He added that the LEO would supplement existing approaches to risk management and help create greater liquidity in the market, lowering prices for participants.The OECD has repeatedly called for governments to help “kick-start” functional longevity risk markets by issuing bonds linked to individual population’s liquidity. Deutsche Börse had similarly predicted that ETFs could be used to trade longevity, and the UK’s Life & Longevity Markets Association has long pushed for a more liquid market, proposing a framework to set standards for indices.Deutsche said the LEO incorporated survival rates based on publicly available population data from national statistics bodies, referencing five year groups based on gender.The bank said its product would at first target UK and Dutch investors, with products based around the population of the Netherlands and people in England and Wales – the latter based on data provided by the UK’s Office of National Statistics. Deutsche Bank has launched a longevity risk index in the hope that it will increase liquidity within the market.The company said the Longevity Experience Options (LEO) was meant to provide a standardised approach, allowing pension funds to further hedge longevity risk.Paul Puleo, head of pensions and insurance risk markets, noted that many of the current approaches to hedging longevity risk were “costly and time-consuming”.“While we expect the bespoke market will continue to grow, the next step in development of this market is to make longevity risk management available to a broader range of market participants,” he said.
Infrastructure markets need to be more transparent, with greater emphasis placed on the development of sector benchmarks, according to the European Association of Paritarian Institutions (AEIP).Setting out its views on infrastructure, the association said that while pension funds were long-term investors – and therefore well-suited to invest in the asset class – they first and foremost needed to abide by their fiduciary duties to members.“The reality is that infrastructure represents a valuable asset class and for sure a viable option for long-term investors, but these latter face several hurdles to access it,” the AEIP’s paper noted.It said the lack of comparable, long-term data was one of the hurdles facing investors and that the absence of infrastructure benchmarks made it difficult to compare the performance of the asset class. It also identified an organisation’s scale as problematic to taking full advantage of the asset class.“Direct investments, those that yield the most interesting returns, are the most difficult to pursue, as their governance and monitoring require skilled individuals and a strict discipline regulating possible conflicts of interests,” it said.“National regulation does not always simplify direct investments, and pension regulators in some cases limit the use of the asset class in a direct or indirect way.”The association called on governments to play their part in making infrastructure accessible.“Often the lack of infrastructure investments is not due to a lack of projects but not finding the right match with investors,” the AEIP added. “Some form of standardisation might be investigated.”The organisation said policymakers should not expect pension funds to solve the infrastructure shortfall alone but accepted that the industry “should and could” do more, noting that both Australia and Canada enjoyed a regulatory framework that fostered infrastructure investment.The UK has also recently reformed its tax system, exempting private placements from withholding tax – which could lead to a growth in infrastructure debt mandates.For its part, the European Commission has sought to boost the profile of infrastructure projects on the Continent, asking member states to publish pipelines as it pushes ahead with its €300bn investment package.The Commission pledged in March that it would increase transparency in the infrastructure loan market, considering the development of a centralised database of infrastructure credit data.,WebsitesWe are not responsible for the content of external sitesLink to AEIP paper on infrastructure
Lack of action on climate change could see portfolios lose close to 50% of their value, according to research conducted by the University of Cambridge.It warns that investors will be unable to hedge against certain climate risks but concedes that it is difficult for investors to distinguish between the types of risk they can counteract and those that can only be addressed by an overhaul of the economy.The University of Cambridge Institute for Sustainability Leadership projects future global growth based around three scenarios: 1) a global agreement to limit temperature increases to 2° C; 2) the economy continues with the current level of mitigation; and 3) there are no further efforts to mitigate climate change.It finds a notable impact in the short term when global-temperature increases are limited to 2° C and governments opt for no mitigation. “The No Mitigation scenario,” the report says, “causes a global recession for the first three quarters of the analysis period, while the Two Degrees scenario does not cause a global recession but does cut economic growth in half when compared with baseline.”It adds, however, that the No Mitigation scenario sees an indefinite continuation of loss of output, while limiting the global-temperature increases in line with the recommendations of the Intergovernmental Panel on Climate Change sees the economy underperform compared with current activity for up to 12 years but eventually grow “much faster” than the baseline scenario.Transferring its calculations to four model portfolios – based around a high exposure to fixed income, a conservative portfolio, a balanced portfolio and an aggressive portfolio with high equity exposure – the Institute finds that the aggressive portfolio fared worst when No Mitigation took place, recording a loss of 45% and registering a “permanent loss, with returns not being restored to the baseline projection levels”.The report argues that, unlike other claims, the modelling shows a demonstrable, immediate impact rather than a hypothetical future discount on current values.It also finds that, while the largest loss for the aggressive portfolio – comprising 60% equities and 35% fixed income, largely mimicking the holdings of the Norwegian Government Pension Fund Global – was suffered in the 2° C scenario, this was down to the volatility suffered by equities, and the portfolio overall recovered relatively quickly.Cautious investors, investing only 12% in equities and 84% in fixed income, were most shielded from the impact of climate change, the report adds.“Regardless of the sentiment scenario studied, the high fixed income portfolio will be least at risk of any financial market disruption,” it says. “However, this portfolio also experiences low performance and small overall gains.”Where no climate change mitigation occurs, the University’s report recommends a shift away from developed market real estate, while emerging market oil and gas could help cut the loss potential almost in half, by 47%.It suggests capital should instead be deployed towards transport projects in developed markets and emerging market pharmaceuticals.Jake Reynolds, director for sustainable economy at the Institute, argued that the calculations showed no investor was protected from the impact of climate change.“However,” he said, “it is surprisingly difficult to distinguish between risks that can be addressed by an individual investor through smart hedging strategies and ones that are systemic and require much deeper transformations in the economy to deal with.”Read more about the upcoming climate conference in Paris and the pipeline for renewable infrastructure in the current issue of IPE,WebsitesWe are not responsible for the content of external sitesLink to University of Cambridge’s ‘Unhedgeable risk’ report
“But,” he added, “and this is a big but – we do not know what will happen next, what a Britain without the EU will look like.”Jakubowski said “what has really increased now is uncertainty”.He said he hoped that, five years from now, he could look back and see that a solution was found to ensure that Brexit “did not disrupt the EU’s economic and political cooperation with Great Britain too greatly”.He added: “Brexit is an example of the fact we are not only living in a world where interest rates were abolished by the central banks and returns are at an all-time low but also where geopolitical events keep on rattling the markets.” On a personal note – “as an EU citizen” – Jakubowski lamented that “nobody is talking about EU as a peace project anymore”, and said this model had been “disrupted” by the UK’s vote to leave. Market reaction to the UK’s recent decision to leave the European Union (EU) has largely been overplayed, according to Rainer Jakubowski, chairman and CFO at the BVV, the €26bn pension fund for Germany’s financial sector.“I think the markets are prone to overreacting in situations like these,” Jakubowski told IPE.“They eventually recovered more quickly than expected”.He said it became clear to many that, first, a Brexit was still two years away, and second, that the “horror scenarios described prior to the vote failed to come true”.
Of the top 100 alternative asset managers, the survey showed that real estate managers had the largest share of assets, at 34%, followed by hedge funds with 21%, private equity fund managers with 18% and private equity funds of funds with 12%.Funds of hedge funds, meanwhile, had 6% of the total, infrastructure accounted for 5% and illiquid credit 5%.Nikulina commented that institutional investors were continuing to focus on diversity – but not at any cost. “While inflows into alternative assets continue apace, investors have become more mindful of alignment of interests and getting value for money,” she said.She said this had contributed to more blurring of the lines between individual asset classes, as investors concentrated on underlying return drivers.The ultimate aim of this is to achieve true diversity and make portfolios more robust in the face of the increasingly volatile and uncertain macroeconomic environment, Nikulina said.Separately, a survey from Northern Trust suggested that Nordic institutional investors were about to increase their allocations to alternative asset classes and environmental, social and governance (ESG) investments.Polling around 50 Nordic institutional investors about the changing role of alternative investments at a recent event, Northern Trust said more than 80% expected investor allocations to alternatives to rise within the next five years, with the highest new allocations going to private equity and infrastructure.Paul Cutts, head of alternative investment services for Northern Trust Global Fund Services across Europe, Middle East and Africa, said: “In the current low-growth, low-interest-rate environment, alternative investments play an increasingly important role for investors looking for higher yield and lower volatility.”Poll participants also said they expected an increased focus on ESG factors within the investment process over the next five years, with 26% saying ESG credentials could make or break a deal. Mamadou-Abou Sarr, global head of ESG investing at Northern Trust Asset Management, said: “ESG considerations are naturally linked to infrastructure investments.” The largest 100 alternative investment managers around the world saw a 3% rise in their assets under management in 2015 to $3.61trn (€3.26trn), with pension funds accounting for $1.49trn of this – up 5% from the year before, according to a survey.Willis Towers Watson’s Global Alternatives Survey showed that total global alternative assets managed by all 602 investment managers covered in its broader survey had reached $6.2trn at the end of December 2015.Luba Nikulina, global head of manager research at the consultancy, said: “The shift away from equities and bonds into alternatives has gained momentum among most institutional investors around the world, as these strategies have helped to manage risk through diversity.”Persistent economic uncertainty coupled with highly volatile conditions is likely to reinforce this trend, she predicted.
Ireland’s regulator has said pension funds should be subject to new minimum standards before they are launched, as it unveiled a consultation paper recommending a “rationalisation” of the number of active schemes.The consultation paper, which the Pensions Authority said earlier this year would form the basis of a submission to the government on the country’s future regulatory architecture, also proposed stricter standards for trustees and providing fund members with better information about their savings.Launching the paper, minister for social protection Leo Varadkar said the proposals to simplify pensions were vital “to successfully deliver a universal supplementary pension system”, a reform long promised but yet to be delivered.Varadkar said the universal system was an “essential objective” for his department, which has been working on proposals since the Universal Retirement Savings Group was launched by his predecessor in February last year. The Authority’s paper spoke of the need for authorisation of any future scheme launch, with the process examining a fund’s governance, administration and financial set-up.The paper said the arrangement would allow the Authority to “perform a gatekeeper role”, ensuring new schemes could provide good outcomes for members.It also proposed enhanced standards for trustees in line with the revised IORP Directive and warned that academic qualifications would not always be sufficient.Instead, it urged that any fund have at least two trustees, with one possessing the required academic experience and the other having served as a trustee for a set period of time.On consolidation, the Authority recommended that any master trust launched in the market be subject to a number of additional requirements – including minimum capitalisation, independent trustees and policies on asset management charges.David Begg, chairman of the Authority, said there was a “serious concern” about the efficiency of the Irish defined contribution (DC) market, which informed the proposals put forward.“It is the Authority’s view that changes to the current system are needed to address the existing shortcomings so pension savers better understand their pensions and the decisions they need to make, and achieve better value for money,” he said. “The objective of such changes is to create a pension system fit for purpose and underpinned by good governance principles.”The head of the Authority, Brendan Kennedy, has long spoken of the potential benefit of discouraging small-scale DC schemes, and questioned whether a market the size of Ireland required any more than 100 schemes. The consultation closes on 3 October.,WebsitesWe are not responsible for the content of external sitesLink to the Pensions Authority’s consultation
Aon Hewitt plans to offer defined contribution (DC) arrangements from its Belgium-based multi-employer IORP.The consultancy group has contracted out DC administration and communication for the IORP, United Pensions, to Inadmin, a subsidiary of Dutch pension manager APG.The cross-border scheme already implements defined benefit (DB) schemes for nine multinational companies, including European pensions plans of US pharmaceutical company AbbVie.“We expect that the combination of DB and DC will further improve the quality of our proposition,” said Pascal Hogenboom, chief executive of Aon Hewitt Netherlands. In a joint statement, Aon Hewitt and Inadmin said the administrator would initially service the Dutch market.“However, as there is currently no provider that delivers DC services on a multi-jurisdictional basis in Europe, and because Inadmin has international aspirations, we don’t exclude a future extension of its sphere of activity,” said Paul Bonser, Aon’s head of international retirement in the UK.According to Bonser, Aon Hewitt was in touch with dozens of companies that are considering outsourcing their DC plan, adding that Aon expected to acquire new clients from not only the Netherlands, but also from the UK, Ireland, Spain, and Italy.He said Aon Hewitt was convinced that it could offer a large-scale investment strategy, with the consultancy acting as fiduciary manager. Currently, Aon Hewitt has $4.5trn (€4.2trn) of assets under advice worldwide.Contracting out DC administration fitted into Aon Hewitt’s goal to offer “best-in-class” solutions, Bonser added.“We are very impressed by Inadmin’s performance and therefore we see it as our perfect business partner,” he said.Last year, Inadmin saw the number of participants it services double to more than 100,000, thanks to large clients joining, including asset manager Robeco, ABN Amro PPI, and income insurer Loyalis. Its pension assets under administration increased to more than €2bn.Hogenboom said he expected that another five Dutch companies would join United Pensions with their DB plans, while Bonser said he expected many local firms to join, after they had seen the advantages of Aon Hewitt’s cross-border platform.Current schemes in United Pensions comprise approximately €160m of pension assets, he said.Bonser declined to elaborate about United Pensions’ exact growth target, but stressed that the vehicle was a long-term strategy.“We see it as a very successful project and very attractive to multinationals. Therefore, we expect significant growth,” he said.
Potential areas of research include benchmarks, guidelines, rating methodologies, disclosure frameworks, reporting templates and risk correlation.Hiro Mizuno, GPIF executive managing director and CIO, said: “This is a unique opportunity for GPIF and the World Bank Group to make a valuable contribution towards the Sustainable Development Goals, providing practical solutions to catalyse the development of sustainable fixed income markets.“This partnership strongly reflects GPIF’s strategic commitment in advancing the integration of environmental, social and governance considerations in all asset classes of its portfolio.”World Bank Group president Jim Yong Kim described the initiative as being about “transform[ing] the way asset owners and managers see investment opportunities”.“We can’t achieve the Sustainable Development Goals and meet the world’s rising aspirations without a much bigger contribution from the private sector,” he added.Nearly half (44%) of GPIF’s assets were allocated to bonds as at the end of June. Its policy mix foresees a maximum bond allocation of 64%, including domestic and foreign bonds.GPIF is a strong advocate of incorporating ESG issues into investment strategies, and the need to adopt a long-term, holistic perspective. It recently began tracking three ESG indices for around ¥1trn (€7.8bn) of domestic equity investments.Major investor organisation Principles for Responsible Investment has also been exploring how ESG and sustainability considerations could be applied to fixed income. So far its focus has mainly been on credit rating agencies. The world’s largest pension fund and the World Bank Group are to work together on initiatives aimed at directing more capital towards sustainable investments, especially in fixed income.Announcing their partnership today, Japan’s $1.4trn (€1.1trn) Government Pension Investment Fund (GPIF) and the World Bank Group said investors were increasingly looking for opportunities to have a positive impact, but data and standards for incorporating environmental, social and governance (ESG) considerations varied across asset classes.The link between investment performance and sustainability “considerations” was better developed in relation to equity than for the fixed income market, for example. This is despite the size of the global equity market being dwarfed by that of the global fixed income market.The World Bank Group and GPIF will develop a joint research programme to explore practical solutions for integrating sustainability considerations into fixed income portfolios, they said.
France’s €9.8bn Ircantec is seeking to appoint managers to a framework agreement for €800m of active systematic equity investments in non-European developed economies.The public sector pension scheme has tendered two mandates for an initial allocation of €400m each.One of the mandates is for factor investing. For the other the pension scheme only said the manager should use an active systematic investing process different to that used for the first allocation.Both mandates are for equity investments in OECD countries excluding Europe. The contract is for five years. The deadline for applying is 14 November.Late last year Ircantec’s board approved a new strategic asset allocation aiming for a higher allocation to equities, real estate and unlisted assets.The focus this year is on implementing the new allocation, and Ircantec has previously said there would be a host of mandate tenders in connection with this.Earlier this year it launched a search for a dedicated transition manager. In June it awarded a €250m green bond mandate to Amundi Asset Management.Ircantec is a pay-as-you-go scheme – its €9.8bn of investable assets constitute reserves.FRR pushes into venture capitalAlso in France, Fonds de réserves pour les retraites (FRR) has awarded three venture capital mandates. Idinvest Partners, Omnes Capital and Truffle Capital will each set up and manage a fund for investments financing French companies’ “early stage” and “later stage” development.When FRR launched the tender in November last year, it indicated the mandates were for up to €200m in total. The €35bn pension reserve fund is in the process of implementing a €2bn allocation to domestic illiquid investments, split between private equity (€1bn), private debt (€600m), and real estate and infrastructure (€400m).FRR is also looking to appoint two transition management specialists as part of a mandate renewal. The application deadline is 27 November. See the forthcoming November edition of IPE magazine for a “How We Run our Money” interview with FRR.
However, Mercer said that such indices “may lead to an inability to address concentrations of risk, valuation bubbles or crowding”.In addition, the consultancy warned that indices with publicly available rebalancing rules could be “gamed” by other market participants, and the lack of a proprietary process could lead to the factors being eroded over time.However, Mercer was broadly positive on factor investing strategies – also known as smart beta – particularly “active multi-factor” approaches.“Investors making use of factor indices may wish to compare such approaches against active multi-factor strategies,” the report said. “For a relatively small increase in fee level, active multi-factor approaches offer superior risk management and portfolio evolution over time.”Factor investing in general should be considered an active investing approach, Mercer added – even when used through an index-based approach such as an ETF. This was because every strategy made significant deviations from market cap indexes.The company also urged investors in “traditional” quantitative strategies to compare these investments to multi-factor products as they could potentially access similar risk exposures at a lower fee.IPE’s Special Report on factor investing, published in May, is available here. This month’s ETFs Guide is available here. Investors should be wary of factor-based indices using “simplistic or naïve metrics”, according to a report from Mercer.The consultancy giant warned in a white paper on factor investing that index approaches, including exchange-traded funds (ETFs), should be treated with caution despite their rapid growth in popularity in recent years.“Factor indices can be dangerous,” the consultancy wrote. “They tend to be naïve in their approach and static in their design.” Several index providers, including FTSE Russell, MSCI and Standard & Poor’s, have launched indices based on factors such as low volatility, momentum and value.