German real estate company IVG, which had been granted the right to administer its own insolvency procedures by a German court, has now also been given the green light on its proposed recovery plan.The board of management is aiming for a debt/equity swap, a measure made legal for German insolvencies two years ago.Additionally, the company’s equity will be reduced to zero, which means that, for the first time in 28 years, IVG will not be listed on the stock exchange.The equity will then be increased by adding receivables and an additional cash component, IVG said. In a statement, it added: “Creditors taking part in the capital increase also agree upon a partial waiver of their debts.”Overall, entitled creditors will receive 60% of their capital, the company said.“Initially”, there are no plans to trade the new shares on the stock market, IVG said, quenching rumours of a new IPO.On 20 March, the creditors are to decide on the recovery plan, which also includes a split of IVG Immobilien AG.Under the board of management’s plan, the company is to be separated into its three constituent areas of business – real estate, institutional funds and caverns, for the storage of oil and gas.A new parent company is to be created structured as a non-listed financial holding, as sole shareholder of IVG Immobilien, IVG Institutional Funds and IVG Caverns.
However, because this creates an exposure to the fund’s risk of failure, other participating investors are needing assurances of its creditworthiness.Burnett noted that S&P previously designed an assessment framework for the larger public sector asset owners, while some of the Canadian schemes were also rated entities.The latest project evaluates the risks posed by defined benefit (DB) schemes with a single corporate sponsor.He told IPE: “Regular UK, Australian or Dutch pension schemes, they are not an entity that even has the ability to issue debt, never mind being interested in a rating, so we’ve never had a methodology to assess them.”He said the assessment examined the strength of the corporate sponsor, as many schemes are in “structural deficit”, and that the funds usually end up with a rating on par, or one below, their sponsors.“The ultimate risk is on the underlying corporate sponsor, as opposed to the fund itself,” he said, explaining that the approach is similar to a covenant assessment conducted by some DB funds.The approach “steps around the issue of the structure, the regulation, the liquidity”, Burnett said.The process will ultimately increase the transparency of any construction projects – either infrastructure or real estate – that attract funding from such single-sponsor DB funds.Burnett said S&P would not stop at simply evaluating single-sponsor DB funds.“Whilst at the moment this criteria only deals with single-sponsor defined benefit schemes, in the future, we hope to expand that thinking and extend it to other types of schemes.” Standard & Poor’s is to begin rating pension schemes involved in the funding of construction projects on back on increasing interest in direct lending.The ratings agency said developing the assessment method was partially driven by a change in the way pension investors are providing project finance, with the past two years seeing a gradual shift away from the full sum being provided in advance.Instead, said Robin Burnett, the company’s senior director of infrastructure finance ratings, schemes are increasingly opting for a quarterly or monthly drawdown of financing.“For transaction sponsors, as well as for those procuring the project, these more flexible structures remove the negative carry and improve the economics of the project,” he said.
He rejected that allocation alone could explain the difference in performance, as both the large mutual pension insurers and corporate pension funds use a “fair amount” of external services.“Mutually owned organisations,” he said, “are basically independent, but inside the organisations there is fierce competition among investment units and portfolio managers, which leads to shorter-term performance objectives and more intensive tactical allocations.“On the contrary, corporate funds seem to have longer-term objectives, and they rely more on strategic allocations than tactical ones – this seems to be the main explanation why smaller ones perform better.”With a view to cutting costs, companies in Finland have outsourced or transferred approximately 95% of pension fund assets to large mutual pension insurers.Companies in the country with more than 300 employees are required by law to use large mutually owned pension insurers or set up their own pension funds. All pension entities are jointly responsible for the pensions.Additionally, the pension system is set up as partially funded on an ongoing basis, which means that those employers arranging their pensions via their own schemes carry mainly operational implementation risks compared with the defined benefit schemes found elsewhere in Europe, where longevity, mortality and interest rates dominate risk scenarios. Smaller corporate pension funds in Finland outperformed their larger peers by 6.7% over the 10-year period between 2004 and 2014, according to a recent study.Finnish consultancy Esko Advisors – which conducted the research together with Jari Käppi, associate professor of finance at the International Business School Suzhou – said the 0.6% per annum outperformance ran counter to the commonly accepted benefits of scale for pension funds. Petri Kuusisto, chief executive at Esko, said the figures showed that companies with their own schemes saved more than 10% on their pension costs compared with larger players.“This benefit, derived from the investment performance difference and lower administration costs, is substantial and shows no scale benefits for larger players,” he said.
Even the most reform-resistant EU member states will face pressure to comply to the European Commission’s Capital Markets Union plan, writes Jeremy WoolfeIf a leaked draft copy of the European Commission’s battle plan aimed at creating an effective Capital Markets Union (CMU) is anything to go by, even the most reform-resistant EU member states will face great pressure to comply.The confidential document, from financial stability commissioner Jonathan Hill’s department, reads like a strategy plan from a corporation rather than from an institution.The contrast with documents relative to, say, a typical, single piece of legislation from the Commission is striking. In fact, its eventual “Elements of a Capital Market Union Action Plan” may well have the flavour of a military operations order. It covers a host of eventualities. Its scope is broad.The official Action Plan is due to be discussed by Hill in Brussels on 1 October and presented to a European Parliament delegates meeting in plenary session on 7 October.The plan, from Hill’s DG for finance, follows February’s “green” policy paper “Building a Capital Markets Union”.On pensions, that text emphasised that growing occupational and private pension provision in Europe could result in an increased flow of funds.The flows could be into a more diverse range of investment needs through capital market instruments and, according to the policy paper, facilitate a move towards market-based financing.Particularly focusing on occupational pensions, the new draft action plan – which evidently takes in input from all relevant sectors – refers to the pan-European 29th Regime project, which would co-exist alongside nationally based systems. The plan writes that the merit of this project will be judged from a feasibility assessment to come from the European Insurance and Occupational Pensions Authority (EIOPA). The authority’s advice is due early next year.Also, the Commission is described as planning work to enable a launch of a “blue-print for the creation of a pan-European market for private pension (third-pillar) products”.One item of emphasis is on “building blocks” to upgrade securitisation rules to boost investments into the SME sector. This was stressed by commissioner Hill, speaking at a recent meeting in Brussels of the European Banking Federation.The draft strategy document states that the lack of ability by potential investors to “pre-screen” companies may be a deterrent to investment in SMEs. Dating from before the summer break, it notes that work is taking place.It refers to, for instance, “enhancing the advisory capacity across all member states to assist SMEs, which could benefit from alternative [that is, non-bank] sources of finance”.Among other references is one to problems with the existing Prospectus Directive. Clearly, the Commission wants to get its teeth into it. It indicates revisions as a “short-term” priority, later in the year.Currently, when larger companies raise funds via capital markets, it can cost them “excessive” fees to produce “voluminous prospectus disclosures”. The outlay can be up to 15% capital raised for issuances of less than €6m, and up to 5% for amounts of more than €50m.Other facets in the plan include attention to the Solvency II regime, the Capital Requirement Regulation, the Common Consolidated Corporate Tax Base (CCCTB), national rules restricting cross-border capital and insolvency rules.Under Solvency II, the plan advocates revisions to the calibrations to accommodate “the new definition of infrastructure and provide a regulatory treatment to appropriately incentivise infrastructure investments”.As for legal barriers to cross-border investment, the plan points a finger at national rules. Here, the Commission proposes a direct approach with member states, to remove the barriers. It also notes that it is “seeking to give stronger effect to Treaty provisions on the free movement of capital”.On insolvency, it regrets that only a handful of EU member states has followed a 2014 recommendation for a new approach. Hence, the Commission has begun preparatory work to put in place “a minimum harmonisation”.The final action plan is likely to state that each major initiative should be accompanied by an implementation accessory. This would define the intermediate steps, inputs and resources needed to support delivery. Undoubtedly, the Commission is giving its “top priority” to having a fully functioning CMU in place by 2019.The hope has to be that member state governments will be persuaded to act appropriately. That would mean working together on reforms aimed at creating economic progress – that is, towards “the European dream”.
It said it understood the use of DLT could bring benefits to the market but that it wished to understand fully any detriment that could arise through reliance on such ledgers.The supervisor predicted the clearing and settlements markets could see significant benefits, as the use of DLT could cut back on the number of intermediaries needed in any transaction.“Certain proponents of the DLT believe the clearing and settlement of transactions could effectively combine into a single step, which would be (almost) instantaneous,” the discussion paper adds.“This could create a number of additional benefits, including reduced counterparty risk and less need to post collateral.”ESMA also predicted the use of DLT could reduce costs for providers, as certain back-office functions – including reporting and monitoring of transactions – could be automated.“Also, the use of distributed ledgers could reduce or even eliminate maintenance costs of individual ledgers at company level and reduce the need for costly business continuity plans,” the paper states.“In addition, by reducing the need for multiple intermediaries, the DLT could also reduce transactions costs.”ESMA has asked for feedback from the industry by 2 September.,WebsitesWe are not responsible for the content of external sitesLink to ESMA discussion paper The European securities supervisor has launched a consultation on the use of ledgers to verify clearinghouse and other transactions, predicting its use could reduce the need for collateral.According to the discussion paper by the European Securities and Markets Authority (ESMA), the use of distributed ledger technology (DLT) – one example of which is blockchain, used to validate transactions of virtual currency Bitcoin – could see significant benefits for the clearing and settlement markets and reduce counterparty risk.Saying it was “mindful” of issues raised by the use of Bitcoin, ESMA nevertheless stressed its research on DLT would be limited to how the technology could be used within the securities markets.It noted that any regulation of payments of virtual currencies would be for the European Central Bank or the European Banking Authority to consider.
The UK’s Office for National Statistics (ONS) intends to use a new measure of inflation in a move that could spark fresh debate about index-linked benefits.The measure, CPIH, was first introduced by the ONS in 2010 and designed to reflect housing costs better than the existing consumer prices index (CPI).John Pullinger, the national statistician, announced yesterday that CPIH would be the ONS’s preferred inflation measure effective from March next year.Consultancy firm LCP said the move could open the door for the government to adopt CPIH for social security and pension benefits in the Autumn Statement, to be delivered on 23 November. The older CPI measure of inflation forms part of the state pension’s ‘triple lock’, which ministers want reviewed.Public sector pension benefits are linked to inflation, so any change in government policy could be applied to these pensions.However, the effect on private sector funds is less clear.Lynda Whitney, partner at Aon Hewitt, said the implications would depend on individual scheme rules, and trustees would have to be sure to communicate clearly any changes to members’ benefits.The pension fund for children’s charity Barnardo’s last week lost an appeal to switch its inflation measure from the retail prices index (RPI) to CPI.RPI is typically higher than CPI, so a switch to the latter would reduce future liabilities.UK government index-linked bonds use RPI, but last year saw the issue of a handful of CPI-linked bonds.No bonds have yet been issued using CPIH.Richard Gibson, an associate at Barnett Waddingham, said: “If the government were to issue CPIH-linked debt, that would provide welcome relief to pension funds that are seeking assets that more closely match their liabilities and likely reduce buyout prices for most schemes. We hope they will put this question out to consultation in due course.”However, Aon Hewitt’s Whitney cast doubt on the government’s appetite for such issuance.“CPI has been around for quite some time, but there has been extreme reluctance to issue CPI-linked debt,” she said.“Also, politically, the fact RPI is higher than CPI means the government doesn’t want to change it.”In addition, while Whitney agreed pension funds would be likely to buy into longer-dated CPIH bonds, she questioned whether there would be sufficient demand for the short end of the yield curve.
The Eurogroup will conduct the benchmarking exercise for the first time next year, and thereafter every three years. It will be carried out in the context of “existing processes and surveillance mechanisms, in particular the Ageing Reports and the assessment of the Stability Programmes”.Speaking to the press after yesterday’s meeting, Jeroen Dijsselbloem, Dutch finance minister and president of the Eurogroup, said: “I am very happy about this agreement.“This is the second benchmarking exercise the Eurogroup has agreed to. The first one was the benchmark on the tax wedge on labour which we started in September 2015. So this is the second one on the sustainability of pension systems and I think that will help to deepen our work on fiscal sustainability in macroeconomic imbalances.” The Eurogroup has agreed to benchmark the fiscal sustainability of euro-area countries’ pension systems as a tool to guide potential further reform.The group of euro-zone finance ministers reached the agreement at a meeting yesterday.Ministers want to assess the fiscal sustainability of pension systems and benchmark these against the best performers of the euro-area using two key indicators and further “flanking” indicators. The two key indicators measure medium- and long-term sustainability risks, focusing on the impact of pension spending.The “flanking” indicators include the legal and effective retirement age, and the pension benefit ratio, level and evolution.
The manager of a DKK100bn (€13.4bn) holiday pay fund has urged employers to pay into the fund in order to boost its earning power.LD Pensions was given the task in 2017 of managing the new Employees’ Fund for Residual Holiday Funds, running the cash equivalent of an extra 12 months’ worth of holiday entitlements granted to Danish employees as a result of bringing local legislation into line with EU law.LD said its new portfolio could yield 4.5% a year on average if employers opted to pay their liabilities into the fund – a third more than the 3% return the fund would gain otherwise, according to preparatory work carried out by Denmark’s employment ministry.The provider said new fund was expected to have total assets of DKK100bn once it was operational. LD said that the proportion of employers opting to pay into the fund could be of great importance for its investment work. Charlotte Mark, finance director, LDCharlotte Mark, finance director of LD Pensions, said: “It poses challenges for the fund’s strategy – we do not know in advance what the employers will do.”She added: “The employers’ funds provide a safe return, and that is in itself good.“But there must also be room for more risky investments to generate a good return on employees, and that requires some of the funds to be paid by employers before they fall due on the employee’s retirement.”Mark said LD would look at different investment tools outside of its current strategy if only a small proportion of the fund’s assets could be actively managed.“We believe in a good result, even though it turns out that many employers need liquidity,” she said.Employers must report the cash value of holiday entitlements earned by employees in the “transition year” leading up to new holiday pay act coming into force on 1 September 2020.It is then up to the employers whether they want to keep the money in the company until the staff members’ retirement and pay an annual indexation charge, whether they will pay all employees’ earned holiday money to LD, or whether they will choose a combination of these two options.
The Global Impact Investing Network (GIIN) has presented “core characteristics” of impact investing in a bid to establish clarity and pave the way for further growth of the market.Speaking to delegates at an impact investing conference in The Hague on Tuesday, Amit Bouri, CEO and co-founder of the GIIN, said the characteristics had been developed to guard against the effects of disingenuous or mistaken marketing.“As the sector’s popularity grows, there will be some people who put an impact label on financial products that don’t deserve it,” he said. “Some may do so on purpose to profit from the ‘brand’, others simply may not know any better.“If we let this ‘impact washing’ become widespread, the brand will be diluted, and the whole industry will suffer from the ensuing scepticism.” Amit Bouri, GIINAccording to the GIIN, the core characteristics will help investors understand the essential elements of impact investing and what constitutes credible impact investing practice.They could be used to inform investors’ own approach as well as assess potential investment partners.Sapna Shah, director of strategy at the GIIN, said: “Our priority is to set appropriate expectations and define practices in a way that is useful to an investor building or deepening an impact investing portfolio, to support greater participation from both new and experienced impact investors.”There are four impact investing “tenets”, according to the GIIN: intentionality, evidence-based investment design, impact management, and “contribution to industry growth”.During a panel discussion on “impact washing” at the Impact Summit Europe conference, a delegate asked whether the risk of impact washing could be seen as “a necessary evil”, where the risk of dissuading more investors to engage with impact investing was perhaps the bigger danger.The core characteristics of impact investing, according to the GIINIntentionality: This, said the GIIN, is “at the heart of what differentiates impact investing from other complementary practices that focus on avoiding harm or mitigating risk”. Impact investing was about actively setting out to “positively contribute to social or environmental solutions by establishing clear impact objectives and thorough strategies to achieve these goals ahead of execution”.Evidence-based investment design: Impact investing, according to the GIIN, involved the use of empirical data and research from financial services and other disciplines, including social and environmental sciences, as “the basis and support to establish impact objectives and validate results”.Impact management: Impact investors also needed to commit to measuring and managing an investment’s impact with a view to meeting the set objectives. The GIIN said this meant using “feedback loops” whenever possible.Contribution to industry growth: “Impact investors share non-proprietary and non-private positive and negative learnings, evidence, and data so others can benefit from their experience”. Questions of sizeThe GIIN estimated the size of the global impact investing market to be $502bn (€446bn). This latest figure provided “the most rigorous estimate of the current size of the impact investing market”.The data is self-reported by impact investing organisations identified by the GIIN, with the association adding $84bn on the basis of extrapolation.Earlier this week the Global Sustainable Investment Alliance (GSIA) released figures putting the size of the impact investing market at $444bn at the start of 2018. The GSIA included “community investing” in its definition.According to the GIIN, the $502bn are deployed by 1,340 organisations. More than 800 asset managers accounted for in excess of 50% of the total assets under management, with 31 development finance institutions managing just over a quarter.In a survey of conference delegates carried out by Phenix Capital, a European impact investing consultant, almost 80% of respondents expected to increase their target allocation to impact investing over the next three years. A third of the institutional asset owner respondents with an impact allocation allocated at least 10% of their assets under management to impact strategies. IPE will be publishing a special report on impact investing in May The impact investing market needed to grow with integrity to ensure “impact at scale” rather than just “capital at scale,” he said.
Source: XPS Investment. *LGIM did not participate in XPS’ survey in 2018 and 2017. LGIM data is sourced from the KPMG LDI Survey 2017 and assumed to remain constant in 2017 and 2018. The consultancy estimated that over half (54%) of UK pension schemes’ liabilities were now hedged with LDI. This was based on estimating that the UK private sector had a total DB pension scheme liability of around £1.9trn and discount rates of gilts plus 0.5% per annum.However, it also said the actual level of hedging was probably higher as the 54% excluded hedging achieved through holding bond assets outside a specific LDI hedging programme.BlackRock, Insight Investment, and Legal & General Investment Management (LGIM) continued to dominate the LDI market, with XPS’ survey estimating they managed 87% of LDI assets.BMO Global Asset Management added 93 new mandates in 2018 and now had the largest number of mandates, although the manager was still fourth largest by the notional value of liabilities hedged, according to XPS.The consultancy noted that Insight Investment had “also made some significant additions over the year”. It had taken on 30 new mandates to hedge an additional £67bn of notional liabilities. The vast majority of new mandates came from smaller defined benefit (DB) pension schemes, according to XPS. It attributed this in part to the growth of investment platforms and fiduciary management.Directly accessed pooled funds were the single biggest contributor to the growth in mandate numbers, according to the consultancy. It said that 92% of the new mandates in 2018 were from pooled solutions, up from 87% in 2017.Tim Miller, consultant at XPS, said: “73% of all LDI mandates are now in pooled LDI solutions, highlighting the efforts made by managers and advisers to bring accessible LDI solutions to all schemes.”Total hedged liabilities by manager Pension schemes hedged an additional £59bn (€69bn) of liabilities last year, taking the liability-driven investment (LDI) market to over £1trn, according to XPS Pensions Group.Simeon Willis, chief investment officer at XPS Investment, the group’s investment consulting arm, said: “The pensions mass market has overcome its initial reservations and LDI is now a £1trn market.“This is a great achievement for fund managers, advisers and trustees, who are now firmly taking control of their schemes’ futures, not leaving it to chance.”Reporting on its latest annual LDI survey, XPS said broadly all of last year’s growth – up 6% from £965bn in 2017 – could be attributed to new mandates, which increased by 12%, or 265.