first_imgThe International Accounting Standards Board (IASB) has signalled institutional investors in the UK it is prepared to give a greater role to the notion of stewardship in financial reporting as it revises its conceptual framework.In a series of documents seen by IPE, IASB staff and board members were revealed to have expressed sympathy for the concerns of long-term shareholders over what they say are major shortcomings in financial reporting.The documents show that the IASB’s outreach efforts, part of its conceptual framework project, have involved major investors such as RPMI and NEST Corporation, the entity behind the National Employment Savings Trust.Following one meeting on 15 April between shareholder representatives and Darrel Scott, Barbara Davidson and Stephen Cooper of the IASB, one investor concluded that the momentum towards prudence in IAS 1 was very strong. In another document, IASB member Stephen Cooper was reported to have sought a precise definition of the notion of ‘prudence’. Cooper also complained, the document continued, that the word has many meanings.The documents also revealed that investors expected the IASB to give a more prominent role to the concept of stewardship once the board had signed off on its conceptual framework.The IFRS Conceptual Framework sets out the principles that underlie the preparation and presentation of financial statements. The IASB restarted work on the conceptual framework in 2012 and a new framework is expected to be in place next year.The IASB representatives also indicated their support for the view that prudence was to demonstrate healthy scepticism about, or as a counterbalance to, management’s tendency toward optimism.Less positively for some investors, however, the IASB representatives also warned that the idea of a true and fair view override in international accounting was a non-starter.They also expressed an interest in how financial statements could focus on highlighting distributable profits, and reinforce the argument that accounts had long-term capital providers as a primary audience.The revelations come as investor frustration with International Financial Reporting Standards (IFRS) and the UK accounting establishment reached a near crisis point.At the end of last year, three major institutional investors demanded that the International Accounting Standards Board (IASB) bring back an explicit reference to the notion of prudence into its conceptual framework.The demands were set out in a letter addressed to the UK financial watchdog, the Financial Reporting Council.The three signatories to the 25 November letter – the Association of British Insurers, the Investment Management Association and the National Association of Pension Funds – collectively manage over £7trn (€8trn) of assets.The move followed the publication of a barrister’s opinion earlier in 2013 by the Local Authority Pension Fund Forum and other major institutional investors. That document, George Bompas QC argued that there were substantial legal flaws with IFRS.In particular, Bompas argued that statutory accounts prepared under IFRS failed to give a true and fair view of a business’s financial performance. The ABI, IMA and NAPF also pointed to the true and fair view override, as well as the concept of capital maintenance, as further areas of major concern for investors.The IASB removed references to prudence, or caution, from its conceptual framework in 2010. It substituted instead the concept of neutrality.The move was intended to bring the IASB’s conceptual framework closer to the US GAAP framework, which makes no reference to prudence.The IASB has in the past defended the move vigorously. In a speech to the Federation of European Accountants, IASB chairman Hans Hoogervorst argued that IFRSs are inherently prudent.At the heart of the debate over prudence, and the parallel issue of whether accounts prepared under IFRSs show a true and fair view, is the conflict between long-term company owners or shareholders and other investors with a short-term horizon.Company owners argue that financial statements that meet the needs or interests of an investment bank that trades in a stock cannot meet their longer-term need for prudence or caution in accounting.The issue of prudence has also come under the political spotlight in Europe with members of the European Parliament warning the IASB that it must address investor concerns about prudence in accounting and clean up its corporate governance act.Sharon Bowles MEP, the British chairwoman of the European Parliament’s influential Economic Affairs Committee, warned in a statement released on 13 March, after a vote in Parliament on funding for the IASB’s activities, that the London-based standard setter is drinking in the last-chance saloon.In separate correspondence obtained by IPE, the IFRS Foundation director David Loweth told MEPs that the “IASB will reach its own, independent, decision on the role of prudence within the conceptual framework.”last_img read more

first_imgThe two pension funds of engineering firm Royal HaskoningDHV have announced that they are intending to merge into a multi-company scheme on 1 January 2015. The decision comes in the wake of the merger of the engineering companies Royal Haskoning and DHV in 2012, leaving the new company with two pension funds, the employer indicated.The new multi-pension fund is to carry out a new pension plan for all participants, and would also manage accrued pension rights of all participants and pensioners, said Royal HaskoningDHV.The Pensioenfonds DHV manages approximately €580m of pension assets for 3,400 employees and deferred participants as well as 1,100 pensioners of the former DHV. The €336m Pensioenfonds Haskoning (SPH) has 1,505 active participants, 1,475 deferred members and 610 pensioners.SPH has placed its pensions under a guarantee contract with insurer Nationale Nederlanden, which is to expire at year-end, according to the employer.A multi-company scheme operates under a single board, managing ring-fenced assets which are individually liable to the financial assessment framework (FTK).Contrary to an industry-wide pension fund, a multi-company scheme is open to pension funds from different sectors with different pension arrangements.The concept of the multi-scheme was meant as a transitional phase between the Premium Pension Insutitution (PPI), Dutch cross-border DC vehicle, and the proposed API for defined benefit funds.However, the API concept never made it onto the statute books and has been replaced with proposals for the APF, which will not be able to accommodate non-domestic pension funds for the time being.The interest from the sector for a multi-company pension fund has been limited to three schemes so far.last_img read more

first_imgIn general, solvency levels among German Pensionskassen have increased from 135% to 138% year on year.As of year-end 2014, only one Pensionskasse – which, in Germany, are set up chiefly as an insurance-like vehicles – failed to meet its solvency requirements.BaFin warned that, if interest rates continued at their currently low levels, Pensionskassen would “suffer more than life insurers” because of their longer-term businesses and the fact they have to pay out life-long pensions.For 2014, the average interest granted on members’ assets in Pensionskassen amounted to 4.1%, slightly below the 4.4% average for the year previous.In total, the Pensionskassen regulated by BaFin managed nearly €140bn in assets, as per year-end 2014, having seen their assets grow by 6% through returns and contributions.Meanwhile, a spokesperson for BaFin confirmed to IPE that the supervisor had chosen a sample of Pensionskassen that will take part in the stress tests conducted by EIOPA later in May.It declined to reveal the size of the selected candidates to avoid speculation on the identities of the institutions.However, the spokesperson confirmed that the German government would meet EIOPA’s target of covering 50% of the balance sheet total of pension assets in the market.Several pension fund associations have warned that, because mostly large institutions are to take part in the stress tests, the results will reflect only one part of market. Only nine of the 126 Pensionskassen regulated and tested by German regulator BaFin failed national stress tests performed at year-end 2014, the watchdog announced.In its annual report, BaFin points out that this is two fewer than reported the year previous, and that solvency levels of Pensionskassen had improved slightly over the period.With its own stress tests, the regulator seeks to gauge the resilience of market participants to various market downturns in one or more asset classes.The tests do not include a quantitative assessment, as it is done under Solvency II.last_img read more

first_imgThe Pensions Regulator (TPR) has begun surveying the occupation defined contribution (DC) market to ascertain the prevalence of exit fees and charges, sometimes charged to members looking to transfer out.The UK government is to begin consulting on how to address excessive early exit fees placed on members, and improve the transfer process for DC savers – particularly in light of the new freedoms.TPR will question a sample of DC trust schemes, while the Financial Conduct Authority (FCA) has written to insurance-based DC providers seeking similar information.The regulator said the information would complement its work with DC schemes on how they adapt to offering flexible retirement options, now that annuitisation is no longer compulsory. In other news, the Pensions Infrastructure Platform (PIP) has secured more than £1bn (€1.4bn) in pension fund assets to be directed towards UK assets.The outfit, created and managed by the National Association of Pension Funds (NAPF), said the two specialist funds managed by Dalmore Capital and Aviva Investors secured nearly £650m in capital, alongside a further separate mandate.In its half-yearly update, the PIP said it agreed a separate £370m co-investment alongside Dalmore Capital, but the NAPF declined to provide further details on the investment, or which schemes were involved.The PIP is continuing to work towards authorisation from the FCA to set up the platform to become a not-for-profit asset manager and make direct infrastructure investments on behalf of UK funds.Meanwhile, the defined benefit (DB) deficit at private sector schemes has fallen over the month of June to £259bn, according to JLT Employee Benefits.The marginal fall of £6bn came as the result of a slight pick-up in yields bringing down liabilities by £63bn to £1.48trn.Asset values also fell by £57bn, providing the slight improvement in funding levels.Over the last 12 months, however, the situation has worsened, with funding levels falling from 87% to 83%, while liabilities are 11% higher.Asset values, now a total of £1.22trn, have also risen 5.6%.last_img read more

first_imgThe remaining 10% is split between construction and energy-efficiency projects, waste, pollution and water-themed investments or agricultural and forestry-related developments.Germany’s Kreditanstalt für Wiederaufbau was one of the largest issuers of labelled green bonds over the period surveyed, selling $4bn within its first year active in the green bond market.The UK’s Transport for London, with all of its issuances falling within the climate bond sector, also issued £400m (€564m) worth of green bonds in 2015.The number of green bonds trebled compared with 2013, from $11bn to $36.6bn.The Climate Bonds Initiative said it was expecting total issuance to hit $70bn by the end of 2015.The state of the market report, commissioned by the HSBC Climate Change Centre of Excellence, also found evidence of greater diversification in the types of bonds being offered.It noted that the US state of Hawaii issued an asset-backed green bond, while BerlinHyp established the market for green covered bonds with a €500m issuance in May 2015.The report laid out 10 steps to grow the market, throwing its weight behind the pooling of smaller-scale carbon-reducing projects, such as rooftop solar panels.The securitisation market, it said, could boost activity in this area.“This includes encouraging deal flow of green loans suitable for subsequent securitisation, supporting financial warehousing of loans and providing credit enhancement for securitisation issuance,” it said. “These supports can be made conditional on loans using standardised contracts. This would speed up the standardisation process for low-carbon assets such as energy-efficiency loans.”Last year, the Climate Bonds Initiative conceded the climate bonds market was not quite developed enough to warrant the launch of dedicated indices. The climate bond market has grown by 20% over the last year, with a large part of the growth stemming from an increase in labelled green-bond issuances.The Climate Bonds Initiative estimated that the market for climate-related bonds stands at nearly $600bn (€545bn), consisting of $531.8bn in unlabelled climate-aligned bonds and $65.9bn in labelled green bonds.Sean Kidney, the organisation’s chief executive, said the development showed institutions could now invest in a “large and liquid” universe of fixed income holdings.With more than 90% of bonds investment grade, the large majority of issuances – $418bn – relates to low-carbon transport projects, followed by clean energy projects, which account for 20% of the universe.last_img read more

first_imgSecond, the country needs to create a much more flexible labour market. Sharma argues that the Modi government, despite having the first majority in 30 years, still repeats the mantra that labour law reform is subject to the unions’ approval, and that it must not be biased towards the employer. The problem is that, with very inflexible labour markets, employers fear they cannot make staff redundant easily, even if the companies are facing losses that deter investment in industry in large parts of the country.Modi, it seems, has dismissed ‘hire and fire’ as a “Western concept”, not in keeping with Indian culture. Such an attitude, while great for those already in employment, is not so good for those seeking it. It is also arguably one of the reasons why the UK and US are experiencing more vibrant economies than many European countries such as France, which also has more rigid labour laws.Third, Sharma argues that the country needs genuine administrative reform. It is the incapacity and inefficiency of the state, he says, that poses the greatest hurdle for the economy – as anyone who has experienced Indian bureaucracy can testify. In particular, ministries need to become policy-making, not rule-making, centres, with independent agencies and regulators empowered to make the rules instead.Fourth, Sharma argues that India needs to reform its budget and expenditure mechanism. Making the Union Budget use accrual-based accounting instead of a cash-based one, he says, would increase transparency while cutting the Union government out of the process of disbursing monies to the states for schemes they are implementing and evaluating.What irks Sharma most is the government’s astounding timidity on reform. In principle, any major reform creates losers as well as winners, yet the economy as a whole is better off. What should be a worry is whether Modi’s administration becomes hijacked by vested interests that thwart the promises of change that swept him into power.Joseph Mariathasan is a contributing editor at IPE The prime minister’s timidity in the face of much-needed reform is astonishing, writes Joseph MariathasanIndia’s growth rate is now comparable with China’s, but it still lags far behind in many respects, most notably in the state of its infrastructure. India’s current prime minister, Narendra Modi, came into power in May 2014 on a wave of optimism and hope that his administration would finally produce the changes required to transform the economy. More than two years later, there has certainly been some changes, accompanied by much hype, but many commentators are disappointed and frustrated by his inability to create the “Big Bang” changes the economy requires.Economist Mihir Sharma argues there are four key problems the Modi administration has failed to tackle.First, he says, India should be privatising those businesses that governments should not be in. The most notable example is the national carrier, Air India, which Sharma describes as a national disgrace in terms of service quality. It is seen as a bottomless sink for taxpayer rupees and a constant source of undercutting and instability in the aviation sector. He, along with many others, argue that dozens of Indian public sector units are a drain on public resources and productive capacity, and should be sold off.last_img read more

first_imgIn announcing that the plans would be scrapped, the FSA said: “Changes to the model could thus have major consequences for companies’ asset allocation and may ultimately also be liable to affect Swedish capital market stability.”The traffic-light model was first introduced in 2006, replacing statutory restrictions on investment within insurance company portfolios by a principles-based approach.Its aim is to identify – by carrying out stress tests for equity, credit, interest rate, real estate and currency risks – companies whose capital buffer is highly exposed to financial risks.The model also includes stress tests for underwriting risks such as longevity risk.The tests assess whether insurers and pension funds can meet their pension promise obligation, with companies given an overall rating of ‘green’ (low risk) or ‘red’ (high risk).The ‘amber’ (medium risk) category was dropped some years ago because it was considered too ambiguous.The FSA said it also identified a number of deficiencies in the existing model, not least because of continuing low interest rates.Magnus Strömgren, deputy Executive Director for Insurance at the Swedish FSA, told IPE: “We tried to change the model into something more realistic, and there were areas where our proposals were more stringent than the existing model. But we made mistakes as well.”Strömgren continued: “The existing model does not recognise that there could be negative interest rates. And it assumes there is no correlation between equity or interest rate shocks, and other asset classes, such as property. But in a stress situation, many things happen at once and cannot necessarily be said to be independent. Thus, the capital required in a severe financial stress is most likely underestimated by the current model.”Rather than redesign the traffic-light system, the FSA will now ask insurers and pension funds to provide additional information on potential risks – such as credit risks – in their business activities.This is intended to identify companies taking risks that might, given their financial situation and in a stress situation, threaten future pension payouts.The FSA will then initiate a dialogue with those companies to agree a course of preventive action.However, legislation setting up a framework for a new type of company, pursuing only occupational pensions business, is likely to be introduced within 3-4 years. This will include new risk-sensitive capital requirements and could therefore allow the FSA to scrap the traffic light model or change it into something of a more targeted approach to certain risks, said Strömgren. Sweden’s Financial Supervisory Authority (FSA) has dropped plans to change its traffic light model for insurance companies and pension funds after criticism that this would impose additional capital requirements on those companies.Insurers and pension funds would effectively have been required to hold a higher percentage of their assets in low-risk instruments such as government debt to hedge their regulatory interest-rate risk under the new model.This would not only have restricted investment choice but could also have weakened liquidity in the corporate bond and mortgage bond markets, according to the industry.The proposals had been sent out for consultation last October.last_img read more

first_imgThe chief executive of Denmark’s Industriens Pension has predicted that market returns will be lower in 2018 and volatility higher, after a buoyant 2017 for international financial markets.The pension fund, which covers the Nordic country’s industrial sector workers, reported an 8.2% return on its total investment portfolio for 2017 in preliminary financial results for the year. This amounted to DKK12.2bn (€1.64bn) in absolute terms.Last year’s result was boosted mainly by listed equities, with infrastructure and real estate generating 8.8% and 8.1% respectively, according to the data published.Laila Mortensen, chief executive of Industriens Pension, said: “The development of financial markets in 2017 was marked by a high level of global growth and continued very easy monetary policy.” Laila Mortensen, CEO, IndustriensShe added that slightly lower returns and greater fluctuations could be expected in 2018 compared to last year, when the markets were unusually stable and rose for most of the year.Market developments last year had contributed to securing a high return on equities and other risk assets, Mortensen said.“But it should also be mentioned that the return on stable, unlisted investments such as infrastructure and property has been very gratifying,” she added.Foreign listed shares, in which Industriens Pension has DKK33.8bn invested, produced a 15.3% return last year, topped by the return on domestic listed shares of 18.9%.The pension fund has DKK11bn in Danish listed equities.Government bonds generated 1.3%, and investment-grade corporate bonds produced 4.4%.Private equity, in which the pension fund has invested DKK16.5bn of its portfolio, returned 10.3%.Mortensen said the pension fund had generated an average annual return of 9.5% over the course of the past decade.Industriens Pension’s total assets under management rose to DKK165bn at the end of last year, from DKK157bn reported at the end of 2016.last_img read more

first_imgStrong investment performance and increased deficit contributions by employers were behind the reduction in the aggregate deficit, according to Barnett Waddingham.“This is the third year in a row that deficit contributions have increased, suggesting that the FTSE350 companies are stepping up their commitment to paying down DB pension scheme deficits,” it said.However, the report also found that the average deficit contribution paid by FTSE350 companies as a proportion of dividends remained at 10% in 2017.The firm speculated that the Pensions Regulator may be concerned that around 43 companies boosted dividend payments while at the same time reducing deficit contributions. “However, within this group there will be some companies who agreed to pay higher levels of contributions in the short term, which have now done their job in reducing the DB deficit,” it commented.“It is only right that they can now return to more normal contribution levels,” the firm added.Nick Griggs, partner at Barnett Waddingham, said that while the deficit shrinkage was positive news, it would not take much to tip the balance the other way.“Our analysis suggests that a 0.5% fall in bond yields in 2017 would have pushed the aggregate deficit of the FTSE350 DB schemes up to £85bn,” he said.“With the health of the UK and global economy threatened by a lack of progress with Brexit and the threat of a trade war from Trump’s America First assault, there could a major impact on the size of pension deficits and the ability of FTSE350 companies to pay the contributions needed to clear these,” Griggs warned.Separately, consultancy Mercer earlier this month released figures quantifying the likely size of UK DB deficits for FTSE350 companies, saying the aggregate pension deficit had more than halved in 2018 so far, improving by a total of £40bn from £72bn at the start of the year to £32bn.With its figures compiled on a different basis to those from Barnett Waddingham, Mercer included data for July as well as the first half.In July, both asset values and liabilities had risen and the deficit had increased by £3bn compared to £29bn at the end of June, the firm said. Pension deficits at major UK companies have fallen sharply in the first half of this year, but are still susceptible to bond yield shifts, according to a new report.Consultancy Barnett Waddingham estimated the aggregate defined benefit (DB) pension scheme deficit for companies in the FTSE350 index was around £35bn (€38.9bn) on an accounting basis at the end of June 2018, down from £55bn at the end of last year. At the beginning of last year the aggregate deficit stood at £62bn.The £35bn deficit compares to FTSE350 companies’ total pre-tax profits of £210bn, putting the collective deficit at 17% of total corporate profits compared with 70% 18 months ago, according to the firm’s latest report analysing the impact of DB pensions on UK business.This bucks the trend seen since 2011, where deficits steadily increased as a proportion of pre-tax profits from a low of 25% and hitting a peak of 70% in 2016, the firm said.last_img read more

first_imgPrivate credit is now firmly established as a mainstream investment by institutional investors with the asset class on track to reach $1trn (€0.9trn) of assets under management by 2020, according to new research.Europe has become a core region for private credit investors with Germany leading the way, according to the survey of 70 private credit managers, conducted by the Alternative Credit Council – the private credit affiliate of the Alternative Investment Management Association (AIMA) – and law firm Dechert.Respondents managed an aggregate $470bn in private credit investments.Over 70% of all private credit committed capital came from institutional investors, according to the study, at a time when the “historically unprecedented liquidity support” provided by central banks in recent years was likely to end. Of the committed capital, 38% came from North American investors and 31% from Europe, excluding the UK.Much of the growth in European lending over the past year came from Germany, the survey reported, with German sponsors and borrowers increasingly embracing private credit.Businesses supported by investors were getting more diverse, the Alternative Credit Council found. While 41% of European respondents’ capital was allocated to SMEs or mid-market borrowers, managers were also increasingly lending to a wider variety of borrowers outside the mid-market, from smaller businesses and start-ups, to larger corporations, real estate and infrastructure projects.European managers reported average allocations of 19% to real estate, 9% to large corporates and 8% to trade finance. However, distressed debt – relatively popular with North American investors – made up only 3% of European allocations.The survey report said: “The continued difficulties faced by European banks in offloading their non-performing loan (NPL) books, along with fragmented creditor protection frameworks across Europe, means that the market for European distressed debt remains less attractive. This may change in coming years, as policymakers continue to encourage a more active NPL market in Europe.”Growing competition for private credit investments had created a buyers’ market for borrowers, with the report noting that companies were seeking more flexibility on loan covenants and driving a hard bargain on pricing. However, managers said there were still risk baselines they would not cross.Looking ahead, private credit managers expected continued growth across the asset class, with a third of respondents planning on increasing allocations to SME and mid-market lending over the next three years.However, they were also preparing for the possibility of an end to the current credit cycle and tougher economic conditions for borrowers. As such, said the report, managers were increasingly lending at positions higher in the capital structure, and moving away from cyclical sectors.See also: IPE’s Credit Investing Special Report from the November issuelast_img read more