Round-up of the monthly news and developments from the global investment market with stories regarding low paid workers, responsible investing, the Euro-zone and more.
EC News Investments is accompanied by a round-up of the months people moves and mandates and buyouts, giving you indepth insight into the market.
Low paid workers could lose tax relief for workplace pensions
An estimated 500,000 lower paid workers could see tax relief on their workplace pension contributions be taken away according to Royal London. Royal London’s assessment is based on a recent review document from the Department for Work and Pensions. The document was a review of the automatic enrolment earnings trigger and qualifying earnings band for 2017/18 that shows, for the first time, the number of workers who earn more than the earnings trigger for auto-enrolment, £10,000, but less than the income tax threshold £11,500. Employees in this position in a workplace pension scheme that applies pension tax relief using the net pay arrangement system will not get tax relief. However, those whose scheme uses the relief at source method will get tax relief. A DWP statement read, “The Government has also considered in particular the fact that around 280,000 workers earn between £10,000 and £11,500 would not benefit from tax relief on their contributions if enrolled into a pension scheme that uses a Net Pay Arrangement. Small and micro employers should ask their provider about the tax implications before making a decision on the scheme they choose.” Royal London predicts half a million workers could lose out as the personal tax allowance increases from £11,500 to a target level of £12,500 by 2020. This gap could worsen if the earnings trigger for auto-enrolment is cut below £10,000 to include more workers.
Three UK managers in top five ranking for responsible investment
Three of the UK’s largest asset managers are ranked in the top five for responsible investment performance. Schroders, Aviva Investors and Standard Life Investments ranked 1, 3, and 5 respectively in ShareAction’s report of 40 major European asset managers. French groups also ranked highly with Amundi, Natixis and AXA all in the top 10. ShareAction has been compiling a ranking of major institutional investors on responsible investment every year since 2006, but this year’s is the first in which the organisation has included European firms who mainly operate outside the UK. Companies were rated on publicly available information and a detailed questionnaire, which gave organisations opportunity to explain how their investment process incorporated environmental, social and governance factors.
Benchmarking pension systems discussed by Euro-zone ministers
Finance ministers in the Euro-zone are going to look into benchmarking member state pension systems. The Eurogroup discussed the sustainability of member states’ pension systems. A statement ahead of the meeting read, “Ministers will look into the possibility of introducing benchmarking in this policy area and will discuss the choice of indicators and the frequency of reporting. The goal is to agree the modalities of a benchmarking exercise.” The talk was the ministers’ third round of discussions on pension sustainability in the euro area. The first was in December 2015, when the group discussed “putting pension systems on a sustainable path” as a policy priority, given the older population and other developments. In June last year the group adopted a set of common principles for strengthening the fiscal sustainability of pension systems and invited the Commission to come up with appropriate benchmarks, based on the common principles.
How the London Stock Exchange Group merged its pension schemes
Tim Jones, group head of human resources at the London Stock Exchange Group (LSEG) explains the challenges that led to the merger, "What we've always set out to do is to try to ensure that we have market-leading, market-aligned benefits in all of the geographies in which we operate. So one of the big challenges we have is how we harmonise terms and conditions. One of our key aims has been to try to prevent having individuals sitting next to each other, all of whom are on a myriad of different terms and conditions, some higher, some lower." On looking over the group’s pension and benefits offerings across LSEG, one of the key things Jones and his team noticed was the cost of running the group's two defined benefits schemes. The two schemes were the London Stock Exchange Retirement Plan, which had closed to new entrants in 1999, and future accruals in 2012 and the LCH Pension Scheme, which was closed to future accruals in 2013; schemes which together have a membership of 3,000 and assets of around £600m. Jones says, "One of our challenges then, as you can appreciate, was juggling and managing two pension schemes, two sets of trustees, two sets of advisers and a whole host of asset managers and other providers." LSEG started to look at how to make running the two schemes more efficient and to have a single, very clear, investment strategy. After careful discussion with stakeholders the decision was taken to proceed with a sectionalised merger, an option Jones said also had the advantage of allowing other sections to be added to the arrangement at a later date should LSEG make further acquisitions. Having made the decision to conduct a sectionalised merger, LSEG set up a joint working party, including representatives of both the company and the two existing trustee boards, to aid communication between all the parties involved. Broad says the process itself split into two phases: first the scoping and feasibility, asking the big questions about how the two schemes could be brought together; what a new scheme should look like and how it should be governed; followed by the second which was implementation. As LSEG was setting up a new scheme as part of the sectionalised merger, it also had to set up a new trustee board, which has nine members.
Bulk annuities table for 2016 led by Legal and General
Full-year 2016 bulk annuities by UK pension plans hit £10.2bn. This includes the £1.2bn buy-in by Phoenix Life with its own UK pension plan earlier in the month and is the largest single transaction over 2016. Legal & General and Pension Insurance Corporation (PIC) wrote the largest volumes of business with UK pension plans at £3.3bn and £2.5bn respectively, a 33% and 25% market share. Rothesay Life focussed in 2016 on its £6.4bn annuity transfer with Aegon and wrote no material pension business with UK pension plans during the year. 2016 is the third year in a row that volumes have exceeded £10bn. The majority, £7.5bn, were finalised in the second half of the year, highlighting the surge in activity following the EU referendum. This high-level of activity has carried on into 2017 and, as predicted in LCP’s De-risking Report 2016 published in December, LCP continues to believe buy-in and buy-out volumes in 2017 could exceed £15bn for the first time.
UK pension fund liabilities could drop by 2%
Pension fund liabilities in the UK could fall by up to 2% due to revised mortality figures, according to Willis Towers Watson. New data from the Continuous Mortality Investigation (CMI), which monitors UK longevity trends, showed standardised mortality rates improved by 2.6% a year on average between 2000 and 2011, but since then have been close to zero. Stephen Caine, senior consultant at Willis Towers Watson, said, “For some schemes about to embark on new funding negotiations, adopting [new CMI data] could cut life expectancy for a male retiring now by around six months compared with the assumptions made when they last went through this process three years ago. This could represent a reduction in liabilities of up to 2%.” Aon Hewitt has warned that the same data could mean some pension schemes finding themselves at the wrong end of poor pricing in the longevity hedging market.
€10bn bill for the UK to cover 'underfunded' EU staff pension scheme
A bill of between €7.7bn and €10bn could be sent to the UK for its share of the EU officials’ pension and benefits funds, according to a comprehensive study of European finances. However, EU officials could have been underfunding the pension scheme due to discrepancies between discount rates used to calculate liabilities and staff contributions. The figures will likely be a contentious issue in the UK’s negotiations to exit the European Union. The pension estimates were made as part of a broader study of the UK’s likely financial obligations towards the EU. The UK’s estimated contributions relate to unfunded defined benefit plans for EU staff and a Joint Sickness Insurance Scheme, with combined liabilities of €63.8bn at the end of 2015. Staff are expected to contribute one-third of annual pensions costs, with member states paying the balance. Based on this, the study’s authors estimated the UK’s bill for future pension payments at between €7.7bn and €10bn, depending upon whether the calculations take into account rebates from the EU to the UK.
UK investors hit by BlackRock manager overhaul
In March, the fund giant revealed a new strategy for active management, as it re-organised its US-domiciled business to incorporate more data-driven and factor-based stock selection, while separating out its high-alpha funds. The move will see several fund manager depart and in the US affecting some $30bn (£24bn) of assets under management. However it has been reported that the changes mean teams will be replaced on BlackRock's £105m Global Equity, £87m US Opportunities, £84m US Dynamic and £175m Emerging Markets funds, sold in the UK. The Global Equity fund, managed by Ian Jamieson, Tom Callan and Simon McGeough, will be handed over to London-based Stuart Reeve, of the firm's £160m Global Income product and co-manager Andrew Wheatley-Hubbard. US Dynamic will be handed to US-based managers Todd Burnside and Joe Wolfe, while US Opportunities will be taken over by senior BlackRock investors Tony DeSpirito, David Zhao and Franco Tapia. The Emerging Markets vehicle, run by Dhiren Shah and Luiz Soares, will fall under the remit of soon-to-be Hong Kong-based Gordon Fraser and Andrew Swann. BlackRock originally stressed in an announcement that the changes would entail "no re-positioning of active equity products currently managed outside of the US". However the affected funds are sold into the UK