-seeking pool was reallocated from actively managed global equity to two new high-conviction equity mandates managed by Edinburgh Partners and Longview Partners.These seek high returns from conventional large-cap equities by taking relatively concentrated portfolio positions.The CEPB said it spent much of 2013 investigating emerging market debt and other forms of debt investment for the return-seeking pool.But with the onset of the US Federal Reserve’s tightening, or at least ‘tapering’, of US monetary policy towards the middle of the year, it decided to hold back from investing, although it is following the asset class during 2014.At end-2013, the liability-matching pool was split 77% in index-linked government bonds and 23% in corporate bonds.The CEPB invests ethically, with its policy and practice shaped by the Church’s Ethical Investment Advisory Group (EIAG).During 2014, the EIAG is continuing its major review of policy recommendations on climate change and investment.It will also advise the CEPB on the use of pooled funds, publishing a policy this coming autumn.Last summer, the Church Commissioners were found to have invested in controversial payday lender Wonga, via a venture capital partnership.Meanwhile, the tri-annual valuation of The Church of England Funded Pensions Scheme (CEFPS) – the largest pension scheme run by the CEPB – was completed in 2013 and showed a deficit of £293m, compared with net assets of £896m.Contributions have been raised from 38.2% to 39.9% of pensionable stipend as from 1 January 2015.In addition, because of the scheme’s increasing maturity, the fund’s de-risking strategy continues, moving the fund from being 100% invested in return-seeking assets to a 60:40 split between liability-matching assets and return-seeking assets, to be achieved linearly by end-2029.The fund’s recovery period runs for 12 years from 1 January 2014. The £1.6bn (€2bn) portfolio of the Church of England Pensions Board (CEPB) made 18.6% on its return-seeking investments in 2013, outperforming the benchmark’s 17.6% return, according to its latest accounts.The average annualised return on the £1.4bn return-seeking pool for the three years to 31 December 2013 was 8.5%, outperforming the benchmark return of 7.5% over the same period.Over five years to the same date, the return was 11.2% per annum, with 11.1% for the benchmark.The fund’s £210m liability-matching pool also outperformed its benchmark by 0.1% with a return of 0.6%, while its performance over three years at 7.6% equalled its benchmark.
The number of active cross-border IORPs has risen to 76 in 2015, but money managed by the entities still only accounts for a fraction of Europe’s €3.6trn in pension assets.A report by the European Insurance and Occupational Pensions Authority (EIOPA) found that while the number of active schemes increased by one to 76, the number of authorised cross-border funds increased by two over the last year.According to the supervisor’s 2015 market development report, four funds withdrew from the cross-border market over the last year, while six new funds registered their activity, resulting in the net increase of two to 88.Germany was the largest single market for cross-border funds, with four entities responsible for more than half of the €53.8bn in cross-border assets. The UK, with €12.3bn in cross-border funds, came a distant second to Germany’s €27.8bn.Unlike Germany, where the money is concentrated in four schemes – including one of Germany’s largest, the €21.5bn banking-sector fund BVV – UK assets are split across 25 funds, including several for publishing houses and the JP Morgan UK Pension Plan.Ireland accounted for a further fifth, or €11.4bn, in assets, split across several financial sector arrangements, retirement funds for the clergy and the Irish Airlines General Employees Superannuation Scheme.The remaining €8.6bn in assets are spread across one scheme in Austria – APK Pensionskasse – three in Luxembourg, four in Lichtenstein and a dozen in Belgium, including the pension fund for employees of Euroclear, which announced it was moving from the Netherlands to Belgium in 2013.While the majority of assets, or €48.2bn, is held within what EIOPA classifies as defined benefit (DB) schemes, €700m is in hybrid funds and a further €4.9bn in defined contribution (DC) funds.Increasing the appetite for cross-border funds has been one of the stated goals of the revised IORP Directive and was singled out when EU member states agreed to a compromise on the IORP draft last year. Brian Hayes, an Irish MEP and the rapporteur in charge of steering the directive through the European Parliament, recently branded the existing cross-border framework as a “heritage nightmare”. Increasing cross-border activity is also one of the goals of EIOPA’s proposed pan-European personal pension framework.,WebsitesWe are not responsible for the content of external sitesLink to EIOPA’s 2015 market development report on cross-border pensions
The UK’s banks could pool the assets of their pension funds to create a scheme with the ability to compete with large Canadian and Asian investors, the head of Santander’s £10bn (€13.7bn) UK fund has suggested.Antony Barker, chief pensions officer at the UK bank, said he could imagine a time would come when the industry would pursue a sector-wide arrangement, as there was no competitive advantage to be gained from the operational management of pension funds.He argued in favour of pooling, as it would allow for the sector’s pension assets to pursue a different investment strategy.“From a pension fund perspective, we [the Santander UK pension fund] are probably more transactional than most,” he told attendees at the recent joint IPE/IP Real Estate Real Assets & Infrastructure conference in London. Barker added that the pensions sector was often unable to trade, due largely to a lack of sufficient in-house staff.“I can envisage a time where it makes sense to have a national Bank Pension scheme,” he added, citing the Dutch market’s industry-wide funds as inspiration.“The operation of a pension scheme is not a competitive element,” he added, “and [a single scheme] would actually pool together a £100bn portfolio that could compete directly with the Canadian and Asian investors to get involved in these major projects.”Across the UK’s main retail banks – HSBC, Barclays, Lloyds Banking Group, Santander and Royal Bank of Scotland Group, which also owns NatWest – assets within their defined benefit funds approached £130bn at the end of 2014.Germany has long had a pension fund for the financial services sector.BVV, founded more than 100 years ago, is the largest Pensionskasse, with €25.1bn in assets, second only to the Bayerische Versorgungskammer, with €62bn in assets.Barker went on to outline the benefits of a more proactive approach to investment, arguing that the Santander UK Group Pension Scheme – itself a merger of six funds consolidated into a master trust structure in 2012 – had begun approaching investments more akin to the strategies pursued by endowments, lowering its equity exposure to around one-fifth of assets.He said the approach allowed for the acquisition of “material” stakes when investing.“We typically like to take 20-25% holdings, which gives us access to the board,” he said.“Therefore, we are able to direct management as a very interfering limited partner rather than simply trying to apply some rules of either tilting the portfolio or voting engagement.”
Asset managers welcomed the Chinese government’s decision to go ahead with the scheme, saying it marks another important step in the country’s capital markets’ opening to global investors.“Within three months, the Shenzhen Connect will offer retail and institutional investors full access to one of the most attractive pools of investment opportunities in the world,” said Francois Perrin, portfolio manager, and Karine Hirn, partner at East Capital, an asset manager, in a joint statement.“Welcome to the world of the Chinese private companies, welcome to the 21st century, made in China,” they said.As part of its latest review, index provider MSCI recently decided against including mainland Chinese shares (A-shares) in its benchmark emerging market index, and the East Capital specialists suggested MSCI will look favourably on the Chinese government’s decision on the additional stock exchange link when the index provider next considers its stance on A-shares’ inclusion.The Shenzhen-Hong Kong Stock Connect is based on the Shanghai-Hong Kong Stock Connect, which was piloted in 2014 and has been in operation since then.The Shenzhen Stock Exchange (SZSE) was established in 1990, a year after the Shanghai Stock Exchange, and is the largest and most active domestic equity market in China, according to East Capital.Helen Wong, chief executive, Greater China, HSBC, noted that the Shenzhen-Hong Kong Stock Connect should provide investors around the world with access to “China’s new generation of private sector companies listed in Shenzhen, including an array of innovative internet and technology players based in the Pearl River Delta.”East Capital’s Perrin and Hirn expect overseas institutional investors to focus more on the Shenzhen stock exchange than Shanghai’s.Aidan Yao, senior emerging Asia economist at AXA Investment Managers, said that the state council’s approval of the trading link was anticipated, with onshore/offshore equities having rallied in recent days.In addition to via the Chinese government’s stock exchange connection programme, now boosted with the pending launch of the SZ-HK, overseas investors can invest in mainland China via quota programmes, such as the Renminbi Qualified Foreign Institutional Investor (RQFII) scheme.AXA IM’s Yao said that the stock connect programme differentiates itself from the quota programmes by “the clean design of the system that minimises official interference and maximises investor inclusion”.He said the only restriction imposed by the Stock Connect programme is on Chinese mainland retail investors wanting to trade on the Hong Kong stock exchange (so-called southbound trades), and that it is therefore much more inclusive than the quota programmes, which are available only to selective institutional investors.APG, the €424bn Dutch asset manager, cited the size of China’s markets and the ongoing efforts to open them when speaking to IPE about a co-operation arrangement it recently agreed with €131bn Chinese asset management company E Fund Management. China’s government has approved Shenzhen-Hong Kong Stock Connect (SZ-HK Connect), another trading initiative providing foreign investors with access to mainland Chinese companies’ equity.The go-ahead was announced by Premier Li Keqiang at a Chinese state council executive meeting today, 16 August.“The preparation for the launch of Shenzhen-Hong Kong Stock Connect has been basically completed, and the State Council has approved its implementation plan,” he said.The exact launch date is expected to be announced soon.
The scheme’s resources, mainly stemming from contributions from companies, amounted to €63.7bn in 2016. This was an increase of 3.1% from 2015, although this was partly the result of tweaks to previous payment calculations. The “real” increase was 2.3%, according to a statement from Agirc and Arrco.Pension benefits, meanwhile, amounted to €73.4bn in 2016, up by 2.8% from 2015.The technical deficit of €4.3bn takes into account a €5.4bn payment made to the schemes by AGFF, a vehicle set up by the Agirc and Arrco to finance the cost of early retirement. The deficit in France’s pension schemes for private sector employees and executives fell by around €700m to €2.24bn in 2016, helped in part by €2bn of return generated by the schemes’ reserves.The aggregate deficit across the two schemes – Arrco, for private sector employees, and Agirc, for executives – stood at €3bn in 2015.The schemes are part of France’s public pay-as-you go pensions system, covering round 22m active members and 15m pensioners. They are separate schemes for now, but are due to merge under reforms agreed in 2015 as part of an effort to tackle the funding shortfall. The technical deficit, which does not include financial returns generated from the investment of scheme reserves, amounted to €4.3bn in 2016.
The €1.4bn pension fund of Dutch Automobile Association ANWB has raised its strategic equity allocation from 30% to 36% at the expense of its discretionary matching portfolio, which was lowered to 38%.In its annual report for 2016, it said the adjustment came in the wake of a switch to a dynamic investment policy, following an asset-liability management study.However, as the pension fund – with a funding of 95.9% last July – was not allowed to raise its risk profile, the allocation change couldn’t be fully implemented this year, it said.At the same time, the scheme increased its interest hedge from 46% to 60.5%, ahead of a planned further rise to 65%. It said its interest cover was based on the swap curve and comprised of payer swaps as well as receiver swaps. Last year, the ANWB Pensioenfonds divested its quanto put options – an instrument without exposure to currency risk – which it had held since 2012, when they were to cover 50% of its equity risk.The equity hedge was no longer needed, the scheme said, as its funding would remain above the set trigger of 80% without the options.Henk van Drunen, the pension fund’s director, told IPE that the complexity of the hedge was an additional reason to divest, “as the options were difficult to evaluate and their impact was often opaque”.Last year, the put options came at the expense of 0.17 percentage points of the scheme’s overall result because of rising equity markets.The pension fund reported an overall result of 9.7%, chiefly due to the effect of the falling interest rates on its matching portfolio, which generated 12.8%.The interest hedge contributed almost 4 percentage points to the result. In contrast, its cover of the US dollar, Canadian dollar, the pound and the yen caused a loss of 1.1 percentage points.Credit, high yield and emerging market debt – placed in pools – jointly produced an 8.8% return, while equity gained 8%.The scheme also divested a 4% holding in commodities futures, following a loss of almost 26% in 2015.It said that government bonds in its liabilities portfolio had returned almost 3.7%. However, it lost almost 0.4% on its stake in Merrill Lynch euro-denominated money market fund, citing “negative capital market interest rates as a result of the ECB’s policy”.The ANWB scheme said that investments were managed passively in principle, and preferably through discretionary mandate because of lower associated management costs, transparency and flexibility.This approach also provided better options for a bespoke policy for responsible investment, according to the pension fund.The board said it currently didn’t see the need to adjust its pension scheme, but made clear that it was actively assessing the pension fund’s future for the mid term.The ANWB Pensioenfonds is preparing for central clearing of its derivatives in compliance with incoming European rules, and has therefore placed its interest swaps into a single mandate.
Credit: Manuel JosephShanghaiThe fifth – and perhaps one of the most significant mega-trends is education. Education has been prized in China since ancient times, but in the past decade the government has been focused on developing skilled human capital on an unprecedented scale.The quality may not always be the highest, but it is improving. Many of the world’s leading technology companies have set up research and development centres in China. As Woetzel and Towson say in their book, everything is in place in terms of graduates, educational and corporate structures, and functioning research processes. The driving economics are powerful, so quality and innovation should come naturally.The final megatrend is the Chinese internet. China has 700m people communicating with each other on the net. WeChat is a combination of Facebook, Whatsapp and a host of other social media apps.China is also becoming a leader in artificial intelligence, much of which is based on internet applications.China’s importance to the global economy is now eclipsing that of the US. Understanding what drives China’s growth is a pre-requisite for any understanding of the global economy today.See the November issue of IPE for an in-depth Special Report on China. Qianhai, the business district of the city of ShenzhenThere has been a deliberate shift in location from the expensive coastal areas towards inland cities such as Chengdu. Chinese manufacturers win by low costs and that is often in high-tech areas.Western companies tend to focus expensive healthcare equipment on the major cities only. Their Chinese competitors will produce simpler machines, aimed at second- and third-tier cities enabling them to build scale while their products get better and better.The third mega-trend is still a work in progress: the rise of the Chinese consumer. Middle-class incomes in Asia will dwarf everything else and will be the biggest economic growth engine in the future.Over the past 30 years, 300m people have joined China’s middle class. While in the past they have focused on value for money, that is changing as consumers look at more emotional needs – with an emphasis on branded goods. Indeed, one Chinese friend of mine tells me his family love coming to London as they can buy designer clothes cheaper than in Shanghai or Shenzhen.The fourth is capital. China has huge amounts of it, with a high rate of savings.This is not to say that capital is always deployed in the best manner. The banking sector is dominated by China’s big four state-owned banks, which function as an arm of the government. That means loans are not always made on the basis of economic criteria.State-owned enterprises are supported by the banking sector, but private smaller companies often find it difficult to access expansion capital, whether in the form of debt or equity. The problems associated with a largely state-driven banking sector have given rise to a large shadow banking system with wealth management products of all types – and not always with enough transparency for savers to appreciate the risks they may be running. The second is Chinese manufacturing scale. Woetzel and Towson emphasise that what differentiates China is not just its history as an outsourced manufacturer for Western companies, but the sheer scale of manufacturing driven by the size of its domestic consumer base.That means it has such large economies of scale that it can outspend its competitors on research, factories, fixed assets, marketing and other fixed costs, which creates a stronger and stronger competitive advantage over time.As the authors point out, China produces 80% of the world’s air conditioners, 90% of personal computers, 75% of solar panels, and 70% of mobile phones. China’s president Xi Jinping gave a three-and-a-half hour opening speech at the start of the Communist party’s 19th Congress last week. The party constitution has been revised to include a reference to “Xi Jinping thought” to rank alongside the thoughts of Deng Xiaoping and Mao Zedong himself.China’s phenomenal growth over the past few decades has not been a function of the policies of any one leader. Deng may have been the instigator of China’s move towards essentially a capitalist economy, but China’s rise to wealth and power has been a function of many significant trends.For those seeking to understand the China phenomenon, a good place to start would be by reading The 1 Hour China Book by Beijing-based academics Jonathan Woetzel and Jeffrey Towson. Their assertion is that six mega-trends are key to the China story. For newcomers to China, it is worth appreciating what these are.The first is urbanisation. China has a population of around 1.4bn. When the Communists took over in 1949, China was predominantly a rural economy. Now, over 56% of the population is urban and that percentage is growing rapidly at an average of 18.5m people every year. It is through urbanisation that China has lifted the mass of its population out of poverty.
Belgian pension funds generated an average investment return of 6% for 2017, up from 5.1% in 2016, according to the Belgian industry association PensioPlus.Investment returns averaged 6.8% a year since 1985, the association added.PensioPlus said: “Last year was characterised by strong economic growth, while central banks maintained their policy of quantitative easing [QE]. These two factors led to stock market climbs and consistently low interest rates. Equally notable in 2017 was the strong performance by the euro.”The return was calculated on a weighted average basis from a sample of 58 schemes with combined assets of €17.6bn, out of a total €29.8bn assets under management in the second pillar. At end-2017, Belgian pension funds had allocated 43% of their assets to fixed income, 38% to shares, with 11% in alternatives and 6% in real estate.While equity allocations remained roughly the same as the previous year, allocations to fixed income showed a slight fall. However, the percentage held in alternatives – such as insurance, infrastructure, private equity and convertible bonds – rose from 7% in 2016.PensioPlus said that, in 2018, it expected the European Central Bank’s QE policy to be phased out, leading to a risk of asset prices overheating and higher inflation in the long term. Meanwhile, stock market volatility could increase.The organisation warned: “Since pension funds have as much as 43% invested in debt, if their investment strategy remains unchanged, any increase in interest rates could have a negative effect on future returns.”However, it pointed out that stress tests carried out by the European Insurance and Occupational Pensions Authority (EIOPA) showed that Belgium’s pension funds continued to be adequately funded.PensioPlus said: “EIOPA’s study shows that Belgian pension funds are resistant to stress, both in periods of crisis when stock markets are falling sharply, and when the long-term interest rate is falling.”Meanwhile, with 19 pan-European pension funds already based in Belgium, the country is forging ahead with its ambition to triple second pillar pension assets under management to €100bn by 2025, 30% of which would be linked to pension assets of multinational companies.
Prudential Financial’s office in Newark, New JerseyUK pension insurers like PIC tend to reinsure their bulk annuity business against the risk of members living longer than expected. Prudential’s McCloskey said this was a “more efficient” use of their balance sheets and allowed them to focus on investment risks.For Prudential Financial, taking on longevity risk helps balance out its huge life insurance business by offsetting the risk that people die sooner than expected with the risk that others die later than expected.As well as a long-standing partnership with PIC, the US insurer has backed major longevity swap deals for Marsh & McLennan Companies and the BT Pension Scheme in recent years. The latter transaction remains the biggest longevity risk transfer deal ever completed, covering £16bn of liabilities when it concluded in 2014.JLT launches buyout comparison toolSeparately, consultancy JLT Employee Benefits last week launched a “buyout comparison service” to allow pension funds considering de-risking transactions to access price quotes from a number of insurers.Eight funds have already signed up for the service, the company said. They will upload anonymised member data to an online portal, which then “streamlines” the data for insurers to analyse and price. This replaces the current “manually intensive” process for insurance pricing, JLT said, whereby insurers would process data on member benefits directly from schemes in whatever format it was held.Using its comparison service, the consultancy said schemes would “receive actual quotations, rather than proxy buyout prices on a regular basis, allowing them to expedite the process towards locking into a bulk annuity contract”.Harry Harper, head of buyouts at JLT Employee Benefits, said: “With more schemes coming to market, the existing model was becoming inefficient, giving rise to a situation where schemes received fewer quotes, paid higher prices and could not update quotations regularly, to the detriment of all market participants.“By allowing schemes to access regular ‘real’ pricing, companies and trustees using our service will be able to spot when insurer pricing has improved and can transact immediately to capture the pricing opportunity. For our clients, improved automation means better information, more quotations and less chance of missing opportunities.” Bill McCloskey, head of transactions for international longevity reinsurance at Prudential Financial, told IPE the model was “a material step forward”. “We have been able to provide a specific commitment that lets [PIC] know that it can use our model to come up with the underwriting and fee structuring,” he said.“As PIC is executing the pension insurance, it has full transparency and commitment [on reinsurance]. The fact that we have a transparent set of criteria for underwriting gives them not only great certainty but also reduces – or even eliminates – the need for us to do due diligence on the scheme and its data.”LCP, the UK consultancy and a lead adviser on many derisking transactions, reported that insurers had “a pipeline of over £30bn of deals” going into 2018. Capacity in the market had grown by £5bn, the firm said. Pension Insurance Corporation (PIC) has partnered with an American insurer to automate part of the de-risking process for smaller pension funds.It means PIC and Prudential Financial can automate the longevity reinsurance aspects of buyouts and buy-ins for schemes of less than £200m (€227m) in size, improving efficiency and reducing costs for all parties.The two firms trialled the “flow reinsurance” system last year on transactions totalling nearly £300m. In total Prudential took on the longevity risk connected to more than $1.2bn (€968m) of PIC’s bulk annuity business in 2017. The new system allows PIC to secure a commitment from Prudential to take on longevity risk early on in any derisking transaction. Subject to meeting Prudential’s criteria, the schemes and the insurer are given price certainty from Prudential and guaranteed capacity for reinsurance.
UK supermarket chain Tesco has slashed its pension deficit by almost £3bn (€3.5bn) over the course of 12 months on the back of improving corporate bond yields and its decision to update the discount rate model used for accounting purposes.In its preliminary results for 2017-18 announced on Wednesday, Tesco said the pension deficit had fallen to £2.7bn, from £5.5bn at the same time last year.The supermarket group’s chief financial officer Alan Stewart said the reduction stemmed from a combination of factors.“45% is driven by the external factors, the mortality and the experience of the scheme; 55%… is due to the change in the discount rate methodology where we’re now looking at the bonds,” he told investors in October. Rising yields on corporate bonds, which drive the discount rate used for accounting purposes, also proved beneficial, the company said.Annual contributions to the pension deficit remained steady over the full-year period, but Tesco said they would increase by £15m to £285m from April this year. “This is a small increase on the previously agreed £270m, and is in line with our expectations,” Stewart told investors last year.Stewart also noted that it was “worth pointing out that our scheme is very young compared to the majority of schemes. Only 18% of all members are currently drawing a pension.“This means the liabilities are very long term, with over half of the benefits due to be paid in a period beyond 30 years from now.”Dave Lewis, Tesco’s chief executive, welcomed the news, which saw the UK’s largest grocer report annual profits of more than £1bn for the first time in four years.“We have further improved profitability, with group operating margin reaching 3% in the second half. We are generating significant levels of cash and net debt is down by almost £6bn over the last three years,” he said. “All of this puts us firmly on track to deliver our medium-term ambitions and create long-term value for every stakeholder in Tesco.”Analysts were broadly positive on the results. Barclays Research estimated the pension deficit could drop to £2.1bn by 2021.JPMorgan Cazenove said: “We turn buyers of Tesco shares for the first time in five years as its cash flow, top line and balance sheet have improved on a standalone basis. We see Tesco as the most visible turnaround in our food retail universe.”