IPE asked three pension funds – one small, one medium and one large – in three countries – Denmark, the Netherlands and the UK – the same question: “What do you see as your major challenges in 2005?” Here are their answers:
Steen Jørgensen, managing director and CEO of Denmark’s Finanssektorens Pensionskasse, the industry-wide pension fund for financial sector employees. The pension fund has AUM circa e2.3bn
“I think it’s going to be a difficult year. The economic prospects for 2005 are not as positive as they were for 2004 so one of the man challenges will be getting an absolute return. Indeed, market players are concerned about whether we will get positive returns on equity markets and if we do whether they will be in single-digit figures. Looking at the fixed-income market, I’ve seen research that indicates 80%-plus of US observers still expect interest rates to rise and if they’re right it means losses on fixed income assets. So that will be difficult too. And emerging markets are to a great extent linked to the dollar and the general perception is that the dollar will depreciate this year, and people are concerned about what will happen in emerging markets if US interest rates go up.
“Another issue this year is that of new products. The government is keen that people will get more choice and are allowed to pick their own investment/risk profile. This presents the challenge of keeping up with product developments and being competitive. And here we are, as we say, in a hurry, but very slowly. Being an industry-wide pension fund we have to keep costs low so cannot develop all the new products our competitors are offering, and we cannot wait to see what they are doing. And as our members are from the financial community, so it requires additional efforts to provide them with a competitive pension scheme.
“This year people will be able to move their SP and LD scheme holdings and I will try to persuade my members to move their funds from SP and LD into their pension scheme with us. But I will be competing with banks that have higher charges but a much better marketing facility.
“All Danish labour market pension schemes have to conform to the findings of a report on good governance when publishing their 2004 annual reports later this year. It’s like the Tabaksblatt Code in the Netherlands.
“A problem is that we get more, and more detailed, regulations which try to make us run our investments on a day-to-day control basis even though we are long-term investors. And we need to set up more and more compliance. So that’s a lot of costs. Here there are two main issues, the new EU solvency requirements that must be in place by 2007 and the IAS accounting rules that will be implemented this year. We will have to change a lot of rules and procedures and that takes the focus away from serving clients.
This comes from both the EU and local
regulators because every time they take on
something at a European level the Danish
regulators often put additional regulations in place. But while this puts a lot of pressure on individual pension funds, it is one of the reasons that the Danish pension system is so stable.”
Gerard Beuker, chairman and employers’ representative on the board of the Netherlands construction industry pension fund, the Bouwnijverheid, which has AUM of e16bn
“In 2005 we are confronting two main problems - I can’t categorise them as challenges - and they will mean a lot of work for us. The first is the introduction of new legislation introducing tax changes that mean from 2006 it will be virtually impossible for people aged below 55 to take early retirement, and indeed retirement will only become feasible above 63, transforming the way we have operated over the past 10-15 years.
“And the issue of early retirement is sensitive for us, as our members are working in the building industry which it is more arduous than work undertaken by people in offices, for example.
“The government wants the industry’s proposals on how this will be implemented by 1 January 2006 and currently employers’ and employees’ representatives are gearing up for extensive labour negotiations in the first quarter to hammer out a new set of arrangements, analyse how to employ all the tax facilities available to retirees after 65 and then to come up with ways to enable members to retire at 62 or 64. Then we must make changes to pension fund rules, which in turn must be approved by the regulator. In my opinion it will take at least two and probably three years to meet the deadline.
“The second major problem is related to the new pensions act that the government intends to bring into force in 2006 and which will include the new the IAS accounting standards. The difficulty is the requirement to value the liabilities as well as the assets at fair market value which will probably result in a great volatility in the coverage ratio.
“The main impact of the implementation of the EU pensions directive later this year will be the setting of the minimum solvency ratio at 105%. Dutch regulations will require a fund breaching this level to rectify the situation within a year. There are only two ways achieve this, by cutting payments or raising premiums – and not just by 10-20% but probably doubling it. So we must all undertake new ALM studies to ensure we never come under the 105% threshold.
“It has become fashionable among government departments or the supervisory board to make initiatives on the pensions front. All have their own agenda and there is no harmonisation. An example is social affairs minister Aart Jan De Geus’ call to extend corporate governance to pension funds. He has asked the industry to get back to him in April with its proposals. But reports show that with all the changes pension funds are suffering from regulation fatigue. We have a phrase ‘the best is the enemy of the good’, meaning that improvements’ could endanger the system as a whole. For example, it could drive employers to decide that maintaining a DB system is becoming too difficult and costly and so to switch to DC.
“But on the positive side, in general employees trust pension funds and this was evident even when the equity market collapsed. We have to cherish this trust.”
Peter Moon, chief investment officer of the UK’s Universities Superannuation Scheme which has AUM of e30bn
“The major challenge is to take a more long-term approach to investments. We ran a competition about two years ago looking at long-term and responsible investment. It raised the level of debate about what pension funds should really be aiming for, whether to beat the competition or to pay out pensions to pensioners, and I think that now we can agree that our function is to pay out pensions but also run the money in an effective and efficient way.
“So my challenge is to get the trustees to accept an asset structure that represents those long-term aspirations and which reduces the potential volatility of contribution rates for the employer. And that means we are more than likely to move towards a benchmark that is defined by real return by a much larger suite of assets that we might have used. So we’re more likely to get into private equity or infrastructural projects than we would have been in the past because they have very long gestation periods. But as the fund is going to remain cash flow positive for the next 40 years that is not going to cause us any problems.
“However, I think we have entered a fairly low return period for equities and other real assets such as property. In the 1990s we saw very spectacular performance followed by a speculative bubble and that has caused markets to be much more cautious than they were. I think profits growth is likely to be reflected in share price growth. We’re really looking for returns of 5-10%, or 5-8% post market, over the next five years. I think that the less legislation we have the better it will be for pension funds but as a tit-for-tat trustees have to educate themselves on pensions matters, and that’s one area that’s a major challenge not only in 2005 but going forward.
“We’ve got to restore trust to the whole financial services sector. If you’re a pension fund you’ve got to work harder to pay benefits, if you’re a life assurance company you’ve got to convince people you weren’t playing fast and loose with their bonuses.
“However, the Pension Protection Fund is another negative which doesn’t seem to us to do the job. First I don’t think there’s enough money and second, a fund like ours would not get any protection and could not claim until every university had gone bust, and the chances of all 350 of our institutions in the scheme going under is zero.
“We didn’t stop contributions and we also have conservative assumptions in the asset mix. We are also in a better position because we don’t have to follow FRS 17 because as an industry-wide scheme we don’t have only one identifiable employer, but rather 350. So it would be difficult to get a common figure.
“We’ve done whatever we can to encourage transferability across Europe and internationally for academics coming into and moving out of the UK. So we’ve tried to enhance labour mobility so if the EU pensions directive can help on that front we think it’s good value.”