European Pensions...vulnerable to challenges such as market volatility, rising life expectancy and managing reputations. However, the Netherlands has created a variety of options for

AIFM

D / Investing in Russia / Sm

art beta / Investing in Japan / Netherlands / Turkey / Adm

inistration/ LongevitySeptem

ber 2014

See page 16 for latest industry appointments

News round-up

Industry column: IEBA

Interview: OGEO FUND

Focus: Smart beta

Plus:

www.europeanpensions.net

September 2014

20 AIFMD and its impact on the popularity of alternatives 43 strAIght-through processIng and its effect on administration

European PensionsInvestment: Country spotlight: De-risking: Investment:

JapanWill this year be able to meet the dizzy heights of 2013 for investors in Japan?

Turkey

How its pension systems are evolving to match the country’s growing economy

Longevity

Will the European pension market ever be ready for longevity swap transactions?

Russia

What the Russia/Ukraine tension means for Russian investment markets

European Pensions

the Dutch pensIon solutIons DesIgneD to Meet

toDAy’s FunDIng AnD governAnce chAllenges

Making a splash

http://www.europeanpensions.net

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EditorialComment

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6th floor, 3 London Wall Buildings, London, EC2M 5PD

ISSN 1753-5859

Leading the way

The Netherlands is consistently considered the leader in providing pension provision; shining a light for other nations to follow. However, last year saw the fifth Melbourne Mercer Global

Pension Index rank the Netherlands in second position, with Denmark knocking it off its previous top spot.

So what, you may ask? Coming second in a global listing of pension systems is still an impressive ranking, and still merits the Netherlands being held up as a positive example.

Yet its slip down the rankings is indicative of the struggles even the mighty Dutch pension system has faced recently.

Last year saw funds cutting benefits in order to achieve minimum funding ratios enforced by the DNB. The Dutch regulator has also asked 60 small and medium sized pension funds to consider its long term viability. Yielding to this pressure, the number of DB pension funds is expected to decline to below 300 this year, compared to over 700 in 2007.

According to DNB, Dutch consumer confidence in pension funds, following fund cuts and debates over higher retirement ages and the need for reform, has remained low. Its latest survey found that while respondents’ confidence in their own pension funds rose to 57% from 55% in 2013, it is still “significantly below” confidence levels in insurers and banks.

So Dutch DB schemes, just like those in other countries, have proved vulnerable to challenges such as market volatility, rising life expectancy and managing reputations.

However, the Netherlands has created a variety of options for companies wanting to ease the burden of their DB scheme.

This includes the amalgamation of a pension scheme into an industry-wide fund, a DC insurance offering such as a PPI, and grouping schemes together into multi-company pension funds. Also on the horizon is the APF, enabling pension schemes to pool together, knowing their assets and liabilities are ring-fenced. Added to this, the Dutch is pioneering collective DC, which enables schemes to group investment, inflation and longevity risk.

Dutch pension schemes are still struggling under the same pressures currently facing all pension industries. But with the number of options

it has already created to tackle these problems, it seems we can continue to look to the Dutch to guide us through these changing times.

Laura Blows, Editor

03 www.europeanpensions.net

http://[email protected]

http://[email protected]


In this issueContents

September 2014

40

20 Restricting alternatives? Edmund Tirbutt finds that while new regulations around alternative investment funds will increase costs, the asset class is likely to still find favour among pension funds

43 STP: Straight solutions to the DC challengeChanges to the defined-contribution landscape in both the UK and mainland Europe suggest that the decision to implement straight-through processing is a case of when rather than if, discovers Stephen Bouvier

46 The right timeCharlotte Moore examines whether the European pension market will ever be suitable for longevity swap transactions

22 A quick retreatAs tensions between Russia and the Ukraine continue, Lynn Strongin Dodds explores what this means for Russian investment markets

30 Eastern promiseInvestors in Japanese equities received excellent returns in 2013, yet 2014 has not yet generated similar success. Laura Blows explores the ups and downs of this once-stagnant market

37 Making a splashFollowing the fast pace of changes to pension scheme governance and funding rules, many Dutch pension funds are looking at alternatives to their current status as independent entities. Marek Handzel looks at the range of options

40 Turkish delightAs Turkey joins the next wave of emerging economies, David Adams explores how its pension system is subsequently evolving

37

General features

Investment features

Country spotlights22


In this issueContents

28

34

0626 Addressing unmet needs of asset ownersHow integration of smart beta in portfolios can help to control exposures

28 The third waySmart beta strategies have been attracting increasing attention over the past 12-18 months. Nadine Wojakovski asks what role they are playing in pension fund portfolios, and how strategies are developing

34 A cautious performerBelgium’s fifth largest pension fund, the multi-employer OGEO FUND scheme, has achieved impressive results in recent years through keeping member and employer outcomes at the forefront of its thinking. Executive committee member Emmanuel Lejeune revealed some of the secrets to the fund’s success

Regulars

Interview

Focus: Smart Beta

06 News

15 Diary

16 Appointments

18 Industry column

48 Pensions talk

50 Directory



RegulatoryNews

EIOPA publishes new report on protection of DB and DC members

REGULATORY INSTITUTION TARGETS TRANSpARENcY ANd ImpROvEd GOvERNANcE fOR SchEmE mEmbERS

Written by: Lauren Weymouth

The European Insurance and Occupational Pensions Authority has

published a report on issues affecting occupational pension scheme members and beneficiaries.

The report outlines the EIOPA strategy towards addressing consumer protection issues related to occupational pensions to ensure transparency, simplicity and fairness across the internal market for consumers.

Among the issues identified by EIOPA as areas to analyse are governance issues in the management of occupational pension schemes, lack of European convergence and insufficient/inappropriate disclosure of relevant information to scheme members.

According to the report, future analysis may be needed in these areas, particularly looking at charges, training standards, transparency and availability of information for members and financial education.

EIOPA said working on these issues would lead to the accomplishment of strategic goals such as mitigating and managing risks and threats to the financial stability of the occupational pensions sector.

“This list of areas and topics identified may not be exhaustive and should be seen as work-in-progress,” EIOPA said in the report.

“It is meant to serve as an initial source of information and a point of reference when defining future EIOPA Work Programmes in the coming years.”

EIOPA has also said it is to continue working on solvency measures for IORPs in 2014.

According to its annual report for 2013, EIOPA said: “Further work on solvency measures for IORPs and the appropriate measures for DC schemes will be an important area for own-initiative work by EIOPA.”

In March, the European Commission published a newly revised IORP Directive. Commenting on the directive at the time, European Commissioner for the Internal Market Michel Barnier said

the proposal does not contain new solvency capital requirements for IORPs and “it is the next Commission which will have to assess the advisability of that, based on the work of EIOPA”.

The draft directive includes provisions on new governance requirements on key functions including risk management, a self-assessment of the risk management system and the requirement to use a depositary to reduce operational risk.

EIOPA also said in its report it will continue to undertake its role in identifying, assessing, mitigating and managing risks and threats to the financial stability of the insurance and occupational pensions sectors.

“[EIOPA] will continue to review and improve the tools, procedures and products it develops in order to capture, analyse and report on risks and vulnerabilities,” the report stated.

In addition, EIOPA is seeking feedback on its plans to make the use of legal entity identifiers compulsory in Europe.

The regulatory authority has published its draft guidelines obliging European pension providers to register for legal entity identifiers and require the use of codes for identifying financial institutions.

The guidelines require national competent authorities in Europe to oblige institutions under their supervisory to register for an LEI code by 30 June 2015, and smaller organisations to do so by 30 June 2016. The draft guidelines are due to apply from 31 December 2014.


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CountryNews

Omega Pharma ruling a potential ‘game changer’ for scheme wind-ups

PRINCIPAL EMPLOYERS OF IRISH DEFINED BENEFIT SCHEMES FORCED TO MEET TRUSTEE CONTRIBUTION DEMANDS

Written by: Adam Cadle

Principal employers of Irish defined benefit pension schemes will from

now on be forced to meet trustee contribution demands even when the scheme is not insolvent on an MFS basis, the Irish Commercial Court has ruled.

A recent judgment handed down by the court ruled that the employers of the Omega Pharma scheme must pay €2.23m to the trustees as a result of the employers’ failure to meet a contribution demand by the trustees upon the winding up of the scheme.

In October 2012, the principal employer gave three months’ notice of its intention to terminate contributions to the Omega Pharma pension scheme.

During the notice period, the trustees sought to engage with the three scheme employers on the scheme’s deficit but no such engagement took place.

The trustees therefore sought legal and actuarial advice and notwithstanding the fact that there was no deficit on the funding standard basis prescribed under the Pensions Act 1990, made a contribution demand for the sum of €3m.

This sum was judged by the scheme actuary to be a fair assessment of the scheme’s deficit and was calculated using a mixture of annuity costs and transfer values, rather than a straightforward annuity buyout basis.

When the employers continued to refuse to engage with the trustees, the latter commenced proceedings in the Commercial Court in May 2013. The sum sought was €2.23m, as two members had taken transfer values in the intervening period. The trustees argued that the trust deed and rules gave them the power to seek a contribution demand at the level demanded. The defendant employers stated the rules did not permit the trustees to make a new contribution demand during the notice period and that, as the scheme was not insolvent on an MFS basis, it was not reasonable for them to make a contribution demand on a higher basis.

In his judgment however, Mr Justice Moriarty felt the amount demanded was reasonable, particularly given the decision by the trustees not to seek the higher annuity

buyout basis and also the lack of engagement by the employers.

LCP said the ruling could be a “game changer” for the operation of pension scheme wind-ups.

“In many cases, defined benefit pension schemes have been winding up with payments to members of no more than the MFS value of liability,” it said.In a separate situation involving Irish DB pension

schemes, Ireland’s pensions regulator has said it is consulting on a set of guidelines for the financial

management of DB schemes.The Pensions Authority has set out the practices it expects

trustees to follow in order to understand and manage the funding and investment of their DB scheme.

Provisions cover the scheme data trustees should have available, financial management governance practices, process, and the analysis trustees should undertake to arrive at decisions.

The authority said that since the early 2000s the majority of schemes have failed to meet the funding standard, and remaining schemes are faced with much greater contribution increases than originally planned.

“In many cases, defined benefit

pension schemes have been winding up with payments

to members of no more than the MFS value of

liability”


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CountryNews

Around €7.5bn could be made available to help finance SMEs by

giving business owners early access to a part of their pension funds, according to the Dublin Chamber of Commerce.

In its Budget 2015 submission, the Chamber said the government needs to focus on non-banking financing for SMEs for the purposes of investing in or scaling a business.

Around €30bn is currently under management in Irish pension funds which is related to individual or defined contribution arrangements. As it stands, there is no way to access any part of the pension fund prior to age 60.

According to Dublin Chamber CEO Gina Quin, as well as offering a new source of credit to SMEs and start-ups, “releasing pension funds for investment would provide assurance to those struggling with unsustainable debts that they can make a new start without the need to apply for fresh credit”.

“The only tax cost to the Exchequer would relate to lost revenue from the pension levy, totalling around €45m,” she said.

Under the Chamber’s recommendations, a portion of the DC pension funds would be made available to individuals before the age of 60 on a one-off basis, solely for the purpose of business growth.

Furthermore, these funds would only be used for specific events such as investing in a start-up company, investing in an existing SME business with a view to scaling up and creating jobs; and/or capital expenditure within an existing business.

An important condition of the proposal would be that the pension should not be established expressly for the purpose of an early drawdown.

A ‘look back’ condition of about

two years would help prevent tax avoidance scenarios (e.g. lump sum payments being placed into the pension and then taken out).

The Dublin Chamber said in order to maximise the amount invested, individuals should also be able to make use of

their lifetime tax-free lump sum, which is 25 per cent of the pension funds at drawdown, capped at a maximum

of €200,000.“Access to finance remains a major issue for

SMEs, many of whom remain highly indebted as a result of past investment decisions and contracts,” Quin said.

“Irish SMEs, like their European counterparts, are overly reliant on banks for financing their

activities and improving the alternatives to banks must be a priority.”

Furthermore, the Dublin Chamber said it is crucial the monies released from pensions cannot be raided by the banks.

“To prevent this, it is proposed to create an ‘investment capital trust’ into which the tax free funds would be released,” it said.

“Such trusts could be administered by the existing trustee structures within life assurance offices. This would ensure that monies would not be absorbed into bank balance sheets.

“The trusts would also allow unincorporated businesses to avail of the scheme, and keep the pension funds separate from their trading accounts.”

“Releasing pension funds for

investment would provide assurance to those struggling with unsustainable debts that

they can make a fresh start without the need to apply

for fresh credit”

Pension funds ‘should be unlocked to finance SMEs’ - Dublin Chamber

Around €7.5bn AvAilAble bY GivinG buSineSS oWnerS eArlY ACCeSS To THeir FundS, CHAmber oF CommerCe SAYS

Written by: lauren Weymouth


Denmark’s largest supplementary pension scheme ATP is to change the method of setting the guaranteed

return on new contribution payments, to better safeguard the purchasing power of pensions while taking the lower liquidity in the financial markets into account.

From January 2015, the guaranteed return on new ATP contributions will be set for 15 years at a time. The guaranteed pension of a 20-year-old member’s contribution payment is guaranteed to be raised three times before retirement age.

Under the current rules, a lifelong guaranteed return is fixed at the time of the annual contributions being made.

The guaranteed return is set for as long as 80 years, making the prevailing interest rates at the time of the annual contribution payment a decisive factor for the individual member. The adjustment affects those born after 1964 and all existing guarantees remains unchanged.

“The individual member’s ATP pension will depend less

on the interest rates prevailing in the year of the contribution payment and will to a higher degree reflect interest rates over the course of the member’s lifetime. The purpose is to better safeguard the purchasing power of pensions,” ATP CEO Carsten Stendevad said.

ATP said the adjustment regarding future pension guarantees “should be seen in the context of the implementation of a new discounting curve for valuation of ATP’s existing pension liabilities in the autumn of 2013 which reduced the interest rate sensitivity of existing guarantees by 25 per cent”.

“These measures reduce our interest rate sensitivity and increase our investment flexibility,” Stendevad said.


CountryNews

Just one third of Swiss pension

funds are looking to cut costs as issues of diversification and long-term returns rise

to the top of their agendas, Credit Suisse has said.In a survey entitled Switzerland: Pension funds’ main

concerns in 2014, Credit Suisse said 40 per cent of respondents believe discussions regarding costs are over and 85 per cent of respondents said most of the potential for cost reduction has already been exhausted.

Furthermore, the survey revealed the vast majority of respondents said asset management costs were not the deciding factor for them when choosing an investment.

“The pension fund managers also think that it is not the costs themselves that are ultimately essential to an investment decision but the returns that can be expected once costs have been deducted,” the report said.

According to Swiss industry research unit economist

Andreas Christen: “Respondents feel that demographic trends combined with the excessive minimum conversion rate are exacerbating the problem of redistribution between the working population and pensioners.”

Many pension fund representatives also view demo-graphics to be a challenge as it will require higher savings contributions or lead to a reduction in benefits, he added.

Furthermore, Christen commented that in the context of the ageing population and the rapidly diminishing ratio of workers to pensioners, there is also the question of whether second-pillar capital accumulation will continue to grow in the future.

“Despite the impending wave of baby-boomers reaching pensionable age, our models show that by 2050, population ageing is likely to lead to a reduction in the rate of capital accumulation in the second pillar, but not to an absolute reduction,” he said.

“Although the annual difference between contributions paid in and benefits paid out could be negative, investment returns should more than compensate for this.”

Cutting costs no longer top priority for Swiss pension funds

Issues of DIversIfIcatIon anD long-term returns rIse to the top of scheme agenDas

Written by: adam cadle

ATP to make changes to pensions product

amenDments to better safeguarD purchasIng poWer of pensIons

Written by: adam cadle

“From January 2015, the

guaranteed return on new ATP contributions will be set for 15 years

at a time”


InvestmentNews

the Principles for Responsible Investment added more than 200 new signatories in the year to April, as assets

under management of participating investors grew to more than $45trn (€33trn).

The UN-backed initiative announced the number of signatories had increased to more than 1,260 after the year of near-record growth.

New signatories over the year include Unilever Pension Fund, Credit Suisse Private Banking & Wealth Management, Harvard University Endowment, Green Investment Bank, Greater Manchester Pension Fund, and Morgan Stanley Investment Management.

“The updated figures come after analysis of the most rigorous data set on global responsible investment activity ever collected by the PRI,” managing director Fiona Reynolds said.

“The closure of the first reporting round under our new framework saw more than 800 investors disclose how they are implementing the PRI’s six principles across their portfolios to help create a more sustainable financial system.”

A number of factors were identified for the increase in AUM, including equity market performance, the addition of new signatories, and an enhanced system for calculating signatory holdings under the PRI’s new reporting framework.

The framework was redeveloped between 2011 and 2013, and conservative AUM estimates were made based on sample groups of the signatory base who participated in a voluntary reporting exercise.

Eight Danish signatories announced they were to leave the PRI late last year, citing ongoing governance failings.

Among the signatories, ATP, Industriens Pension, PensionDanmark, PFA Pension, PKA, and Sampension issued a joint statement saying they will follow the princi-ples, but remain outside the organisation until it “lives up to basic requirements for good corporate governance”.

The PRI has since launched a governance review, aiming to assess what governance structure it should adopt to fulfil its mission of developing an economically efficient, sustainable global financial system rewarding long-term, responsible investment.

UNPRI achieves near record signatory growth in 2013/14

assets unDer management of partIcIpatIng Investors groW to more than €33trn

Written by: matt ritchie

InternationalNews

News in brief Pension plans compulsory for SK firms

south korean firms told to implement pension plans by 2022



south Korea is set to require all local companies to introduce a retirement

pensions plan by 2022.According to Reuters, the mandatory rules

were announced jointly by the finance ministry and two other government agencies to help diminish welfare costs caused by increased life expectancy.

Since 2005, South Korean firms have been voluntarily offering retirement pensions, but only 15.6 per cent of the eligible companies have adopted pensions plan as at June this year, government data has shown.

The remaining 1.42 million companies out of 1.68 million will be required to implement pension schemes by the beginning of 2022, Reuters reported.

Despite just 15.6 per cent of firms adopting the new system, as at June this year, pension provisions worth some 87.5trn won (£52.13bn) have been invested in financial assets, according to data by the financial ministry.

The ministry said it intends to implement the new system gradually, starting with larger companies of over 300 employees, which will be required to adopt it by 2016.

■ Euronext has announced that Cees Vermaas, Ceo of euronext amsterdam and member of the managing board of euronext, has resigned and will step down from his position immediately. his replacement will be announced once the firm has received approval from the regulators. euronext chief operating officer, Jos dijsselhof, will be acting Ceo of the firm in amsterdam to ensure the smooth running of the business, until such time as the replacement is announced.

■ Mercer has entered into a a definitive agreement to acquire a 34 per cent stake in Alexander Forbes Group Holdings. it will become a key strategic shareholder in the upcoming listing of the south-african based firm on the Johannesburg stock exchange (Jse). alexander forbes has also announced its intention to list on the Jse.

■ BlackRock has launched ishares Core series for european investors. the suite consists of 14 etfs designed to provide access to some of the most popular exposures used by investors today. the launch follows the growth and evolution in the european etf market.

■ Altana Wealth has launched a ucits version of its absolute return altana Corporate bonds fund, following institutional demand and a gross return since inception of 13.34 per cent. the ucits fund is now open to outside investment and launched with €15m. altana is offering both income and accumulation share classes for retail, with a 1.25% management fee, and institutional with a 0.75% management fee.

Motorola Solutions sells $1.4bn of bonds to fund pension contributions

the firm sold bonds in bid to fund pensions and reduCe debt


motorola Solutions Inc has sold $1.4bn of bonds to help fund

pension contributions and refinance debt. According to Business Week, data by

Bloomberg shows Motorola sold equal, $400m portions of 3.5 per cent notes due in 2021 and 5.5 per cent bonds due in 2024.

Motorola intends to partly use proceeds to redeem $400m of 6 per cent of senior notes due in 2017. The firm’s net pension obligation totalled around $1.2bn in the US as at the end of 2013, Business Week reported.

Bloomberg data also showed the communication equipment provider last issued bonds in February 2013, when it sold around $600m of 3.5 per cent notes due in 2013 that yielded 175 basis points more than treasuries.


Pensions Diary


If you have any European pensions events to promote, please contact [email protected]

WoRldPEnSionSuMMit 20145-6 November 2014muziekgebouw aan’t iJ & bimhuisamsterdam, holland

the Worldpensionsummit brings together pension professionals from over 40 countries. the Worldpensionsummit 2014 will offer key analysis, insights and ample room for peer-to-peer discussion into the pension space. the summit will explore the many ‘crossroads in pensions’ in plenary sessions, dedicated tracks and special summit briefings. worldpensionsummit.com

EioPA AnnuAl conFEREncE 2014 19 November 2014frankfurt am main Germany

eiopa’s fourth edition of its annual conference is set to include speeches from key position holders at european institutions, as well as three panel discussions on sustainable growth, the new eu pensions directive and solvency ii. the conference will be an opportunity for lively dialogues, providing the chance to exchange views on regulatory and supervisory developments in the pensions sector. insuranceeurope.eu/eventsmanager

iRiSH PEnSion AWARdS 201427 November 2014the shelbournedublin, ireland

now in its third year, the irish pension awards, in association with European Pensions, aim to give recognition to those pension funds and providers who have proved their excellence, professionalism and dedication to maintaining high standards of irish pension provision. the event will honour the best serving pension funds, investment firms, consultancies and pension providers. europeanpensions.net/irishawards

diary dates 2014the latest events occurring across the european pensions space

SuPER invEStoR 201418-21 November 2014the Westin paris - Vendome, paris, francewww.icbi-superinvestor.com/page/dates-venue

iAPF GovERnAncE conFEREncE 27 November 2014the print Works dublin Castle, dublin, ireland www.iapf.ie/Events/

Not to miss...

tHE SHoREx WEAltH MAnAGEMEnt FoRuM GEnEvA 20143 December 2014Grand hotel kempinski, Geneva, switzerlandwww.shorexgeneva.com

SWiSS PEnSionS conFEREncE 4 December 2014international Conference Centre, Geneva, switzerland www.spc14.cfaswitzerland.org


PensionsAppointments

People on the move...

The latest news and moves from people within the European pensions industry

If you have any appointments to announce please contact [email protected]

Peter rowles Towers Watson has appointed Peter Rowles to head its retirement practice for the UK and Ireland. Rowles will succeed John Ball, who was appointed to the position of EMEA head of retirement solutions in June this year. Rowles joined Towers Watson in 1987 and has held various leadership roles. Prior to this, he led Towers Watson’s retirement consultancy team.

henry fischel-bockLombard Odier has appointed Henry Fischel-Bock to head its domestic European private client business with effect from 1 January 2015. Fischel-Bock joins Lombard Odier from Barclays Wealth, where he led the UK & European wealth management business until July 2014. In his new role he will report to Frédéric Rochat, a managing partner of Lombard Odier.

kevin flaherty SCIO Capital has appointed Kevin Flaherty as head of syndicate. Flaherty was previously managing partner at Trimast Capital and Deutsche Bank AG London’s head of structured product syndicate for Europe, Asia and Australia. Prior to this, he worked for Barclays Capital within the ABS trading and research team for seven years. He will identify new investment opportunities in European structured credit, building on SCIO’s track record in European ABS.

aPril yeungMirae Asset Global Investments has appointed April Yeung to the role of client portfolio manager covering the UK, European and Middle East. She will be responsible for product management and communication of the firm’s equity investment capabilities to clients. Prior to joining the firm in 2010, she worked for Fidelity Investment Management.

christoPhe girondel Nordea Asset Management has appointed Christophe Girondel as its joint global head of institutional and wholesale distribution. Girondel will take this position in addition to his role as global head of wholesale fund distribution. He will take on two client-facing units that were previously run as separate business units. He is a member of the executive committee at the firm and joins with18 years’ experience in the financial industry.



PensionsAppointments

gillian tiltmanNeuberger Berman has appointed Gillian Tiltman as a portfolio manager for Europe within its global real estate securities group. Tiltman will be based in London and will report to Steve Shigekawa, senior portfolio manager, and head of the Neuberger Berman Global Real Estate Securities Group. In her new role, she will be responsible for constructing and managing assets invested in Europe within the global real estate strategy.

JÖrg frotscherAquilaheywood has appointed Jörg Frotscher as its business development executive across Europe. Frotscher will lead the new operation, which is now up and running in a new office based in Dusseldorf, to expand into Europe. Frotscher is a German national and will work on the marketing of the firm’s life and pensions software system called Administrator.

enrique gonzalez Milestone Group has appointed Enrique Gonzalez to head product management for the APAC region. He will be responsible for the alignment of the firm’s product line to key client segments. He has more than 25 years’ experience in the international asset-servicing. Prior to this he held senior positions at BNP Paribas, J.P. Morgan and Citigate.

danielle singer Invesco Perpetual has appointed Danielle Singer to its multi-asset team as senior client portfolio manager. She will represent the global targeted returns strategy across the distribution channels in the Americas. She will be fully involved in the multi-asset investment process, contributing to the team’s investment ideas and implementation. Prior to joining the firm, Singer was a strategist and director of the global investment solutions team at UBS.

gilles boitelInvesco PowerShares has appointed Gilles Boitel as PowerShares business development director for Switzerland. He will be responsible for driving business development in Switzerland Previously he was responsible for institutional clients in Switzerland and Liechtenstein at Source. He has also held roles at Accenture and iShares.

christoPher anderssonStandard Life Investments has appointed Christopher Andersson to its European business team as investment director for sales in Sweden. Andersson has worked in the Nordic investment markets since 2000 with considerable experience of financial institutions. He was previously sales manager at Lannebo Fonder. He will be based in Stockholm.



IndustryColumn

a whole

generation

of people

will be

retiring

in 20 or 30

years from

now on

inadequate

incomes. it

will not go

unnoticed

We have a growing population who have little adequate provision for retirement. These are the self-

employed and contract hire people. Ask yourself this question: How do these people survive when they retire? The answer is, in many cases, they do not do particularly well. Many of them do not retire, they simply stop receiving orders. “But we do have Social Security” you say, “and there is also the opportunity to save...”

social security Let us start with Social Security. Across the EU, the average Social Security pension is about 40 – 50 per cent of pre-retirement income for someone earning the national average wage. In less socialised states, the rate is lower.

There is a very relevant study from the European Commission: Pension Adequacy in the European Union 2010 - 2050.

Two items stand out. Here is one: “Greater sustainability in Social Security pensions in most EU States has, to a large extent, been achieved through reductions in future adequacy.”

And the other: “Replacement rates are projected to decrease by 2050 by at least five percentage points in 17 member states and 15 percentage points in 11 others.”

The report also shows that, even with these reducing numbers, cost is projected to increase by 2050 by up to four percentage points of GDP.

So, there we have it. By 2050, Social Security pensions will be driven down from about 40-50 per cent of average earnings to about 35-40 per cent. And 2050 is when many of the people who have just entered the workforce will be retiring. How adequate is it? If you think that 40 per cent of an average income of €30,000 is enough to live on, think again.

Can we expect the State to fill this gap? Without further plumbing to Social Security systems, declining demographics and increasing

life expectations have already seen to that.

individual provision So, what is the solution? How about one more quote from the EC study: “Individuals will have to take a larger share of the risks for their future pensions.”

That is a good starting point. But how much is it all going to cost? It all depends on how optimistic you want to be on investment returns, life expectation etc. But let us take a number which says that, if you want to finance a pension of 70 per cent of your income at age 65 on todayʼs outlook, it is going to cost you about 25 per cent of your income if you start saving at age 25.

Some of that will be provided by Social Security, of course, so we are looking at some-thing less than these numbers. If Social Security gives you 40 per cent of your pre-retirement income you need another 30 per cent, which will cost you almost 10 per cent of your income.

But for the self-employed? In some countries the self-employed do, admittedly, get a pretty good deal - the UK is a prime example. But in others, the legislation is patchy.

There are very few purpose built products for the individual saver, whether it is insurance, mutual funds or anything else. Many of them are very opaque on true management charges and investment returns, which leaves many small savers with the suspicion that these vehicles were not always developed with the client in mind.

I think if you approach any government today with a plea for better treatment, you will be met with the reply: “We cannot afford it.” In other words, the tax giveaway has to be found from somewhere else.

So a whole generation of people will be retiring in 20 or 30 years from now on inadequate incomes. It will not go unnoticed. Governments will pay in one form or another.

Once upon a time

neil irons explores hoW to deal With the problem of inadequate private pension savings and declining state provision

International Employee Benefits Association



www.europeanpensions.net 19

IndustryColumn

In fact, one of the concerns of the EC study is the poverty trap between now and 2050. Make the reform and the government will collect the tax from the retirement pension and also reduce the need for means-tested benefits, housing subsidies etc which are extremely complex to administer and expensive to fund.

Europe has grown up in the last 60 years with a very social model. As Angela Merkel said: “Europe has 7 per cent of the worldʼs population, 25 per cent of its GDP and 50 per cent of its social costs.”

So, when combined income and Social Security tax rates reach, and exceed, 50 per cent on modest levels of income, company retirement plans become the most attractive tax-free perquisite ever devised.

What we are sure of is that we are in an age of austerity when government tax receipts in almost all countries are falling well short of expenditure. And we also know that they will look at anything which carries the label of ‘tax giveaway’.

reducing tax-effectivenessThe biggest single giveaway is company retirement plans. Supposing that in their search for tax revenue governments removed the tax exemption from company plans. This, by the way, is not as radical as you might think. It is already happening in many countries, but not all in one go.

It has already been going on for some time but it has not been in a scale where voters openly revolt - taxes on contributions, investment incomes, capital gains, restrictions on employee tax deductibility - have all been introduced.

So, supposing that it got to a point when the tax effectiveness became marginal. What does a retirement plan do for a corporation when it is not tax effective?

We have already seen the flight from defined benefit plans. In 1995, according to a UK government report, five million employees were covered by defined benefit plans. By 2012, that number had fallen to 1.8 million. The picture is much the same in other countries where defined benefit plans were predominant

- Germany, The Netherlands, Ireland and the United States.

Employers did not abandon their plans altogether of course. They were replaced by a variety of designs - chiefly defined contribution.

But the contribution rates were nothing like those needed to support the retirement income levels of the old defined benefit plans. So, where are we heading from here?

Ironically, we have almost come full circle. This article began with information about a large sector of our populations that have very inadequate provision for retirement. And, suddenly, we notice the ‘immune’ part of the population - the employed - are facing the same issues. It does leave you with the feeling that it is all very unfair.

solutionThere is no reason why we should be treated differently. And there is a solution. The right of all individuals to spend a percentage of pre-tax income, with an adequate ceiling that reflects modern day standards of living (and not some ‘social’ salary which just keeps you off the poverty line), will provide proper social justice.

It would apply to all people, including the self-employed, contract hire and fixed-term employees, and employees of a company that do not have a plan or which closed it down.

This could go a long way to restoring the balance for the next generation.

How do we achieve this highly ambitious objective?

Yes, it will cost money in the short and medium term and compromises will be needed all the way round. Acting alone by individual interested groups will solve nothing. But this is nothing new - it is just the art of politics. As employers, advisers and employees we need to learn to act like politicians.

■ written by neil irons, ieba*Since writing this article, Neil Irons sadly passed away. For over 40 years Neil was a very respected authority in the field of international employee benefits. European Pensions passes on its sincere condolences to his family.**This article has been reproduced from IEBA News with kind permission of IEBA.


New regulations governing alterative investment funds inevitably attracted

controversy when becoming law in July 2013 but by the time the actual compliance deadline had passed a year later opinions had conspicuously mellowed.

The Alternative Investment Fund Managers Directive (AIFMD) has effectively imposed Ucits-style regulation on the managers of alternative investment funds like hedge funds and property and infrastructure funds. Key areas affected include remuneration, depositary, risk management, transparency and reporting.

Although commentators inevitably highlight the cost and inconvenience associated with virtually any new regulation, most now also acknowledge tangible upsides.

Principal Global Investors CEO Europe Nick Lyster says: “From a client perspective you could argue it’s pretty positive in restoring trust which pension fund investors had lost in alternative investment fund vehicles. It also enables asset managers to get a passport to anywhere in Europe rather than be restricted to those countries with private placement agreements.

“We believe AIFMD could grow into a global brand in the way Ucits has, although I think it will take a bit of time and we probably won’t know if this will be the case for three or

four years. Once people know what they are getting they may begin to appreciate it but it may need the European industry to pump it up a bit and educate people about it.”

On the negative side, the fact that the 22 July 2014 compliance deadline is so recent has brought the issue of temporary non-compliance to the fore but this is unlikely to leave too many permanent scars.

Research findings published by BNY Mellon the day before this deadline showed that, whilst 82 per cent of managers canvassed confirmed that the required AIFMD

structure had been established to meet the next day’s deadline, 44 per cent would still not have received authorisation from their local regulator.

The research also highlighted a significant proportion of managers as having work left to complete in respect of key elements of the AIFMD regulations. Thirty-one per cent still needed to implement risk and control systems, 36 per cent had yet to update fund documentation and 38 per cent had yet to appoint a depositary.

BNY Mellon head of product management asset servicing EMEA region Paul North feels that the initial bedding-in period could last into next year.

CostIncreased cost, however, is here to stay. Although this will vary greatly according to the size of firm involved, BNY Mellon has calculated a mean average cost of $400,000 for the initial registration and a mean average on-going annual cost of around $300,000. Whilst this is unlikely to prove much of an issue for very large alternative investment funds with high levels of existing corporate governance, it could prove very significant for smaller firms.

PTL client director Colin Richardson says: “Any fund larger than £1 billion is unlikely to be materially affected by the cost but

RegulationAIFMD


We believe AiFMD

CoulD groW into

A globAl brAnD in

the WAy uCits hAs

restricting alternatives? Edmund Tirbutt finds that while new regulations around alternative investment funds will

increase costs, the asset class is likely to still find favour among pension funds

WRIT TEN BY Edmund TirbuT T, a frEElancE journalisT

i n V E s T m E n T


smaller ones could find it quite a burden. They might, for example, not have the people to separate portfolio management and risk management or to handle the greater documentation needed for risk management. Some funds may also need a new depositary function as you now need an independent depositary.

“Most of the measures individually are sensible but there is a question as to whether considering them all is too much of a burden. In particular, the tight rules about remuneration of managers, especially variable remuneration, are not popular with many managers. But whether you think they are good or not is a subjective opinion.”

The fear is that some high quality smaller funds will choose not to comply with AIFMD, which will therefore restrict choice for pension fund managers. This is considered unlikely to happen with funds actually based within the EU, although the extra costs could act as a wake-up call for fund management groups to close down some uneconomic funds there.

Aurum CEO Kevin Gundle says: “If you are a small firm based in Europe you must comply if you want to market your products and survive as an enterprise, so it could tilt things in favour of big firms. It’s not just the costs of registering but the ongoing costs of compliance and, although there are groups popping up offering to do compliance out-sourcing, I’m fairly sure it can’t be outsourced completely as you need accountability, and outsourcers won’t take that on. I expect some consoli-dation in the alternatives industry to create economies of scale.”

Small funds based outside the EU, on the other hand, could well choose not to comply. This would mean they couldn’t market their products within the EU but they could still do business via ‘reverse solicitation’ – if

pension funds approach them. Invesco Real Estate head of

product management Simon Redman says: “Pension funds using reverse solicitation must be based in countries with private placement agreements and must acknowledge that they won’t have the protection of AIFMD. This will massively restrict choice as the ability to get funds to market will be very restricted.”

However, Mercer principal, alternatives research group Robert Howie feels that lack of clarity has been an issue for non-European based funds as well as cost and that the former problem should be largely resolved by future legislation.

“The registration process has been difficult for some fund managers and the uncertainty is rarely around European managers, it’s about non-European managers trying to access Europe as there hasn’t been sufficient clarity on how they do this,” he says. “So some non-European managers I’ve come across have said they will wait on the sidelines for now. There will be a second raft of legislation making things much clearer for them which will be in place by 2018 at the latest, but hopefully much sooner.”

Cardano head of manager research Chris Parkinson is unusual in predicting that AIFMD could actually make smaller pension funds favour conventional investments over alternatives if they are doing their own research because they will be aware that bigger pension funds wishing to indulge in reverse solicitation will have larger teams to identify opportunities and obtain information on available alternative investment funds.

impactMost commentators, on the other hand, feel that whilst fund choice could be restricted, AIFMD is

unlikely to have any significant impact on the desire of pension funds to actually access alternative investments. They will look at the merit of the investment class and only once they have decided what allocations they require will they confront the regulatory implications.

LCP partner Clay Lambiotte says: “AIFMD is merely viewed as another layer of compliance, and I have had no clients suggesting they will be basing decisions on it. Changes to regulation are ongoing and just a cost of doing business but one thing that concerns me a little bit is that this regulation could breed complacency with investors if they see hedge funds have complied. They still have to do other research.”

Demand for alternative investments generally has been strong of late and looks set to continue, irrespective of AIFMD. Interest in commercial property picked up around three years ago as pension fund managers increasingly valued its low volatility and ability to offer a higher income to corporate or government bonds. Similarly, pension funds began investing more in hedge funds late last year in recognition that the withdrawal of quantitative easing is likely to affect fixed income and that equities are vulnerable in the mature phase of a prolonged bull market.

JLT Investment Consulting director Julian Brown says: “AIFMD is not negative but only a small part of the trend as people are looking for growth and are prepared to consider hedge funds again. I don’t think they will want them to produce super returns in excess of equities but they will be looking for returns similar to equities without the volatility. There may be a move away from the classic 1 per cent and 10 per cent charging model for fund of hedge funds.” ■

RegulationAIFMD



Given recent events in the Ukraine, it is no wonder that institutional investors are

losing their appetite for Russia. To date diplomatic efforts have failed to find a solution to the crisis and the tighter sanctions imposed after the alleged shooting down of the Malaysia Airlines Flight MH17 are beginning to bite. The big conundrum for investors is whether the country is going back to the future and abandoning the path of reform.

As Hermes Fund Managers head of emerging markets Gary Greenberg, based in London, puts it: “The Russian investment case is in question. The big issue is whether the Russian administration has given up the modernising of its economy and integration with the West and is going to plan B and looking to create a Eurasian Union with the former Soviet countries, remaining largely a commodity producer.”

It is not an easy question to answer. The foreign ministers of Germany, France, Russia and Ukraine have been in negotiations about a ceasefire in eastern Ukraine but talks have borne little results. In the meantime, fighting has intensified in Donetsk and Luhansk. At the time of writing, a meeting has been scheduled between Ukraine’s President Petro Poroshenko and Russia’s President Vladimir Putin in Minsk but it is difficult to predict the outcome.

Different scenarios There are a few different scenarios, the first being tensions continue to escalate with the Kremlin backing the separatists and using the humanitarian disaster in eastern Ukraine as an excuse for a military intervention if the separatists lose ground. This direction is thought to be supported by the Russian political elite, especially among the military-industrial and the nationalist circles. They are in favour of Russia closing the doors on the world market and instead re-industrialising its economy via the use of the currency reserves that have been squirrelled away over the past few years.

An alternative would be to end the conflict, although this would have to be done in a way that causes little embarrassment to Putin. “There is pressure on both sides to stop this downward spiral,” says fund management firm East Capital’s chief economist Markus Svedberg. “I don’t think Russia has a problem with Ukraine wanting to join the European Union (EU) and the subsequent trade benefits. It is more to do with their wish to join NATO, which is a red line in the sand and Russia will do what it takes to prevent this. Look what happened in Georgia although Ukraine is seen as more strategically important.”

The Ukraine hopes to join the EU in the next five years with NATO entry slated for a later time. However, no date has been set in

stone and the same is true with Georgia, which fought a five day war with Russia in 2008 after there were murmurings of the country becoming a new member. Instead, the country lost two provinces and is now looking at negotiating a so-called ‘substantive package’ of cooperation, which falls short of the hoped-for invitation to join its Membership Action Plan (MAP) - a formal step towards full NATO membership.

Investor attitude It is no surprise that against this backdrop, investors are retreating. Globally they have pulled $940 million from Russia stock funds and $413 million from bond funds in the year through to 12 August, according to the recent report by data provider EPFR Global. The tide is unlikely to be stemmed as sanctions are beginning to take their toll on the economy. The EU and US widened its blacklist in the wake of the downing of MH17 with banks, energy and arms now on the roster of banned sectors. They had already severed ties with dozens of senior Russian officials, separatist commanders and Russian firms accused of undermining Ukrainian sovereignty.

Matters have further been compounded by the Russian government prohibiting imports of Western food. Although pictures of empty shelves once laden with

Investing in Russia


A quick retreatAs tensions between Russia and the Ukraine continue, Lynn Strongin Dodds explores what

this means for Russian investment markets

WRIT TEN BY Lynn Strongin DoDDS, a freeLance journaLiSt

i n V e S t M e n t


parmesan and brie are doing the rounds on Russian social media, there are no 1980s-style shortages. However, most economists – and the Russian government – expect food prices to rise, a setback for Russia’s long-running struggle to tame inflation.

“Russia was already struggling with lower investment,” says Schroders emerging market economist Craig Botham. “It had been propped up by government and consumer spending, but the sanctions are having a direct impact. For example, Russian banks and non-financial companies have external debts of $80 billion that have to be repaid by the end of the year. In the past they would have looked to raise the money overseas but now they will have to do this domestically. The country’s central bank will do its best but the cost of credit will be higher and that will have a knock on effect on the economy.”

ING Investment Management senior emerging market strategist Maarten-Jan Bakkum also notes that the Russian economy was struggling before the conflict in Ukraine started. “The sanctions are challenging the outlook even more as a recession is almost a given now. Next year’s gross domestic product (GDP) growth is likely to be -1.5 per cent. This assumes no big escalation from the current status quo. The main problem for Russia lies on the financing of existing debt. European capital markets are now more difficult to access for Russian corporates, which means that more debt has to be financed domestically. This is likely to drive up interest rates and weaken the ruble.”

Bakkum does not believe that investors will return to the Russian equity market anytime soon. “International institutional investors have been selling heavily in Russia

this year. A technical rebound is always possible, particularly if we see a bit of a de-escalation of the conflict. However, it is not so likely that we will see a long period of inflows again. Selling pressures are expected to remain due to the sanctions and the more complicated geopolitics.”

Svedberg also believes that geopolitics will drive the equity markets. “The level of uncertainty is so high that it is difficult to make any strong calls. The Russian market is cheap and there are some good opportunities. For example, consumer stocks trading at eight times earnings with double digit sales growth and 5 per cent to 6 per cent dividend yield. The same case can be made for electronics, transportation and real estate but most investors are hedging their bets at the moment and waiting to see what happens.”

There are a few fund managers such as Robin Geffen, Neptune Investment Management CEO and fund manager of the Neptune Russia & Greater Russia Fund, who are being selective. “We are monitoring

the situation in Russia extremely closely, and while we have no Russian holdings in our global funds, we continue to find select opportunities for our Russian portfolios. Overall we have increased our holdings in exporters that have less exposure to domestic economic headwinds and that stand to benefit from a weaker ruble.”

Within Neptune’s domestic holdings this has translated into a focus on sectors such as telecoms, IT and food retail that are able to generate strong returns and where structural growth drivers remain intact despite the cyclical slowdown in the economy. “We invest in companies here that have high quality management teams, proven execution track records and benefit from a lack of international competition in their sectors, boosting returns,” he adds.

According to Greenberg, the holders of debt are in a good position because of the country’s strong foreign currency reserves and the fact that it does not have a current account deficit problem. Also events in the Middle East continue to support the oil price. “From a debt standpoint, they will not go the way of Argentina anytime soon.”

ING Investment Management senior client portfolio manager EMD Roy Scheepe adds: “From the credit perspective, though Russia is facing a challenging future, we think the country can withstand this shock for some time given its large FX reserve, strong fiscal and current account balances. From this angle, a rating downgrade is not imminent and if Moody’s/S&P or Fitch downgrade Russia one or two notches, its total rating, according to the new mandate’s rule of split ratings, will still be investment grade. The country is currently rated Baa1/BBB-/BBB by the three rating agencies.” ■

Investing inRussia


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PAGE 28

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In January 2014, Russell Investments conducted a survey of equity investment decision

makers from almost 200 asset owners across North America, Europe and the Middle East to better understand perceptions of smart beta. In the survey we found that the greatest unmet need from asset owners was for the ability to use smart beta indices to control their exposures.

Defining smart betaSmart beta happens to be a narrow term that is often used to define a broad range of investment strategies. At Russell, we generally break these strategies down into two types of exposures. The first type is ‘strategy-based’ and the second is ‘factor-based’. Strategy-based smart beta exposures have seen a lot of popularity over the past few years and are typically non-cap weighted, with an emphasis on the strategy’s ability to outperform a traditional cap-weighted benchmark. Factor-based smart betas on the other hand are designed to provide exposure to a segment of the market that displays similar factor characteristics (i.e. value, momentum) and asset owners that are looking to manage their exposures more explicitly typically

look to factor-based solutions.When comparing strategy-based

and factor-based portfolios, there are similar characteristics and exposures between the two. For example, the return stream from a strategy-based minimum variance portfolio is similar to the return stream from a factor-based low volatility portfolio. An equal-weight index has small cap exposure, but is not specifically focused on the small cap factor. Likewise, fundamental indexing has a value exposure, but is not specifically focused on capturing that factor.

Investors need to take into consideration the similarity in both exposures and returns between specific strategy-based and factor-based portfolios in their assessment of the most appropriate solution.

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In response to the need to more explicitly control portfolio exposures we launched the Russell High Efficiency™ Factor Index (HEFI) series. In developing the HEFI series, our focus was on identifying equity market factors that were relevant, comprehensive, universally robust, persistent and implementable. The consistent methodology utilised across the HEFI series offers an advantage to investors who are looking to control and manage exposures and effectively combine their smart beta allocations with traditional active strategies. The factors we have focused on – value, momentum, quality and low volatility are the four primary drivers of active equity returns.

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Three types of smart beta usageWe believe that smart beta exposures, whether they are strategy or factor-based, can serve as a strong complement to an active portfolio with the potential to enhance returns, help reduce portfolio risk and add diversification. The three key parts of our process where smart beta exposures are employed are:

StrategicFrom a strategic point of view, we utilise smart beta strategies to position our portfolios in line with our long-term investment beliefs. For example, Russell believes there is a value premium in the market and when we construct our portfolios

we want them to be biased towards value. We also believe that medium term momentum works well and that our portfolios should also have that same exposure.

Dynamic The next approach is considering smart beta strategies from a more dynamic or tactical basis. Within our own portfolio construct we are increasingly more adaptive in how we position the portfolio through different market cycles. Although we have longer-term beliefs regarding the expected pay-off to different factor exposures, we recognise that over shorter-term horizons the interplay of the market cycle, valuations and sentiment can present opportunities to take advantage of market dislocations. We believe having smart beta exposures that allow us to adjust the portfolio to

the changing market conditions, allows us to get the right exposure at the right time.

Risk ManagementA third approach is to integrate active and passive allocations within the portfolio structure. For example, the portfolio could incorporate an exposure to smart beta strategies designed to complement the stance taken by the active managers as a whole. Russell research has shown that in general, active managers are overexposed to more volatile stocks, and what may appear to be a well diversified portfolio is actually overexposed to the volatility factor. Shifting a portion of the equity allocation to a defensive strategy can continue to provide the active management opportunities while potentially mitigating the unwanted exposure to volatility that may be introduced by active managers.

The complementary nature of the Russell HEFI series and the low correlation of active returns across the factors enable investors to build robust multi-factor portfolios. The ability to effectively combine factors within a portfolio has historically been limited to quantitative-based asset management firms. The Russell HEFI series brings many of these quantitative techniques and insights to investors in a modular framework which is easy to implement and manage.

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There has been a growing body of research to show that the hypothesis that market cap

weighting was efficient as an investment strategy was in actual fact not true. Last year researchers at Cass Business School found that equity indices constructed randomly by monkeys would have produced higher risk-adjusted returns than an equivalent market cap-weighted index over the last 40 years.

“In a market cap weighted portfolio you are buying more and more stocks as they get expensive. That is the opposite of a winning investment approach,” explains Russell Indexes regional director Jamie Forbes. “So if you can be more clever than adopting market cap strategy in a passive rules-based way, for example tilting towards value stocks, you have a better chance of outperforming the market over time.”

The market cap index, she adds, still

has to be the barometer of what the neutral position is because everything else will have periods of underperformance, namely periods where the market is being driven by sentiment or momentum.

Since the mid 1980s the ‘Russell 2000’ was the first index to capture the small caps, followed a few years later by the value and growth styles through market cap indices. “Today our ability to capture smart beta has improved,” offers Forbes. “The advent of ETFs and passive investing and tracking an index has evolved to other forms of indices.”

Russell takes a broad view in defining smart beta. It calls it a “transparent rules-based way to capture market exposures or factors”. A market exposure might be small cap companies or value companies. Other types of factors might be quality or momentum or low volatility. There are also strategy-based smart beta approaches, which are alternative ways of weighting the market. One widely-followed approach is

a ‘fundamental’ weighted index, which weights stocks by something other than price, namely cash flow, dividends and sales.

“We are seeing an increasing diversification between active, passive and smart beta, which has to be aligned with investor objectives such as risk constraints, time horizons and investment appetite,” says Forbes. “For example, an active manager could take our smart beta indices and apply judgment about how they would apply weight or timing to the overall portfolio.”

There has been a lot of development of smart beta within the equity side of a portfolio. Forbes might see 20-30 per cent in smart beta, and the remainder benchmarked to cap weight, with a mix of both active and passive strategies.

Smart beta has become a topic on the agenda for investors, notes Towers Watson’s investment consultant in the manager research team, James Price. He says it offers a way for investors to access exposure previously only available

through an active manager. But he warns that the range of smart beta offerings is extensive and

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The third way Smart beta strategies have been attracting increasing attention over

the past 12-18 months. Nadine Wojakovski asks what role they are playing

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WRIT TEN BY NadiNe Wojakovski, a freelaNce jourNalist

i N v e s t M e N t


can be very complicated and so asset owners really need to understand how suitable each strategy is for them.

Advantages He says there are three main advantages to employing smart beta. They are simplifying part of a portfolio, cost reduction and portfolio construction.

Smart beta can help simplify parts of the portfolio to diversify or allow operational ease – for example, an asset owner may have a number of active managers with a value bias for selecting stocks. It might be that they are at a stage of wanting to de-risk and therefore looking to sell their equity portfolio in the future. If they have five or six active managers then that can be a complicated process. In order to simplify the process an asset owner can change from using active managers to using one or two smart beta strategies. On the other hand, they may wish to invest in new diversifying asset classes such as commodities or reinsurance. Again smart beta can be used to free up time to invest in new asset classes.

It can also help with cost reduction, for instance if a portfolio has expensive active managers, then smart beta can be used to retain an overall value bias, while reducing costs.

Smart beta also aids portfolio construction as it offers investors a way to really think about what underlying risks and factors may drive their portfolio. It is a useful, additional lens to look at the diversification of the portfolio.

Price does not believe in prescribing a particular allocation to smart beta as it depends on the investors’ objectives. “Our view is that it is a tool, an excellent addition to an investor’s tool box. But you have to use it for the right job and you have to be very careful about

using it appropriately. It is not right for every asset owner but if it is right we will make use of it.”

“Investors are looking for an investment that will achieve a better risk adjusted return, or in the case of minimum volatility, less risk per unit of return,” says index provider MSCI managing director Brett Hammond. “They are looking for it in a systematic way rather than relying on the vagaries of active management.”

He says that investors are typically taking between 30-100 per cent of the equity portfolio and putting it in one or more of the indices – which often are minimum volatility, value and quality.

Looking at the statistics from 1988 to present – the MSCI quality index has returned 60 per cent more than the market-cap weighted world index. In contrast the minimum volatility index has returned 10-15 per cent more. Hammond explains that the volatility index is not designed to give super returns but to dampen volatility. By combining the two indices, he says, you get “a superior combination of risk and return”.

Increasing attentionRussell’s March 2014 survey of asset owner’s perceptions of smart beta across North America, Europe and Middle East, showed that smart beta is attracting a lot of attention. Two thirds of asset owner’s evaluating smart beta said they expect to make an allocation in the next 12-18 months. Larger asset owners were comfortable putting more in smart beta whereas smaller investors were just “dipping their

toe” (less than 10 per cent allocation) but indicated that they would increase over time

Towers Watson has seen a surge in smart beta allocations. Its clients made over twice as many new investments in smart beta strategies during 2013 alone - around $11 billion across approximately 180 portfolios. This compares to the approximate $5 billion invested across almost 130 portfolios the year before.

Towers Watson global head of investment research Craig Baker says it had taken some time to get to this point, given that it started developing the concept in 2000 as part of its work on structured alpha, and then in more detail in 2002 as beta prime.

Hammond says that in Europe, Danish, French and Dutch pensions in particular have shown interest in smart beta, with Swedish Pension Scheme AP4 and French Pension Scheme FRR having allocations to the MSCI factor indices.

But it is still early days and he expects the market to grow from strength to strength. “There is a revolution going on in investing. For so many years we had just active and passive and then smart beta comes along. “Investors can access returns that used to only be accessible to active managers and they can now do it passively. It’s a third way.” ■

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The past year has required investors to keep a close eye on Japan, a surprising change

after two ‘lost’ decades of recession rendering Japan a ‘forgotten economy’ in the eyes of overseas investors.

However, from late 2012 foreign investors turned to Japan for opportunities, as the effects of the first two of Prime Minister Shinzo Abe’s ‘three arrows’ of Abenomics – monetary easing, fiscal stimulus and reform and growth – began to materialise.

This led to a stellar 2013 for investors in Japanese equities, as they enjoyed a 50 per cent rally by the end of the year.

Comgest Growth Japan Fund portfolio manager, Richard Kay,

noted in May 2014: “Since the start of Abenomics five quarters ago, Japanese companies have beaten consensus net income estimates every quarter by an average of 9 per cent.” He added that retail sales had increased 4.4 per cent year-on-year in January 2014.

Pulling backHowever, the start of 2014 was not generally strong for investors in Japan, with January especially weak. As the first half of the year drew to a close this had resulted in investors once again pulling back from Japanese equities.

For Threadneedle head of global equities William Davies, the reason for this rapid flood and exit was simple enough. “There was

investment from foreign investors last year due to the weakening of the yen,” he explains. “However during the first half of this year people lost faith as they did not see the yen depreciating any further.”

The second quarter of 2014 was negatively affected by the increase in the rate of consumption tax, from 5 per cent to 8 per cent in April.

This resulted in Japan’s second quarter GDP falling 6.8 per cent compared to the previous quarter on an annualised basis, while at the same time the previous quarter’s growth rate was revised down from 6.7 per cent to 6.1 per cent, “yielding the obvious conclusion that the economy has shrunk during the first half of 2014,” Schroders Japanese equities fund manager Andrew Rose stated.

However, the decline was slightly lower than expected, and central to the decline was the ‘payback’ from the front-loaded demand in Q1 caused by consumers trying to ‘beat’ the 3 per cent consumption tax hike, he added.

Although the drop in April Japanese retail sales of 13.7 per cent compared to the previous month was a worse decline than consensus expectations, it was no great surprise, agrees Schroders Japanese equities fund manager Nathan Gibbs. Likewise, the 3.2 per cent inflation rate in April – a 23 year high

Investing inJapan

Sean

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Eastern promise Investors in Japanese equities received excellent returns in 2013,

yet 2014 has not yet generated similar success. Laura Blows explores the ups and

downs of this once-stagnant market

WRIT TEN BY Laura bLows

I N V E s T M E N T


– following the sales tax increase and stimulus from the Bank of Japan, was in line with market expectations, he added.

Bounce backEven though 2014 may so far be disappointing compared to the highs of the previous year, sentiment is still positive that the country’s economy is finally on the road to recovery.

In its Monthly Report of Recent Economic and Financial Developments August 2014, the Bank of Japan stated that with regard to the outlook, Japan’s economy is expected to continue its moderate recovery trend, “and the effects of the subsequent decline in demand following the front-loaded increase prior to the consumption tax hike are expected to wane gradually”.

This has been noted by Nikko Asset Management global chief strategist John Veil, who expects the economy to bounce back in the third quarter. He notes that following the sharp second-quarter slowdown, Japan’s shares have largely priced-in the news and rallied.

There are a number of reasons for

this optimism. According to Rose, some of the data surrounding consumption post the end of June cut-off for the second quarter GDP is more encouraging, while exports are “finally showing some signs of responding to the currency’s weakness over the last 18 months”.

Gibbs also noted that machinery orders in March rose at its fastest pace since 1996, a trend “set to continue as companies’ ramp up their spending”.

On the domestic side, Bank Julius Baer’s head of research Asia, Mark Matthews, also predicts domestic spending to be on the cusp of a large increase, “as savings are deployed amid the arrival of inflation, adding a missing dimension to Japan’s economy”.

That regular monthly wages were raised by an average of 2 per cent in April is another reason for positivity, says SuMi Trust economist Genzo Kimura, as “historically this has been a substantial driver for inflation”.

The pension fund policy of Japan’s Government Investment Pension Fund (GPIF) is also expected to play a significant role in the resurgence of

the equity market. The pension fund, which has total assets of $1.2 trillion – more than the Mexican economy – is expected to re-weight its portfolio holdings away from fixed income and instead increase its equities holdings to 20 per cent. According to Reuters, this would create nearly $100 billion of new money into the Tokyo stock market. And where the world’s largest pension fund goes, others are sure to follow.

Company changesThere are also signs of fundamental changes to Japanese companies that will be conducive to economic growth. As Nomura chief strategist Hiromichi Tamura says: “Last year the Bank of Japan and general politics were important. This year is the turn of the companies.”

A notable development this year was the introduction of a stewardship code. Based upon the UK’s version, it features seven principles for institutional investors, such as publicly disclosing how the investor manages conflicts of interest, being orientated towards the companies’ sustainable growth and having in-depth knowledge of the

Investing in

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Japan


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companies in which they invest.According to Tamura, 127

investors have so far accepted the code, including the GPIF. “When the stewardship code was announced, many investors were quite negative,” Tamura explains. “But once these measures were included as part of the government’s growth strategy, and with a fund as big as the GPIF behind it, many investors also got behind the code.”

He has noticed an increasing trend for companies to hire outside directors as well, following Prime Minister Abe’s administration enacting a revised law that urges large companies to introduce outside directors.

Also flaming this focus on corporate governance is the recently-launched JPX-Nikkei Index 400. This comprises of companies with ‘good’ corporate governance, thereby helping to drive up standards within Japanese firms.

While Prime Minister Abe has been encouraging the improvement of corporate governance, he is also planning to take more direct measures to increase the attractiveness of Japanese businesses for investors.

third arrowAs part of its revised growth strategy, presented in June, the Japanese government has announced it will reduce the corporate income tax rate.

This is seen as a positive development to drive the Japanese

equity market, as currently Japan is the most highly taxed geography in the world for corporates.

According to Kay, the tax burden of Japanese corporates have averaged 39 per cent over the past seven years, versus “20 per cent in Europe, 26 per cent in emerging markets and 22 per cent in the USA”.

This puts Japan’s return on equity at a disadvantage of 24 per cent to Europe, 17.5 per cent to emerging

markets and 22 per cent to the USA just for tax reasons, he explains.

The IMF is also clear in the benefit this could provide, as it states that for every 1 per cent decrease in the tax rate, a corresponding 0.4 per cent increase in growth is attainable.

The planned changes to corporate tax are evidence of Prime Minister Abe implementing his ‘third arrow’ of reform and growth. According to Threadneedle, some of the specific measures Prime Minister Abe has discussed recently include reform of the energy market, the liberation of women in the workplace, and better universities and healthcare.

The problem with arrow three, Davies says, is that it is an “extremely long list of ideas, each of which might be reasonably minor in impact, and many of which will be complicated to implement”.

Kay notes that some investors may be disappointed with the pace of reform. However, he says: “In our view the Abe administration has not

reneged on its promises for structural reforms, but rather they will be implemented gradually when the time is ripe.”

Along with waiting for third arrow reform, those watching the Japanese economy are also looking at whether the Bank of Japan’s

aim for 2 per cent CPI growth per annum will materialise, or whether more monetary stimulus from the bank will be required.

Both Nikko Asset Management and Pictet Asset Management expect that the Bank of Japan will provide additional monetary stimulus during the second half of the year to underpin the economy.

However, according to Kimura, “much scepticism remains among foreign investors as to whether Japan will ever be able to move out of deflation”.

But whether Japan bounces back in the second half of the year, and whether Prime Minister Abe’s three arrows results in lasting change for the economy - as opposed to yet another false dawn - one thing is certain. Japan is no longer a ‘forgotten economy’ in the eyes of investors. ■

Investing inJapan


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Combining caution with performance is OGEO FUND’s ‘golden rule’, and

the approach paid dividends last year as the fund delivered a €53 million profit with investments returning 7.38 per cent.

The fifth largest pension fund in Belgium, OGEO’s 2013 result was down on the previous year’s 9.17 per cent return but above the Belgian average of 6.73 per cent. It also left the fund €515 million in surplus, with around €968 million in assets under management.

Member of OGEO’s executive committee, Emmanuel Lejeune, says the multi-employer fund

has achieved these results by maintaining a tight focus on the fund’s objectives, rather than chasing short term returns.

“OGEO FUND manages long-term financial liabilities for first pillar statutory pensions and its asset allocation mirrors this mission. When defining an investment policy the attitude on risk is crucial,” Lejeune says. “The primary objective of the management of a pension fund is not to target the best performance in relation to a given benchmark. On the contrary, its main goal is always to guarantee the interest of the sponsor organisations and of the pension fund beneficiaries.”

InvestmentThe approach of tailoring investments to meet the requirements of OGEO’s more than 4,000 current and future pensioner members and seven sponsoring employers has resulted in a portfolio that looks quite different to the typical

Belgian pension fund.According to Mercer’s 2014

European asset allocation survey, Belgian schemes last year typically allocated 45 per cent to equities and the same proportion to bonds. Property accounted for 4 per cent of assets, with the remainder allocated to other assets.

OGEO bucks the trend, allocating 55 per cent to various bonds. Eurozone government bonds account for 35 per cent of the portfolio, Eurozone corporate bonds 15 per cent, and emerging market and high yield bonds 5 per cent.

Elsewhere OGEO allocates 20 per cent to equities, 12.5 per cent to real estate, 7.5 per cent to insurance products, and 5 per cent to Euro medium term notes.

The real estate portfolio is currently valued at around €180 million, and under the current investment policy cannot exceed 25 per cent of total assets. In keeping with its long term focus, OGEO invests in property on a ‘bricks and mortar’ basis, targeting long term inflation-indexed leases with high quality tenants. Assets are currently split geographically between Belgium and Luxembourg.

“These assets play the role of a ‘float’,” Lejeune says. “Even when listed assets are down, we are able to keep our heads above the water.”

OGEOFund


A cautious performerBelgium’s fifth largest pension fund, the multi-employer OGEO FUND scheme,

has achieved impressive results in recent years through keeping member and

employer outcomes at the forefront of its thinking. Executive committee member

Emmanuel Lejeune revealed some of the secrets to the fund’s success

WRIT TEN BY mat t ritchie

i N V e S t m e N t

OGEO FUND(Figures at 31/12/2013)Assets under management: €968 million Funding: €515 million surplusAffiliated organisations: 7 (Tecteo, ALG, IILE-SRI, CILE, City and CPAS of Seraing, Province of Liege, AIDE) Beneficiaries: 4,019


The fund’s assets are managed via an open-ended collective investment vehicle - OGESIP Invest – which has contracts with four managers to run the portfolio.

“One of the main objectives of this SICAV is to allow closer monitoring of our asset managers. The setting up of this SICAV has numerous advantages - optimisation in terms of asset allocation, better management and more detailed and frequent reporting,” Lejeune says.

Managers are selected based on criteria including international reach, pension fund experience, and the services they offer regarding advice and financial analysis. Managers need sufficient size to be considered, with €1 billion in AUM a minimum.

OGEO currently uses Candrian, KBC AM, Degroof, and Crédit Agricole. Each manager invests according to the same broad discretionary mandate, with a focus on active management.

“The board has opted for such an approach, rather than specialised management by asset class, because we believe that in this latter case it is essential to put in place a specialised coordinator in strategic asset allocation,” Lejeune says. “The freedom given to all asset managers for them to access all asset classes allows for a better diversification of asset classes. We believe that by adopting the solution of a specialised coordinator in strategic allocation, there may be a greater risk of

misjudgment by one single person in the choice of an asset class at a given moment.”

GovernanceOGEO expects to hit €1 billion in assets under management this year, and the increasing size of the fund means maintaining high standards of governance and transparency is crucial.

The fund was established in 2007 as an Organisation for Financing Pensions under Belgian law, which Lejeune says provides for good transparency and the possibility for affiliated organisations to participate in setting asset allocation strategy through the General Assembly.

The General Assembly is a requirement of OFP status, and is comprised of representatives of all the fund’s sponsors. It has broad powers for carrying out or ratifying decisions relating to the fund, including changes of statutes or funding commitments, investment policy, and approval of annual accounts and reports.

OGEO is the only first pillar multi-employer OFP in Belgium, assisting public and semi-public institutions such as town councils, municipalities, provinces, inter-municipal bodies, and public welfare centres in their pension obligations. It caters for organisations across a diverse range of activities and

sectors including water, energy, public services, and more.

Lejeune says the fund has put in place a range of measures to ensure a high level of transparency and oversight, in addition to the risk management and transparency benefits associated with the fund’s SICAV, OGESIP Invest. Initiatives include establishing a financial committee including independent experts, and engaging an auditor to conduct a preliminary review of accounts halfway through the year.

“The financial committee contributes to the analysis and is instrumental for steering a constructive dialogue about the market conditions. There is no legal requirement to put in place such body, but it is undeniable that the financial committee contributes to enhance the professionalism of OGEO FUND.”

The fund has also split the technical actuary and appointed actuary functions. Financial plans and calculations of technical provisions are first drawn up by technical actuaries from Integrale Insurance Services, before being submitted to appointed actuary

OGEOFund


ASSET ALLOCATION

Eurozone govt bonds: 35%Eurozone corporate bonds: 15%Shares: 20%Real estate: 12.5%Insurance products: 7.5%EM and high yield bonds: 5%Euro med term notes: 5%

ASSET MANAGERS

Banque DegroofCrédit AgricoleCandriam (ex-Dexia Asset Management)KBC Asset Management

ThE MULTI-EMpLOyER FUND hAS AChIEvED

ThESE RESULTS By MAINTAINING A TIGhT FOCUS

ON ThE FUND’S OBjECTIvES, RAThER ThAN

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ESOFAC who presents an actuarial report to the board.

While demanding in terms of governance and reporting, OGEO’s increasing volume of assets also offers the fund and its beneficiaries considerable scale benefits.

“The size of our AUM allows OGEO FUND to make important economies of scale and, for each sponsor organisation, irrespective of their respective size, to have access to the best professional advisers,” Lejeune says.

“Each client benefits from a proper and rigorous management of its pension commitments. OGEO FUND believes that its affiliated organisations are at the heart of its organisational system. It therefore makes available to them, free of charge, fast and practical tools, in particular with regard to pension funding calculations. OGEO FUND’s model is fully transparent vis-à-vis its affiliated organisations.”

GrowthOGEO FUND also runs a complementary pension offering for contracted staff, alongside its first pillar scheme.

OGEO 2 PENSION, also established as an OFP, was launched in 2008 and enables affiliated organisations to establish a system of complementary pensions for their contractual staff.

“There are numerous contractual employees in public administrations and they very often find themselves at a disadvantage, with pensions that are on average 20 per cent less than their colleagues with a civil servant contract,” Lejeune says. “OGEO 2 PENSION is also in the position to offer its services to employers in the private sector, even if, for the moment, the majority of our affiliated are from the public sector.”

Changes in the European legislature could also present the

fund with new opportunities for growth, both at home in Belgium and further afield.

The IORP Directive aims to remove barriers for cross-border pension provision. The directive is currently being revised with the aim of further enabling pension provision across member states.

“In this context, OGEO FUND presents regularly its model to new interlocutors and discussions are currently underway with various potential new affiliated companies, in Belgium and abroad, to transfer within OGEO their pension liabilities and their related financial assets,” Lejeune says. “OGEO FUND therefore continues its efforts to expand its model towards other potential sponsor organisations.”

OGEO’s size and coverage also positions it to contribute strongly to the dialogue around Belgian pension provision.

The fund publishes its views via a twitter account and blog, and has

commissioned research aiming to broaden the understanding of the Belgian pension market.

“By doing so, OGEO FUND intends to contribute actively to the debate on pensions and provide practical and innovative solutions for their financing,” Lejeune says.

Recent work includes a study last year in conjunction with International Centre of Research and Information on the Public, Social and Cooperative Economy (CIRIEC) and the University of Liege, looking at the financing of pension funds by provincial and local authorities in Brussels and Wallonia.

This year OGEO engaged research firm IPSOS to test public opinion on pensions in Belgium. The results revealed a general concern among Belgians over the future of their pensions, and a strong view that ensuring adequate financing of the pensions regime should be a top priority for government. ■

OGEOFund


ThE FUND hAS pUT IN pLACE A RANGE OF MEASURES TO

ENSURE A hIGh LEvEL OF TRANSpARENCy AND OvERSIGhT


C o u n t r y s p o t l i g h t n E t h E r l A n D s

Making a splashFollowing the fast pace of changes to pension scheme governance and funding rules, many

Dutch pension funds are looking at alternatives to their current status as independent

entities. Marek Handzel looks at the range of options

WRIT TEN BY MArEk hAnDzEl, A frEElAnCE journAlist

CountrySpotlight


In the eyes of many, the Netherlands is home to the best pension provision in the world. But the secret of this Dutch

success has little to do with the overall design of the nation’s pensions system, says Cardano head of innovation Stefan Lundbergh.

“It’s because everybody saves a lot,” he says. “And if you save a lot, then you’re going to get a good pension.”

Lundbergh’s assessment is

playing out in real time. Despite all the plaudits that have been cast the way of the feted Dutch retirement savings system, its DB schemes have proved to be just as vulnerable as any other country’s to both the vagaries of the financial markets and the relentless rise of human life expectancy.

Many funds have struggled in recent times to meet the strict funding benchmarks set by De Nederlandsche Bank (DNB),

the pension regulator. And this pressure on solvency has forced the regulator to demand improved governance of funds – a requirement that many smaller funds have not been able fulfill.

Recognising this escalating problem, DNB asked 60 small and medium-sized pension funds to seriously consider their long- term viability back in April. It has also warned that more invitations for self-reflection are on the cards.

The areas that DNB expects trustees and employers to examine include the skewed ratio of active scheme members versus pensioners and the general rising costs of running a fund. For many, the calculations make for grim reading.

No wonder, then, that DNB predicts a further fall in the amount of funds in the Netherlands. In 2007, there were over 700 in operation. This year that figure may drop to almost 300.

Paulus van den Bos, a pension law specialist with CMS in the Netherlands, says that the governance obligations on trustee boards have pushed many companies to look to transfer their pensions. Not only do directors have little time to fulfil their tasks on trustee boards, but increasing concerns about liability are making them think twice about their roles anyway.

37


“It’s mostly this issue which has led to increasing numbers of companies to say ‘well, this is it for us. This is becoming too complicated and burdensome’,” he says.

“This is accelerating the drive towards companies liquidating their pension funds.”

And there seems no end in sight to the pressure. New rules on financial governance, coming in from January in the form of the Financial Supervisory Framework (FTK), will install further, stricter controls on funds.

Take your pickThankfully, the Dutch have a variety of current and imminent IORP (Institution for Occupational Retirement Provision) options available for companies who want to wave goodbye to their funds.

The first of these is the industry-wide fund. Entering into one of these has many well documented attractions, but amalgamating a small fund into one of these behemoths is no straightforward task, as Lundbergh explains.

“It’s basically a merger between two pension funds, because when you enter it, you need to transfer your liabilities and pay for that with your assets,” he says.

“And that can be quite complex when you have different contracts and funding levels. Then you have to ask: how do you map everything in a fair way?”

A more popular route nowadays is the defined contribution (DC) insurance one, particularly in its guise as a Premie Pensioen Instelling (PPI).

Essentially an investment vehicle run by insurers and other financial services providers, it is now in its fourth year of existence and has made some admirers out

of former skeptics. The Dutch government published

an evaluation report of PPI schemes earlier this summer that extolled the positive impact it has had on retirement savings.

“Many more employers are now going for a PPI instead of a straight insurance or pension fund option,” says Robeco head of European pensions Jacqueline Lommen.

“That’s because it’s doing very well. In fact, PPI has been shown to increase pension benefits by 13 per cent. And that’s for various reasons, including lower costs and better investments.”

However, as Lundbergh points out, the challenge for companies choosing a PPI, or indeed any insurance solution, is what they do with the pension rights that they have already built up.

“But that depends on the funding for your pension fund. If it’s well funded, then of course that’s not a problem. But if you’re underfunded then you need some cash contribution to cover the gap,” he says.

A third, and not so well received route, is that of the multi-company pension fund. Introduced in 2010, the idea of grouping schemes

CountrySpotlight



together was conceived to deal with concerns over the growing number of pension plans that had simply become too small to continue on their own. This way, they could share best practice, save on costs and preserve a hybrid, or even full, DB status if they wished. But the concept has failed to take off.

“Companies have had very difficult discussions about who should be governing such a fund,” says Van den Bos. “So a lot would actually rather liquidate then go through the whole process of starting up a multi-company pension fund.”

A new modelThis failure has not put off the authorities in the Netherlands, however. In fact, it has helped them shape an improved IORP, the APF, or ‘general pension fund’ as it is sometimes called.

The launch of the APF has been postponed until mid-2015, but many commentators believe that its introduction cannot come soon enough for the Dutch market.

Once up and running, funds will be able to enter the APF safe in the knowledge that their assets and liabilities are ring-fenced. This should make it much easier to pool schemes. It will also provide them with a common administration and management structure.

“With the APF you will be able to achieve economies of scale in many aspects, including a board that will take care of a lot of the day-to-day running of the scheme,” says Lundbergh.

Van den Bos believes that it may prove to be the best long-term solution for smaller funds, as long as companies can be made to feel comfortable about using it as a vehicle for their employees pension provision.

Lommen agrees, saying that its eventual introduction can only be a good development, both for individual funds and the market as a whole.

“It could be very helpful in consolidation for the small and medium sized funds,” she says.

“It’s also part of a broader trend in the Dutch market, in that the APF, like the PPI models, is owned by financial providers.

“It brings in more competition in the second pillar pension market, better service and lower costs.”

A collective effortAs well as the APF, there is another model that the Dutch are pioneering – the collective DC (CDC) plan.

Academics, policy makers, pension funds and social partners have all been involved in the building process of the CDC, which aims to make the transition from DB to DC as smooth as possible, while attempting to replicate DB benefit outcomes.

A typical CDC will group investment, inflation and longevity risk. On the investment side, this eliminates one of the main problems of individual DC - having to move assets prior to decumulation to avoid any sudden losses. It also provides lower transaction costs and risk mitigation, through diversification.

CDCs also aim to provide benefits based on career average earnings, but these will be controlled by the scheme’s funding status. So if a fund finds itself in difficulty, benefits could be cut for a specific cohort of scheme members, a consequence of the inter-generational risk sharing element found in CDC.

However, if it works, then the Dutch may yet be able to lay claim to the world’s best pension system for many years to come. ■

CountrySpotlight


NoT oNly Do DirecTors

hAve liTTle TiMe To FulFil

Their TAsks oN TrusTee

boArDs, buT iNcreAsiNg

coNcerNs AbouT

liAbiliTy Are MAkiNg

TheM ThiNk Twice AbouT

Their roles ANywAy


Earlier this year Turkey was named by economist Jim O’Neill, the man who defined

the BRIC countries in 2001, as one of the ‘MINT’ countries (along with Mexico, Indonesia and Nigeria), the next wave of powerful emerging economies. Turkey’s GDP has risen from around $230 billion in 2002 to over $800 billion today. By 2050 it could have the 14th highest GDP in the world, according to research from Goldman Sachs.

But Turkey still lags behind many wealthy countries in terms of pensions provision. It has a state pillar that could benefit from further reform, an almost non-existent

occupational pensions pillar and a third pillar that grew rapidly in 2013 but is constrained by some of the country’s economic characteristics. These include the very high proportion of the workforce engaged in ‘informal’ employment and thus not paying tax or pension contributions.

“Ten years ago 50 per cent of people were in the informal workforce,” says Allianz Asset Management senior economist for international pensions Renate Finke. “That erodes the contributions base for a pension system.” Even now, around 39 per cent of the workforce is in informal employment.

ChangesHowever, 2013 may have been a watershed year for the third pillar private pension system (BES), as the number of assets within the system increased by 29 per cent and around a million individuals signed up. When BES was formed in 2003 there were six companies operating in the market. By July 2014 there were 18, investing TRY 30 billion (€9.95 billion) in 237 funds for 4.53 million savers. Much of this money is invested in Turkish government bonds, something that clearly has positive ramifi-cations for investment in the country’s infrastructure.

But despite the growth seen in 2013, BES remains very small for a country with a population of 76.6 million. This will become a bigger problem over time, because although today, like the rest of the MINTs, Turkey has a relatively young population, it is set to become one of the fastest ageing societies in Europe. Life expectancy has risen from 38 for men and 44 for women in the 1950s to 71.7 for men and 78.5 for women, as fertility rates have fallen to 2.05 children per woman. By 2035 it is estimated that over 14 per cent of the population will be aged 65 or older, pushing Turkey into the ‘aged country’ category. By 2050 the elderly may account for over 21 per cent,


Turkish delightAs Turkey joins the next wave of emerging economies, David Adams explores

how its pension system is subsequently evolving

WRIT TEN BY DaviD aDams, FREELaNCE JOURNaLisT

C O U N T R y s p O T L i g h T T U R K E y


making Turkey ‘super-aged’. Major reforms to the state

pension were completed around the Millennium. The current state retirement age is 60 for men and 58 for women, but will rise to 65 over the next 35 years. The replacement rate was 93.1 per cent in 2013.

There is a very small second pillar system, incorporating mandatory DB funds that act as a substitute for the state pension in some professions, as well as a few DC occupational schemes. In 2013 the mandatory schemes served just 0.9 per cent of the working population and the voluntary schemes 0.2 per cent.

Then there is BES, the third, private pillar, to which employers may also contribute. The main change that boosted take-up during 2013 was that from January of that year the government matched the first 25 per cent of every individual’s pension contributions up to TRY 1,000 (about €350) per month.

“Even in the prevailing macro-economic environment of uncertainty, the direct 25 per cent government contribution [means] the system is [out-performing] many investment tools,” says BNP Paribas Cardif bancassurance executive vice-president Emre Erkan.

In addition, employers can now claim tax deduction on pension contributions up to 15 per cent of employee income, with a cap contribution equal to the national minimum wage. Tax on distributions at retirement fell from 3.75 per cent of total account value to 3.75 per cent of investment income on the account.

The number of multinational companies making contributions into BES for Turkish employees also increased during 2013, notes Towers Watson director of the international consulting group

Michael Brough. Around 40 per cent of these employers now do this, up from 33 per cent in 2011 and 29 per cent in 2009. “There will come a point when it hits the 50 per cent mark when lots of other multinationals start to do this too, because they will want to be providing benefits at the median level,” he suggests.

SlowdownBut the rapid increase in BES growth slowed in 2014, because of broader economic forces. Demand fell by 15 per cent in the first half of 2014 compared

to the previous year. “In general, it appears that volatility in the markets seriously impacted the revenue generated by the private pension funds,” says Erkan.

Risk appetites appear to be low among Turkish pension fund asset managers, in part because the high interest rates which largely prevailed until 2008 made government bonds an easy investment choice. However, there are now signs that competition in the market is driving innovation and greater diversification in asset management, with a greater range of funds now more open to investing in corporate bonds and equities.

Another important change Brough predicts for the third pillar is that increased competition will reduce

charges. At the moment, he says, BES is relatively expensive, with average charges of around 3 per cent compared to, for example, 1.5 per cent in the UK. “But the first policyholders will always be the ones that pay the most,” he points out. “Charges will come down as money flows into the system and more competition is created.”

Finke assesses progress made by the Turkish government in increasing both the number of participants and the value of assets invested through BES. “They are doing fine with the

participants but not with the contributions,” she says. “I think that is connected to the labour markets: if they can achieve more employment they can achieve more contributions. But I think they will just monitor it for another two or three years, then take further steps if it is not doing what they want it to be doing.”

CountrySpotlight

2013 mAy hAve been A wATerShed yeAr for

The Third pillAr privATe penSion SySTem (beS),

AS The number of ASSeTS wiThin The SySTem

inCreASed by 29 per CenT And Around

A million individuAlS Signed up


future developments Finke also thinks it unlikely there will be many more dramatic changes to the state system during the next few years. She points out how far the system has already been changed over the past decade, noting that prior to the 1999/2000 reforms some men could start to draw on pension benefits at the age of 43 and women at 38. The reforms have included lowering accrual rates and altering parameters used to calculate benefits, as well as the increase in retirement age.

There is still clamour in some quarters for the government to stimulate further development of a second pillar. One possibility would be to introduce some form

of auto-enrolment system, putting private sector workers without private pension provision into workplace schemes. “Auto-enrolment is something that the Turkish authorities are definitely interested in,” says Brough. But there do not yet appear to be any concrete plans for any national roll-out, or significant development of the second pillar. Another measure that may be worth considering is linking the country’s severance pay system to its pension system.

For the future, Erkan believes the government needs to put more effort into stressing the long term benefits of saving for retirement. However, research conducted by

Finke’s team at Allianz suggests a degree of cognitive dissonance among younger people in Turkey. Majorities of people in both the 30 to 45 and 60 to 75 age groups are pessimistic about their standards of living in retirement – yet this does not appear to be driving them to save more.

“The awareness is OK, they know they have to do something and they are now aware of the new initiatives in the private pension market, but there’s no evidence that this is leading to them saving enough,” says Finke. But, unlike many of the challenges faced by the government and the growing Turkish pensions industry, this is not an exclusively Turkish problem... ■

There iS STill ClAmour

in Some quArTerS for

The governmenT To

STimulATe furTher

developmenT of

A SeCond pillAr


People need to be clear what they mean by straight-through processing (STP), says the

Superannuation Arrangements of the University of London (SAUL) Trustee Company chief executive Penny Green. If you approach a third-party administrator with the question ‘can you do it?’, the answer will invariably be ‘yes’, because of the sheer depth of the subject. But, she warns, for a trustee or manager of a pension scheme, this is the wrong starting point entirely.

Choosing the right starting point for that dialogue is all the more important as companies not only move to defined-contribution (DC) provision but also as the demands of that provision grow in complexity. In the UK, the implications of the March 2014 budget have underlined the importance of considering the role an external service provider might play.

For example, a sponsor might decide to offload the management of its pensions scheme to a third-party administrator; alternatively, it could keep that function in-house yet partner with a software provider

or third-party administrator. Either way, the service providers who spoke to European Pensions were keen to point out the advantages of outsourcing.

First, a service provider will manage regulatory change and risk – whether that is IT and data compliance issues or maintaining and updating software platforms. Secondly, they can offer innovation and web-based tools to match the member engagement and empowerment that tomorrow’s

pensions environment will invariably demand. Third, service providers say, they can cut costs.

But, to return to Green’s question, what is straight-through processing? At its most basic, STP is the seamless processing of investment instructions between a pension scheme and its investment managers. STP’s proponents argue that automation strips out the need for manual clerical interventions and reduces risk.

DC growing STPAnd the rise of DC and the need to process ever more investment transactions from scheme members via web-based platforms means that the relevance of STP will only

STP: Straight solutions to the DC challenge

Changes to the defined-contribution landscape in both the UK and mainland

Europe suggest that the decision to implement straight-through processing is

a case of when rather than if, discovers Stephen Bouvier

WRIT TEN BY Stephen Bouvier, a freelance journaliSt

a D M i n i S t r a t i o n


AdministrationPensions

STP iS ThE SEamlESS

ProCESSing of invESTmEnT

inSTrUCTionS bETwEEn a

PEnSion SChEmE anD iTS

invESTmEnT managErS.

STP’S ProPonEnTS argUE

ThaT aUTomaTion STriPS

oUT ThE nEED for manUal

ClEriCal inTErvEnTionS

anD rEDUCES riSK



increase with time. That is certainly the view of administration software developer aquilaheywood’s product and business development director, Simon Barker.

“If you look back over the past decade,” says Barker, “the question was: do I outsource, or do keep it in-house? This is no-longer the case.” Instead, he explains, the rationale for outsourcing has changed and the mood is now about the more nuanced challenge of pushing functions and, implicitly, costs back onto individual scheme members.

“As I see it,” he adds, “pension administration outsourcing in the UK feels like a flat market, in which schemes that administer themselves rarely move out of house. But the world we are moving to is one where whether I’m outsourced or not, I will want to offer these new technologies.”

Green agrees that the future is about delivering more. “You have to think about what the scheme member wants. If they see money deducted from their salary, they want to see it invested the next day.” This means, she explains, that service providers must be able to payroll contributions, apply all the relevant switches, and invest the money appropriately at the fund manger(s) level in the appropriate fund(s) with neither errors nor human intervention.

But she warns that sponsors pay too little attention to this point. “I don’t think people think this piece through. Scheme members might have a poor understanding of the scheme they are in, and might not even appreciate the distinction between DB and DC, but they do understand that they want to see where there money has gone.”

And although pensions administration is about delivering a service, curiously little pressure for change has come from those who stand to benefit most from it – scheme members. Instead, change has followed legislation. For example, auto-enrolment has created a world in which workers can look forward to having pension pots dotted all along their career timeline.

Similarly, some future pensioners will have a legacy DB pot sitting alongside past and present DC pots. Add in a requirement for mandatory guidance on managing that provision, and the future for STP becomes a little clearer.

“STP in a DC world is fundamental to the success of the DC model because of the pressures that members will eventually bring to bear for real-time information. They are going to want to be able to access their funds and information about them at a time of their choosing. STP is the most cost-effective way of delivering this,” says Mercer’s UK retirement administration business leader Claire Ross.

She continues: “DC provision

PensionsAdministration

STP in a DC worlD iS

fUnDamEnTal To ThE

SUCCESS of ThE DC

moDEl bECaUSE of ThE

PrESSUrES ThaT mEmbErS

will EvEnTUally bring

To bEar for rEal-TimE

informaTion


brings with it demand for members to be able to access their plan online, move their assets quickly, and more generally enjoy a quick turnaround on transactions – in other words, a lot like we have already with online banking.” But there the comparison with online banking ends, because despite the fact that the DC revolution is with us already, scheme members have been slow to embrace the new technology.

Embracing online tools“Administrators have delivered online tools but people aren’t using them fully,” explains Ross. “Pensions are not at the forefront of people’s minds. It’s often thought of as something that will happen in

the future so they don’t see a need to login today. We have the apps, modelling tools and education but, realistically, people don’t look at their pension benefits frequently. I’m frequently disappointed with the take-up rates.”

Barker thinks he knows why. “At the moment, nearly every pension scheme has got a static content site that provides information on the scheme. Alongside this, you have a relatively small number of schemes that have the member login piece. I would agree that we would be kidding ourselves if we expect to see frequent member logins,” he explains.

“In addition, the member piece is often still quite rudimentary. In other words, we haven’t seen a lot of integration between the member login piece and the content piece. Where we are taking this is to introduce a content management tool that allows our clients to control the experience.

“So they can blend static content with the member login piece and come up with some pretty powerful tools. I expect we will see plenty of demand from clients to implement self-service in light of the changes on the horizon in the UK. As part of this process, I believe a lot of schemes will want to migrate from two sites – static content and the member login – to a single site.”

European developmentsBut DC-driven change is not the sole preserve of the UK. As Barker notes,

on continental Europe, the realisation that the state cannot continue to provide funding at current levels and that corporates must be incentivised to step in is driving developments.

“The Netherlands,” he says, “has a huge occupational pension market, although the big difference with the UK is that it is made up of industry-wide schemes. Against a population of 15 million, they nonetheless have something like 90 per cent scheme memberships.

“Some of the Dutch industry-wide schemes have built their own technology and have also taken on responsibility for other industry schemes. Nonetheless, they are nearly all dependent on quite old technology. So it is not outsourcing as you might expect to see it in the UK, but it is about upgrading existing technology to keep pace with developments.”

Meanwhile, Germany has started to heed the warnings about the cost implications of its state provision. It is, explains Barker, “a surprisingly under developed market” at the moment. And for this reason he believes the drift toward DC provision could mark it out as an area for growth.

As for STP’s final destination, Green predicts a world in which it will be possible for an employee, in effect, to retire online. She explains: “We would receive data from the employer, validate it, generate a quotation, and notify the member over secure email to pick up the quote without any need for human intervention.” ■


AdministrationPensions

DESPiTE ThE faCT ThaT ThE DC rEvolUTion iS

wiTh US alrEaDy, SChEmE mEmbErS havE bEEn

Slow To EmbraCE ThE nEw TEChnology


Even though the benefits longevity swaps can bring to pension schemes has been

debated for many years, in recent months the market has finally kicked into gear.

According to Mercer, year-to-date the total value of swaps in the UK is £22 billion, which includes the BT Pension Scheme breaking previous records by transferring £16 billion of longe-vity risk to the insurance market.

According to Mercer’s Financial Strategy Group principal Andrew Ward, total volumes have dramatically increased.

“In addition, there has been considerable innovation with the use of captives - an alternative to a traditional insurance company or a bank intermediary between a pension fund and re-insurer for the larger deals,” he explains. “Simplified solutions are now available at the smaller end of the market.”

UK growthBut while the growth of the longevity market in the UK is surging ahead, the European market lags. That’s because a number of factors in the UK have created the perfect environment for a longevity swap market to flourish.

One of the key factors is UK defined benefit pension payments are linked to inflation, which is particularly problematic from a longevity perspective.

Aon Hewitt partner Matt Wilmington says: “If a pensioner lives an extra year, the scheme not only has to pay the pension for an extra year but that pension has also been increased in line with inflation.”

The structure and regulatory environment of the DB industry also makes longevity a more important risk for UK pension funds.

In particular, not only do UK pension funds have to increase payments in line with inflation, benefits cannot be cut. And marked-to-market accounting of pension scheme assets and liabilities has existed in the UK for more than a decade – longer than in continental Europe.

Ward says: “The slings and arrows of misfortune in the form of interest rates, inflation, longevity increases and equity volatility have long been keenly felt and forced UK pension

schemes to think about better managing these risks.”

This spotlight on the risks inherent to a DB scheme resulted in a seismic structural shift in the industry, with most sponsoring companies opting to close the pension schemes to new members and look towards either a buyout or self-sufficiency.

Moving assetsAs pension schemes progress down this path, they shift out of risky assets and into fixed income assets as their funding levels improve and they move closer to their goals. While the funding position of the schemes is improving, schemes also become more sensitive to changes in longevity assumptions.

Towers Watson director Ian Aley says: “As schemes move out of riskier assets, there is less possibility that excess returns could compensate for any increases in longevity. That makes it even more important for these to manage their longevity risk.”

This has resulted in longevity risk becoming an increasingly important concern for the UK pension industry, with considerable resource devoted to making the right longevity assumptions for pension plans.

Wilmington says: “Over the past four or five years, there has been an increased focus not only making the right longevity assumptions but also looking at identifying the risks around those assumptions.”

The major risk to most longevity

ManagingLongevity


The right timeCharlotte Moore examines whether the European pension market will ever be

suitable for longevity swap transactions

WRIT TEN BY Charlot te Moore, a freelanCe journalist

i n V e s t M e n t


assumptions is an underestimation of how long pensioners will live. Wilmington says: “Every time the actuaries carry out a longevity evaluation, life spans increase.”

Up until recently, the insurance industry was more advanced in its approach to assessing longevity risk than pension schemes. Wilmington says: “This was born of necessity: an insurance company risks making a significant loss if it makes an incorrect assessment of longevity.”

Matching expectationsAs pension schemes have become sophisticated in their assessment of longevity risk, however, their assumptions have move into closer alignment with those of the insurance sector.

Wilmington says: “There are now very similar views between pension schemes and insurers about how long people will live, which has been very helpful for the longevity swap market.”

The high quality of data available in the UK has also been helpful for both insurance companies and pension schemes.

Ward says: “We have both long detailed death experience information and postcode information.” These two factors make it much easier to make an accurate assessment of longevity risk for particular employee populations.

While there has been a particular combination of factors which make the UK market an ideal place for the longevity swap market to develop, there is interest in these deals in other regions.

Branching outWard says: “We are working on cases in North America. It is not unfeasible to expect the first North American swap to be completed sometime this year.”

But while there is interest in

longevity swaps from other regions in the world, the European market is much less developed.

That’s because most of Europe does not have the same environment to make the management of longevity risk such a priority.

Punter Southall senior consultant and head of mortality technical committee Cathy Love Soper says: “There are many European countries, such as Belgium and Spain, with very small DB liabilities so longevity does not have such a big impact.”

Nor do European countries have the same constraints on benefit payments. In the Netherlands, for example, where collective defined contribution schemes are more prevalent, it is possible to reduce payments. If payments can be reduced, then it is less important to make accurate longevity predictions or try to manage that risk.

And in Ireland, increases in pension payments can be discretionary rather than mandatory.

In addition, marked-to-market pension accounting is a relatively new phenomenon in mainland Europe. It was only ushered in when the IAS19 accounting standard for EU-listed companies was introduced at the start of 2005. More importantly, the removal of the ability to ‘spread’ gains or losses from IAS19 was only introduced in 2013.

As the spotlight of marked-to-market accounting has not shone as strongly on European pensions for as long, there has been less awareness of the impact of risks such as interest rate, inflation and longevity on pensions.

As result more DB schemes are still open and therefore less vulnerable to the impact of longevity risk as they still have a sizeable allocation to risk assets, which can help to make up any shortfall.

Aley says: “There is not the same

imperative to manage longevity risk as there is in the UK because there is not the same proportion of closed funds.”

Nor is the data for assessing the longevity risk as robust in most European markets as it is in the UK. Love Soper says: “There is much stronger migration within mainland Europe which makes it much harder to get a handle on life expectancy experience in each country.”

Shrinking sizeEven though the regulatory and market environment in Europe is less favourable for managing longevity risk, there is a chance that as this market becomes more sophisticated in the UK, it will become easier for European pension schemes to become more involved.

Ward says: “Up until now most of the deals in the UK market have been very large as these are more profitable for re-insurance companies. As the market becomes more developed and streamlined, those deal sizes will decrease.”

Those deals could then be used by smaller plans in other European jurisdictions, as the longevity deals become more standardised and easier to transact, he adds.

As more European pension schemes get to grips with marked-to-market accounting, it is likely that pension schemes will come to a similar conclusion as UK and start to close DB funds.

Aley says: “As these schemes close, they will focus more closely on managing risk including longevity risk and will be more motivated to parcel off this risk.”

For a European longevity swap market to thrive, however, both sides of the market have to be interested in growing the market. Aley says: “The re-insurers will want to diversify their longevity portfolio exposure beyond the UK.” ■

ManagingLongevity



PensionTalk

“The pension fund managers think that it is not the costs themselves that are ultimately essential to an investment decision but the returns that can be expected once costs have been deducted.”Credit Suisse’s ‘Switzerland: Pension funds’ main concerns in 2014’ report

On the impact of the AIFMD

NiCk LySTerPrincipal Global investors CeO europe“From a client perspective you could argue it’s pretty positive in restoring trust which pension fund investors had lost in alternative investment fund vehicles. We believe AIFMD could grow into a global brand in the way Ucits has, although I think it will take a bit of time and we probably won’t know if this will be the case for three or four years. Once people know what they are getting they may begin to appreciate it but it may need the European industry to pump it up a bit and educate people about it.”

CLay LambiOTTeLCP partner “AIFMD is merely viewed as another layer of compliance, and I have had no clients suggesting they will be basing decisions on it. Changes to regulation are on-going and just a cost of doing business.”

“Releasing pension funds for investment would provide assurance to those struggling with unsustainable debts that they can make a new start without the need to apply for fresh credit.”Dublin Chamber CeO Gina Quin

On the Dublin Chamber of Commerce’s suggestion that pension funds should be unlocked to finance SMEs

On costs no longer being the top issue for Swiss pension fund investors


CLaire rOSSmercer’s Uk retirement administration business leader “Straight-through-processing in a DC world is fundamental to the success of the DC model because of the pressures that members will eventually bring to bear for real-time information. They are going to want to be able to access their funds and information about them at a time of their choosing. STP is the most cost-effective way of delivering this. DC provision brings with it demand for members to be able to access their plan online, move their assets quickly, and more generally enjoy a quick turnaround on transactions – in other words, a lot like we have already with online banking.”

On the need for automation within administration

In their own words...

Industry personalities’ comments on the hot topics affecting the European pensions space


PensionTalk

“international institutional investors have been selling heavily in russia this year. a technical rebound is always possible, particularly if we see a bit of a de-escalation of the conflict. However, it is not so likely that we will see a long period of inflows again. Selling pressures are expected to remain due to the sanctions and the more complicated geopolitics.”iNG investment management senior emerging market strategist maarten-Jan bakkum

iaN aLey Towers Watson director “As schemes move out of riskier assets, there is less possibility that excess returns could compensate for any increases in longevity. That makes it even more important for these to manage their longevity risk.”

CaTHy LOve SOPerPunter Southall senior consultant and head of mortality technical committee “Many trustees are cautious on allocating a large proportion of their

assets to an LDI strategy with yields at low levels. However, we are definitely having more conversations with trustees around liability hedging strategy as the management of interest rate and inflation risks remain a high priority. In addition, many schemes have implemented trigger-based approaches to increasing their hedge ratio as rates rise.”

On longevity risk

On investing in Russia

eLizabeTH COrLeyallianzGi CeO “The sustainability of pension provision depends on funds being able to make investments that generate an adequate return for their long-term liabilities. This will require a more nuanced and differentiated approach to risk factors and associated capital requirements than currently under consideration.”

On an IORP II risk-based approach ‘stifling long-term investment’


PaULUS vaN DeN bOS CmS pension law specialist “It’s mostly this issue which has led to increasing numbers of companies to say ‘well, this is it for us. This is becoming too complicated and burdensome’. This is accelerating the drive towards companies liquidating their pension funds.”

“If a pensioner lives an extra year,

the scheme not only has to pay the pension for an extra year

but that pension has also been increased in line with inflation.”

aon Hewitt partner matt Wilmington

On the governance obligations on Dutch trustee boards


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http://www.cairncapital.com

http://www.towerswatson.com


For professional investors or advisers only. *Schroder International Selection Fund is referred to as Schroder ISF. ** Source: Schroders, I Acc share class, calendar year performance from 1999 to 2013. Source for ratings: Morningstar OBSR, awarded to I Acc share class, as at 30 June 2014. Past performance is not a reliable indicator of future results, prices of shares and the income from them may fall as well as rise and investors may not get the amount originally invested. Issued in August 2014 by Schroder Investment Management Ltd., 31, Gresham Street, EC2V 7QA, who is authorised and regulated by the Financial Conduct Authority. For your security, all telephone calls are recorded. w45789

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Documents

European Pensions...vulnerable to challenges such as market volatility, rising life expectancy and managing reputations. However, the Netherlands has created a variety of options for