Into the brave New Year
The New Year is a holiday that celebrates the passage of time and if you are among those who become introspective as the last seconds of the old year tick away you might have promised yourself to improve at least one side of your life.
And if your list of things to improve is longer than the list of goodies from Santa, you in might have joined the ranks of the ‘New Year’s Resolutions’ army.
Much has been said and written about these resolutions, which are generally connected with a healthier life style, and much sarcasm has been poured on how short-lived these promises are.
European pension funds and representatives of the pension industry, on the other hand, seem to have geared up for a series of long-term, far-reaching New Year’s resolutions, which could just stand the test of 365 days.
Reflecting on 2004, Andrea Girardelli, director of Fonchim, the €1bn Italian industry-wide pension fund for chemical workers, says: “It was not particularly negative, but not happy either. It was not really disappointing, we have had a performance above inflation rates,”
One measure that is likely to increase the size of assets under management in Italy’s complementary pension system is the diversion of some of the Tfr contributions into the complementary funds.
This will involve the implementation of the so-called ‘silent assent’ – the provision that the end of career indemnity of workers, known as Tfr, will be invested in pension funds unless employees positively refuse. The government hopes this measure will boost saving rates since many employees are unlikely to make an active choice.
“We had hoped the pension reform would implement the mechanism of silent assent by the end of 2004, that would have had a positive impact on contributions,” Girardelli says. “It could have increased them, maybe to the tune of 30 to 40%. But it seems that ‘silent assent’ will be implemented in 2005”.
Fonchim choose new asset managers in 2004 and the exercise was one of the most important events of the year, says Girardelli. Fonchim now offers three different funds to cater for different age groups and risk appetite – a system known as known as “multi-comparto”.
The €894m core ‘stability’ fund, managed by San Paolo, Crédit Agricole, Duemme, Pioneer and Templeton, is invested 70% in bonds and 30% in equities.
The €47m ‘currency’ fund, managed by LCF Rothschild, is entirely invested in bonds, while the €26m ‘growth’ fund, managed by Pioneer, is invested in 40% in bonds and 60% in equities.
Most members choose to remain with the core fund, says Girardelli. “It turns our multi-comparto was not the great success that we had hoped for. I suspect we are not dealing with conservative investors, but rather with lazy ones. People do not sufficiently think of their pensions”
Encouraging members to make an active choice is Fonchim’s new year’s resolution, he says. He is currently heavily involved in an information campaign aimed at the fund’s members. “We are committed to launch an information and communication campaign with our members to let them know the benefits of switching to the best investing options for their age and situation.
“We must get the message across and explain as clearly as possible about the advantages.”
For the €2.2bn industrywide Ilmarinen Mutual Pension Insurance active management rather than active choice is resolution number one. “We concentrate developing more active management. This means more balanced activity between equity, bond, allocation and foreign exchange” says Jari Puhakka, head of equities and fixed income at Ilmarinen, which has scooped a Best European Industry-wide Fund Award – and the country award for Finland at the IPE Awards in Zurich.
Puhakka says the fund has been “a little too worried” about bond yields and have not got maximum benefit from declining yields. But in 2004 the fund has been “very successful” in weighting different parts of equity markets, such as market and small cap weightings.
“Another successful area has been excess return; we have been able to generate in foreign exchange markets compared to our strategic hedging policy” Puhakka says.
“To achieve these targets more active_management we reorganised ourselves and invested in new risk management systems. After a few years of testing we activated some of our quantitative models and developed new ones all the time,” he adds.
Reorganisation could well be on the agenda of the Irish umbrella scheme Construction Federation Executive Pension Scheme, worth €370m. Phelim O’Reilly, general manager of the pension fund will carry out a review of its investment strategy in 2005.
“We have a review every three years,” O’Reilly explains saying asset managers may or may not be replaced.
“We also have an eye out for regulations on umbrella pension schemes from the Pensions Board. We obviously want to make sure we appropriately conform to the new regulations” O’ Reilly says.
In May 2004, at the end of the financial year, the fund has been rewarded for of its “aggressive” equity stance, the manager told IPE.
Back in March 2003, he explained, the scheme had allocated an extra 10% to bonds, changing its allocation to the asset class from 75 to 85%.
“It has paid off big time, we have had significant results. Returns were well ahead of our peers,” O’ Reilly says.
But the fund has not always had causes for celebration in 2004, its lowest point for the scheme, he added, has been the impact the Madrid massacre has had on the markets.
Close monitoring of the markets is top of the resolutions list for the Italian architect and engineers’ fund, Inarcassa, worth about €2.3bn.
Inarcassa’s Paoli Tosi said the fund would try to find the right asset allocation to adjust markets moving ‘sideways’. Inarcassa is also thinking of enhancing its exposure to the Pacific region and possibly considering currency overlay management to hedge further depreciation of the dollar. Its depreciation has been cited by Tosi as the low point of last year.
The fund, on the other hand, has had “an excellent return” from the equity portfolio, fuelled by the fund’s overweight stance in sectors such as energy utilities.
Achieving good returns in unpredictable markets is also a challenge for the director of the Munich–based HVB Pensionsfonds and industry wide Chemie Pensionsfonds, Martin Grossmann. He is also eyeing higher transparency for the beneficiaries of the funds.
“The better they understand what we are doing, the better their acceptance of the results we deliver,” he says.
An informal New Year resolutions survey by IPE finds that real estate investment is among the resolutions of a French industry-wide pension fund, which has decided to achieve greater diversification through exposure to this asset class and to commodities.
For Richard Balfe of the European Parliament Members Pension Fund, the main challenge and resolution for 2005 is to get the scheme back into balance and head for a break-even. Balfe remarks that the highlight of 2004 was realising that that market had stop falling, but the low point was seeing its rise was “slow.”
Alan Steele, of the London Borough of Hounslow ‘s pension fund, wishes to “spend more time looking after the pension fund”. Steele’s challenge for the year is helping keep final salary pension schemes alive and preventing their closure.
For James Kernan, of PriceWaterhouseCoopers in Warsaw, the focus is on the debate on the future of pensions. But he means to raise the debate on state pension reforms in old EU’s member states. The challenge ahead, he reckons, is “getting the state in old member states to face the need for real reform, including making the implicit debt into explicit debt.”
A UK pension scheme sponsor’s challenge for 2005 is to implement the Finance Act, which he sees as the highlight of 2004 and the Pension Act, the low point. His personal resolution, however, is “to delegate more”.
All over Europe the pension industry has geared up for a year of improvements and change almost in every aspect of the pension area.
And yet on further examination of responses from IPE’s informal survey, there seems to be room for more, as currency manager Fred Bisset, of A.G Bisset and Co. suggests.
Bisset, whose highlight in 2004 has been the ‘discovery’ of currency overlay and alpha by consultants, clients and journalists, has come up with this resolution: “Enjoy and keep up the good effort.”
Have a good 2005. Enjoy!