Positive approach to New Year
IPE asked pension funds in three countries – Germany, Italy and Norway – the same question, ‘What do you hope will happen in 2006, and what do you fear?’ Here are their answers:
Dirk Lepelmeier, head of investments at Nordrheinische Ärtzeversorgung (NAEV), which has an AUM of €7.5bn
“The new German government has
no reform agenda. Instead we find a weird set of ideas cobbled together in the
coalition agreement between the Social Democrats and Christian Democrats. Our hope is that what they do in practice will be better than the policies set out in their coalition programme.
“One of the main questions is whether the two sides really want to work together or will only manoeuvre to find the best opportunity to opt out of the coalition to win the next election.
“We expect a continuing low interest world, within a range of 3-4%. If interest rates increase to more than 4% it probably would be due to cost and inflation pressures from further rises in raw material prices, especially for energy.
“So what will we do within the scenario we envisage? Given the economic perspectives we will focus on reshaping our existing bond portfolio, which is approximately 45% of our total portfolio. We have a very rigid risk-adjusted asset allocation model and using that we want to invest more effectively under risk capital constraints. Under this heading we want to implement a portable alpha structure with regard to our basic bond investments. We plan to separate our active risks from the underlying market risks which are typically expressed using a benchmark. Implementing this new strategy we plan to use a three-level approach.
“Level one will be a basic money market investment bringing together and transforming all our existing bond investments with ‘A’-rated partners, which means by definition according to portfolio theory that no risk capital is needed. On top of this we will implement on level two an active duration management, respectively a passive technical (maybe market-trend driven) duration model. Level three will be the portable alpha structure, and we hope to find excellent alpha managers who are able to produce positive alphas in less efficient markets.
“Having this strategy in place we will be more flexible to meet market challenges by adjusting our interest rate duration or our portable alpha structure, that is by switching due to spread variations from high-yield corporates to emerging markets bonds.
“NAEV currently has 50,000 members – 38,000 doctors paying contributions and 12,000 doctors already drawing pensions from the scheme. Within the next three to five years we envisage a shift from a positive to a negative liquidity position, with yearly contributions lower than paid out pensions.
“Last but not least of our perspectives for 2006 is that world economic growth – at least for the time being – definitely needs the US consumer to bravely spend an awful lot of Asian savings.”
Stefano Pighini, pension fund administrator of Fondenel, the pension fund of energy utility ENEL, which has AUM of €450m
“The perception that derivatives are expensive is largely a fallacy. Derivatives that are symmetric in nature, like swaps and futures, are usually quite cheap because in essence you are buying a simplified version of the underlying securities.
We were expecting the reform of the second pillar to come into effect this month, but in the event it has been postponed until January 2008, with the transfer of the TFR severance payments to the pension funds staring at the end of June 2008.
“Only small parts of the reform will come into force in 2006 and they mainly affected the pensions regulator Covip, which has been given more powers and more money. Covip will issue new regulations on both existing and new pension funds within the first half of this year. This will mark a complete rewriting of Law 124 of 1993, which established the second pillar in Italy, and Covip will redefine financial regulations. Its new rules will be applied from the end of 2007 to be in line with the new legislation.
“We are waiting to see what Covip writes about investments, financial managers and conflicts of interest and hope the new regulations will ease existing requirements like that requiring investments to be linked to a published benchmark. We would like to see a move towards the new EU pensions directive’s prudent person principle.
“The new legislation also released €17m to be spent on advertising before the end of last year to boost subscriptions to second pillar pension funds. At the moment only 14% of the eligible workforce has joined a second pillar fund, so there is considerable room for an increase.
“Meanwhile, we are expecting a reform of Law 703/96 issued by the Treasury which includes a limitation on financial investments. Part of it has already been rewritten in the new legislation but we are waiting to see changes regarding the Organisation for Collective Investment of Savings private equity and alternative investments. There has been quite a push from our side to diversify investment.
“We will have an election in April and may have a new government in June/July. If a left-wing government replaces the current right-of-centre administration it may reassess the 2008 start date for the second pillar reform. But at least we’ll know this year.
“The reason for the postponement is that there are too many parties trying to grasp the €13bn TFR flow. Most seem to be happy with the delay: the government because it was going to have to pay compensation to small companies for surrendering the money to pension funds, and insurance companies that wanted to make a play for the funds and now will be eligible because they will come under Covip regulation.
“The only losers are the pension funds that will have less money to administer this year. But it will not affect the employees; the money is theirs. It will just be transfered from one pocket - the TFR - to another, the pension fund.”
Jon Steinar Eide is investment manager for the public authority pension fund for Norway’s Akershus county, the Akershus fylkeskommunale pensjonskasse, which has AUM of NOK5.5bn (€699m).
“Under our recent pension reform it is mandatory for all workers in Norway to have an occupational pension. The new law requires that all employers must pay an amount equal to 2% of an employee’s salary into a defined contribution plan.
“But this will not have an impact on us as we are a defined benefits fund and as such we are governed by an agreement between the employer and the employees which the law makers cannot change. With DB plans employers pay substantially more, ranging from 6% to 12% of a salary, and generally it is not required that employees make contributions from their salary, although that is the rule in municipal DB plans where the employees must pay 2%. With us the contribution rate differs from year to year. It is adjusted to the investment market, it’s low when there is a good investment income and higher when investment income is low.
“Similarly, as Norway is not a member of the EU we are not directly affected by the European pensions directive. But regulations in the EU usually come to Norway after a time lag.
“Multi-employer pension funds and insurance companies have to set an amount up-front on the income they require for operating the pensions. This is done to ensure that each customer gets equal net returns from the financial activity.
“We currently have quantitative restrictions on investments. We can hold a maximum of 35% of our portfolio in equities. We should stress test to ensure we can cover a loss of 30% on Norwegian equities and 20% on foreign equities and simultaneously we must be able to cover a 2% interest rate hike. As a result we must make sure that we have sufficient buffer capital to deliver these requirements.
“The introduction of the EU directive’s prudent person principle would be a positive development because if a pension fund has enough buffer capital then a holding of, for example, up to 40% in equities would not be a problem.
“At the moment we cannot do that, although we have enough buffer capital.
“Elsewhere on the investment side, we are facing risks from increasing rates and a too long duration on the portfolio. In addition, the main driver of the Norwegian stockmarket is the oil price and that may fall. Consequently, it is necessary for pension funds to have a higher allocation to foreign equities to diversify the oil price risk as those markets will gain from a reduced oil price.
“We have one-third of our equity portfolio in Norwegian equities and two-thirds abroad, and that is our strategic bet, so we will hold that position.
“On the liabilities side, the decreasing rates will pose a challenge as they will lower the rates that are used to calculate net asset value of the liabilities and will increase their net value, and that is a risk.
On the opportunities side, we anticipate growth in emerging markets.”