Irish flag carrier Aer Lingus is to pay nearly €191m towards a new defined contribution (DC) scheme for part of its staff, as the airline seeks to settle the protracted dispute surrounding the underfunded €1.4bn Irish Airlines Superannuation Scheme (IASS).The company said it would accept the findings of an expert panel, convened by the Irish government and social partners, in what was seen as the final opportunity to end the “protracted and divisive dispute” over a €715m deficit in the multi-employer fund.In an announcement to the Irish Stock Exchange, Aer Lingus chief executive Christoph Mueller noted that a recommended €146.7m payment was a significant increase over a previous Labour Court ruling that urged a €110m investment into a new DC scheme to compensate active members for the benefits cuts they would incur due to the restructuring of the IASS.“Aer Lingus and the company reluctantly accept the recommendations of the expert panel as the only solution that is capable of acceptance by all the parties,” Mueller said. He said implementing the “very complex” solution would require continued effort by everyone involved in the dispute, which has lasted several years, partially due to the reluctance of former major shareholder Ryanair to consent to any payment.Mueller added: “A significantly improved industrial relations environment is also a key requirement, and a functioning internal dispute resolution mechanism must be established for this purpose. We strongly encourage all parties to work collaboratively to achieve these goals.”Additionally, the company said it would offer the trustee of the IASS a further €14m to compensate deferred members for part of their benefits cuts, raising its offer to €44m.It said it was now engaging with the trustee and had received “initial conformation” that the fund would proceed with a proposed de-risking strategy, as outlined in a recent funding proposal.Under the 25-year funding proposal, the scheme has allocated heavily to euro-zone government bonds, with an aim of achieving a €28m surplus by 2039.It is also reducing member benefits by up to 20%, cutting the current deficit to €197m.If both payments are accepted by the trustee, then Air Lingus would end up contributing €190.7m to a new DC fund, a nearly €51m increase from the €140m payment previously recommended by a Labour Court settlement.The company will now seek final approval for all payments from all stakeholders, then convene an extraordinary general meeting to gain shareholder approval, with the aim of completing all payments by the end of 2016.The announcement comes a day after Irish minister Leo Varadkar, whose Department of Transport, Tourism and Sport was one of the government departments involved in convening the expert panel, told the Dáil that he urged all parties to seize the opportunity and “bring this issue to a final and fair conclusion”.He added that he had spoken with both the chairman of Aer Lingus, Colm Barrington, and at least one of the board members representing the interests of the state.Varadkar also said he had not yet had an opportunity to discuss the matter with the board of the Dublin Airport Authority, the other scheme sponsor involved in the dispute, which was also urged by the expert panel to contribute towards the funding of a new DC scheme.A spokesman for DAA referred back the company’s previous statement on the expert panel report, which noted that it would review the recommendations.
It deals with the preparation of financial reports by pension schemes.Updates to the 2007 guidance became necessary after the UK authorities consolidated UK GAAP into a single accounting standard, FRS 102.FRS 102 is a fundamental reform of financial reporting in the UK.In essence, it is a localised version of the International Financial Reporting Standard for Small- and Medium-sized Entities.Alongside this change, UK legislative and regulatory actions have also made a number of changes to the legal and regulatory environment for pension funds since 2007.In particular, the past seven years have seen the introduction of auto-enrolment, as well as an increasing number of pension schemes entering the Pension Protection Fund.The PRAG issued its draft SORP in April on a three-month comment period.The changes take the form of wide-ranging amendments to the 2007 SORP.Comments on the proposals closed on 16 July.The PRAG invited views from interested parties on a series of changes that affect annuities, investment-risk disclosures, the fair-value hierarchy, financial statement presentation, auto-enrolment, legislative disclosure requirements and concentration of investments.But despite widespread support for the PRAG’s approach in the document, experts who spoke with IPE cited areas for concern.In a recent press notice, the ACCA warned that the PRAG must “more fully” explain the concept of “significant” when it applies to a new requirement to account for matching annuities on the balance sheet.The accountancy body also called for the PRAG to include “an indication” of the “level of materiality applied to disclosures in the example financial statements” in the SORP.And in an interview with IPE, ACCA spokesman Paul Cooper warned that the new SORP would lead to inconsistencies between statutory reporting requirements for disclosures about investments and the requirements of UK GAAP.Urging the DWP to act, Cooper, a corporate reporting manager with the ACCA, said: “It is important changes can be made so the legal requirements are consistent with the revised SORP.”David Hutchings of Hymans Robertson said: “The SORP talks about information to quantify risk. A single number in the accounts could be misleading because that number in isolation might look large and yet say nothing about risk mitigation.“We would like to see a requirement for entities to provide a better explanation of risk – perhaps through the inclusion of an updated statement of investment principles as an appendix to the Report and Accounts to avoid putting big figures into accounts that might be misleading.” Pension fund accountants in the UK have broadly welcomed proposed new guidance from the Pensions Research Accountants Group (PRAG) dealing with the preparation of financial reports by pension funds.In a statement on the draft guidance, global accountancy body the Association of Chartered Certified Accountants (ACCA) said it thought the changes detailed in a draft Statement of Recommended Practice (SORP) would “bring clarity”.But the ACCA warned that interested parties must now lobby the Department for Work & Pensions (DWP) to bring forward legislation to align investment disclosures under UK law with developments in UK generally accepted accounting principles (GAAP).The draft SORP sets out a series of amendments to a 2007 SORP.
The UK Pensions Regulator (TPR) has unveiled Lesley Titcomb as its new chief executive after a nearly two-year search.Titcomb joins from financial services regulator the Financial Conduct Authority, where she is currently COO.She is expected to take up her new role as head of TPR in March 2015, with current interim chief executive, Stephen Soper, stepping down.Soper was appointed interim after former chief Bill Galvin’s departure and will move back to his role as executive director for defined benefit (DB) regulation. Galvin announced he was leaving TPR in March 2013 to become the chief executive of the Universities Superannuation Scheme (USS), one of the UK’s largest schemes, with £42bn (€52.5bn) in assets.Titcomb, also an FCA board member, has been COO since April 2013 after joining the organisation’s predecessor in 1994.Titcomb said: “With so much fundamental change, it is important that the industry is overseen by a strong, independent pensions regulator, focused on the issues within the sector, that is respected for its technical expertise and authoritative voice.“I relish the opportunity of working with the regulator’s high-quality team and with other industry stakeholders.”Soper will lead the organisation until Titcomb joins in March next year.
In terms of third-quarter asset allocation, the main shifts since the previous quarter have been a 3-percentage-point fall in equity and equity fund investment (to 27% of the total portfolio), and a similar rise in cash holdings, to 11%.The overall share of bond and bond-fund investment remained unchanged at 54%.Geographically, the share of Latvian assets increased by 4 percentage points to 43%, including rising investment in venture capital and real estate funds that focus on the Baltic region.The share held by Eastern European assets rose by 2 percentage points to 20%, while the Western European share fell from 17% to 16%, and that of global/international markets from 14% to 12%.Close to 91% of all investments were in euro-dominated securities, with some 7% in US dollar assets.Assets since the start of the year increased by 10.3% to €2.2bn, boosted by a 1-percentage-point increase in the contribution rate, to 5%, which came into effect in May.In 2016, the rate rises by a further percentage point.Membership fell by 0.5% to 1.24m.Third-pillar pension fund returns showed a similar trend, with the average year-to-date yield falling to 0.47%, from 3.47% in the second quarter and 5.34% in the first.The five balanced-strategy funds generated 0.48%, and the active, equity weighted ones a much lower 0.01%.Over the quarter, the balanced funds reduced their equity and equity-fund exposure by 2 percentage points to 9%, and their bond holdings by 3 percentage points to 65%, while cash holdings increased by 5 percentage points to 15%.The active funds also reduced their equity holdings – from 41% to 38% – while the share of bonds in the portfolio increased from 44% to 45%, and cash from 6% to 8%.As a result of the third quarter’s poor investment results, the total asset value for both types of plan fell by 0.7% over the previous quarter to €304m.Since the start of the year, assets have grown by 8.1%, and membership by 5.1% to 248,016, of which 22% are employers paying their workers’ contributions.The LKA report noted that the average age of participants in 2015 was 46 years, as a savings culture among younger workers has yet to develop in Latvia. Latvia’s pension funds averaged a positive nine-month return as of the end of September despite a volatile third quarter.Returns were down substantially, however, on the record performance achieved in the first quarter.According to the Association of Commercial Banks of Latvia (LKA), second-pillar funds generated an average return of 0.28%, down from 2.71% in the second quarter and 9.5% in the first.The eight active, equity-weighted plans generated 0.13%, the four balanced ones 0.00% and the conservative plans 0.75%.
Pension Insurance Corporation (PIC), which recently agreed a pension buy-in with the Aon Retirement Plan for £900m (€1.1bn), has now sealed a reinsurance deal covering longevity risk associated with the transaction with Prudential Insurance Company of America (PICA).PICA said this was the third longevity reinsurance deal it had made with PIC, and showed that there was a continuing need for longevity reinsurance under the new Solvency II regulatory regime.It said the transaction covered longevity risk associated with pension liabilities amounting to about $1.1bn (€973m) for some 2,900 pensioners across two sections of the UK’s Aon Retirement Scheme.PIC announced the Aon buy-in in May. Khurram Khan, the defined-benefit insurance specialist’s head of longevity risk, said: “This was a keenly contested process, showing continued strong demand for Pension Insurance Corporation reinsurance tenders.”Noting that the Aon deal was PIC’s first big pension insurance transaction under the new Solvency II regime, Bill McCloskey, vice president, longevity reinsurance at PICA owner PFI said: “This deal truly demonstrates that large buy-ins priced under Solvency II are still an attractive option for trustees.”
The law introducing defined contribution pension plans without guarantees to Germany has passed the larger house of parliament, the Bundestag.The Betriebsrentenstärkungsgesetz (BRSG) was passed on Thursday with the votes of the government coalition, comprised of the social democratic party SPD and the conservative parties CDU/CSU.Against expectations, both opposition parties – the Green party coalition Bündnis 90/Die Grünen and the left-wing Die Linke – rejected the legal draft as agreed on by the government last week. The vote by the Green delegates came as a surprise because party representatives had agreed to the law in a preliminary vote in a parliamentary committee meeting the night before. The BRSG will for the first time allow the creation of defined contribution pension schemes – also called defined ambition plans – which can be set up by collective bargaining agreements.Only companies signed up to these agreements will be able to set up the new plans.However, all companies in Germany will be required to pay money they saved through salary sacrifice arrangements (Entgeltumwandlung) back into those plans.The Greens and other critics feared this and other changes might increase the burden on smaller companies.Insurers move to offer BRSG-friendly platformDuring the long negotiations on the BRSG over the past year, insurance companies had led the opposition to the ban on guarantees for the new plans. However, it now seems some have found a way to get a slice of the new pension cake.Five small mutual insurers announced yesterday that they were to join forces and create a pension platform. The so-called “Rentenwerk” is to be set up to provide companies and unions with flexible pension solutions to be implemented under the new law.Germany’s national competition regulator still has to approve the collaboration between Barmenia, Debeka, Gothaer, HUK-COBURG, and Die Stuttgarter.The BRSG itself still has to pass the smaller house of the German parliament, the Bundesrat, in its last session before the summer on 7 July.It is expected that the representatives of the German provinces in the Bundesrat will approve the draft.However, analysts have said the Green parties’ approval could be crucial in getting the green light from provinces where the party is part of a regional government coalition.Stephan Oecking, partner at Mercer Germany, called on the companies and unions that will have to negotiate the new pension plans to “make full and quick use of the full range of new possibilities”.Reiner Schwinger, managing director at Willis Towers Watson Germany, added: “The new framework will fill the current white spots in the German pension landscape.”Fred Marchlewski, managing director at Aon Hewitt Germany, summed up: “Occupational pensions will become more attractive overall, but also more complex.”
The €300m Dutch pension fund for the travel sector has said it was looking for a merger with a larger industry-wide scheme or a switch to defined contribution (DC) arrangements.Reiswerk Pensioenen made clear that continuing independently was not an option because of its funding position and its predominantly young membership. “The long duration as a consequence of our young population requires taking more investment risk,” said Frank Radstake, the scheme’s employer chairman. ”But the financial assessment framework (FTK) doesn’t allow us to do so because of our funding shortfall.”The pension fund was therefore “stuck in the FTK trap.” The small sector scheme has been in trouble since the introduction of a new and lower ultimate forward rate (UFR) in 2015, part of the discount mechanism for liabilities.Despite a defensive investment policy, including a 90% interest hedge, the scheme’s funding level has since plummeted from 125% in 2014 to 99.5%.In its annual report, Reiswerk Pensioenen said it was unable to hedge against the impact of the new UFR, which had caused a steep rise of its long-term liabilities.Radstake said the UFR was expected to drop further and that the current asset mix would not solve the pension fund’s financial problems.He indicated that the scheme’s small size – it has 9,000 active members – was another reason why it wasn’t deemed future-proof.Joining another sector scheme or switching to DC would both give Reiswerk the option to increase the risk profile of its investments.A merger would bring the added benefit of scale, but would also mean an instant rights cut for the scheme’s members.“However, in the long term the results will improve,” said Radstake.Based on its current position, the pension fund was headed for a rights discount in 2021 anyway, he noted.The social partners in the travel industry said they wanted to make a decision about the scheme’s future next summer.
In recent years, Hermes, which began life as BTPS’ in-house asset manager, has moved to expand its client base significantly and now has 550 clients in wholesale and institutional markets. In addition to managing £32bn (€37bn) of funds, the manager advises on £336.1bn of assets through its Hermes Equity Ownership Services (EOS) stewardship division.The combined company will have almost £330bn of funds under management once the acquisition is complete.Gordon Ceresino, vice-chairman of Federated Investors, said the deal ticked three key boxes for the US firm: people, complementary product offerings, and distribution. UK asset manager Hermes Fund Managers wants to boost its presence in North America following its acquisition last week by US investment heavyweight Federated Investors, its CEO Saker Nusseibeh told IPE.Federated last week snapped up 60% of Hermes from its owner, the BT Pension Scheme (BTPS), in a deal that valued the company at £410m. Under the terms of the offer, BTPS will retain a 29.5% stake with certain members of Hermes’ management team holding the remainder.“We have a very strong footprint that we have built over the last five years here in Europe and in parts of Asia, but we don’t have access to the US,” Nusseibeh said following the announcement on Friday.“We knew there would come a time for it to make sense for our shareholder to change. You can’t be owned by a pension scheme for ever and particularly one that is mature and becoming a smaller and smaller part of the business… Back in 2009, when I first joined, [third-party business] was barely 8% of our income and by the end of last year, it was 70%.” The BT Pension Scheme will retain a minority stake in Hermes“We are US-centric and were looking for a distribution footprint that was complementary to ours,” Ceresino said. “If you look at the footprint of Hermes in Europe, where we are very thin, and in Asia where we have different sales forces, we see the synergies as being outstanding.”Hermes has also been actively building up its expertise in environmental, social and governance (ESG) investing in recent years.“We view Hermes as the world leader in ESG,” said Ceresino. “We are just starting to see the momentum in Europe spill over into the US and ESG is starting to be at the forefront of decision-making. To have this as part of our family and to bring Hermes’ skillset to the US is a wonderful opportunity.”Federated’s move is the latest in a series of mergers and acquisitions that have swept across Europe’s asset management sector in recent years. “Big has suddenly become beautiful,” said Amin Rajan, CEO of asset management research firm CREATE-Research, as mid-sized firms have sought to soften the twin margin pressures of increased investor scrutiny on fund fees and the rise of passive investing. Last year saw an £11bn merger between Standard Life and Aberdeen Asset Management, as well as the completion of the tie-up between Janus Capital Group and Henderson Global Investors.The 20% devaluation of sterling against the dollar in the wake of the UK’s 2016 decision to leave the EU led many international players, including venture capital firms, to look more closely at the UK market. Yet despite the apparent buyers’ market, analysts last week questioned whether the US firm had actually overpaid, noting that Hermes’ valuation as a multiple of earnings had been significantly higher than in recent asset management deals.Speaking with IPE, Ceresino batted off the question, stating that the price paid for Hermes was justified. “When you look at the quality of this firm and its market place and positioning, I think it warrants a premium,” he said. “When you look at the long-term growth aspects of the firms combined it certainly warrants the price that we paid.”For Hermes’ Nusseibeh, the industry was at “a tipping point of change between the old models of asset managers and the new models”.He shrugged off any wider concerns of increased pressures on costs. “Not as far as we’re concerned because our margins have been growing,” Nusseibeh said. “When everyone had [fund] outflows in 2016, we had positive flows.” Critical to the acquisition and the opportunities thrown up was market positioning, he added.“Federated and Hermes stand [at the juncture] where we are the beneficiaries of this tipping point. It’s not just about markets, it’s not just about plugging products or cost-cutting; it’s about having the right product at the right time in the right place.”
During a debate in the Dutch parliament last night, Koolmees said the issue was one of the reasons that had triggered the government amendment.However, the minister acknowledged that there could be legitimate reasons for cross-border value transfers, for example if multinational companies wanted to centralise pensions provision for their staff in a single country.Aon’s UnitedPensions vehicle, domiciled in Belgium, has been one of the most active cross-border pension offerings, having signed up clients including chemicals giant Dow and pharmaceuticals company AbbVie.According to Koolmees, the number of cross-border transfers of pensions had been limited so far, but he added that “the issue must remain a focal point to us all”.The details of the government amendment were unclear, however, as it had yet to set a minimum number of participants that must respond to a proposal for a cross-border transfer.In addition, the amendment did not include a reference to the role of a pension fund’s accountability body in approving a value transfer. The Dutch government wants to set additional conditions for pension funds moving assets out of the Netherlands to access more flexible regulatory environments abroad.In an amendment to the implementation bill for the EU directive IORP II, social affairs minister Wouter Koolmees stipulated that a two-thirds majority of participants and pensioners must approve a cross-border collective value transfer.The government also wanted to have the option of setting additional conditions through an implementation order if the cross-border transfer was aimed at accessing more flexible supervisory regime.Last month, Dutch MP Pieter Omtzigt raised concerns about cross-border transfers after it emerged that Aon Hewitt Netherlands’ pension scheme had seen its funding ratio improve by 11 percentage points following its move to Belgium. He claimed the move was “supervisory arbitrage”.
The Dutch pensions system has lost part of its attractiveness since the financial crisis, which hurt its large capital-funded second pillar, according to a pensions law professor.Yves Stevens, professor of pensions law at the Catholic University of Leuven in the Belgium, argued in an interview with IPE’s Dutch sister publication Pensioen Pro that the Netherlands’ generous state pension (AOW) was the best feature of the system.He said that it would be very difficult to “export” the second pillar to other European countries because of the current low interest rates and the increasing individualisation of the labour market.Stevens is also a member of the European High Level Expert Group on pensions, which is to advise the European Commission about the improvement of second and third pillar pensions by the end of this year. Yves StevensThe professor argued that the financial crisis had changed the governments’ approach to the so-called ‘Aaron Condition’, which reflects whether supporting pay-as-you-go or capital-funded pension provision is more efficient.If the real interest rate is lower than economic growth, pay-as-you-go is more attractive, he said.“Until the crisis, the Aaron Condition had always favoured capital-funding,” Stevens explained. “However, the low interest rates and [low] return assumptions have made pay-as-you-go more favourable.”According to the professor, the individualisation of the labour market – also known as the ’gig economy’ – had led to a greater variety of types of employment, with fewer fixed contracts and waning trade union power.“As a consequence, the second pillar has come under pressure from the first and third pillars all over Europe,” he explained. “Some countries, including Poland, Romania and Hungary, are reducing their second pillar.”Poland, for example, removed its own government bonds from the second pillar in 2014, transferring them into the first pillar to help fund the state pension.Stevens noted that, where capital-funded plans are being set up, the trend in many countries was towards auto-enrolment, with the option of opting out – as is the case in the UK, Ireland, Poland and Turkey.“But this is all about an individual approach and not about collective labour conditions.”In Stevens’s opinion, the Netherlands should be proud of its state pension arrangement, which is available to all citizens, regardless of their labour history. The only other country where this applied was Iceland, he said.Stevens: “Moreover, the AOW benefits are much higher than in many other countries, including Belgium.“This is a really strong foundation of the Dutch pensions system. As a consequence, there is hardly poverty among the elderly in the Netherlands.” According to Stevens, the perception of capital-funded pensions has changed since the crisis. In Belgium, for example, the Dutch system was no longer viewed as a good example.“Although many sector schemes have been established in Belgium since 2003, they never raised their premiums from 1-2% to the envisaged 4-6%, as the crisis has dented confidence,” he said.“Companies opted for salary and bonuses, rather than investing in a pension fund. As in Belgium, a pension is more considered as salary than as social provision, this choice was easier here.”‘Pay as you go’ versus ‘capital funded’