The Omnibus II Directive effectively updates the EU’s Solvency II framework directive agreed in 2009, to reflect changes such as those in the Lisbon Treaty.It also deals with concerns about artificial volatility and pro-cyclicality created by the Solvency II measures when they were tested in the fifth quantitative impact study (QIS 5) in 2010, Insurance Europe said.The lobby group said the agreement was an important milestone on the way towards the new Solvency II risk-based regulatory regime for insurers in the EU.Looking ahead to future stages of the Omnibus II process, there will be very little time between the finalisation of the delegated acts and technical standards, and the proposed application date of 1 January 2016, Insurance Europe said.Despite this, the federation said Europe’s insurers would do all they could to meet the ambitious timetable.“While the compromise reached between the institutions on Omnibus II is not the ideal solution the insurance industry would have wished for in terms of correctly reflecting insurers’ long-term business and low exposure to market volatility, it is a workable base from which to develop the technical details of the new regulatory regime,” Balbinot said.He said Solvency II would increase confidence in the European insurance industry, the largest in the world, accounting for one-third of global premiums Europe’s vast insurance sector has welcomed last night’s agreement between EU institutions on the Omnibus II Directive – part of the new Solvency II regime – even though it said the result “was not the ideal solution”.With so little time left to finish the many details of the new rules, it was important the agreement had been reached now, said Insurance Europe, the European insurance and reinsurance federation.Sergio Balbinot, president of the industry body, said: “Insurance Europe commends the EU institutions for reaching agreement on Omnibus II.“It was important for Omnibus II – which updates the Solvency II Directive of 2009 – to be finalised now, as a great deal of work remains to be done on the technical details of the new regime before insurers and supervisors can be ready to apply it from the start of 2016.”
Month: September 2020
Investors will need to adjust to more frequent periods of market uncertainty, the head of PIMCO’s European operation has warned.Andrew Balls, a deputy CIO at the Allianz Global Investors-owned asset manager, said he believed the recent market uncertainty caused by the tapering of the US Federal Reserve’s quantitative easing (QE) was simply a sign of things to come.“We had this [market turbulence] last year around the taper[ing], we had it around emerging markets,” he said at a briefing summing up PIMCO’s longer-term market views. “We think you’re just going to get more bouts of market turbulence – we should get used to it.“This is the natural thing to happen if the market makers aren’t making markets.” Balls noted that the instability would also be triggered by market participants re-thinking their investments, or events such as hedge funds speculating – which was last week believed to be behind an increase in Italian government yields.He added: “Fixed income markets, in a way, look a bit more like equity markets. So, over time, there should be good opportunities for us to absorb risk, when you get these temporary dislocations.”The deputy CIO also predicted the European Central Bank (ECB) would eventually undertake its own QE programme.He said ECB president Mario Draghi had made clear how the bank viewed its role in reacting to immediate liquidity concerns versus inflationary pressures.“If they take the inflation target seriously, it seems there is a pretty good chance they’ll do quantitative easing,” Balls said. “Maybe they’ll try to do it via private sector assets, but that seems pretty impractical, so it’s likely they’d do government bonds.”Balls’s colleague Mike Amey, a managing director and portfolio manager in the firm’s London office, also expressed concerns about the low levels of inflation seen within the euro-zone.“We’ve been stuck at below 1% inflation for some time,” he said. “We think it would drift up over time, particularly if the ECB does QE. But there is real risk of expectations becoming entrenched for lower inflation.”Amey later added that the low inflationary rate would pose a problem if a shock to the euro-zone were to occur.“We think we’ll eventually get back above 1.5, but having the probability of inflation getting stuck at about 1% is non-trivial.”According to the most recent data from Eurostat, euro-zone annual inflation stood at 0.7% in April, an increase from 0.5% in March – both well below the ECB’s stated target of 2%. Amey said: “In terms of the credibility of the [ECB’s inflation] target, respectful of the difficulty of managing a committee, if you take seriously a target of close to 2% inflation, you should be responding if three years out you still have inflation so low.”
The five largest Dutch pension funds saw their assets increase by several percentage points during the second quarter, following positive results on all asset classes. However, because their liabilities also increased as a consequence of falling interest rates – the discount rate fell by 21 basis points to 2.54% over the period – their funding improved only marginally.All of the larger Dutch schemes achieved good results on fixed income and equity, with several pension funds noting that emerging market equities were “making up” for their disappointing returns last year.The €325bn civil service scheme ABP reported a quarterly return of 5% (8.2% year-to-date) and saw its coverage ratio increase by 1 percentage point to 106.7%. But, according to vice-chair José Meijer, the slight improvement in the scheme’s financial position is “no reason for cheering yet”.She pointed out that, if interest rates remained at their current levels, ABP’s funding would decrease as a result of the three-month average approach for the discount rate.Emerging market equity, with an 8.4% return, was the best performing asset class, ABP said, adding that emerging market debt (5.9%) and property (6.5%) also performed well.Its investments in government bonds, credit and inflation-linked bonds (ILBs) generated 3.1%, 2.9% and 3.1%, respectively, while developed market equities returned 5.3%.The scheme reported returns of 4.7% for private equity, 4.8% for commodities, 2.9% for infrastructure and 1.8% for hedge funds.Meanwhile, €152bn healthcare scheme PFZW produced a quarterly return of 5.6% – and a return of 9% over the first six months – and said its funding had improved by 1 percentage point to 110%.The scheme attributed its 5.1% equity return to stimuli from central banks and an improved economic outlook.Its fixed income holdings generated 3.2%, benefiting from falling interest rates as well as from narrower credit spreads.PFZW further reported quarterly returns of 4.7% on property, 3.9% on high-yield/emerging markets debt, 2.5% on hedge funds and 2% on infrastructure.Its ILBs returned 3.5%. The healthcare scheme said its 4.8% profit on commodities was largely due to rising oil prices.The €53bn metal scheme PMT – the largest pension fund in the market sector – reported a quarterly return of 5.2%, and said its funding remained stable at 105.2%. PMT said its investments in equity, fixed income, property and alternatives returned 5.4%, 5.5%, 3.8% and 2.5%, respectively. Its year-to-date return was 11.6%.The metal scheme had to cut pension rights by 0.4% last May, following a funding shortfall at the end of 2013.The €43bn pension fund for the building sector, BpfBouw, returned no less than 6.9% over the second quarter, although the result included 3.1 percentage points from the interest hedge of its liabilities.BpfBouw’s funding increased by 2.2 percentage points to 116.4% at June-end.The building scheme also made clear that it was anticipating a funding drop during the third quarter, as a result of the three-month average of the discount rate for liabilities.It said it returned 6.1% on equity, 3% on fixed income and 1.9% on property.The €36bn metal scheme PME generated 4.9% on its investments and also closed the second quarter with a funding of 105.2%.It noted that it was able to benefit from falling interest rates due to its 59% fixed income allocation, which returned 3.4%, and that the 50% interest hedge on its liabilities added another 2 percentage points to its quarterly result.However, it also pointed out that its low-risk profile – with equity holdings of no more than 34% – also limited its ability to benefit from improving markets.Its equity investments returned 4.9%.
The use of social media in investment management is influencing decision-making according to research studying the impact of asset managers’ social media presence on asset owners.Research carried out by Greenwich Associates towards the end of 2014 showed nearly a third of asset owners made an investment decision or recommendation based on social media output.A third said information from social media also led to discussing a specific topic with their investment consultants.The survey showed receiving timely news and industry updates was the most common reason to use social media, with 44% suggesting they sought educational content to be better informed on investments. Some 36% used social media platforms to research asset managers, with a third seeking recommendations for investment products.Greenwich Associates managing director, Dan Connell, said asset managers should consider social media strategies given its impact on investment decisions and usefulness in distributing messages.“Knowing decisions can result in the allocation of hundreds of millions of investment dollars, it is certainly notable that social media platforms are more often playing a role in achieving institutional investors’ workflows,” he said.Overall, LinkedIn was the preferred source of information with 85% of those using it doing so at least once a week.The study showed geographies different on their use and consumption, as European institutions preferred LinkedIn, the plurality in US asset owners leaned more towards Twitter, while those in Asia Pacific preferred YouTube.Facebook, while growing in use as a news source, was still not deemed as a professional tool by investors.However, 78% of institutional investors in Asia Pacific said Facebook was used at least once a month as a source of financial information, compared to 23% in the US and 17% in Europe.“More investors in Asia cited using social media sources in the past month than traditional financially oriented news websites,” the paper said.There was a strong split between the type of institution engaging with social media, with public and private pension funds falling behind insurance companies and endowment funds.However, Greenwich put this down to a number of regulations restricting corporate pension fund usage of social media.“Social media was originally developed to help people communicate with one another,” the paper said.“While this still remains the primary goal of most major social media sites, the application of social media to financial services yields different priorities.“Asset managers looking to attract investment from [institutional investors] should consider the nature of their social media presence.”However, the research firm warned a social media-savvy asset manager would fail if content was sub-par.“While the importance of fund returns is paramount, the impact of content that is unique, insightful, and ideally, actionable can be significant,” it added.
The unravelling Greek debt crisis played havoc with UK charities’ investment performance over the second quarter, according to preliminary figures from Asset Risk Consultants (ARC).Losses in June lowered UK charity investment performance to less than 2.5% for the year to date.Of the four different risk profiles used to classify portfolios, the riskiest – the ARC Equity Risk Charity Index – produced the worst second-quarter performance, with a return of -2.3%, including a -4.5% return for June alone.Even the best performers – the low-risk ARC Cautious Charity Index and the medium-to-higher-risk ARC Steady Growth Charity Index – were little better, both returning -2.1% over the period. The ARC indices are based on the actual performance, net of fees, of around 1,500 segregated UK charity portfolios run by 28 asset managers, although for the preliminary figures for June’s performance were estimated.There are no asset class restrictions: portfolios are classified according to their volatility in relation to UK equity markets, with the ARC Cautious Charity Index carrying the least risk relative to UK equity markets, the ARC Equity Risk Charity Index the most.Over the past month, which saw intense negotiations between Greece and its creditors culminate in a deal now rejected by Greek voters, all four risk profiles produced negative returns, with performance worsening the riskier the profile.In June, the Cautious Index returned -2%, the Balanced Asset Index -2.9% and the Steady Growth Charity Index -3.6%.Daniel Hurdley, head of research at ARC, said: “After hitting record highs earlier in the quarter, both bond and equity markets were down as the news flow from Athens changed on a daily basis from good to bad, and all points in between. This created uncertainty, resulting in mixed signals from central banks.”He added: “As a result, UK equities were down around 6.4% over the month, the FTSE 100 ending the quarter around 500 points below the highs of April.“Bond yield volatility increased due to changing sentiment on interest rate movements, so longer-dated Gilts were down around 3-3.5%, and even shorter-dated Gilts were in negative territory, at -0.4%.”However, overseas markets were also in choppy waters, according to Hurdley.“Global equities also suffered due to Greek uncertainty, and, in the Far East, the Chinese bubble burst, causing significant losses across Asian markets,” he said.”Commodities were also down, leaving just some hedge funds and cash giving low but positive returns.”As a rough guide, equity exposure in the four indices is around 30% in Cautious, 50% in Balanced, 70% in Steady Growth and 85% in Equity Risk.Meanwhile, for the year to date, returns ranged from 0.1% for the Cautious Index to 2.4% for the Steady Growth and the Equity Risk Indices, while the Balanced Asset Index returned 1.8%.Over the 12 months to the end of June, the best performers were the two intermediate indices, with Steady Growth returning 4.9% and Balanced Asset 4.8%.Equity Risk made 4.2% and Cautious 3%.
SPMS, the €9bn pension fund for medical consultants, has reduced its risk exposure by decreasing its strategic equity portfolio from 34% to 26%, as well as by increasing the interest hedge of its liabilities. In a newsletter to its participants, the pension fund said that an asset-liability management study has shown that it could also achieve its indexation target of at least 3% with less risk.SPMS, which reported a funding level of 123.8% at July-end, said it had replaced its divested equity holdings with government bonds. As a result, its strategic fixed income portfolio increased to 53% of assets.In addition, the scheme’s CIO Marcel Roberts had also raised its interest hedge from 70% to 78%. “As a consequence, interest rates changes can hardly affect the funding ratio, increasing the probability that our participants are to receive the pension they expect,” Roberts said.A reduction in risk by Dutch pension funds is currently quite rare, as many schemes are keen to increase their investment risk to boost returns.According to Roberts, the pension fund’s ample funding was the drivinf factor behind its decision to reduce risk.“Because interest changes are difficult to predict, whereas their impact can be significant, we have opted to increase the interest hedge,” he said.In contrast, many other pension funds have lowered the interest hedge, as they expected that interest rates were more likely to increase.The pension fund posted a 25.3% return over the course of 2014, including 13.1 percentage points attributed to its interest hedge through long-duration swaps.The scheme’s fixed income holdings produced an overall result of 19.4%, with inflation-linked bonds and euro-denominated government bonds yielding 23.2% and 27%, respectively.Emerging market debt delivered no more than 11%, thanks to the depreciation of local currencies relative to the euro, according to SPMS.Equity holdings in the US, Europe and emerging countries generated 25.5%, 7.4% and 10% respectively, it said.The scheme’s 9% hedge funds allocated returned 2.9%.The medical consultants’ scheme said it had introduced real estate debt as a sub asset class within its 10% property portfolio.Jeroen Steenvoorden, the pension fund’s director, said that the new investment – of 1 percentage point of its real estate holdings – was meant to stabilise returns and as a diversifyer.He declined to provide details about expected returns, but indicated that the yield was supposed to match the overall benchmark for its property portfolio of 6.5%.The pension fund for medical consultants said it incurred administration costs of €544 per participant and spent 0.72% on asset management, including 0.16% for transactions.SPMS has more than 8,000 active participants, 1,170 deferred members and 6,590 pensioners.
Denmark’s largest commercial pensions firm PFA has reported a big fall in investment returns for the first three quarters of this year but said holdings in equities, alternatives and property supported profits in the face of big market swings.Reporting interim figures, PFA said its investment return for January to September was DKK7.4bn (€992m).This time last year, it posted an investment return of DKK34.7bn.Allan Polack, group chief executive, said: “In the first nine months of the year, returns were driven in particular by shares, alternative investments, property and a stronger US dollar. “Despite the high degree of turbulence on the financial markets, due especially to uncertainty surrounding China’s growth and extremely low interest rates, we at PFA have had a good exposure to those parts of the equities market that have been robust.”The overall return on unit-link pensions was 3% in January to September, down from 8.2% in the corresponding period in 2014.With-profits pensions, on the other hand, returned an average of 1.5% in the nine-month period, compared with 11.2% in the same period last year.PFA’s overall profit in the period was DKK235m before tax compared with DKK991m in the same phase of last year, with the result having been dragged down by a wide loss on its health and accident insurance business of DKK644m.PFA’s pensions business made a DKK784m profit, little changed from the DKK807m reported for the first nine months of 2014.Polack explained that the claims trend within the insurance business continued at a high level during the third quarter.Solvency coverage increased to 300% at the end of September from 278% at the end of 2014.Total contributions grew to DKK21.3bn in the first three quarters of the year, up 18% from DKK18.1bn in the same period a year earlier.Regular contributions increased 6% to DKK12.5bn from DKK13.2bn, according to the interim data.PFA’s total group assets tipped slightly lower at the end of September to DKK550bn from DKK552bn at the end of December 2014.
The UK’s North East Scotland and Clwyd pension funds are backing a Unigestion private equity fund, which has achieved its first close and invested in a UK-based oil and gas company and a supplier to life science companies.More than €100m has been committed to Unigestion Direct Opportunities 2015 (UDO 2015), more than half the target size of €200m.The fund has attracted support from existing and new investors, according to the asset manager, including the £3.2bn (€4.1bn) North East Scotland Pension Fund and £1.4bn Clwyd Pension Fund.Paul Newsome, head of investment management for private equity at Unigestion, said the asset manager had a “significant pipeline” of interest in the fund from new investors. UDO 2015 is focused on investing in 12-15 privately owned companies around the world, with enterprise values of less than €1bn.The fund has completed its first investments, in Zennor Petroleum, a UK-based oil and gas company, and US-based BioreclamationIVT (BioIVT), which provides biological products used in drug discovery research by life sciences and pharma companies.Zennor specialises in the appraisal and development of hydrocarbons in the North Sea, where, according to Unigestion, “there currently exists an opportunity to buy multiple high-quality assets at very attractive prices”.Zennor recently acquired a subsidiary of First Oil Expro, a UK oil and gas producer that entered into administration.Unigestion invested alongside sector specialist Kerogen Capital.For its investment in BioIVT, Unigestion partnered with Arsenal Capital, another sector specialist.North East Scotland Pension Fund, administered by Aberdeen City Council, had a benchmark asset allocation of 10% to alternatives, including private equity, as of the financial year 2014-15.Clwyd Pension Fund, administered by Flintshire County Council, had a 10% allocation to private equity as at 31 March 2015.Read more about investment opportunities and driving forces in the energy sector in the May edition of IPE Magazine
The €3.4bn Dutch Pensioenfonds SNS Reaal has raised concerns about its own sustainability after one of its main clients revealed it was considering a switch from a collective to an individual defined contribution (DC) plan.In its annual report for 2017, the scheme said that insurer Vivat had renewed its contract with the pension fund for only one year, until the end of 2018, as it was considering a change of model.However, the scheme’s other main client, the Volksbank, wanted to stick to the current collective DC arrangements and had extended its contract for three years, SNS Reaal said.The pension fund’s board said continuity of the scheme would be challenged if Vivat placed its pensions elsewhere. The Pensioenfonds SNS Reaal has already experienced a fall in active participants: last year, the scheme saw its active membership decrease by 800 to 5,523.It said that the number of employees at the Volksbank – the parent company of ASN Bank, SNS Bank, RegioBank and BLG Wonen – was also likely to fall as a consequence of reshuffles.The pension fund warned that it would lose half of its remaining active participants if Vivat were to leave, and that implementation costs would rise as a result. Costs per participant had already increased from €290 to €312, largely as a result of falling participant numbers, it said.The Pensioenfonds SNS Reaal reported combined asset management and transaction costs of 0.36%, which compared to 0.5% on average for comparable schemes, according to the Institutional Benchmarking Institute.The scheme attributed the relatively low costs to the fact that it hadn’t invested in expensive asset classes, such as commodities, hedge funds and private equity.Both Vivat and the Volksbank originated from bancassurer SNS Reaal, which was taken over by the Dutch government in 2013 after it ran into financial problems in the wake of the credit crisis.Vivat, the parent company of asset manager Actiam and insurers Zwitserleven and Reaal, was bought by by Chinese insurer Anbang in 2015. It employs 2,500 staff.
Elizabeth Warren addresses students in Washington in 2017Addressing the problem requires consideration of the causes, and not a superficial ‘cure’ for the symptoms of ailing democracy. It is not clear that Warren has addressed these, as her solutions appear to have a focus on “putting power back in the hands of workers and unions”.Her objective is to increase worker participation in decision making “by letting their workers elect at least 40% of the company’s board members to give them a powerful voice in decisions about wages and outsourcing”. This by itself will not create more middle-class jobs – even with, as she advocates, “a new era of strong antitrust enforcement so giant corporations can’t stifle competition, depress wages, and drive up the cost of everything from beef to internet access”.Middle-class problemsIn common with the middle classes in other developed economies, those in the US face two major structural challenges, both of which lead to rising inequality and the disappearance of middle-class jobs.The first is the rise of emerging markets, where educated workforces at lower wage levels than developed markets provide an economic arbitrage in whole sectors, particularly manufacturing.The second is the rise of automation, the internet and artificial intelligence (AI) in its widest forms. These are also serving to destroy large numbers of low-level and even mid-level service jobs in areas such as banking, law and insurance.The rise of emerging markets is something to celebrate, however, as their rising prosperity is also an enabler for rising prosperity in developed markets.The issue that has not been addressed is how rising prosperity in developed markets should be redistributed across the population. It is rising inequality within developed markets, rather than a narrowing of the gap with emerging markets, that politicians need to address.Automation and AI Providing a foreign policy for all argues for a reconsideration of Trump’s “NAFTA 2.0”, and bringing back US troops from overseas wars – important but perhaps of more significance to the rest of the world than for Americans themselves.The two remaining issues are to strengthen democracy and to rebuild the middle class. The two are related, but maybe not in the way that Warren has presented them. Regardless, they are crucial to ensuring that the US maintains its pre-eminence and leadership in the world.In the case of strengthening democracy, Warren has argued against the gerrymandering of voter districts and the influence of powerful lobbyists. She claims that “after decades of largely flat wages and exploding household costs, millions of families can barely breathe”.Studies such as those in Ganesh Sitaraman’s book The Crisis of the Middle-Class Constitution argue that a strong and sizeable middle class is a prerequisite for liberal democracy to flourish as in the US’s constitutional system. Economic inequality is not just a matter of fairness or economic efficiency, it is central to the survival of democracies.But the struggle of the middle classes is not just a US phenomenon. The McKinsey Global Institute in a recent study found that between 65% and 70% of the population in 25 advanced economies had total income that was flat or had fallen in 2014 compared with 2005. “Today’s younger generation is at risk of ending up poorer than their parents,” the report declared. The 2020 US presidential race has begun in earnest with a number of democratic contenders announcing their bids – including Massachusetts senator Elizabeth Warren.The key issues she intends to focus on are, according to her website: to end Washington corruption; rebuild the middle class; strengthen democracy; ensure equal justice for all under the law; and to provide a foreign policy for all.Few would argue that these are not worthwhile slogans, but do they mean much more? An end to Washington corruption is promised by every aspiring presidential candidate – most notably Donald Trump with his “drain the swamp” cries during his own path to the presidency.Ensuring equal justice for all is an understandable goal for a former Harvard law professor, but it is not clear whether it will have any significant impact on the US population or the world at large. Capitol Building, Washington DCIn a recent paper by Nobel prize-winning economist Joseph Stiglitz and Anton Korinek, the authors explore another challenge posed by automation and AI: income distribution. If redistribution is too costly, it may be impossible to compensate the losers of technological progress, and they will oppose progress – much as the famed Luddites who destroyed machinery at the dawn of the first industrial revolution.Presidential candidates such as Elizabeth Warren must understand and address these challenges. It is somewhat disappointing that Warren has so far only addressed them in a cursory manner.Both should be regarded as unambiguously positive, but as Korinek and Stiglitz warn, while individuals and economies more broadly may be able to adjust to slow changes, this may not be so when the pace is rapid. In an economy characterised by “winner takes all” economics it is not surprising that ideas such as a universal basic income have been promoted by tech leaders from Mark Zuckerberg to Elon Musk.Warren has made a start in addressing the issues through arguing for greater redistribution of wealth by stopping “giant tax giveaways to rich people and giant corporations”, instead declaring that she would “start asking the people who have gained the most from our country to pay their fair share”.Her proposals include an “ultra-millionaire tax” on the 75,000 richest families, the proceeds of which she pledges to use to build “an economy that works for everyone”, including universal childcare, student loan debt relief, and healthcare.Tackling inequality in the US is key to restoring the health of democracy and the middle classes in the US – perhaps this provides opportunities for the likes of Warren.