However, the DC funds are still heavily overweight developed equities, which now account for 80% of all assets.Emerging market listed assets are growing, but still only make up an average of 4% of portfolios.The proportion of schemes allocating to emerging markets is reducing, as volatility in the region, particularly among equities over the last 15 months, continues.Less than half of FTSE schemes (48%) invest in the markets, compared with 55% in March 2013.The growth in alternatives is rising through the use of diversified growth funds (DGFs) as DC default investment vehicles.DGFs mainly invest in equities but utilise additional measures such as derivatives and diversify more with the use of alternatives, in order to reduce volatility and increase returns.Recent research conducted by consultancy Towers Watson found significant growth in the use of DGFs among FTSE 100 schemes.The proportion using a DGF as all, or part, of their default investment strategy increased from 10% to 70% over the last five years.This coincided with a drop in the use of passive investment vehicles, which fell 22 percentage points, to 40%, among the trust-based DC arrangements.Separating the funds among FTSE 100 and FTSE 250 firms, DC schemes at the larger end of the scale tend to be slightly more adventurous and diversified.Over the last six months, the data showed FTSE 100 schemes shifting assets towards UK equities but remaining more diversified than their smaller peers.FTSE 250 firms reduced allocations to emerging market equities, down to 2%, while FTSE 100 allocate as much as 5%.Stephen Bowles, head of DC at Schroders, said: “All these pension schemes that are not diversifying their assets are missing the valuable growth and low-volatility benefits, which can be achieved through diversification opportunities.” UK listed companies’ defined contribution (DC) pension schemes investment in alternatives is growing, with some schemes allocating as much as a third of funds to the asset class.Research and analysis by asset manager Schroders showed that while 48% of funds within the FTSE 350 do not engage with alternative investments, those that do are increasing their allocations.One-quarter of schemes now allocate more than 15% of assets to alternatives, with allocations at five funds breaking the 20% mark.Average allocations have increased by 1 percentage point, between October 2013 and March 2014, to hit 8%, matched by a 1 percentage point decrease in allocations to fixed income.
The Wellcome trustees’ report said: “Tactically, we viewed the risk to sterling from the referendum to be asymmetric and reduced our sterling exposure (including hedges) to an all-time low ahead of the vote. Sterling’s subsequent depreciation and the generally steady performance in underlying assets enabled us to record a sterling return in the year of 19%.”At end-September, 58.1% of Wellcome’s portfolio was denominated in US dollars, compared with 23.8% in sterling.Asian currencies made up 8.5%, with a further 4.1% in European currencies.The report said: “Our global diversification enabled us take advantage of the sharp depreciation of sterling over the year. It also provided the rating agencies with the confidence to maintain our coveted AAA/Aaa (stable) credit rating, even as they were downgrading that of the UK government.”Danny Truell, managing partner of investments at the Wellcome Trust, said: “The portfolio has again performed well in a difficult environment for many investors. The decision to reduce home country bias and to diversify assets and geographical exposure has borne fruit.“Although future investment returns are unlikely to match recent experience, we remain confident the portfolio should generate sufficient cash flows to insulate the trust from potentially more difficult conditions.”In terms of performance by individual asset classes, public equities – 50.5% of the portfolio at end-September – were led by growth markets with a 29.9% return, followed by global (28.6%) and developed world equities (24.6%).But all these were lower than the MSCI AC World return of 31.3%.In their report, the trustees criticised the “poor” performance of their outsourced public equity strategies.The report said: “Of our 11 external equity managers, with £4.2bn of our investments, eight underperformed against their reference benchmarks, in each case by at least 5%. Although nine of the 11 are still ahead of their benchmarks over five years, warning bells are sounding.”And it said active public equity managers, particularly in the US and Europe, were confronting three powerful and correlated headwinds: a long-term structural bias against mega-cap companies, performance measurement periods that engender pro-cyclical behaviour; and the accelerating shift from active to passive index management.Over the past decade, the trust has reduced its external active management in global and developed market mandates from 85% to around 20% of its public market exposure.In contrast, all five of its external managers for emerging market equities have beaten their benchmark since inception.The best-performing class for private equity – which as a whole makes up 25.2% of the trust’s portfolio – was large buyouts, with a 34.9% sterling return (though the US dollar return was 15.6%); mid buyouts and specialist returned 25.7% and 24.9%, respectively, compared with an MSCI AC World return of 31.3%.But hedge funds made -0.7% over the period, the only strategy boasting positive results being directional funds, with a 0.8% return.Hedge fund exposure has been more than halved from 23% in 2008 to 10.7% in 2016, with some funds sold to increase exposure to equities.Wellcome’s real estate portfolio failed to repeat the double-digit returns of the previous year, with a 3.2% return for the year to end-September: 3.6% for residential, and 0.5% for non-residential, portfolios.Residential property – concentrated in prime central London units – makes up just over half the allocation.Over the year, the allocation to property fell by 2.7%, to 10.2% of the overall portfolio.The report said: “Uncertainty induced by the impact of Brexit and downward pressure on London super-prime residential activity created by higher taxes caused headwinds for our predominantly UK property interests. Active management enabled us to record modest positive returns.“Uncertainty about Brexit might well create further attractive opportunities for our patient long-term capital.” A tactical bet on the outcome of the UK’s EU referendum helped push investment returns at the Wellcome Trust – the UK’s largest charity – to 18.8% for the year to 30 September, compared with 6.1% for the previous year, and taking its investment assets to £20.9bn (€24.9bn).The results take the annualised return over three years to 13.3% per annum, and over five years to 14% per annum.While not predicting the “surprise result” of the EU referendum, the trust said it had already diversified its portfolio globally over the past decade to reduce significantly any home country bias.But this policy was intensified in the run-up to last June’s vote.
Dutch pension funds including airline KLM’s three schemes benefited from rising interest rates and positive investment results during the second quarter of 2017.The coverage ratio of most of them rose by several percentage points since March.With an investment result of 0.7%, the Algemeen Pensioenfonds KLM – the airline’s €8.3bn pension fund for ground staff – posted the best quarterly performance among the larger schemes in the Netherlands. It generated a 3.2% yield over the first six months of the year.Its funding ratio rose 2.9 percentage points to 109%. The €3bn Pensioenfonds KLM Cabinepersoneel generated 0.6%, in part thanks to a 1.8% result from its equity allocation. This took its year-to-date result to 3.4%.Coverage of the pension fund for cabin staff increased by 3.3 percentage points to 106.3%.The Pensioenfonds Vliegend Personeel KLM, the€8.5bn fund for pilots, reported a second quarter return of 0.4%. In the first six months of 2017 the scheme gained 3%.Its funding ratio improved by 3.1 percentage points to 120.5%.Meanwhile, PGB,the €24.5bn multi-sector pension fund, said it returned 0.1% over the second quarter and 2.1% over the first half of 2017.Since March, it lost 1.7% and 0.1% on government bonds and credit, respectively. In contrast, residential mortgages and inflation-linked bonds delivered positive results of 1.1% and 2.6%, respectively.Within its return portfolio, PGB achieved quarterly profits on equity (1%) and property (0.5%).However, it had to sacrifice 4.2% on alternative fixed income, 1.4% on infrastructure and 0.6% on private equity.Despite this, PGB’s coverage ratio rose by 2.4 percentage points to 100.8%.The €23.5bn sector scheme for the private road transport sector (Vervoer) reported a quarterly gain of 0.4%, but indicated it was 0.1% in the red over the past half year.However, its funding rose 1.4 percentage points to 101.8%.Recently, the five largest Dutch pension funds reported a funding improvement of approximately 2 percentage points during the second quarter, as a consequence of reduced liabilities in the wake of rising interest rates.However, none of them had generated positive quarterly returns. The best performer on a relative basis was the €389bn civil service scheme ABP, which did not generate a return or a loss. It gained 1.9% over the first six months of 2017.
Asset manager and asset owner engagement with UK companies is having a positive effect on investment decisions and ultimately value, according to a new report.The report is a joint effort of the Investment Association (IA) and the Pensions and Lifetime Savings Association (PLSA), who previously issued reports separately about stewardship by their respective constituencies.It was based on two questionnaires, one for asset managers and service providers, and one for asset owners. The trade bodies’ inquiries found that “the investment chain is working as intended”, they said in a statement.“Asset managers, which tend to engage and vote in-house, are maintaining high standards of stewardship,” they said. “While most asset owners outsource their stewardship activities, a substantial core are integrating it into their investment practices and 68% now include a stewardship policy in their Statement of Investment Principles.” For those respondents that conduct stewardship in-house, almost two-thirds reported that engagement with UK companies resulted in somewhat or considerably better investment decisions.The task of engaging fell mainly to portfolio managers as opposed to dedicated stewardship specialists, for those keeping the capability in-house. This demonstrated that stewardship was being integrated into the wider investment process, according to the IA and the PLSA. Emerging markets join the sustainability driveEmerging market regulators have decided to establish a Task Force on Sustainable Finance.The decision was taken at an International Organization of Securities Commissions (IOSCO) meeting in Sri Lanka this week, during which emerging market regulators agreed to the development of sustainable finance.The regulators form IOSCO’s Growth and Emerging Markets committee and include representatives from dozens of emerging markets, including Brazil, Russia, India and China.Moody’s formalises climate change dialogue with investors Moody’s Investors Service has joined the Institutional Investors Group on Climate Change (IIGCC), the first credit rating agency to do so.It has become an associate member, a new category of membership created for financial services providers that are neither asset managers nor asset owners.The move comes at a time of heightened debate and scrutiny about the role of credit rating agencies in preventing or enabling the integration of environmental, social or governance (ESG) considerations in finance.The UN Principles for Responsible Investment, for example, has been running an initiative aimed at exploring how ESG factors can be systematically included in credit risk analysis. The High Level Expert Group on sustainable finance, an advisory body to the EU, has recommended that rating agencies disclose how their credit ratings’ will take into account information provided in accordance with the recommendations of FSB Task Force on Climate-related Financial Disclosures.Stephanie Pfeifer, CEO of IIGCC, said Moody’s membership “sends a powerful message to a segment of the financial sector that has valuable research and insight to contribute to our work and activities”.Anke Richter, associate managing director of Moody’s corporate finance group, said: “Moody’s is committed to enhancing the systematic and transparent consideration of environmental, social and governance factors in our assessment of creditworthiness.”She said joining the IIGCC underlined the importance the rating agency places on dialogue with investors as well as issuers.Corporate SDG action in the spotlightA consultation has been launched on an idea to create an alliance that would develop free, publicly available corporate sustainability benchmarks aligned with the UN Sustainable Development Goals (SDGs) as a means of triggering a “race to the top” in corporate behaviour.Aviva, the Index Initiative, the UN Foundation and the Business and Sustainable Development Commission have proposed to establish the World Benchmarking Alliance (WBA), which would develop, fund, house and safeguard the corporate sustainability benchmarks.The UK, Danish and Dutch governments have committed funding to the consultation phase, in addition to funding and support from Aviva.The consultation’s announcement coincided with the UN Global Compact Leaders Summit on the margins of the 72nd session of the UN General Assembly in “Global Goals Week”.Speaking at the summit in New York today, Mark Wilson, Aviva’s chief executive officer, said: “Our idea is simple. We turn the SDGs into a corporate competitive sport. We draw up transparent data on performance towards meeting the SDGs, and we rank companies according to how well they are doing.“This will motivate a race to the top and is what the proposed World Benchmarking Alliance is all about.”The consultation will run over the next nine months.
A proposed amendment German pension guarantee rules could save the country’s insurers, Pensionskassen and Pensionsfonds from having to sell off further valuation reserves.The German finance ministry has put forward a change to the calculation of additional interest rate guarantee buffers (Zinszusatzreserve), bringing in a cap linked to market rate changes.The new calculation method could bring down the Zinszusatzreserve by up to two thirds, Friedemann Lucius, board member at Heubeck AG, told the German newsletter Leiter bAV.In its proposal the finance ministry noted: “The interest rate guarantees for customers are already safeguarded enough to have the buffers increase at a slower rate.” Since 2011 all insurance-based retirement providers – including Pensionskassen and some Pensionsfonds – have had to top up their actuarial reserves to ensure they can afford the guarantees promised to members as interest rates have fallen.However, over the past few years the calculation method has been heavily criticised by the industry. To finance the buffers, valuation reserves had to be sold off. The proceeds in turn had to be invested in asset classes with insufficient returns.According to the current calculation method the percentage that has to be put aside for the buffer is based on market interest rates measured over a 10-year period.With continued cuts to the interest rate these calculations have led to providers accumulating reserves of around €60bn in total, according to the finance ministry BMF.The proposal (available in German) is up for public consultation until 28 September.
Director remuneration will take centre stage at AGMs this yearTheir report said that, in the UK, just the first £10,000 of pension contribution was tax effective. In addition, the UK has a “lifetime allowance” limit for individuals’ total pension savings of just over £1m. Manifest and MM&K recommended that any payments in addition to this should be stopped.The action would reduce pay by around 7%, the groups said, as pensions equalled 7% of total remuneration for the average FTSE 100 chief executive at that point. Commenting on the IA’s move, chief executive of Minerva Sarah Wilson said the company was pleased to note the body’s guidelines had been strengthened.Wilson said: “Pensions disparity between executives and employees is a long-standing problem. Our remuneration research from the Greenbury era [a 1995 remuneration report] identified potential for abuse and our clients have long had research and voting guidelines aimed at equalising pensions for workers and boards.”She added that the Pensions & Lifetime Savings Association and the Trades Union Congress introduced similar policy recommendations in 2010.The IA’s efforts to challenge board diversity were welcomed by Hermes EOS, which has advocated for improvements for some time.A spokesperson for the shareholder governance group said it strongly supported the initial goals set out in previous government-commissioned reviews of achieving at least 33% female representation on FTSE 350 boards and on FTSE 100 executive committees and their direct reports by 2020.The spokesperson said as the target year approached, it expected companies to have reached the minimum requirement and would act with their voting recommendations where this had not happened. The body representing the UK’s £7.7trn (€8.9trn) asset management industry is to increase its pressure on companies failing on diversity measures and awarding what it sees as excessive executive pension packages.The Investment Association (IA), the members of which include 250 of the UK’s largest fund groups, said ahead of this year’s annual general meeting (AGM) season that it would be highlighting companies that were lagging peers on these two issues.Andrew Ninian, director of stewardship and corporate governance at the IA, said: “The IA’s remuneration principles set out shareholder expectations on executive pension contributions and our members have been clear this is an issue of fairness and pension contributions should be aligned with the majority of the workforce.”The IA’s Institutional Voting Information Service, which provides corporate governance research to shareholders to inform their voting decisions during AGM season, will “red-top” companies who pay newly-appointed directors pension contributions that are not in line with the majority of their employees. Corporate governance groups have been pressing on this issue for some time.In 2016, The Manifest – now Minerva Analytics – and MM&K Total Remuneration Survey called for cash pension allowances to be stopped.“They are just another way of giving cash to senior executives,” the groups said. “Chief executives should be on the same type of pension plan as most of the other UK employees. It is question of fairness.”
Source: Fossil Free Greater ManchesterFossil Free UK campaigners outside the office of Greater Manchester Pension Fund, a UK public pension fund, in July 2019This is arguably no surprise given developments such as the European Commission’s sustainable finance action plan in Europe, while the US, according to the Principles for Responsible Investment (PRI), is an exception to the growth in sustainable finance policy measures since 2000.Across all regions, outperformance emerged as a less significant ESG adoption driver than risk mitigation.Almost half of the surveyed investors (48%) felt their ESG/responsible investing strategy had a positive impact on the “ESG behaviour” of their investee companies or reduced ESG risks to their portfolio (47%).For respondents who noted fiduciary duty as their primary consideration, the next and highest ranked drivers – both at 40% – were requirements for ethical and social responsibility on behalf of their clients and a desire to mitigate ESG-related risks.Hurdles: data, resource constraintsThe survey, which was of senior executives directly involved in or influencing asset allocation decisions, also sought to delve into factors holding back ESG adoption.The chief deterrent selected by respondents across all investor types was unreliability and inconsistency of ESG data, although internal resource constraints/cost implications were a close second (44% and 43%, respectively).Pension funds were most concerned with a lack of reliable or consistent ESG research/data, according to the survey, while sovereign wealth funds and endowments and foundations cited internal resource constraints and cost implications as the top factor hindering increased uptake of ESG.A lack of expertise to integrate ESG factors appears to be problematic for pension funds in particular, with 45% citing this as a top three barrier compared with 21% of endowments and foundations, and 38% of sovereign wealth funds.SSGA surveyed senior executives with asset allocation responsibilities at more than 300 institutions, comprising private and public pension funds (78%), endowments (6%), foundations (11%) and sovereign wealth funds (5%).A spokesman for SSGA said that where the firm referred to ESG or responsible investing in the survey, it was describing “a deliberate investment approach that aims to incorporate environmental, social and governance (ESG) factors into investment decisions”. By a policy on ESG or responsible investment the company meant a formal code or set of guidelines adopted by a respondent’s institution that sets out its approach to responsible investing, including the objectives and scope of its responsible investment strategy.The SSGA survey report can be found here. Across all types of institutions, in Europe, regulatory shifts were the clear top “push factor” (52%), said SSGA, followed by a desire to mitigate ESG and reputational risks (45% and 39%, respectively). In North America, regulation was the third most significant driver. Avoiding reputational risk drives pension funds to adopt environmental, social and corporate governance (ESG) “principles” more so than it does other types of institutional investors, a survey suggests.More than one-third (35%) of pension fund respondents to the survey – carried out by State Street Global Advisors (SSGA) earlier this year – included reputational risk as a top three factor driving ESG investing at their institution, compared with 21% of endowment and foundation respondents, and 6% of sovereign wealth funds.“Reputational risk is of greater concern for pension funds, particularly public pension funds, because any public criticism of their portfolio allocation decisions often leads to additional scrutiny by their beneficiaries,” Rakhi Kumar, head of ESG investment strategy at SSGA, told IPE. “This could result in increased regulation or interference in the investment decision making process.”Meeting or anticipating regulation was the most significant driver of pension funds’ adoption of ESG principles, however, the survey showed, followed by mitigating ESG risks, and fiduciary duty.
Scientific Beta is lagging behind on one of the most important green finance developments in recent years, an independent member of the technical expert group (TEG) whose EU climate benchmark proposals were scathingly criticised by the smart beta index provider last week has said.One of a barrage of criticisms made by Scientific Beta was of the carbon exposure metric proposed by the TEG, whereby carbon intensity is calculated on the basis of a company’s Scope 1, 2 and 3 emissions divided by its enterprise value, including cash (EVIC).Criticisms of the metric included that it creates sector biases, is volatile and may render unworkable the self-decarbonisation requirement TEG has proposed for the climate benchmarks, and “does not do justice to issuer-level climate change efforts”.Describing the metric as “exotic”, Scientific Beta argued there was “no scientific or business basis” to use it instead of a widely-used version of weighted average carbon intensity (WACI) based on Scope 1 and 2 emissions and using revenues as the denominator. Scientific Beta said self-reported Scope 3 emissions data is too scarce and lacking in quality and consistency to support portfolio decision-making and that requiring Scope 3 emissions to be included in the carbon intensity calculation could lead to “disregarding the efforts made by companies to mitigate their greenhouse gas emissions”.Scope 3 emissions are all of an entity’s indirect emissions except those from purchased energy – for example, in the case of fossil fuel companies they include emissions produced when an individual drives an internal combustion engine car.‘Commercial self-interest’Andreas Hoepner, professor of operational risk, banking and finance at University College Dublin, is one of two members of the European Commission’s sustainable finance TEG who was appointed in a personal capacity and the only such individual on the benchmarks sub-group.Hoepner said: “It is stunning that Scientific Beta can write over 70 pages with 99 footnotes on EU green finance policy and fail to even mention the EU’s net zero 2050 aim, which was adopted last year.”“If they had taken the EU’s net zero 2050 aim as their starting point instead of their commercial self-interest, they might have come to a different conclusion on crucial aspects such as the Scope 3 emissions of the fossil fuel sector.”Asked what the TEG’s starting point was with regard to its work on the EU climate benchmark categories, Hoepner told IPE it was the Intergovernmental Panel on Climate Change’s 1.5°C warming trajectory with no or limited overshoot, which effectively meant carbon neutrality by 2050.The European Commission agreed on a 2050 net zero ambition in November 2018, with EU member states, except Poland, endorsing this goal late last year. “It is crucial for Scientific Beta and others to understand that fossil fuel Scope 3 emissions are the primary cause of climate change.”Andreas Hoepner, professor of operational risk, banking and finance at University College Dublin and member of the TEG Hoepner said: “Given the EU’s aim of achieving net zero by 2050, it is crucial for Scientific Beta and others to understand that fossil fuel Scope 3 emissions are the primary cause of climate change. They are the patient zero, to use a coronavirus metaphor.“Hence,” he continued, “fossil fuel scope 3 emissions have to be downsized significantly for the EU to achieve net zero by 2050. Repsol and possibly also BP seem to understand this, as do many asset owners and asset managers.“Scientific Beta has to understand this scientific reality too, if they want to gradually transform themselves into a leader in environmentally responsible investing.”EVIC denominatorHoepner said using revenue as the denominator for greenhouse gas (GHG) emissions biases the GHG intensity figure in favour of sectors such as coal, which are exposed to stranded assets when compared with market valuation-based denominators.“In my personal view, this can be considered greenwashing in favour of polluting sectors and is not aligned with the EU’s net zero 2050 objective,” he said.“The recent launches of EU Climate Transition or EU Paris-Aligned Benchmark concepts by index providers that were not part of TEG, such as Dow Jones S&P or Solactive, show that many of Scientific Beta’s competitors can work with our proposed denominator of EVIC.”“Scientific Beta appear rather desperate to avoid the costs of switching from revenue to EVIC,” he continued.The TEG’s final report on benchmarks is meant to provide the basis for the European Commission’s drafting of delegated acts specifying more detailed requirements in relation to the EU climate benchmark categories.Scientific Beta’s report can be downloaded here.GHG emission scopesThe GHG Protocol Corporate Standard classifies a company’s GHG emissions into three scopes:1. Direct emissions from owned or controlled sources2. Indirect emissions from the generation of purchased energy3. All indirect emissions not included in scope 2 that occur in the value chain of the reporting company, including both upstream and downstream emissions
The International Accounting Standards Board has cleared an amendment to its lease accounting standard, International Financial Reporting Standard 16, that it says will ease the burden on lessees during the COVID-19 pandemic.Under the terms of the quick-fix amendment, which will apply to lease payments made up until 30 June 2021 and was issued today, lessees do not need to reassess their leasing contracts for accounting purposes – a potentially time-consuming and costly process – where a lessor varies lease payments to take account of the pandemic.The IASB published an exposure draft setting out the proposals on a shortened two-week comment period on 24 April. The board also decided during the 15 May meeting to take no further action in relation to lessor accounting. IFRS 16 requires lessees to assess each lease at inception in order to identify and recognise a separate lease liability and so-called right-of-use asset. The standard also tells lessors that they must effectively repeat this process where the terms of the lease contract change.With the onset of the COVID-19 pandemic, a number of lessees have negotiated reductions in their lease payments – potentially triggering a reassessment of their leases.The IASB amendment now means that they will be able to ignore lease payment forbearance where it is linked to COVID-19, subject to certain disclosures about the profit or loss effect. Reactions to the proposal were mixed in the comment letters submitted to the board, some 15 of which arrived after the end of the 14-day curtailed comment period. The CFA Institute noted that the nuances and potential implications of the proposed amendment were “[t]oo many to fully, robustly consider and evaluate in the two-week exposure period.”The group went on to remind the board that investors need to be able to understand the cash effect of the rent concessions. Another investor group, the Corporate Reporting Users Forum, however, broadly endorsed the changes. FRC chair departure news disappointsThe UK’s Financial Reporting Council (FRC) has announced that its recently appointed chairman, Simon Dingemans, is to step down from his role after serving just seven months in the role.The department for business, energy and industrial strategy is to begin the search for a successor, the audit watchdog said in a statement.According to the statement, it “had not proved possible” for Dingemans to manage potential conflicts of interest arising between the part-time role of FRC chairman and other appointments in the private sector that he was keen to pursue.“Surely the key thing was appointing someone with the passion and commitment to make the position their major job and forgo other job offers if there were a conflict?”Sharon Bowles, former MEP and ECON chairSharon Bowles, former MEP and chair of the European Parliament’s economic and monetary affairs committee, told IPE: “This is really disappointing news. “The remit was to lead the FRC out of the disaster it had become. Surely the key thing was appointing someone with the passion and commitment to make the position their major job and forgo other job offers if there were a conflict?”Bowles, who herself applied unsuccessfully for the role last year, added that it was important for the public to understand fully the details of the compromise reached over potential conflicts of interest. She added: “Meanwhile, this is another setback for the FRC that raises serious questions about the quality of the appointment process.”ESMA cautions over COVID-19 P&L presentation Separately, the European Securities and Markets Authority has issued a public statement addressing a number of issues relevant to half-yearly interim financial reporting during the COVID-19 outbreak.In a bulletin, the watchdog notes in particular that disclosures that would normally apply to full year-end accounts could also provide useful information to users of accounts in upcoming interim financial statements in light of the pandemic.It also reminds issuers of the importance of providing financial information under the Market Abuse Regulation on a timely basis – despite current difficulties.Further, the ESMA bulletin calls for “caution” in the presentation of COVID-19 related items in the profit or loss account. ESMA notes such presentation “may not faithfully present issuers’ overall financial performance, position and/or cash-flows, thus being to the detriment of users’ understanding of the financial statements”.Investors have recently complained that the so-called EBITDAC – Earnings before interest, taxes, depreciation, amortisation, and coronavirus – performance measure amounts to massaging financial results because it adds back in the economic impact of the pandemic.In an updated guidance document on so-called alternative performance measures, the UK FRC notes that such measures “are likely to be highly subjective and, therefore, potentially unreliable.”‘Integrated reporting’ council launches consultationFinally, the Integrated Reporting Council has launched a 90-day public consultation on an update to its Integrated Reporting Framework. The IIRC framework, unlike a financial reporting model, sets out to capture how a business manages six so-called capitals for success, which it has identified as financial, manufactured, intellectual, human, social, and natural capital. As such, its supporters say its remit is wider than any model focused more or less on a single metric such as the Carbon Disclosure Project or the Sustainability Accounting Standards Board model.The exposure draft is open for comment until 19 August.Read morePensions accounting: A matter of survivalIf there is one thing defined-benefit (DB) scheme sponsors and trustees can be sure of this year, the COVID-19 pandemic is going to affect not only their ability to fund schemes but also how they account for them. Integrated reporting: Accounting goes sustainableCombining conventional financial reporting with non-financial reporting in a single integrated framework presents challengesLooking for IPE’s latest magazine? Read the digital edition here.
Romania’s mandatory second pillar pension funds returned -4.5% over the first four months of 2020, according to the Romanian Pension Funds’ Association (APAPR).The first quarter had seen returns for the €13bn-worth second pillar system slump to -6.7%.According to Mihai Bobocea, adviser to the board and spokesman for APAPR, 90% of the Q1 fall was caused by plunging equity markets, the Bucharest Stock Exchange falling by 24% over the period and the UK, German and French exchanges suffering similar falls.The remainder 10% loss was caused by short-term volatility in bond prices, as Romanian pension funds value all holdings on a mark-to-market basis. In fact, these bounced back into positive territory much sooner than the equity markets, Bobocea said. Bonds form the lion’s share of Pillar II portfolios, with 65% of assets in government bonds and a further 10% in other bonds, as at 31 March 2020. Listed equities made up 18.5% and UCITS 2.5% of portfolios at the same date, with the rest in bank deposits.But there was a significant recovery in April, and returns for the 12 months to 30 April 2020 were still positive, at 4%.Over the longer term, average annual returns for the three years to end-March 2020 were 2.2%, and 3% over the five years to that date.Bobocea told IPE: “We expect the recovery to continue, as the lockdown on the economy started being eased on 15 May.”Under the new “state of alert” which superseded the state of emergency, individuals may now move around their local neighbourhoods without an affidavit. Hotels, stores with direct access to the outside, dental surgeries and hairdressers’ salons have been allowed to reopen, although restaurants and bars remain closed, except for take-out services. Romania’s Financial Supervisory Authority (ASF) decided to temporarily lift some investment restrictions for pension funds, allowing them to invest more than 70% of their assets in government bondsWhile Bobocea said it is too early to measure how pension fund liabilities have been affected by COVID-19, he pointed out that liabilities are “insubstantial”. In any case, all second pillar funds are defined contribution schemes.Meanwhile, on 10 April 2020, the country’s Financial Supervisory Authority (ASF) decided to temporarily lift some investment restrictions for pension funds, allowing them to invest more than 70% of their assets – the previous ceiling – in government bonds.However, Bobocea said: “The asset allocation at end-March shows the 70% limit has not yet been breached, and pension funds seem to be treating this temporary lifting of restrictions more as a precautionary measure by the ASF.”Meanwhile, last January, Romania’s finance minister Florin Citu promised that the contribution rate for the second pillar would increase back to 5% in 2021, and ultimately to 6%, as specified when the second pillar was set up.This is in line with the government’s intention to strengthen private pensions by reversing some policies of its predecessor administration, run by the Social Democratic Party (PSD), which had reduced second pillar contributions to 3.75% in 2018, before losing power in October last year.However, in the light of the COVID-19 crisis, this move is now in the balance, given that the second pillar is funded by social insurance contributions, effectively from the government budget.Bobocea told IPE: “It is obvious that Romania’s economy and public finances, like all of Europe’s, will need to show a robust recovery and reconstruction before additional government spending will be possible.”To read the digital edition of IPE’s latest magazine click here.