Round-up of the latest news in the UK institutional investment markets.
Defined benefit pension transfer values increase
Defined benefit pension holders have witnessed their transfer values jump up over 2016, the number of people on this kind of pension is thought to be around 6 million. Under the rules, the majority of workers on defined benefit schemes have the right to transfer their pension entitlement for money. Royal London has said the cash that such people can get has risen over the last 12 months. Some are being offered huge amounts, often tens of thousands of pounds more than at the end of 2015. For someone with a pension valued at £20,000, it is not unusual to be offered £600,000 in cash for the pension; this is equivalent to 30 times the value. But while selling may be useful for many people, Royal London is also warning of significant disadvantages.
Gender data from fund managers required by Willis Towers Watson
Willis Towers Watson will ask fund managers to supply data about the gender composition across their workforce, responding to evidence that more women in the workforce improve financial performance. The plan was put forward by Luba Nikulina, global head of manager research at Willis Towers Watson, at an MSCI event on the subject of women in finance. She spoke of “hardwiring this into the process of allocating money. If asset owners add their voice it will help to move things forward”. She was answering a comment from a representative of a local authority pension fund about asset owners wanting better data on gender representation in roles below board level.
Long-term investment vehicles called for by UK think tank
The UK government should adopt a new investment structure to allow the creation of large pools of “patient capital”, which would bypass the tricky process of merging pension funds. The recommendation is one of six policies the think tank put forward in a report commissioned by the All Party Parliamentary Corporate Governance Group (APPCGG) for input into its submission to the government’s consultation on corporate governance reform. The think tank also said shareholders in listed UK companies should be allowed to designate a certain stake as a “stewardship stake”. This would come with a two-year lock-up and other requirements but offer double voting rights on remuneration at AGMs. The think tank said, “The aim is to create larger pools of patient capital without the difficulty of merging existing pension funds, which is compatible with a defined contribution world and works with the existing reality of significant foreign ownership in the UK.”
PLSA is pushing for a Brexit deal that supports UK pension funds
The UK government must put a strong economy first for the benefit of pension schemes, or a large number of British people will be affected, the sector’s trade body has said. The Pensions and Lifetime Savings Association (PLSA) has highlighted that the strength of UK pension funds depends on the strength of the nation’s economy, its regulatory regime and its financial services sector, all of which could be threatened as the UK negotiates its withdrawal from the EU. Graham Vidler, director of external affairs at the PLSA said, “A successful Brexit matters to the 20m workers, savers and pensioners served by our pension schemes. If the economy weakens, it will make it harder for sponsoring employers to keep defined benefit schemes open and reduce the funds individuals can afford to put into defined contribution pensions, but these risks can be reduced if the government addresses the points we raise.”
Doubling in size for UK pension Infrastructure pool
GLIL Infrastructure, the cooperation between London and Manchester public pension funds, has more than doubled to £1.275bn following the addition of three more funds. West Yorkshire Pension Fund, Merseyside Pension Fund and Lancashire County Pension Fund have joined expanding GLIL’s assets from the original £500m. The collaboration brings together the Local Pensions Partnership (LPP) and Northern Powerhouse local government pension scheme pools, which are working on plans to pool assets more broadly. The two pools were in talks to combine their efforts across all asset classes but this plan was abandoned during the summer. In a statement, the LPP said, “The expansion allows GLIL Infrastructure access to a greater pool of financial commitments and investment expertise from its five contributing funds, cementing it as a significant and serious investor in the UK infrastructure market.”
Divestment data hints at cashflow-negative shift for UK pensions
UK pension funds could be about to enter a cashflow-negative status, data from the Office for National Statistics (ONS) suggests. The ONS saw a net disinvestment of £15bn (€17.3bn) by pension funds and insurance companies in the third quarter of 2016. It was only the fifth time in 30 years the ONS’s survey of institutional investors recorded net outflows but the second time in three quarters after a net disinvestment of £3bn in Q1 2016. Sorca Kelly-Scholte, head of the EMEA pension solutions and advisory group at JP Morgan Asset Management, said the data was “a marker of pension funds becoming more mature. There are two reasons for the disinvestment. One is a tactical play, Investors see toppy valuations and a reflationary environment coming back, and they think they have got to have cash while this plays out.”
PGGM requests regulatory leeway to enhance sustainable investment
PGGM has asked for greater regulatory leeway for pension funds and other institutional investors when it comes to sustainable investing. The €200bn Dutch asset manager said pension funds would enhance their sustainable allocations if the investments were understood by the regulator to pose less risk. A spokesman for PGGM, asset manager for the €185bn healthcare pension fund PFZW said, “At the moment a euro invested in a coal-fired power station counts the same as a euro invested in a wind farm, and we would like to discuss this.” Speaking in Amsterdam at the recent GIIN Congress on impact investing, Peter Borgdorff, PFZW’s director, highlighted the pension fund’s belief that sustainable investments pose less risk over the longer term, although he conceded that this had yet to be proven. He argued that regulatory changes in support of sustainability stand to increase institutional investment in private equity, infrastructure and real estate.
Executive pay stance hardened by PLSA
The UK’s pension fund trade body has offered its opinion to those calling for a tougher stance on executive pay. The Pensions and Lifetime Savings Association (PLSA) wants investors to oppose the re-election of remuneration committee chairs if they also reject pay packages. The stance is part of an updated PLSA corporate governance policy and voting guidelines, designed at encouraging pension fund investors to be more active when voting on remuneration issues. Luke Hildyard, the PLSA’s policy lead for stewardship and corporate governance said, “Provocative levels of executive pay are doing great damage to the reputation of British business. The failure of some companies to recognise stakeholder concerns on this issue is a major worry for pension funds as investors. “Our new guidelines are designed to ensure the individuals responsible for a company’s executive pay practices are held to account. We hope this can at last deliver meaningful progress on excessive top pay.”
Deficit reduced by John Lewis with CPI switch
John Lewis has accepted a new recovery plan with the trustees of its defined benefit scheme following a sizable reduction in the funding deficit, due partly to a change in inflation indexing. The scheme undertook a triennial valuation dated March 2016 which showed a deficit of £479m, down from £840m in March 2013, sparking negotiations about the recovery plan. In an update, John Lewis said the reduction was due to “payment of deficit contributions, a change in allowance for discretionary pension increases and excess investment returns, partly offset by a reduction in the real discount rate”. Following the previous valuation, John Lewis committed to a recovery plan consisting of an £85m one-off payment followed by £44m annually over 10 years. However, the company issued a £300m bond in December 2014, using the proceeds to prepay almost seven years of contributions up front. The new plan includes £303m of cash contributions, £183m of which are due before the end of March 2017. The remaining £120m will be paid over the nine years to March 31 2026.
Trump to order review of Dodd-Frank
Donald Trump will ask for a sweeping review of the Dodd-Frank Act rules established in response to the financial crisis in 2008. Signing an executive action Trump wants to significantly scale back the regulatory system put in place in 2010. Trump will also halt another of former President Barack Obama’s regulations, hated by the financial industry that requires advisers on retirement accounts to work in the best interests of their clients. Trump’s order will give the new administration time to review the change, known as the fiduciary rule. The actions are thought to represent the new administration’s approach to financial markets, with an emphasis on removing regulatory burdens and opening up investor options. The orders are the most wide reaching steps yet to loosen regulations in the financial services industry and come after he has sought to stock his administration with veterans of the industry in key positions. His plans are sure to face fierce criticism by Democrats who charge that Trump is intent on undoing changes designed to protect everything from average investors to the global banking system.