The FTT zone is likely to comprise all EU countries except the Netherlands, the UK, Luxembourg, Malta and the Czech Republic.The DNB excluded derivatives and repos from its calculations, as it assumed the trade would move out of the FTT area, Dijsselbloem said.The European Commission is intending to tax each derivatives transaction by 0.01%.The minister suggested that falling demand for derivatives, or the extension of duration triggered by the FTT, could lead to pension funds failing to fully hedge their financial risks.The so-called Tobin tax could also hit Dutch pension funds indirectly, the Treasury warned, as middlemen and clearing members could pass on FTT costs.In Dijsselbloem’s opinion, the introduction of the tax could also reduce liquidity on financial markets, and possibly increase the bid-ask spread and transactions costs.Even an FTT exemption for pension funds would be unlikely to counter this effect, he said. The European Commission’s controversial financial transaction tax (FTT) will set Dutch pension funds back by at least €250m every year, even though the country has chosen not to participate in the tax, according to finance minister Jeroen Dijsselbloem.In a letter to Parliament, Dijsselbloem pointed out the difficulty of measuring overall costs at this time and warned that the financial burden could actually be much higher.Referring to the calculations of regulator De Nederlandsche Bank (DNB), Dijsselbloem said the loss for pension funds would take at least a quarter of a percentage point off their returns, and come at the expense of coverage ratio and pensions.He said the DNB had only taken equity and bond transactions into account, which are to incur a 0.1% FTT levy if they have been issued in the FTT zone, or are traded within the area.
The regulator’s budget for DB regulation has been squeezed, falling by 10% to £20.9m, and seeing its share of TPR’s budget fall from 41% to 27%.Its budget for DC rose by a third to £16.5m, but it’s share or total budget remains similar as the body secured extra funding from government.Auto-enrolment compliance is funded directly by the tax payer, while DB and DC regulation by a levy on pension schemes or their sponsors.Despite this, the squeeze on DB comes as the regulator finalises its new Code of Practice, to be published in June, which includes how it will incorporate a new objective laid down by the government.TPR’s current objectives include protecting member benefits in occupational pension schemes, reducing the risk to the Pension Protection Fund (PPF), and now to minimise any adverse impact on the sustainable growth of an employer.It will also be monitoring the industry and working with DB schemes as the April 2016 deadline for the end of contracting out approaches, which is likely to lead to more scheme closures.In 2014-15, the regulator also plans to process casework for 1,800 DB recovery plans, a slight increase from the year before, 62,000 scheme returns and 71,740 levy collections.However, it is auto-enrolment that will see the regulator’s main increase in workload, and an extra boost of 47 full-time equivalent roles.Casework for auto-enrolment staging and contacting employers will increase substantially, with total number of cases for education, enablement and enforcement rising to over one million from 200,000.The regulator said its focus remains on being ‘risk-based’ and not addressing every issue, but to select cases and mitigate risks.It also set out its corporate plan for the next three years, including emphasis on how it will enact its objectives.However, speaking to IPE about how the regulator would manage the end of contracting out and its new objective, interim chief executive Stephen Soper said while its corporate plan was detailed, it would fall short in some areas.“Some of the things just don’t square up,” he said.He said the regulator was trying to be more proactive than reactive to the market, and if it simply focused on changes to regulation, it would not manage to fulfil all of its objectives.In a separate statement, he added: “To help us achieve our aims, we will be focusing on overarching corporate priorities, rather than rigidly adhering to a silo-based approach with our individual lines of business.“It is crucial that we approach challenges with organisational flexibility if we are to regulate effectively in today’s ever-evolving pensions landscape.” The continued roll out of auto-enrolment is to dominate The Pensions Regulator’s (TPR) actions next year, with a heavy focus on ensuring employer compliance, and legal action.Publishing an annual update of its business plan, the UK regulator, which is part tax-payer funded, said auto-enrolment would shift to account for majority of budget.The body spent £56.8m (€70m) on regulating defined benefit (DB), defined contribution (DC) and auto-enrolment in 2013-14, with the latter accounting for 37%.In its forecast for the current financial year, which began in April, it said auto-enrolment compliance expenditure would increase by 90% to £40.4m, accounting for 52% of the total budget.
Danish labour-market pension fund Industriens Pension predicts that the current peg between the Danish krone and the euro could be seriously challenged in a few years’ time but sees the krone holding within narrow bands relative to the pan-European currency for now, despite the European Central Bank’s (ECB) expected quantitative easing (QE) programme.The DKK127bn (€1bn) pension fund said it was preparing for the widely expected announcement by the ECB to start wide-scale QE by holding onto its bond risk levels in Danish and core euro area sovereign bonds, while at the same time taking short positions on US Treasuries.Morten Kongshaug, portfolio manager for tactical asset allocation at Industriens, told IPE: “On a two to three-year horizon, the peg may be challenged for real,” he said.“But in the short term, the Danish krone will keep its narrow plus or minus 0.5% level against the euro.” Industriens had not started hedging euro risk, he said, but added that it was considering covering the tail risk of the Danish krone leaving its peg.However, this is a strategic asset allocation question – i.e. a long-term one – rather than a tactical asset allocation choice, Kongshaug said.The prospect of wide-scale ECB quantitative easing has sparked speculation about whether the Danish krone would be able to maintain its current peg to the euro in such circumstances.Asked what the pension fund had already done to prepare for the ECB’s forecast bond-buying spree, he said: “We have kept bond risk in Danish and core euro government bonds, while shorting US Treasury risk.”However, in the immediate term, the pension fund said it did not expect financial markets to change much if the expected broad QE programme were confirmed by the ECB after its governing council meets.“We are disappointed in the short term, as a large-scale QE programme is already discounted,” he said.Kongshaug said the ECB was likely to get national central banks within the euro area to do the bond-buying in any QE programme, rather than buying the debt itself.How the buying volumes will be divided up between the debt of the various euro states will be determined using specific data, he predicted.“The ECB will use capital key weights in its purchase,” he said.This division of the buying will be important for the pricing of risk-free bonds such as German bunds, Kongshaug said.
A Dutch MEP has suggested the revised IORP Directive should be used to encourage the growth of occupational pensions rather than simply focus on matters of governance and risk management.A draft report by Jeroen Lenaers, acting as rapporteur for the European Parliament’s Employment and Social Affairs Committee (EMPL), recommends changes that emphasise that the “introduction of occupational retirement schemes in more member states [sic] remains crucial”.The change was proposed to replace the European Commission’s emphasis on an internal market for occupational pensions that would help foster growth and boost employment.The report by Lenaers, a member of the European People’s Party, also suggested the Commission take account of the need to grow the second-pillar system by providing “significant added value at Union level” by helping coordinate cooperation with individual social partners. It was suggested this would be made possible by a high-level group of experts to “investigate the most important questions concerning pensions policy”, with proposals being put forward on how second-pillar savings rates could be boosted.The proposal is not dissimilar to the Commission’s earlier work on the White Paper on Pensions, which, among other things, proposes various methods by which member states can boost the number of workers contributing towards occupational schemes.The Dutch MEP’s suggestions largely mirror the changes proposed last year during Council of the EU discussions between member states – stripping out the more onerous aspects of the Pension Benefit Statement, for example. In the preamble preceding the amendments, Lenaers said: “The rapporteur has tabled this opinion with the aim to strike the right balance between, on the one hand, the need to have high European standards with regard to governance, supervision, information and transparency, while on the other hand taking into full consideration the much-needed flexibility for member states to efficiently and successfully adapt these standards to suit their specific national situations.”The report was presented to the other members of EMPL at its most recent meeting on 5 March, with the MEPs asked to propose changes to the Lenaers document by 19 March.A second, more crucial report is currently being drafted by Irish MEP Brian Hayes on behalf of the Economic and Monetary Affairs Committee.Hayes was appointed alongside Lenaers and a number of shadow rapporteurs in early January.
As part of the changes, the DCLG also confirmed it would look to replace the current regulation governing investments, which sets out upper limits on certain types of investments, including infrastructure.Instead, funds would be asked to publish an investment strategy statement, allowing them to pursue a prudential approach in line with private sector funds in the UK.The DCLG hinted at the potential for deregulation in late October.The deregulation proposed by the department would require the new statement, effectively taking the place of the current Statement of Investment Principles, to set out a diversified investment strategy and the fund’s approach to risk management.It would also need to mention any potential collaborative investment approaches, and the fund’s environmental, social and governance policy, as well as its approach to shareholder engagement.The funds will have up to six months after the new regulation is in place to publish the new statement, at which point it will replace the investment regulations from 2009.As part of the separate consultation on structural reform, the DCLG urged local authority funds to “explain” how infrastructure would feature within the new pooling arrangements, as well as how pooling could improve the ability to invest in the asset class.Without directing the funds to invest in infrastructure, the consultation highlighted the “wide range” of assets pooled vehicles could seek exposure to – including railways, roads and housing projects, making both greenfield and brownfield investments.The government also acknowledged that, should the LGPS opt for a single, illiquid asset-pooling vehicle – such as the infrastructure joint venture set up by the London Pensions Fund Authority and the Greater Manchester Pension Fund – such a vehicle would be exempt from the £25bn target imposed on the multi-asset pools.The consultation offered other concessions in the area of pooling, recognising that certain investments – such as local holdings or direct property investments – would be impractical for the asset pool to oversee.“In light of the arguments brought forward by authorities and the fund management industry, the government is prepared to accept that some existing property assets might be more effectively managed directly and not through a pool at present,” the consultation adds. “However, pools should be used if new allocations are made to property, taking advantage of the opportunity to share the costs associated with the identification and management of suitable investments.”Both consultations are set to close by 19 February.,WebsitesWe are not responsible for the content of external sitesLink to pooling criterionLink to investment regulation consultations Local authority funds in the UK will see most investment restrictions lifted and a shift towards a prudent person approach, as the government reforms the 90 schemes in England and Wales.Releasing its long-awaited consultation on the structural reform of the local government pension schemes (LGPS), the Department for Communities and Local Government (DCLG) outlined a number of criteria on which pooling vehicles would be assessed.Local funds will be expected to form “up to” six asset pools of no less than £25bn (€35.5bn), and each proposal should outline the level of savings each vehicle should hope to achieve over the next 15 years.The only one of the English pooling proposals to so far meet the £25bn threshold is the London collective investment vehicle, which earlier this week announced the names of four managers in charge of £6bn in mandates.
Pearson qualified findings for the UK, noting they were “completely and utterly illusory”, as the affordability and sustainability of the state pension system was based on continued economic growth, while adequate retirement income was reliant on the uptake of voluntary pension saving and the success of auto-enrolment.During his presentation, Pearson repeatedly referenced the level of private pension saving seen in New Zealand as a desirable level for the UK to achieve.“The key thing [for the UK] is whether we get people to take up the private pension,” he said. “If that happens, then the system [will] remain flawed, but it will be flawed in ways that will be manageable for quite some time.“If we can actually get the take-up somewhere near to New Zealand levels, I would consider that a success.”According to the OECD’s report, as of June 2014 – seven years after the introduction of the KiwiSaver reforms – 67% of the working age population saved into a private pension scheme.To date, the OECD has been unable to evaluate the full impact of the UK’s auto-enrolment policy.The policy, which came into force in 2012 but will only capture the smallest employers in 2017, has to date seen 10% of those affected opt out, according to the Department for Work & Pensions (DWP).Pearson reserved his harshest criticism for the UK’s so-called triple lock, whereby the state pension is uprated in line with either earnings, inflation or 2.5%, whichever is higher.He said the triple lock was “the real problem” facing the UK and the pension system’s sustainability.Citing calls by the UK’s Institute for Fiscal Studies to see an end to the triple lock, Pearson said he “absolutely and completely [agreed]” with the call for the policy to end.“The triple lock is the most bizarre policy we’ve seen in pensions for a long time,” he said.“There is no other country in the OECD that has anything like a triple-lock guarantee.”The policy, introduced by former pensions minister Steve Webb during the last parliament, has received only qualified support from the current majority Conservative party government, which has so far pledged to keep it in place until the end of its current term in 2020. The UK’s pension system is flawed, with the government’s uprating of the state pension by at least 2.5% a “bizarre policy” unseen in any other country, according to the OECD.However, Mark Pearson, the think tank’s deputy director of employment, labour and social affairs, said flaws to the UK’s system would remain manageable “for quite some time”, as long as the country were able to raise private pension saving rates to the level seen in New Zealand.Launching the OECD’s sixth edition of the ‘Pensions at a Glance’ report, Pearson noted approximately half of the 34 states covered implemented reforms of their pension systems over the two years to 2015.He said that, while the reforms mostly put pension systems on a more sustainable path, they were often only a step in the right direction.
An inter-departmental study has concluded that pensions for the Dutch government should be decentralised and divided among separate vehicles for the various levels of government, education, the police and other public sectors.The adjustment – meant to cut costs – could even lead to the division of the €356bn civil service scheme ABP, according to local financial news daily Het Financieele Dagblad (FD).The FD said Ronald Plasterk, minister for Interior Affairs, sent the study to Parliament last week but that the report had already been completed last summer.It said government employers, critical of the “lack of control” over ABP’s contributions, sparked the study, “as the centrally established premium is for 14 different governmental sectors, whereas salaries and collective labour agreements (CAOs) are individually negotiated for each group”. The government cited “painful negotiations” over contributions to ABP over the past six months as an example, according to the paper.This bargaining initially lead to a premium reduction, which was reversed soon afterwards, causing a financial setback of €245m for government employers.The report recommended that all 14 sectors receive their own pension fund, or the ability to opt out of ABP.It also proposed splitting ABP into three schemes – one for Cabinet-level government, one for the lower levels of government and one for education – as another alternative.The latter would solve the issue of the solidarity contribution within ABP, the report said.A third option was internal division within the civil service scheme, with ABP implementing different plans for the various sectors, with each able to decide its own arrangements individually, the FD said.Most political parties have dismissed the report.Roos Vermeij, MP for coalition partner PvdA, said the study’s main aim seemed to be to strengthen government employers’ negotiating position relative to unions.Fellow coalition partner VVD said the break-up of ABP would be a matter for the unions and Dutch companies, not the government. The Christian Democrats (CDA), the Socialist Party (SP) and the Freedom Party (PVV) condemned the proposals.Paul Ulenbelt and Machiel de Graaf – MPs for the SP and PVV, respectively – took pains to emphasise that the government’s policy was aimed at co-operation among pension funds, as well as consolidation.The Liberal Democrats (D66), however, have seen the report in a more positive light.The FD quoted MP Wouter Koolmees as saying that such an adjustment would be sensible, “as it would enable the various sectors to individually conclude arrangements such as higher pay against a lower pension, or the other way round”.
The medically underwritten bulk annuity market is likely to grow rapidly this year due to attractive pricing, with a particular interest in top slicing, according to the consultants.An “unprecedented” number of clients are investigating this market, they said.Top-slicing involves pension schemes purchasing a bulk annuity to cover those members with high liabilities, to remove concentrated longevity risk.Shelly Beard, senior de-risking consultant at WTW, said had been a wide range of transaction pricing in the bulk annuity market this year, which the consultants believe is in part because insurers are “price-testing” new positions under Solvency II.“However, general pricing levels remain strong, and the recent widening of corporate bond spreads has increased affordability for those schemes that have set a price target relative to Gilts,” she said.The consultants said there was a “high level of activity at what is normally a quiet time of year”, indicating a strong year ahead.Overall deal values for longevity hedging could reach £20bn in 2016, after £6bn in 2015 and £25bn in 2014, according to the WTW report.This would be the second-biggest year on record, after 2014, which included a record-breaking £16bn hedge for the BT Pension Scheme. This year could witness the first-ever “half-way house” transaction structures, involving top-slicing in the bulk annuity market and longevity swaps to cover the liabilities represented by the remaining population, according to WTW.This approach is likely to be attractive for those pension schemes “with some Gilts but not enough to annuitise all of their pensioner liabilities”, noted the report.Solvency II, the EU-wide solvency regulation for insurers that came into effect in January, could pose a challenge for pension schemes longevity hedging this year but is surmountable, according to the consultants.The problem, to the extent that it becomes one, stems from bulk annuity providers themselves looking to reinsure longevity risk more regularly because the capital-requirement rules of Solvency II makes holding the longevity risk on their books inefficient.This could mean pension schemes find it more difficult to get traction when reinsurers have limited resources, said the consultants.However, this potential capacity constraint in 2016 is likely to be operational and is one reinsurers are aware of and building their teams to cope with, Beard said.“While we may see bottlenecks in certain areas, we do not expect it to have a major impact on the market, and schemes that go to market with clear objectives will continue to achieve good outcomes,” she said.The onus, according to the report, is on pension schemes to have “a well-thought-out quotation process to maximise reinsurer engagement”. Longevity-hedging deals for company pension schemes could hit £20bn (€26bn) in 2016 despite challenges posed by Solvency II, according to a report by Willis Towers Watson (WTW).The consultancy predicted a 20% growth in bulk annuity deals in 2016, expecting buy-ins or buyouts covering some £12bn of liabilities versus the £10bn of liabilities transferred to insurers in 2015.Pensions schemes can expect lower prices and more innovation due to increased competition in the market, according to the advisory company’s 2016 de-risking report.Canada Life and Scottish Widows entered the market in the second half of 2015, noted WTW, and “we are aware of a number of other companies closely monitoring the development of the market” and likely to develop bulk annuity propositions over the course of 2016.
Another trialogue meeting on revisions to the IORP Directive looks set to be held next week in a bid to strike a deal before the end of the Dutch presidency of the European Union.Cross-border funding will be one of “a few” issues still open, according to a European Parliament source.The meeting has not been formally scheduled, but the date should be fixed by the end of the week, he said.Representatives of the European Parliament, the European Commission and EU member states met last week for a sixth and what was hoped to be final tri-party meeting, but they failed to reach an agreement. They were said to have made significant progress, however, a point reiterated by the parliamentary source today.“We are quite optimistic, but I suppose we’ll have to see what the next week gives us in terms of securing a final agreement,” he said.In the meantime, plenty of discussions and technical meetings are said to be going on in the background.“There is a lot of work still happening at the moment,” the source said. “But we are hopeful of another meeting to seal the deal.”Cross-border funding, as previously reported, is one of the topics still being discussed.According to the source, however, there are others, too, such as depositories and environmental, social and governance (ESG) issues.“It’s a whole package,” he said. The European Parliament’s version of the Institutions for Occupational Retirement Provision (IORP) Directive included wording about the consideration of ESG factors in pension funds’ investment process.
It noted that it was the first time since 2004 that private sector membership was on a virtual par with the public sector, with private-sector membership having been on a continual decline from 1991 to 2012.Total occupational pension scheme membership was 33.5m, the highest level recorded by the survey. It counted 10.6m pensions in payment.The average total contribution rate in private-sector defined contribution (DC) schemes was 4%, broadly in line with the level in 2014, according to the ONS survey.The split is 1.5% for employee contributions and 2.5% for employers.ONS noted that the figures were above the current legal minimum but below the 5% and 8% totals that will be required as of 2018 and 2019, respectively.Aviva noted that, at current rates of decline, in 2024, there will be no more active members of private-sector defined benefit pension schemes in the UK.“This would have significant implications for the health of retirement savings in the UK,” it said.“While the average contribution in a defined contribution occupational pension scheme currently sits at 4%, the average contribution in a defined benefit occupational pension scheme currently sits at 21.2%.”The UK government will next year launch a review of the future of auto-enrolment.The ONS survey excludes group personal pension arrangements. Active membership of occupational pension schemes in the UK reached its highest level in more than 30 years in 2015, according to figures released by the Office for National Statistics (ONS).There were 11.1m active members last year, the highest level since 1983.The numbers are split fairly evenly between the private sector (5.5m) and the public sector (5.6m).Aviva Investors said there had been “a staggering reversal of fortunes” for participation in the private sector, with auto-enrolment the major driver behind this success.