Intelligence
CAPTION: CPTM is taking delivery of 11 Series 101 EMUs being refurbished by Mafersa at a total cost of US$29m. The three-car units were originally manufactured for São Paulo suburban routes by Budd of the USA in the 1950s Photo: E PiresCAPTION: GEC Alsthom’s Aytré factory is due to roll out the first of 105 TER X72500 DMUs this month, ordered for local services by SNCF and 11 regions in two- and three-car formations. A production unit is to be fitted with Fiat tilting equipment by SNCF’s Nevers works during 1998; an all-powered three-car variant capable of 200 km/h inter-city service and a TER EMU are under consideration
PORTUGAL’s railway network is to be modernised over the next three years at a cost of Esc600bn, according to plans announced on December 23 by Minister of Planning João Cravinho. To be funded by the government and the European Union, the package will build on the separate infrastructure and operating companies due to take over from CP this year (RG 12.96 p780). The package covers the introduction of tilting trains on the Lisboa – Porto main line and upgrading to cut journey times on the Lisboa – Algarve route.The restructuring also marks a switch to contract operation on commuter and rural passenger routes, where the government retains control over fares. This will ensure that subsidies are targeted on specific services, rather than meeting CP’s overall loss of Esc1bn a week. Cravinho anticipates that the contracts will gradually be opened up to competition to drive down subsidies. An independent regulator is being appointed under the restructuring to oversee competition, fares and investment. o
“As well as a record year for claims, we saw pension scheme funding worsen during 2012-13 and, although long bond yields have recovered a little since then, scheme funding remains at low levels,” she said.Discussing its investment performance, chief executive Alan Rubenstein noted that the 11.1% return equated with investment gains of £1.6bn, partially boosted by its hedging activity keeping pace with increasing liabilities.“Returns on our managed assets, which ignores the impact of hedging, were also positive, outpacing their benchmark by 4.6%,” he added.The PPF’s assets under management rose to £14.9bn, of which only £1.2bn remained invested in equities due to the fund’s approach of avoiding the same risk it is exposed to through company insolvencies.Nearly all assets remain invested in debt instruments – covering assets including derivatives, repo agreements and sovereign and corporate debt.The fund also noted that the reported financial year was the first under the new levy framework, linking payments to the risk that individual schemes pose to the PPF, and saw an increase in expected payments.“Under these new rules, we saw a fall in the number of contingent assets and other risk-reduction measures submitted for individual levy purposes,” it said.“This meant we collected about 18% more for the 2012-13 levy year than our original £550m estimate.”The report explained that the fall in contingent assets was a product of the fact that many of the ones put forward “failed to provide a genuine reduction in the scheme’s risk”.James Walsh, policy lead at the National Association of Pension Funds, said the fact the PPF’s finances were sustainable was “welcome news”.“Although the PPF is now more confident of hitting its long-term targets, the average levy paid by individual pension schemes is set to increase in the short term, and this remains a concern,” he said.“The NAPF remains committed to working with the PPF on keeping the levy affordable.” The UK Pension Protection Fund (PPF) returned more than 11% last year and was able to increase its funding to nearly 110%, according to its 2012-13 annual report.However, the lifeboat scheme also collected levy payments nearly 20% above its initial £550m (€644m) estimate, after a lower than expected use of contingent assets by defined benefit (DB) schemes saw them fail to offset charges.The PPF saw the likelihood of its achieving self-sufficiency by 2030 – no longer relying on the levy to fund its activities – increase to 87%, and reported a £1.8bn surplus, equating with a funding level of £109.6%.Chairman Lady Barbara Judge said the fund remained “firmly on our glide path” to self-sufficiency, despite the risks facing the PPF remaining high.
The Law Commission, the statutory independent body that monitors the law in England and Wales to ensure it is fair, modern and cost-effective, is to review the powers of English and Welsh charities in relation to mixed-purpose social investment.Mixed-purpose social investment is a relatively recent phenomenon.The investment is made in part to achieve a financial return and in part to achieve a social benefit that furthers its objectives.The Law Commission said social investment in general presented many challenges for charity trustees, with decision-making complicated by the relative novelty of the concept, and the immaturity of the social investment market. But while Charity Commission guidance explains that charity trustees can make mixed-purpose investments, there is concern the current legal framework does not easily accommodate this.This can deter trustees from taking advantage of social investment opportunities and result in high transaction costs.The Law Commission has therefore agreed with the Cabinet Office that it will consider whether the law can be reformed to make clearer the powers and duties of charity trustees in undertaking mixed-purpose investment.In particular, the review will examine whether a new specific power to make mixed-purpose investments is feasible and would be beneficial for charities.It will also consider the introduction of a new legal power for non-functional permanent endowments to be invested in mixed-purpose investments, with the requirement that capital levels must be maintained or otherwise restored within a reasonable period.According to the Charity Commission, there are 50,000 charitable trusts in England and Wales.Assets of charitable trusts with annual income of more than £500,000 (€590,000) total £48.5bn, according to the Association of Charitable Foundations (ACF).Carol Mack, deputy chief executive at the ACF, said: “This has been a longstanding subject of discussion, and it’s helpful to have it looked at.”Raj Singh, programme director at the UK Sustainable Investment and Finance Association (UKSIF), said: “Charities shouldn’t be constrained by red tape when it comes to mixed-purpose social investment. Such investments provide additional leverage to charities by providing additive benefit, on top of core operations, to the people they serve.”He added: “One way of doing that is through impact investing vehicles, though charities will need to be careful to pick a portfolio that ultimately suits beneficiaries.“The growing impact-investing market means this type of investment can be utilised by more and more charities as mixed-purpose social investments.”Singh said it appeared that regulators were beginning to understand that these investments could achieve competitive returns, as outlined in a recent report by Sonen Capital and the KL Felicitas Foundation in the US.He said: “The news that a foundation has invested 85% of its assets into a range of bespoke impact-investment portfolios over seven years, achieving index-competitive levels of return, seems to blow the fears of underperformance out of the water, while still retaining the benefits of diversification.“Clarifying charity law to allow for taking on higher risks would be welcomed, but it should be stressed that mixed-purpose social investing can be return-based.“The range of products in the mixed-purpose social investment market is maturing rapidly, and this type of investment can mirror ‘mainstream’ risk-adjusted investing.”The review represents an extension of the Law Commission’s charity law project, started in March, which will examine selected issues in charity law, including Charity Commission powers, charity transactions and disposals (for instance, of land) and charity mergers.It follows last year’s review of the Charities Act 2006 by Lord Hodgson of Astley Abbotts.The Law Commission expects to launch a public consultation in summer 2014, with the publication of a final report and draft Bill in March 2016, if the review progresses far enough.
Investment bank BNP Paribas has predicted a round of full-blown quantitative easing (QE) by the European Central Bank (ECB), starting at the beginning of the third quarter.Laurence Mutkin, London-based global head of G10 rates strategy at the French bank, told IPE he was consequently bullish on the 3-7 year part of the European supranational bond curve.He also indicated that it would affect the relative performance of interest rate swaps against bonds.Disinflation pressures will leave the central bank with no choice but to pursue the unconventional monetary policy already at work in the US, the UK and Japan. The ECB did purchase government bonds in 2011 as part of its Securities Markets Programme (SMP), but these purchases were sterilised with deposit auctions.“The ECB will have to move to full QE because we just don’t think that other measures are going to be particularly effective,” Mutkin said.The central bank could push its deposit rate below zero, lower its refinancing rate or offer another round of long-term refinancing operations (LTRO).While the ECB has been “operationally ready” to introduce a negative deposit rate for some time, Mutkin said, the lack of excess liquidity in the monetary system – now that so much of the original LTRO has been repaid – would make such a move “almost entirely symbolic”.When there is a lot of excess liquidity in markets, the overnight interest rate paid between commercial banks disconnects from the ECB’s refinancing rate and falls towards its deposit rate.But as excess liquidity dries up – and especially as it falls below about €150bn, as it has recently – those market interest rates begin to re-connect with the refinancing rate.“The deposit rate is becoming less influential on the market level of interest rates, which makes taking it negative easier to do, but less effective,” Mutkin explained.The ECB did cut its refinancing rate to 0.25% in November 2013, apparently in anticipation of this automatic rise in overnight rates back towards that benchmark.“The ECB could cut the refi rate to 15 or 10 basis points, but does 10 or 15 basis points off of the potential peak overnight rate really change the monetary environment?” Mutkin asked.A new round of LTRO could provide the liquidity conditions in which a negative deposit rate would have renewed effectiveness, but he thinks the ECB is reluctant to provide funding for banks to expand their balance sheets by buying zero risk-weighted assets.“[Ewald] Nowotny has suggested that there might be some conditional long-term lending, perhaps along the lines of the UK’s Funding For Lending scheme, but unconditional long-term refinancing no longer seems to be on the agenda,” he said.The ongoing threat of disinflation will spur government bond purchases, he concluded, probably weighted according to the ECB’s ‘capital key’.The biggest providers of capital to the ECB are Germany, France and Italy, but Germany’s outstanding government debt as a proportion of its GDP is much lower than that of Italy or France.The ECB would therefore buy German government bonds in disproportionate amounts, Mutkin suggested.To balance that out, it will likely follow the precedent of the European Stability Mechanism’s investment policy and buy supranational and agency bonds as well as sovereign bonds, he added, and focus on the 0-3 year part of the curve to appease the more orthodox policymakers who harbour long-term worries about inflation.“Because of the desired portfolio re-balancing effect, those who have their three-year paper bought by the central bank will have to go and buy four-year paper from other investors, and so on,” he added.“For that reason, investors should probably think that supranationals will outperform, and that the best part of the curve to be sitting in would be the 3-7 years.”Mutkin does not think QE will necessarily push core euro-zone government bond yields down.He points to evidence that QE in the US and the UK, once underway, actually pushed yields up – thanks to the third factor of market expectations for economic recovery and rate hikes having a greater impact than the supply-and-demand balance.However, he does expect relative outperformance against interest rate swaps, where rates would be set to rise.“What we are talking about is outperformance of spread products and government bonds against the true risk-free rate, which is represented by swaps, which reflect market expectations of where the EONIA rate is going,” Mutkin told IPE.Because the notional principal of many swaps is discounted using EONIA, a rising EONIA rate would result in rising swap rates.That could present an opportunity to move liability-hedging portfolios out of swaps and into cash-market bonds, especially in those parts of the curve identified by Mutkin as most likely to respond to QE purchases.John Stopford, co-head of fixed income and currency at Investec Asset Management, also raised the prospect of QE at his firm’s 2014 Outlook press conference in London on 21 January, while discussing prospects for US dollar strength.“The latest surveys suggest that only about 8% of the market puts a high level of probability on QE from the ECB,” he said. “It is more like a one-in-four probability.”A Reuters poll of economists in November found only 20% entertaining the possibility the ECB would stop sterilising its bond purchases.
Volumes will grow, not least thanks to the ongoing economic recovery, he added, but not enough to offset the amount of capital available.“Clearly there is a tragedy that could re-set rates, but given the level of capital out there that would have to be consumed, that disaster would have to be a whopper,” said Matthew Fosh, of the insurance company Novae.“There is no event in our models that would take up more than 60% of the capital available,” confirmed Ben Brookes of ILS risk analytics firm RMS Europe – who said that he would not be surprised to see the amount of peak peril risk backed by alternative sources of capital double from today’s levels of 10-15%.“I don’t think we will see a traditional rate re-set again; if we do see rates go back up meaningfully it will be from some totally unforeseen event, and perhaps something out of ILS alteogether – perhaps something in fiscal policy.”Johnson suggested a slight pick-up in rates might come as the new class of investors started to feel “a little less comfortable with the risk-reward equation”, but did not see that as an immediate risk.“We worry a lot about capacity in an asset class like this – and you certainly don’t want managers you invest with to have to hoover-up whatever comes to market,” said Craig Baker, global head of investment research at Towers Watson.“We couldn’t suddenly double our clients’ allocation, but we can still go a lot further. It depends on where rates are and what part of the market we are talking about.”Pension funds at the event agreed that while some parts of the re-insurance market looked stretched, it was important to think of ILS as a long-term strategic allocation, and recognise there was more to the opportunity than property catastrophe insurance.“ILS is an important investment class for us,” said Yoshisuke Kiguchi, CIO, Okayama Metal & Machinery Pension Fund, which currently has 9% of its $450m (€330m) fund allocated.Kiguchi made the point that ILS is part of his fund’s “long-term” portfolio, and that the nature of the asset class means that losses will usually be accompanied by a rise in the risk premium, providing a good opportunity to invest more at better rates.“This mean-reverting characteristic is important, and makes us happy to invest in this asset class in our long-term portfolio,” he explained.“We certainly recognise that there are times when you need to pull back, and the flexibility is there to do that,” said Stacy Apter, director of global benefits, financing and asset management at The Coca Cola Company, which allocates 5% to ILS for “equity-like returns with uncorrelated risk”.Apter insisted on a segregated account with Securis Investment Partners and its other ILS manager, to ensure it had the flexibility to define its mandate and its potential exposures.Coca Cola also deliberately chose two managers to diversify its risk within ILS.“One is very much focused on US catastrophe risk, while Securis is more focused on the alternative risks,” said Apter. “They are a good complement.”Espen Nordhus, co-founder of Securis Investment Partners, which organized the event, also went on to emphasize the importance of having access to the full range of ILS precisely to retain the flexibility to avoid areas where rates are under pressure.“We just put $50m into life, and that’s $50m that isn’t in Florida wind,” he said. Pension fund investors in insurance linked securities (ILS) expressed some concern over falling re-insurance rates and emphasised the importance of diversifying ILS exposure to mitigate the risks.Speaking at the inaugural Securis ILS Investor Meeting at Llloyd’s in London on 22 May, re-insurance professionals played down the risk of a significant re-set in rates – at least due to any natural catastrophe.The wall of alternative capital that has pushed rates so low over the past couple of years, from the likes of pension funds and hedge funds, will probably mean that they stay there, they said.“We see no reason for property catastrophe insurance rates to increase, for many reasons, including the availability of capital,” said Nick Johnson an insurance-sector analyst at boutique investment bank Numis Securities.
Danish pensions administrator PKA is investing DKK415m (€55.8m) in green bonds and expects to put more money into the instruments as it works to integrate climate considerations into all of its asset classes.PKA, which manages around DKK200bn on behalf of three labour-market pension funds, said it bought the green bonds from Germany’s development bank Kreditanstalt für Wiederaufbau (KfW) and from the European Investment Bank (EIB).Of the total investment, DKK265m has gone into the KfW bonds, which are guaranteed by the German state, have a maturity of five years and are expected to yield 1.65% a year.The remaining DKK150m has been invested in green bonds issued by the EIB, which are guaranteed by the EU, run for 10 years and have an expected annual return of 2.15%. The money raised through the bond issues by both institutions is used to finance projects within the areas of sustainable energy and increased energy efficiency.Peter Damgaard Jensen, managing director at PKA, said: “We expect to invest in more green bonds as an instrument to meet the global need for investments in sustainable energy and increased energy efficiency.”PKA wanted to integrate climate considerations into all of its asset classes, he said, adding that green bonds were an investment area the provider had long been interested in.“The projects that are included are areas that PKA already invests in significantly, so green bonds are an extension of our strategy of raising our investment in sustainable energy,” he said.The pensions administrator said it now had DKK13bn invested in CO2-reducing projects.PKA noted that UN Secretary General Ban Ki-moon recently called on pension funds to invest in climate-friendly sustainable energy.
Van Ek added that Mercer had received a number of questions from asset managers and pension funds about the situation in China. “They want to know how susceptible their investment portfolio and solvency positions are to further developments, and they also ask whether and how they should act,” he said.Mike Pernot, client adviser at Aon Hewitt, said approximately 1 percentage point of the funding drop was attributable to falling interest rates.He pointed out that the resulting increase in liabilities outweighed both the rise of government bonds and the positive effect of pension funds’ interest hedge.Pernot said the average level of the entire interest curve stood between 1.60% and 1.65% on Tuesday.Aon Hewitt’s client adviser highlighted that the drop of the topical funding came without direct consequences for pension funds’ official policy coverage – the benchmark for rights cuts and indexation – “as it is drawn on the average funding of the previous 12 months”.“However,” he added, “if the current situation doesn’t change, the effect of the topical funding will become gradually visible.”Both consultants concluded earlier that the policy funding stood at approximately 104% on average at year-end. Dutch pension funds’ average funding ratio has fallen dramatically in recent weeks, due in particular to the collapse of the Chinese equity markets and its knock-on effects.Pensions adviser Mercer estimates that the topical funding, including the ultimate forward rate, has fallen by 4 percentage points on average to approximately 100% over the last two weeks alone.Aon Hewitt, employing a different method, estimates coverage has fallen by 3.7 percentage points to 98.3% since December-end.Dennis van Ek, an actuary at Mercer, attributed the funding drop in part to falling market rates, adding that the 30-year swap rate – Dutch pension funds’ most important criterion for discounting liabilities – had dropped from 1.61% to 1.47%.
KPST did not propose any benchmark for the long-only, absolute-return strategy, but it asked that any interested asset manager have at least €300m in assets.Additionally, interested managers should have at least a three-year track record.Applicants have until 30 May to respond to the request for proposal, with further details available from IPE Quest. The IPE news team is unable to answer any further questions about IPE Quest tender notices to protect the interests of clients conducting the search. To obtain information directly from IPE Quest, please contact Jayna Vishram on +44 (0) 20 3465 9330 or email jayna.vishram@ipe-quest.com. The €1.3bn Kosovo Pensions Savings Trust (KPST) is tendering a €40m multi-asset mandate, using IPE Quest.KPST, the pension fund behind search QN-2180, said it was seeking an active manager to oversee the multi-asset portfolio, able to invest in equities, debt instruments and money market funds, among other asset classes.The fund said the mandate, worth €20m-40m, would be allowed to invest in assets from across the world, although it would prefer to limit exposure to issuances from OECD countries.It added that derivatives exposure would only be allowed as part of a hedging strategy.
The UK’s Pensions Regulator (TPR) is yet to be convinced that consolidation of defined benefit (DB) schemes into proposed “superfunds” would help the country’s most stressed pension funds.At the Pensions and Lifetime Savings Association’s (PLSA) investment conference in Edinburgh last week, Lesley Titcomb, chief executive of TPR, said it was positive that concrete work was being done on options to address issues in the DB sector in the UK, but questioned the benefit of superfunds.In a report released last week the PLSA taskforce argued for consolidation as the best way to address problems in the DB sector, and put forward superfunds as the best solution.Panellists at the conference – including Titcomb and representatives of the Pension Protection Fund (PPF) and the government’s Department for Work and Pensions (DWP) – welcomed the PLSA’s proposal, but questions and challenges associated with the proposal were quick to come to the fore. Titcomb said it was “not yet clear” if superfunds would help the regulator deal with the most stressed DB schemes, and also said that the regulator did not think there were systemic problems in the sector – a view it shares with a recent government report.She said TPR was focused on several hundred pension schemes experiencing issues because the employer was struggling, but she emphasised the regulator did not see this “causing a pile-up on the PPF”.Titcomb added “the supervision of an entity such as a superfund is a very different proposition to the supervision of something like a mastertrust”.“I’m not saying we couldn’t or wouldn’t do it, but it’s an entirely different proposition,” she said. “So, interesting work in progress, but lots more questions to come.”Other panellists also welcomed the work of the task force, but brought up questions and challenges associated with its argument for consolidation and superfunds.David Taylor, general counsel at the PPF, said the lifeboat shared the regulator’s view that “the system isn’t fundamentally broken from the protection side of things” and that “we don’t see a case for dramatic change to the current system”.He said the outcomes for stressed schemes were not as binary as the taskforce had argued. The taskforce said in its report that the current system only allows for members to either get full benefits or PPF-level benefits (with reduced indexation and benefit cuts for non-pensioners) if schemes are transferred to the lifeboat fund. Systemic risk, modelling and moral hazardAshok Gupta, chair of the PLSA’s DB taskforce, said the taskforce’s modelling showed a “significant” number of members would have their benefits cut if action was not taken.He also disagreed with the idea that superfunds posed a “moral hazard” by discharging sponsors of their liabilities. He argued that reducing the amount of people forced to accept lower benefits it would not constitute allowing employers off the hook.“It’s giving members something they didn’t have before, and that’s the result we’re trying to achieve,” he said.Charlotte Clark, director for private pensions and stewardship at the DWP, called for clarity over what consolidation was trying to achieve as this would determine how the framework would have to be designed. Keeping schemes above PPF-level benefits and trying to help employers manage risks and costs were two very different outcomes, she said.Asked whether there was sufficient political will to back a consolidation project, Clark said there was – if the benefits were clear and the idea could be shown to work in practice.
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