Pooling power and fears for the Swiss second pillar
A London conference on pension pooling learnt that not only could the market be worth up to a trillion euros over time – but that the technique might even be a way for corporate schemes to take trustees out of the loop.
“We’re talking about very big asset pools,” Willie Slattery, managing director of State Street (Ireland), told the conference, organised by Informa. There was up to e50bn available to be invested at the moment, with the figure “in the hundreds of billions – perhaps approaching e1bn” over five years.
He added that there was “very real interest” from investment managers, citing Barclays Global Investors, Deutsche Asset Management and State Street itself. He said it was a “market imperative” for firms to be involved – and that there was a “very very material” impact on returns.
Slattery was involved with the setting up earlier this year of DeAM’s Ireland-based Common Contractual Fund. The Deutsche GlobalSpectrum CCF was the first pooled fund to use tax breaks to enable pooled funds to buy US equities without incurring US withholding tax.
“I believe pan-European pension funds are some way off,” Paul McGovern, tax partner at KPMG, told delegates. “But there are significant savings to be had by pooling assets.”
The conference was also told that Ireland plans to introduce non-UCITS Common Contractual Funds – which means that they will be able to allow investment in hedge funds.
The same conference was told about the impact pooling could have on the trustees of a multinational firm’s pension scheme.
Brian Hill, head of global custody consulting at Watson Wyatt, told delegates that a new pension pooling product would likely involve plan sponsors setting up a management committee to set asset allocation and select managers.
“There’ll be a group that will tell the management company what to do,” he said. He said the technique would enable large firms to “get rid of local trustees who are not going to do what you tell them”. Trustees - who might be against the idea of pooling - were seen as one of a series of “governance” issues faced by companies.
“Will the trustee model actually be able to survive under the auspices of the IORP?” Watson’s Hill wondered. Pension pooling enables firms to deal with the “huge complexities” of tax regulations and legal jurisdictions, he said. “For a multinational that can often become the driving force.”
Pension funds themselves would not set up pooling of their own volition but would need a financial services provider. Hill remarked: “It’s not something for industrial companies to undertake.”
Firms will be able to get a “better bang for their buck” as a result of economies of scale, Hill said, adding: “Money talks in volumes.”
This would also have an impact on such suppliers as actuaries, consultants, asset managers and custodians, which would have to raise their game. He added: “I think all fees are going to come under pressure from every provider.”
International pensions accounting standards were under scrutiny at an event organised by Swiss private bank Pictet & Cie in Geneva last month.
Speaking before the announcement that he was to leave Pictet to join the Swiss banking regulator, the firm’s senior partner, Charles Pictet, said that the implementation of the IAS19 reporting standards for pensions in Switzerland goes against the principles of the second pillar.
The comments came in his keynote address at a conference organised by Pictet Asset Management, where he was speaking as a trustee of the company’s pension fund.
He spoke of IAS19 as he was outlining the progress of the Swiss second pillar since its inception 19 years ago. He said the first 15 years had gone smoothly, but “unfortunately for us some dark clouds gathered in the last years”. Demographic change and the “forced introduction” of IAS19 were cited as problems.
The new standards have created a “link” between the pension fund and the sponsor, he added.
“This practice is totally contrary to our_system,” he noted – saying that the independence of the company itself and the pension fund had been at “at the heart” of the creation of the second pillar.
“These accounting standards, compulsory for companies listed at the stock exchange, have brought problems for which there is no solution yet,” he said.
“Who decides whether to raise the fluctuating reserves of the pension funds or put the surplus onto the balance sheet of the company?” he asked.
He also said there would be potential conflicts of interest, especially for Swiss subsidiaries of multinational companies.
“Surplus and deficit will play a role more and more important in the decision making on acquisition or sale of companies,” he said.
“On the economic point of view these procedures will have as consequence an increased volatility of results for companies in trouble.”
Pictet said he was “totally against” this. He said he could see the advantage of the idea though: “These standards are good for analysts, but I have doubts.”
There was also a call at the conference for a “predictable” Swiss pension rate. Franz Schumacher, a partner
of the consulting firm PPCmetrics, said that Swiss pension funds should see their real coverage ratio as 10-15% lower than their technical estimate.
He warned against over-optimistic estimates. Schumacher said the prudent principle - which in most European jurisdictions consists of overstating liabilities and understating assets - is reversed in Switzerland.
“Overstating assets and understating liabilities is a taboo, except that it happens in Switzerland,” he said.