Russia’s mandatory second-pillar pension system is in chaos again as the government appears bent on extending the moratorium on mandatory pensions contributions to non-state pension funds (NSPFs).In early August, Labour and Social Protection minister Maxim Topilin confirmed that, as in 2014, all mandatory contributions would be diverted to the first pillar in 2015.Topilin called the funded second pillar inefficient and ineffective, and of benefit only to the financial institutions that run the funds.The minister’s statements have fuelled fears the government is considering abolishing the system or converting it to a voluntary one. The NSPFs, in place since 2002, have more than 22m members and assets under management of around €23.5bn as of the end of March.The statements also exposed tensions between the so-called ‘social’ and ‘financial’ blocs within the Russian authorities.The former are primarily concerned with reducing the deficit and budget transfers to the Pension Fund of Russia, the first-pillar institution.The latter look at the implications of shrinking a pool of domestic financing at a time of escalating EU and US sanctions in the wake of the Ukraine crisis, and escalating Russian government borrowing costs.Interfax, citing an anonymous Bank of Russia source, wrote that the central bank criticised the extension for undermining confidence in the pensions system and depriving the economy of much needed investment.Meanwhile, Deputy Economics minister Sergei Belyakov, who on 6 August apologised on his Facebook page for what, in his personal opinion, was a “stupid” policy, lost his job later that day.The policy also runs counter to the Finance Ministry’s own plans for pension funds.Its public declaration of goals and objectives for 2014, published on the ministry’s website in early June, singled out pension funds as the realistic source of long-term domestic financing in Russian investment projects.The National Association of Non-State Pension Funds (NAPF) has also published a highly critical response.It laid the blame for poor returns on weaknesses in the Russian stock market and existing pension fund investment regulation, reminding the government that it had been discussing extending the list of permissible assets for the last five years.It accused the government, through its unilateral decision to extend the contributions moratorium, of once again failing to consult with other partners (employers and trade unions) in the Trilateral Commission on the Regulation of Social and Labour Relations.It also accused the government of backtracking on president Vladimir Putin’s earlier promise, made in 2013, to restore contribution flows once the system was reorganised to improve transparency and strengthen safeguards.All the non-state funds had to convert from their status as non-profit-making entities to joint-stock corporations, institute a system of guarantees and obtain a licence from the Bank of Russia.Currently, funds accounting for some 76% of all assets have made the conversion, a share expected to rise to more than 95% by the end of the year.
What Tesla’s battery technology represents is the final piece of a jigsaw that, if completed, could enable less developed countries to leapfrog into power generation in a similar way that many countries jumped into the mobile revolution. Anyone travelling to India will soon discover that the mains power supply is unreliable. Households and companies are incurring significant expenses in dealing with the problems of intermittent supply by buying back-up solutions such as diesel generators, diesel, etcetera. Moreover, large parts of many emerging countries do not yet even have access to the grid, and there are numerous places where it would be very costly to scale out the conventional grid.What many emerging economies do have in plenty is sunshine, and the combination of much lower costs for photovoltaic solar cells and cost-effective battery storage systems could be transformative – particularly so if electric cars like Tesla’s become ubiquitous, as their batteries could be used to supplement home storage. Ajay Shah, an Indian economist, sees enormous potential for Tesla’s Powerwall in remote communities in India. Roofs could be equipped with photovoltaic cells, perhaps supplemented by diesel generators for peak loading, while battery storage could be used to by-pass the need to be connected to the grid.But what the Powerwall represents is still just an incremental change to existing battery technology. Once you get beyond the hype, there are still many things that need to happen before the potential of battery storage can revolutionise power generation.First, as Shah points out, higher oil prices would help to encourage the development of alternatives. He favours a global carbon tax, although I suspect this may be an issue for poorer countries. Second, in industrial countries, there needs to be continued government support for R&D and adoption of renewables and electric cars. Third, there needs to be continued worldwide scientific progress with batteries – Tesla’s product is relatively expensive for the power output it can produce. Fourth, Shah believes there needs to be sustained low interest rates globally for a long time, as these technologies require high capital costs but have close to zero running costs. And fifth, countries may needs electricity policies that give time-of-day pricing all the way to each household, ideally with a mechanism for distributed producers to sell electricity back to the grid at a cost that reflects that faced by the grid in delivering electricity to that location.Tesla’s announcement is certainly of importance to both developed and emerging economies as a clear stepping stone to a possible future. But Tesla’s selling price to installers of $3,000 (€2,690) on top of the cost of solar cells, etcetera – together with a continuous output of just 20,00 watts that won’t make it powerful enough even for just a couple of domestic devices – makes it an unattractive proposition for the mass market.However, what it does suggest is that technology is now making great strides in the right direction. The importance of the Tesla Powerwall may not be what it can do but rather its inspiring vision for the future. Even if it takes another decade, the ability to have large-scale, low-cost rechargeable batteries may be far more significant than a flashy sports car.Joseph Mariathasan is a contributing editor at IPE The new large-scale Tesla Powerwall battery is important but perhaps not for the reasons you think, Joseph Mariathasan writesSeveral friends of mine have now been for test drives of Tesla’s electric sports cars. I’m not convinced they were seriously thinking of buying one, but they certainly enjoyed the ride! Whilst Tesla’s sports cars have certainly been a hit, what the company may eventually become famous for is the development of large-scale Lithium Ion batteries, which could transform the economics of alternative energy sources. Chief executive Elon Musk unveiled the Tesla Powerwall last week. This device is designed to store energy at a residential level for load shifting, backup power and self-consumption of solar power generation. If it does fulfil its potential, it could be the first step towards a revolution in power generation.Alternative power sources in the form of photovoltaic cells and wind energy have attracted huge amounts of government subsidies in an attempt to foster viable alternatives to fossil fuels. A key drawback for both is the fact they are intermittent providers of energy – you only get solar power during the day, whereas maximum demand for energy may be at night. Similarly, wind power cannot be guaranteed to supply energy when it is needed.Another significant drawback is that they both require large amounts of space unlike conventional power plants, whether fossil fuel burning or nuclear. In Europe, with a highly developed grid supply, the need is for power sources that can be switched on and off to add power at times of peak demand. In emerging markets like India, the grid supplies do not even supply base power, leading to numerous power cuts, whilst more remote areas may have no electricity at all.
The IORP stress tests the European Insurance and Occupational Pensions Authority (EIOPA) wants to launch later this month should not be based on “something hypothetical”, according to Matti Leppälä, chief executive at PensionsEurope. Leppälä took particular issue with the controversial ‘holistic balance sheet’ accounting approach. “Why does EIOPA need to stress the HBS, which does not exist yet and has not been approved by anybody?” he asked.Further, he pointed out “we have not received a proper answer to this question” yet. Leppälä told IPE he was “unsure whether EIOPA was really pushing the HBS” or using the stress tests to see whether “it makes sense”.But he also stressed that his organisation did not support the HBS approach, as it was “conceptually wrong” and “unsuitable as a regulatory instrument”.“Simpler alternatives”, such as ALM studies and continuity analyses, should instead be used, as the have the “same goals but are cheaper and have less model uncertainty because they are in use”.Leppälä also criticised the stress test itself, which has “a lot of shortcomings because it has a short-term focus”.“This stress test will give just a snap-shot picture,” he said.“It does not enable the long-term evaluation of the sustainability of the IORP.”He added: “For a long-term evaluation, you would need a dynamic stress test that includes the recovery periods – otherwise, you cannot draw any conclusions on whether the system is stable.”He questioned whether the stress test – which includes DC plans for the first time – could provide any significant information on the impact on members and beneficiaries.Leppälä also noted that EIOPA’s aim to cover at least 50% of the national markets was most likely to be achieved by getting the biggest pension funds to participate.“Of course, if and when that happens, results will be biased and unrepresentative of the sector as a whole,” he said.
The Mayor of London, Boris Johnson, has resisted a call to renounce divesting by the London Pensions Fund Authority from fossil fuel investments, saying it is not within his powers to do so.However, he criticised fossil fuel divestment generally as a “political gesture” and “window-dressing”.Assembly member Gareth Bacon, the Conservative economics spokesman for the Greater London Authority (GLA), had asked Johnson at the regular Mayor’s Question Time meeting whether he would “renounce the calls from some in the chamber and outside to divest GLA pension investments in fossil fuels”.In an earlier statement from the Conservative group, Bacon said: “Recent calls to stop City Hall’s pension fund from investing in fossil fuels are frankly irresponsible. “At a possible loss of £25m (€35.7m) over 25 years, this could put thousands of people severely out of pocket, and all for a mere political statement.”According to calculations by Europe Economics, an economics consultancy, a fund disinvesting from fossil fuels would sacrifice the equivalent of an annual return of 0.68% pa.Bacon said applying this to the GLA’s share of LPFA holdings of fossil fuel investments equated with a lost return of approximately £1m per year.Over a typical 25-year investment horizon for a pension fund, this becomes £25m.In reply to the question, Johnson said: “I don’t have the power to direct the LPFA to do this.”However, he added: “They [pension funds] have a fiduciary duty to get the best value for pensioners. And some of the pension funds for the most ‘right-on’ organisations have investments in heaven knows what to get the best value for their pensioners.”Johnson added that, since he had become Mayor, carbon dioxide emissions in London had gone down 14% due to the use of technology and “technical fixes”.“I’d rather see the money invested in those technical fixes than thrown away in some political gesture,” he said.“The way to do this is to keep our strategy of reducing London’s carbon footprint, and the rest is just political window-dressing.”
“There are some other asset classes where it simply wouldn’t be sensible for us to set up a large operation,” he added.“If you were thinking about private equity, or public equity, there are lots of firms that do that, and, with quite a diverse investment portfolio, it would probably be appropriate to continue to put that externally.”However, McKinnon indicated that asset classes or strategies with a lower turnover could be managed internally.“The kind of assets where it’s more buy-and-hold-type propositions, and we’ll be investing in those kind of things for a long time,” he said. “Over time, we’ll expand the operation.”Asked whether this could mean an internal real estate or infrastructure team being hired in future, he said: “We don’t have any firm plans for that, but certainly we’ll expand past LDI.”The PPF has repeatedly spoken of its desire to grow in-house management, with CIO Barry Kenneth last year saying it was due to a desire to better control the portfolio.He told IPE last July: “We know our framework better than anyone else, so, by definition, we should be able to manage it, knowing everything else within the fund, and do so in a more controlled fashion.” Future internal management of assets by the UK’s Pension Protection Fund (PPF) is likely to focus on buy-and-hold assets, after an initial effort to build a team responsible for hedging.The £23.4bn (€29.7bn) lifeboat fund, which saw its funding level increase last year despite a significant decline in investment returns, is building its in-house liability-driven investment (LDI) team after it hired Trevor Welsh as its head of LDI.Andy McKinnon, the fund’s CFO, told IPE internal staff numbers would increase by half a dozen by the end of the year – with some employees working directly on investment, while others work in control and investment operation functions.McKinnon emphasised that the decision to build up in-house expertise was not driven by a desire to reduce costs, and that it would not be expanding in-house management across its entire portfolio.
The company said that, in that new role, Morrissey would continue to be an adviser to Newton and represent it and its parent BNY Mellon Investment Management in the financial services sector.For now, Smits has been appointed to Newton’s board of directors in addition to becoming its chief executive designate.Smits’s most recent job has been that of CIO at Adams Street Partners, where she was also a member of the executive committee.Newton said Smits would be based in London and “actively involved in managing Newton’s business and focus on expanding its presence in key growth markets”.Harris said the company was extremely thankful to Morrissey for her contributions as chief executive.“Under Helena’s leadership, Newton has developed into a globally recognised asset manager and valuable BNY Mellon investment boutique, with strong investment performance across real return, fixed income, multi-asset, global and equity income strategies, along with a market-leading responsible investment proposition, all driven by the firm’s team-based investment approach,” he said.Morrissey said the time was right for her to move on to the next phase of her career.“I am looking forward to assisting Hanneke over the coming months while also continuing my roles with the Investment Association and the Financial Services Trade and Investment Board, among others,” she said.Morrissey is leaving her role as chief executive immediately, and Smits will take up the full chief executive role in due course, subject to FCA approval. Newton Investment Management has announced its long-time chief executive Helena Morrissey is stepping down from the top management role and will be replaced by Hanneke Smits.Mitchell Harris, chief executive of Newton’s parent BNY Mellon Investment Management, said: “We are thrilled to welcome Hanneke to Newton’s board of directors and as chief executive officer designate.“She has deep investment knowledge, an impressive track record of developing senior leaders and investment professionals, and proven expertise growing a global firm across developed and emerging markets.”Morrissey will become chair of the non-executive board of directors after stepping down from the chief executive role.
Dutch supervisor De Nederlandsche Bank (DNB) has fined asset manager GSFS €5m for illegally using its pension fund as an investment vehicle.The regulator also issued the pension fund a €10,000 penalty, while fining the scheme’s three trustees €25,000 each and the sponsor’s chief executive €50,000.According to DNB, the GSFS Pensionfund had carried out large-scale dividend arbitrage activities, which it said largely benefited the employer.In the opinion of DNB, this policy was inappropriate for a pension fund, as pension funds are exempt from paying dividend tax, the FD said. Although the basic fine for similar violations is €500,000, DNB said the punishment reflected the benefits the asset manager enjoyed from its dealing.The pension scheme, for its turn, disagreed with DNB’s intention to remove its legal status as a pension fund, taking the supervisor to court. The pension fund lost its case, also after lodging an appeal following a negative verdict by a lower court.Financial news daily Het Financieele Dagblad (FD) quoted Jasper Hagers, the pension fund’s legal adviser, as saying that the scheme’s board was “baffled” by the fines.“DNB already knew the facts in 2012 and the activities have ceased since then. It feels as if the pension fund has received a kick when it is down,” he said.Hagers added that GSFS would fight DNB’s decision.Commenting on the case, Frank Vogel, board member at the asset manager, described the fines as “coming much too late in the day”.The FD reported that DNB and the pension fund have met each other regularly in court about the sponsor’s unorthodox investment policy over the past five years. The pension fund managed €354m of assets for its 20 members, according to the paper.This article has been updated to correct the spelling of Jasper Hagers’ name.
The well-attended conference – held in Brussels’s prestigious Charlemagne building – heard that there was a clear need for EU institutions to head off this hazard. It could seriously impede cross-border investments by the institutional sector.Commission vice-president Valdis Dombrovskis said: “Most notably, we must devise and implement this [CMU] programme at a time when our largest capital markets hub is leaving the single market. London has traditionally pooled and managed liquidity from across Europe, and provided most of the financial risk management to the rest of the continent.“The prospect of Europe’s largest financial centre leaving the single market thus makes our task more challenging, but all the more important. The rest of the EU economy needs bigger and better capital markets more than ever to complement bank lending with other sources of funding. We therefore need to redouble our effort to build the functioning Capital Markets Union across the EU-27.”Brexit had “powerful implications for the CMU”, said Guntram Wolff, director of the Brussels think tank Bruegel. He also warned of a need to address the possibility of increasing costs of finance and financial instability.Jyrki Katainen, commissioner for jobs and investment, echoed Dombrovskis’ comments: Brexit meant “we need to redouble our efforts”, he said. He referred to “underperformance of the EU’s capital market” and suggested that upgraded risk finance could fill the gap. Responses to the CMU’s mid-term review were revealing its importance, he said.Dombrovskis cited the need for “trusted and timely” effective supervision, performed to the same standard across all participating markets. He warned of the value protecting investors from “predatory behaviour from unscrupulous actors in jurisdictions with lax supervision”.There were warnings of a “race to the bottom” by opportunist jurisdictions: National ministries could be motivated to cheat in efforts to increase their share of financial business lost from London.This led Dombrovskis to mention a public consultation on the operations of the European Supervisory Authorities , which is running until mid-May. He described it as “a very important conversation about the supervisory architecture that we need for the future CMU”.An evidently determined Steven Maijoor, chair of the European Securities and Markets Authority (ESMA), described consistent supervision across the EU as “a very important condition” to support the CMU.There was a need “to address cross-border risks, especially those related to investor protection. Investors are only willing to participate in financial markets when they are well-protected”, Maijoor said.Maijoor added that ESMA’s focus shifted to supervisory convergence, or to achieve “stronger powers to ensure consistency across the EU”.“This would allow more effective and timely intervention to promote convergence of practices across the EU, while different combinations of tools might be needed to address specific convergence issues,” he said.John Berrigan director-general for financial stability and the CMU at the EU Commission, added that strengthened supervision was needed to support a scale-up of the CMU’s volume of finance.After such conferences, delegates tend to collect in small groups, wishing each other a cheerful goodbye. In contrast, delegates this week left the Charlemagne building reflecting on an atmosphere of concern. It was meant to be a major gathering of the EU’s friends and followers to assess the performance so far of the Commission’s Capital Markets Union (CMU) programme.“Most notably, we must devise and implement this [CMU] programme at a time when our largest capital markets hub is leaving the single market.”- Valdis DombrovskisThe aim was to gather suggestions for revamping the flagship initiative during the next two years. Friendly comments on progress of the common rules for a company’s tax base might have been expected. Or how to nudge forwards the promising securitisation regulation, which is at present suffering unexpected delays.In fact, the public hearing on the CMU’s mid-term review was quickly overshadowed by the dark cloud that is Brexit – and a possible breakdown of legislative cohesion across the economic zone. The fear was that some of the other 27 member states could fail to uphold Brussels-based standards.
The Financial Conduct Authority has expressed some concerns about the transition from membership of a defined contribution (DC) scheme to retirement following the introduction of pension freedoms in 2015.Publishing its interim report on a review of how the retirement income market has changed since then, it said it had identified “emerging issues”.Christopher Woolard, executive director of strategy and competition at the FCA, said: “We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future.”The regulator said it was considering investigating whether additional protections were needed for consumers buying drawdown with advice, for example by gathering evidence on whether consumers paid high charges or ended up with unsuitable investment strategies. The regulator said it might also ask the government to consider measures to improve competition in non-advised drawdown, and proposed developing tools and services to help consumers understand their retirement options and improve trust in pensions.The regulator found that consumers accessing defined contribution pension pots early had become “the new norm”, with most opting for lump sumps rather than regular income.Over half of pots accessed have been fully withdrawn, but of these, over half (52%) were moved into other savings and investment products, partly due to a lack of trust in pensions.It noted that this could result in bad outcomes for consumers, as they could pay too much tax, miss out on investment growth or lose out on other benefits.The regulator also found that most consumers accessing their pots early did not shop around for drawdown products from companies besides their existing provider. In addition, many consumers bought drawdown without advice but might need further protection to manage it effectively.According to the FCA, the share of consumers taking out drawdown pensions without taking advice grew from 5% before the introduction of pension freedoms to 30%.The regulator was also worried that annuity providers leaving the open annuity market could weaken competition over time.It also said product innovation had been limited so far, especially for the mass market.Review ‘disturbing’The UK pensions trade body said the regulator’s review made for “disturbing reading”.“Without timely action now, those retiring in the near future who are dependent on defined contribution pots and who have no access to advice will not receive the retirement they hope for,” said Tim Gosling, policy lead for DC at the Pensions and Lifetime Savings Association.The default retirement option should lead towards an income product rather than cash, which could mean a form of “soft” default, he said.Gosling also called for “a new generation of high-quality retirement income products”.“These need to have strong independent governance and be suitable for those needing an income but who do not have access to advice,” he said.The FCA’s report can be found here.
Michael Collins, chief executive of Invest Europe, said: “Demand is high for European private equity and venture capital and it continues to thrive with healthy levels of fundraising and investment in the first half of the year.”He cited a number of high-profile public offerings from European venture-backed start-ups in the last six months, including Spotify, Adyen and Farfetch.Invest Europe said the investment levels came at a time when the European economy was seeing high growth rates and still benefiting from low interest rates.Leverage buyouts struggleHowever, separate research by software provider eFront has shown that other areas of private equity have struggled in recent months.Average leveraged buyout (LBO) fund performance fell for three straight quarters from its 10-year high return multiple of 1.49 in 2017, the company said. In Q2 2018 this figure had fallen to 1.45 – although this was higher than its annualised average return multiple of 1.3 between 2009 and 2018.“LBO funds have enjoyed almost a decade of increasing performance since the financial crisis, reaching an all-time high in the third quarter of 2017, with an all-time low risk in the preceding quarter,” eFront said.“Following this peak, performance has drifted slightly lower… However, performance remains well above the level seen during the financial crisis.” US-based LBO funds performed above or in line with the long-term average, according to eFront’s analysis, with funds launched in 2009 and 2014 “looking to be particularly strong performers”. In contrast, funds based in western Europe experienced more volatile performance “most probably because of the euro crisis”, the company said. Investors channelled €45.6bn into private equity and venture capital in Europe in the first six months of this year, with fundraising 40% higher than in the second half of last year.Private equity industry association Invest Europe said this level of investment was the third-highest figure for a six-month period since 2007.The data also showed that venture capital investment in European start-ups was more than €3bn between January and June 2018, which Invest Europe said was the highest half-year result since 2007.Including this, the association said venture capital had now raised almost €11bn in new funding for start-ups in Europe since the beginning of last year.