Denmark’s PenSam is to expand its in-house asset management team, after internal equity portfolios outperformed those overseen by third-party managers.Benny Burchardt Andersen, CIO at the DKK100bn (€13.4bn) pension provider for employees of Danish municipalities, said a decision reached in 2010 to increase the level of internal active management of equities had paid off – both in absolute and relative returns.He told IPE’s How We Run Our Money that the provider’s current approach to external equity managers was “close to being a passive strategy”, albeit with an enhanced mandate.“In other words, while the external managers are tracking companies, PenSam uses internal tactical management as a second layer incorporating its views on different regions, sectors and derivatives to generate alpha,” he said. “We have a strong view on what constitutes alpha and what constitutes beta in the equity portfolio, and, over the last few years, the estimated 1.5% outperformance, as opposed to the 1% generated by the best external managers between 2010 and 2013, was mainly a result of internal management decisions.”He said the outperformance had resulted in the decision to increase the size of its in-house management team.“We will add to the number of people working in active management both on a strategic and tactical level,” Buchardt Andersen said.“We will have to be extremely focused on creating outperformance in the future because, after two good years in equity markets, future returns and consequently pensions are going to be lower. In short, for us, active management equals outperformance.”Burchardt Andersen said internal staffing levels had already been increased in the area of direct lending, and that the high-yield bond team was also likely to grow.“The board needs to approve it first, but the risk is fair now, which is why we are moving into illiquid credit and investment-grade bonds,” he said.For more on PenSam, see How We Run Our Money in the current issue of IPE.
“Unifeeder is also a well-managed company that has consistently delivered strong results, and has significant long-term growth potential.”He told IPE Danica expected to make “close to double-digit returns” from Unifeeder.He said: “The overall strategy is to replace some of our bond investments with this type of investment.”In 2013, the average return in Danica Balance, the pension provider’s main product, was 7.8%, while Danica’s return on listed equities was 16%.The Unifeeder stake is Danica’s first major direct investment in a company and heralds the start of direct investing as a new investment strategy.Over the next two years, the pension fund is expecting to make direct investments totalling “double-digit billions of krone”.DKK10bn would equate to around 3% of the pension fund’s DKK330bn-worth investment portfolio.The change in strategy has been driven by Aarup-Andersen, who arrived two months ago.Aarup-Andersen was previously chief portfolio manager at Danske Capital, the asset management arm of Danske Bank, which is also Danica’s parent.He told IPE: “We want to refocus the investment process and strategy, and move towards alternatives.“Yields from government bonds and mortgages are very low, while equities are now fully valued because of cheap money.“We can find that extra yield in private markets where we are not up against hundreds of players.”He said Danica’s edge in chasing these deals was its size, its flexibility in the terms it can agree, and also the speed of execution of deals.Danica has not previously owned direct investments because of the skill sets needed to manage them.It is now hiring specialists to build an in-house team.However, it will not be a hands-on investor.Aarup-Andersen told IPE the investment case for future acquisitions would be driven by each specific investee company, and that there were no targets in sector terms.The key parameters would be that a company is well-run with strong financial management, capital generation and low risk resulting from the capital structure in place.He added that direct investments might be made not just through equity but also through debt such as mezzanine finance. Danica Pension, the Danish corporate pension provider, has bought a minority stake in marine logistics company Unifeeder for DKK400m (€54m) from private equity firm Nordic Capital, previously the sole shareholder.Unifeeder, now the largest independent pan-European feeder company, operates short-haul freight transport services into smaller ports worldwide, which super tankers are too big to enter.According to Jacob Aarup-Andersen, Danica’s CFO, the company is an attractive investment because it is asset-light – i.e. it leases vessels on a short-term basis rather than owning them.Aarup-Andersen said: “This gives it flexibility in managing capacity continuously, resulting in low volatility in terms of financial performance compared with companies that use highly leveraged debt structures to buy their ships.
The board concluded that an asset transfer to another pension fund was the best way to keep pace with inflation compensation.Jaarbeurs said joining Horeca, the pension fund for the Dutch hotel and catering industry, was not an option, as the difference in funding levels would have required Jaarbeurs to make an additional payment.At October-end, the coverage ratios at Horeca and Jaarbeurs was 120% and 103.5%, respectively.The pension fund PNO Media was also dropped, as its pension plan’s contribution was too high compared with the premium charged by Pensioenfonds Jaarbeurs.In the end, PGB was selected because “it could almost entirely adopt the current pension arrangements of Jaarbeurs”.“There was no significant difference in funding, the contribution level was right, and the investment policy of both schemes was almost the same,” Jaarbeurs’ board said.The transfer to PGB – scheduled for 31 December – is still subject to regulatory approval.In other news, Koopvaardij, the €3.2bn pension fund for the Dutch merchant navy, has said it will grant its 54,000 participants 50% indexation.The scheme’s board said it could now afford inflation compensation, on the back of a coverage ratio of 112.3% at October-end and “good investment results” this year.It has decided to grant its pensioners and deferred members an indexation of 0.29%, equating to 50% of the consumer index.Active participants will see an increase in their pension rights of 0.49%, which is 50% of the salary increase in the sector, it said.The board said indexation would be unlikely next year due to the stricter rules put in place by the new financial assessment framework (FTK), which will come into force on 1 January.The scheme has not granted inflation compensation since 2010, but neither has it cut pension rights over the period.The board said an analysis of the development of its long-term financial position suggested its options for indexation would be limited for the next 15 years.Lastly, the €17.2bn Philips Pensioenfonds has claimed that new FTK rules for “sustainable indexation” could prevent the scheme from granting full inflation compensation for the next 5-6 years. The company scheme has failed to grant indexation since 2011, and saw its indexation in arrears increase to 6.5%.It said the new FTK would only allow a compensation for this arrears in small steps and only after the pension fund’s funding – currently 110% – exceeded 125%. The board of the €110m pension fund for exhibition venue Jaarbeurs has decided to join the €18bn pension fund for the printing industry PGB. In a statement to participants, Jaarbeurs’ board said increased legal requirements for trustees had forced their hand on whether to liquidate the company scheme.Explaining its preference for PGB, it said it asked for a quote from three insurers, and that only Delta Lloyd and Aegon had made interesting offers on price.However, the pension scheme lacked additional funding to secure indexation, it said.
The Ministry announced that the government would soon present a number of recommendations on how to overcome hurdles to the establishment of pension plans, particularly for small and medium-sized enterprises.According to the government’s latest survey, 55-60% of Pensionskasse or Pensionsfonds members in Germany have opted for deferred compensation, implemented in 2002.And more than half of surveyed Pensionskassen, 93% of Pensionsfonds and 85% of direct insurance providers say they are optimistic that membership figures in their respective vehicles will increase.However, the Ministry pointed out that respondents had shown similar degrees of optimism in previous surveys – optimism that had been justified only “to a limited degree”. Germany’s second-pillar pension system “needs strengthening” despite the fact participation in it has kept pace with the number of working people in the country, according to the Ministry for Labour and Social Affairs.As of the end of December 2013, the number of working people in Germany with an occupational pension plan stood at just over 20m, a 3% increase since the government’s previous survey, commissioned in 2011.According to the 2013 survey, the number of active members in the second pillar has increased by approximately 30% since 2001 – more or less in line with the number of working people overall.While the government cited the role of the private sector in increasing the number of people covered by a pension plan, it also pointed out that Germany’s overall participation rate remained unchanged at roughly 60%.
“High yield’s emergence as a competitor to bank finance as a primary source of capital, the growth of alternative capital providers and new structures for the legacy loan market all contribute to increasing choice for borrowers,” the report said.European leveraged loan allocations reached €116bn in 2014, an increase from around €80bn, and high-yield from from around €83bn to €97bn as US issuance also grew, albeit at a slower pace.The report described recent changes in the European leveraged debt market as a “huge upheaval”, with new legal precedents in covenants and incurrence-based covenants.White & Case said the European market would continue its growth, as 2014’s low-yield environment continued with companies refinancing bonds in call periods at much lower coupons.David Becker, a partner, said: “It is coming of age now as its investor pool has become increasingly sophisticated, providing funding across the loan and bond spectrum.”More M&A activity across the world also helped fuel the leveraged loans market while high-yield issuance in the second quarter of 2014 was 90% higher than a year earlier, with a 116 deals from a year total of 269.In the first half of the year, values and volumes were higher in most Western European countries, the report said, with the UK & Ireland leading high-yield issuance and France leveraged loans.The second quarter was the busiest period in both asset classes as investors clamoured into high-yielding fixed income.However, the retreat of banks, often cited as a growth factor in the markets, also began to cause concern among investors as Q3 began.European pension funds were among those moving into sub-investment grade corporate debt as investment managers became concerned over liquidity in the market and pricing bubbles forming in the first half of the year.At the start of Q3, Mike Karpik, chief executive at State Street Global Advisers, described the high-yield market of showing “pockets of euphoria” with liquidity in the market a major concern.UBS Global Asset Management also began to change the structure of its tacitical asset allocation strategy with liquidity a key concern.These concerns were demonstrated in market volumes with Q2 saw peak issuance for both high-yield and leveraged loans in Europe, a factor not seen in the US, or in previous years within the continent.Issuance fell for the remainder of the year but still supported the record-level market.For more on the high-yield bonds, read IPE’s previous coverage of the market Issuance of high-yield and leveraged loans reached record levels in 2014, backed by change in the way deals are structured for investors.A report, ‘The changing face of international leveraged debt’, by law firm White & Case said these record levels came as market makers experienced strong demand, aided by a convergence in deal structure between the US and Europe.The law firm said European corporates had adopted “US-style” terms, making deals less restrictive and more borrower-friendly.“European corporates and sponsors now have a broader range of financial products available to them than ever before.
It marks a clarification of the position of the FSB, which, in late 2013, would not be drawn on whether pension funds would be classified as systemically important.Its 2014 consultation on non-bank institutions also did not directly address the status of the pensions industry.The consultation, which will run through the end of May, asked respondents to explain why pension funds should be excluded or, alternatively, if the risks associated with the failure of a pension fund should warrant their inclusion as systemically important entities.Mark Carney, chairman of the FSB and governor of the Bank of England, said the second consultation was an important step towards identifying those NBNI bodies deemed too big to fail.“It will also enhance authorities’ understanding of the risks to global financial stability posed by the activities of entities in financial markets, including the distress or disorderly failure of non-banks and non-insurers,” he said.However, pension funds could still be affected by new layers of regulation through their involvement with larger asset managers, with the consultation suggesting there could be an absolute threshold of $100bn (€92bn) in assets to trigger a manager’s inclusion.“In addition to ‘size’, the FSB and IOSCO also considered the possibility of setting additional materiality thresholds based on ‘global activities (cross-jurisdictional activities)’,” the consultation said.“However, since data regarding the international activities of NBNI financial entities are often not disclosed or reported to the relevant authorities, the FSB decided not to set additional materiality thresholds based on ‘global activity’.”An absolute threshold based on assets under management could also impact a number of pension funds through their ownership of large asset managers, such as ABP’s ownership of APG and several large Dutch schemes’ stakes in MN.Cecile Sourbes explores whether a pension fund can be too big to fail,WebsitesWe are not responsible for the content of external sitesLink to FSB consultation on NBNI entities of systemic risk to financial system Pension funds are not to be classed as systemically important financial institutions but could still be subject to increased regulatory burdens proposed for ‘too big to fail’ asset managers.A consultation by the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) on which non-bank, non-insurer global institutions should be classed as systemically important financial institutions (NBNI G-SIFIs) suggested that pension funds could be excluded.It said pension funds posed a low risk to “global financial stability and the wider economy due to their long-term investment perspective”.The FSB’s paper also suggested pension funds were likely to be captured by additional regulation due to their relationship with asset managers but sought advice on whether the reasons for excluding the industry as a whole were sound.
The put option was written in London under the 1992 ISDA Master Agreement (‘master agreement’), a standard template for over-the-counter derivative transactions published by the International Swaps and Derivatives Association (ISDA).The agreement was ended automatically on 15 September 2008 when LB first filed for formal insolvency protection.Enasarco, under pressure from the Italian government and media, eventually found a replacement for the put option, which it purchased itself on 6 May 2009.The master agreement sets out that, when a transaction terminates early, the non-defaulting party must calculate the termination amounts to be paid.When they sign the deal, parties choose one of several possible methods of calculation provided for in the master agreement.In their agreement, LBF and ARIC selected the ‘loss’ method of calculation, which allows the non-defaulting party to calculate the termination payment by reference to its loss of bargain – i.e. the cost of replacing the terminated transaction.The master agreement provides that the non-defaulting party must calculate its loss “reasonably” and “in good faith” and that the calculation should be as of the early termination date, or as soon as reasonably practicable thereafter.ARIC calculated its loss to be approximately $61m, based on the price Enasarco had paid for the replacement put option.LBF disagreed with this calculation, contending instead that, had the calculation been performed correctly, it would have resulted in a payment of approximately $42m from ARIC to LBF.However, the judge found that ARIC’s loss had been calculated reasonably and as soon as practicable following the early termination date.He also made the following comments of particular interest to the wider market:Where an SPV is party to a derivative that is terminated under a master agreement as part of a structured product, its loss can be calculated by reference to the cost of a replacement transaction entered into by the investor. In addition, the terms of the replacement transaction do not necessarily have to be identical to those of the original.A calculation of loss made “as of” a date several months after the early termination date may still be “as soon as reasonably practicable” as stipulated by the master agreement. In this case, although LBF contended that ARIC (or Enasarco) could have obtained a quotation for a replacement transaction earlier than Enasarco actually did, the judge was satisfied that the turmoil in the markets after LB’s bankruptcy, and the difficulties with the transaction structure, meant that no such quotation could have been obtained before at least the end of October 2008, and probably later.Furthermore, had it been possible to obtain a quotation earlier in 2009 than 6 May, it would have made no difference to the price or the resulting loss calculation.Enasarco’s determination of the amount of loss was not “irrational”.The judge said the requirement for the non-defaulting party’s loss to be calculated “reasonably” does not mean that it has to arrive at the most reasonable result, only that it must not arrive at a figure that no reasonable party in the same circumstances could come to.The ruling has important implications for the wider derivatives market, according to Simon Fawell, partner at Sidley Austin, the lawyers who represented Enasarco.Fawell said: “The ruling is an important one for non-defaulting parties under the 1992 ISDA Master Agreement, as it clarifies how the English court will interpret the calculation of loss following early termination.“In particular, the finding on what is a reasonable determination of loss makes it much harder for those determinations to be challenged.”And he said the judge’s finding that ARIC was entitled to calculate its loss on the basis of a quotation obtained by Enasarco was a practical one for structured transactions.“The judge made clear it was unrealistic to expect Enasarco to leave it to an SPV to obtain a quotation for a replacement transaction and calculate the loss,” he said.“Enasarco was the party with an economic interest, and ARIC, as an SPV, had neither the staff nor the resources to undertake those tasks. Had the judge found differently, it would have made the use of SPVs in this type of structure much less attractive to investors.” Fondazione Enasarco, the Italian pension fund for sales representatives, has won a $61.5m (€55.3m) payout from Lehman Brothers SA (LB) for payments due to it following the terminaton of a put option when LB went bust in 2008.The case, heard in the English High Court, concerned a structured investment arranged by LB that provided Enasarco with exposure to hedge funds within its investment portfolio, now worth €6.9bn.The deal was structured through two special purpose vehicles (SPVs): Anthracite Rated Investments (Cayman) (ARIC) and Anthracite Balanced Company (Balco).Enasarco’s €780m hedge fund investment was protected by a put option purchased by ARIC from Lehman Brothers Finance (LBF), a company incorporated in Switzerland.
SPMS, the €10.2bn Dutch occupational pension fund for medical consultants, has started implementing a new risk management framework for its investment portfolio.The rules govern who is responsible for setting levels of risk, how those risks are measured, who provides advice and who monitors risks.The scheme said the framework included risks such as interest rates, counterparties, liquidity, and currency, and these were assessed against policy, procedure and reporting criteria.In its annual report for 2017, the pension fund also detailed a new “three-line defensive model”. Jeroen Steenvoorden, director of SPMS, said that the first defensive threshold comprised the scheme’s administrative bureau, while the second line of defense was made up of the scheme’s financial risk manager and a new manager for non-financial risks.The third protective layer still had to be established, he said, and would be based on additional regulation in the wake of the IORP II pensions directive, as well as guidance from regulator De Nederlandsche Bank.Steenvoorden added that SPMS had professionalised its compliance function through the appointment of a full-time manager for non-financial risks, who has replaced the three part-time compliance officers on the board and the administrative bureau.However, the pension fund also emphasised that it did not plan to reduce investment risk for the time being, arguing that a reduced risk exposure could mean a lower pension result as well as a contribution increase for members and employers. The pension scheme planned to consult its accountability body first, it said.The scheme has also decided to carry out an extensive asset-liability management study, which it said it would evaluate every six months.SPMS posted a net investment result of 5.2%, in part due to a 5% result from its currency hedge of the dollar, sterling and the yen. This more than offset a 3.6% loss incurred on its interest rate hedge.The scheme’s European and emerging markets equity exposures generated 12.8% and 25.6%, respectively, while US equity gained 5.8%. Nevertheless, the pension fund decided to increase its US holdings from 37% to 43% of the equity portfolio, citing diversification reasons.The pension fund said it also wanted to reduce the retail stake in its property portfolio in favour of logistics assets, with target allocations for retail and logistics at 32% and 21%, respectively.Last year, SPMS started building an infrastructure debt portfolio, with an initial investment of €250m in three funds. Steenvoorden said he expected that the portfolio would meet its strategic allocation of 5% at year-end.In 2017, SPMS’s funding improved by 8 percentage points to 126%. It rose further to 127.1% at May-end.The pension fund granted its fixed indexation of 3%, but refrained from paying an additional bonus as deemed its funding level insufficient.
The Dutch state is to issue green bonds as of 2019, Wopke Hoekstra, the finance minister has announced.This would make the Netherlands the first AAA-rated country to issue government bonds aimed at financing sustainable investments.In a letter to parliament, Hoekstra said the country could spend between €3.5bn and €5bn annually on green investments, such as railway infrastructure, energy saving projects, and the development of sustainable energy.He also cited the Delta fund, aimed at protecting the Netherlands against the effects of climate change, including flooding and the provision of fresh water. According to Hoekstra, issuing green bonds was not only feasible but also desirable, as the Dutch treasury supported the development of a solid green capital market, and institutional investors had shown a need for sustainable investment opportunities.“Investors increasingly want to take a stake in sustainable projects. But for safe green government bonds, they have to diverge to foreign players,” argued the minister.He also said that the Dutch government wanted to set an example by issuing green bonds and to be transparant about the results.Within the euro-zone, Belgium, France and Ireland have already successfully issued green government bonds, with Dutch pension funds participating in all of them.Last year, the large Dutch asset managers APG, PGGM and MN subscribed for a combined amount of €967m of French green bonds, with one-fifth of the issued bonds in total being purchased by Dutch investors.Earlier this year, the €414bn civil service scheme ABP took a €360m stake in green bonds issued by Belgium and €110m in Irish green government paper.The pension fund has targeted €58bn of sustainable investments by 2020.Dutch companies and banks have issued €15bn in total in green bonds.Hoekstra said a framework had to be designed and subsequently checked against the international standard of the Green Bond Principles.He added that he would provide details such as scale, duration and an issue date later.
Last year, PGGM increased its holdings in companies linked to climate, healthcare, food and water to €14bn, relative to its 2020 goal of €20bn. Eloy Lindeijer, PGGMLindeijer said PGGM was currently in discussions with private equity managers, and that investments would be subject to the same risk and return requirements as PGGM’s other private equity investments.As the funds in question were relatively young, PGGM’s private equity team wanted to spend a lot of time getting to know the funds, he said. PGGM has also taken a stake in sustainable unlisted firms directly, for example in SCW Systems, which extracts methane from waste. It has also shown an interest in taking over green energy company Eneco in a co-operation with Shell.Going big in small capsOther Dutch pension funds are also seeking ways to increase their sustainable investments in smaller companies.The €431bn Dutch civil service scheme ABP has invested €50m in Anet, a local energy transition fund investing in smaller companies involved in energy generation and distribution, such as hydrogen, energy storage, thermal grids, biomass and chargers for electric vehicles. Anet was established by ABP.The metal and engineering sector schemes PMT and PME have taken stakes in Innovation Industries, a Dutch private equity fund aimed at innovative companies in the construction sector. Innovation Industries focuses on making technologies developed at technical universities ready for the market.Separately, in its ESG report PGGM said it would not necessarily divest its full stake in companies mining oil from tar sands.It said it had already sold its stake in many tar sand firms because of their carbon footprint, and that it expected better results from engagement with its remaining holdings.Biggest Dutch schemes focus on sustainable mortgage holdings One of the Netherlands’ largest asset managers is turning to private equity funds to increase its exposure to small, innovative companies and broaden its impact investment policy.PGGM, the €217bn asset manager of the Dutch healthcare pension scheme PFZW, is seeking thematic private equity funds to achieve its goal for investments in the four themes of climate, healthcare, food and water, according to its head of asset management Eloy Lindeijer.PFZW recently indicated in its annual report that it was unlikely to meet its sustainability investment target for 2020 as it was experiencing difficulties finding sufficient scale for direct sustainable investment in smaller companies.In the asset manager’s ESG report for 2018, Lindeijer said that PGGM had only found sufficient scale in investments in solar and wind farms in the US. Companies with promising innovations were usually too small for PGGM to invest in, and the risks were high. PFZW intends to increase the sustainability of its mortgage holdings by offering homebuyers a discount if their property has the highest energy efficiency rating.It has already increased its sustainable mortgage holdings to €400m, which equates to one-fifth of its entire mortgage investments.PFZW offers its own members mortgages through the Attens brand, with buyers getting a discount of 40bps relative to the going rate, for a maximum of €25,000 of their loan. It said the ceiling would limit the negative impact on the scheme’s returns. Mortgages deliver 150-200bps relative to risk-free investments.According to a PFZW spokesperson, the discount offered to homebuyers would ultimately produce a bigger gain, as it would deliver “a more valuable and liquid collateral”.“In addition, a more energy-efficient home usually leads to a lower energy bill, improving the affordability of the property,” the spokesperson added.ABP, for its turn, said it wanted to lend €500m to homebuyers opting for a property with energy label A, the highest level.It currently works with mortgage provider and Rabobank subsidiary Vista Hypotheken, which offers a 10bps discount for homes with the highest energy rating.The pension fund said it intended to increase its mortgage portfolio with Vista to €800m.Sustainability plays an increasingly important role in the issuance of mortgages. Several providers allow homebuyers to borrow more than 100% of the property value if they increase its sustainability rating, for example through installing thermal insulation.During the past few years, many pension funds have replaced part of their government bond portfolios with mortgage investments, as they are seen as delivering better returns than government paper.