German institutional investors seeking diversification should “take a close look” at listed real estate investment trust (REIT) vehicles, according to Dirk Söhnholz, chief executive at Veritas.Listed real estate has yet to form part of most German institutional portfolios, and with diversification hard to achieve via direct investment, the REIT structure offers investors an alternative route into property, Söhnholz said.The only other option, he said, was closed-end funds and German open-ended funds, which are much less liquid.REITs, he said, are not equity sector funds but a “separate asset class in its own right and not a short-term fad but a long-term necessity”. The main reason for institutional investors’ collective “inertia”, he said, has been the perception that REITs behave like equity sector funds, not as an alternative for exposure to real estate.“We are beginning to see increased interest from institutional investors in REITs,” Söhnholz said.However, Söhnholz acknowledged, drawing on his previous experience at institutional consultancy Feri, that there was “still a lot of convincing to do” if Germany were to emulate the Netherlands, where large pension funds are quite keen on listed real estate.Söhnholz also cited a 2012 Swiss Finance Institute study as the “most profound” analysis of the subject to date.The ‘Are REITs Real Estate?’ report states that “while the short-term co-movement between REITs and stocks is typically stronger than that between REITs and direct real estate, REITs are likely to bring a similar exposure to various risk factors as direct real estate into a long-horizon investment portfolio”.REITs are, the report said, are also expected to have similarly attractive diversification characteristics as direct real estate investment in the long term, at least in the US and UK, he said.Söhnholz noted that REITs and real estate equities were chosen from a global portfolio according to various quality and value criteria, with ESG and ‘extreme value-at-risk screening’ coming top of the list.Söhnholz said ESG was another area where German investors still “needed convincing”.“Now they accept it – if they are sure it does not cost performance,” he said. “But we are aiming to generate outperformance from this ESG screening.”Geographically, real estate REITs consist mainly of equities from the Asia-Pacific region – mostly Australia – and North America and the US, said Chris Jakobiak, portfolio manager at Veritas.European equities are also included, but “no stocks from either Germany or Austria have ever been selected – either because of a too-high tail risk or a shortfall regarding the ESG criteria,” Söhnholz said.He said this was unlikely to change in the near future.Veritas, meanwhile, is looking to offer a similar product for infrastructure as well as bespoke mandates for institutional investors.Pure core and basic infrastructure, such as grids and physical infrastructure, will be considered, rather than airlines or utilities, which are included by some infrastructure ETFs and are equities many investors already have in other portfolios, Jakobiak said.
Complementing the line-up are two leading academics: Julian Franks, professor of finance at the London Business School, and Debbie Harrison, a visiting professor at the Pensions Institute at London’s Cass Business School.The IPE Conference & Awards, now in their fourteenth year, reward excellence and innovation in Europe’s diverse and dynamic pensions sector and constitute Europe’s largest annual gathering of pension funds.With three brand-new categories this year – diversification, infrastructure and credit – the Awards continue to cover the most topical and challenging areas of investment for European pension funds.The deadline for entries is 12 September.Full details can be found here or by contacting Robert Watson on +44 (0)20 3465 9327 or at firstname.lastname@example.org. John Bruton, the Irish Taoiseach between 1994 and 1997, headlines the speakers at this year’s IPE Conference & Awards, which returns to the Hofburg Palace in Vienna on 20 November.In addition to serving as Ireland’s prime minister, Bruton was leader of the Fine Gael Party and played a leading role in the Irish Peace Process, which culminated in the Good Friday Agreement.He went on to serve as the European Union’s ambassador to the US until 2009, when he became chairman of IFSC Ireland, a private-sector body set up to develop the financial services industry in Ireland.Joining Bruton among the notable speakers at this year’s event are prominent European pension fund executives, including Christian Böhm of Austria’s small but innovative multi-employer scheme APK Pensionskasse, and Stefan Dunatov, CIO at Coal Pension Trustees, the investment body managing the £20bn (€25bn) belonging to the UK Mineworkers’ Pension Scheme and British Coal Staff Superannuation Scheme.
It also argued that any revised IORP Directive should focus on the activities of IORPs, not the underlying scheme.“It is often very difficult to establish a clear-cut distinction between DB and DC schemes anyway, as the features of the schemes vary between member states, and many schemes sit somewhere along a spectrum ranging from pure DC to pure DB,” it said.“For example, the distinction in the proposal between which information requirements should apply to DC scheme and DB scheme members, respectively, does not make sense.“Additionally, information requirements should be based not only at the pension scheme but also take into account the activities and risks borne by the IORPs.”The most recent draft of the IORP II Directive, published in late October, saw member states attempt to claw back responsibility for the risk-evaluation for pensions – the evaluation tool used to replace pillar one – leaving the European Insurance and Occupational Pensions Authority (EIOPA) without a role in setting standards. The revised IORP Directive should not seek to distinguish between defined benefit (DB) and defined contribution (DC) pension funds but instead simply examine the risks borne by individual IORPs, according to the European insurance association.PensionsEurope said it was difficult to establish a “clear-cut distinction” between the two types of pension arrangements due to the varying requirements according to member state law, and therefore questioned why information disclosure requirements – under the current IORP II draft only affecting DC schemes – should be limited to the one type of fund.Commenting on the IORP II draft published earlier this year, the association also took issue with pension funds no longer being subject to quantitative requirements – dropped when the first pillar of the revised Directive was discarded by internal markets commissioner Michel Barnier.The position paper said the decision raised concerns that IORP members would not be as protected against losses as their insurance saver counterparts, an argument repeatedly used by the insurance industry to call for an ‘even playing field’ for those providing retirement benefits.
To date, 40 schemes have applied for permission to do so.Klijnsma, however, pointed out in her letter to Parliament that pension funds could also amend their investment policies within their existing risk profiles by “exchanging risks” – reducing interest hedges against lower equity allocations, for example.In her opinion, a strategic investment policy also often provides the best opportunity to increase risk temporarily.She said adjustments to a given scheme’s pension plan – as well as changes in the allowed estimates for future returns – could provide additional options for tailor-made approaches.Klijnsma said pension funds without any shortfall could raise their risk profiles anyway, provided such a move tallied with participants’ attitude towards risk. The Dutch government has rejected pension funds’ requests for greater leeway on their ability to raise their risk profiles.In a letter to Parliament, Jetta Klijnsma, state secretary for Social Affairs, argued that any “additional margin” on risk would be neither necessary or desirable. The state secretary was responding to a survey conducted by regulator De Nederlandsche Bank (DNB), which explored the options for Dutch pension funds wishing to increase their risk profiles – particularly those lacking only the requisite financial buffers. With the introduction of the new financial assessment framework (nFTK) earlier this year, pension funds reporting a shortfall in reserves were given a one-off chance to adjust their portfolios.
Babson Capital Management is to combine its business with that of its subsidiaries Cornerstone Real Estate Advisers, Wood Creek Capital Management and Baring Asset Management into one firm under the Barings brand.The amalgamation of the businesses, which are all affiliates of the MassMutual Financial Group (a marketing name for the Massachusetts Mutual Life Insurance Company), will create an international, multi-asset investment manager with more than $260bn (€183bn) in assets under management, the companies announced jointly.Tom Finke, chairman and chief executive at Babson, said: “As a unified firm, we will be better able to deliver our diverse and global investment offerings to clients.”Finke will head up the new company whose headquarters will be in Charlotte, North Carolina in the US. David Brennan, meanwhile, chairman and chief executive of Barings for the last 14 years, will retire as planned this summer.The companies said they did not expect investment leadership to be changed at the combined firm because the the investment areas involved were complementary.But distribution and marketing capabilities will be combined to support the new company, they said.They expect the first phase of integration to be finished in the fourth quarter of 2016, subject to regulatory approval.The decision to use the Barings brand and logo for the combined company reinforces the “global aspect of the new firm, the diversified nature of its client base and the Barings heritage that dates back to 1762”, the companies said.Both brand and logo will be “refreshed to reflect the global nature of the new Barings and signify the unified platform of the affiliates,” according to the announcement.The Barings name stems from its origins within Barings Bank, a longstanding English merchant bank that collapsed in 1995. It had suffered huge losses from speculative investments in a high-profile scandal involving Singapore-based employee Nick Leeson.The bank was then sold to Dutch bank ING, which in 2005 sold the investment management activities of Baring Asset Management and the rights to use the Baring Asset Management name to MassMutual. Babson Capital Management, which focuses on corporate debt, has €82.8bn in assets managed on behalf of external institutional clients, according to end-2015 data collected by IPE, with €20.7bn of this for European clients.London-based Barings has total assets under management of €32.4bn, of which €23.1bn is for external institutional clients, according to IPE data.Of this, €6bn is managed on behalf of European institutional clients.Casey Quirk advised on the corporate restructuring.
“Investments are focused on Denmark, and our ambition with future vehicles is to expand them over time to the Nordics,” he said.The fund was set up to offer loan financing to real estate construction projects, providing an alternative to bank financing, Bisgaard-Frantzen said.It is focusing on smaller projects, typically providing loans of between DKK20m and DKK100m.“We lend the money via a special purpose vehicle (SPV), where the property and the liquidity are ringfenced, so we are in total control of all liquidity going in and out of the SPV,” he said.The loans are meant to provide up to 90% of the cost of a project, he said, which equates to a 75-80% loan-to-value ratio.The return on these loans is 12-13% a year, Bisgaard-Frantzen said.Although the risk of this type of lending is arguably high, Bisgaard-Frantzen said that, in practice, this was lowered by close monitoring of the lending, as well as the fund’s ability to get involved in projects should anything go wrong.“Because we are very close to these projects, we feel we are in control – also because of the fact we release the loans in tranches,” he said.“In the event of a default, we can go in and take control of the project, so we feel really confident our losses will be very limited if there are any at all.”Bisgaard-Frantzen has two ideas to expand the investments offered by Kinnerton, which received authorisation as an alternative investment fund manager in March 2016.The first of these is to expand into other Nordic countries providing property development loans, and the second is to provide second-lien commercial mortgages, typically at 50-85% loan-to-value at rates of between 8% and 9.5%, mainly to existing property owners.“The whole rationale is that, once Basel 3 is implemented, several of these loans will be unprofitable for banks to have on their balance sheet,” he said.He said interest from institutional investors in these types of fixed income investments was beginning to pick up particularly strongly right now.“With the current interest rate level, it is providing an alternative, and if you look at where we are in the credit cycle, we are convinced the level of defaults are acceptable if you are cautious or conservative in your underwriting,” he said.“Also, because of regulation, banks are unable to take on the projects the way pension funds and other investors can.” Nordea Life & Pension in Denmark is investing DKK500m (€67m) in real estate financing through a fund it launched alongside other investors.The fund aims to raise DKK2bn of capital from Danish and other European institutional investors.Nordea Life & Pension was one of the lead investors in the fund, Kinnerton Opportunistic Credit C, alongside the Danish investment adviser and the UK firm Kinnerton Credit Management, which expects to take over management of the fund subject to regulatory approval.Jens Bisgaard-Frantzen, chief executive at Kinnerton Credit Management, told IPE the fund had already raised DKK570m of its intended total of DKK2bn, and that pension funds made up the bulk of investors so far.
Come to Belgium! That was one of the main messages emerging from an industry event held by the Belgian occupational pension fund association in Brussels last week.The PensioPlus-organised seminar was dedicated to the opportunities for cross-border pension activity under revised EU pension fund legislation – the new directive on Institutions for Occupational Retirement Provision (IORP II).Boosting cross-border activity is a key objective of the directive.Attendees at the event were given a European Commission run-through of the genesis and meaning of the IORP II provisions on cross-border pension activity and transfers, and also heard a member state view courtesy of Luk Behets, legal adviser at the Belgian supervisor, the Financial Services and Market Authority (FSMA). The following two presentations, about ExxonMobil OFP and Resaver, showcased the establishment of cross-border pension funds in Belgium – the drivers behind these projects, the benefits and what is involved.Belgium has been keen to position itself as a, if not the, prime location for cross-border pension funds – or pan-European pension funds, as they are frequently also referred to.There are currently around 80 cross-border IORPs.That the Belgian regulator is a soft touch – the argument often heard from the Dutch – is “a total misconception”, said Ton van der Linden, business services manager and treasurer at ExxonMobil for the Benelux and chair of the ExxonMobil OFP, the cross-border IORP in Belgium.Asked to comment on the charge that Belgium’s bid to host cross-border pension funds rests on regulatory “arbitrage”, van der Linden said “it is a common misunderstanding in the Netherlands that the Belgian regulator is easy-going”.“I can assure you this is not the case,” he said.He said the two regulators had a different “attitude”, with the Dutch regulator – DNB – taking a more rules-based approach and offering “no flexibility at all”, and the Belgian regulator – FSMA – taking a more principles-based approach.ExxonMobil has cited financial-buffer requirements in the Netherlands as one of the reasons for wanting to relocate its Dutch pension scheme to Belgium.Van der Linden also said the Belgian regulator was “cheaper” than the Dutch one.He said ExxonMobil had also considered the UK and Luxembourg as potential sites for a cross-border pension fund but that the existence of the Pension Protection Fund (PPF) in the UK was a deterrent.As a strong company, ExxonMobil did not see much point in paying a premium to insure its fund against default, he said. The ExxonMobil cross-border fund is close to going live in early 2017 subject to “a few wrinkles being ironed out”.It obtained approval from the Dutch regulator, De Nederlandsche Bank, this month. IORP II leaderTom Feys, senior adviser on the financial sector in the Ministry of Finance, told delegates the Belgian government was aiming to be at the vanguard of EU member states implementing the new IORP Directive, just as it was among the “first movers” to transpose the previous directive back in 2006. It has established a task force to do this.Feys also reiterated the government’s commitment to promoting cross-border pension funds in Belgium, highlighting FSMA’s “open-minded, solutions-orientated” approach and a favourable tax regime as some of the attractive aspects.He said the finance minister, Johan Van Overtveldt [corrected], aimed to take advantage of every trip abroad to promote cross-border pension funds to multinationals.The Belgian government is going cold on the financial transaction tax (FTT) it has been negotiating with nine other EU member states, according to comments from Feys.He said the latest text from the European Commission failed to take into account the conditions of the Belgian government, such as pension funds and insurance companies being excluded from its scope, and that “there is also a growing concern, since Brexit” that going ahead with a tax that would only apply to 10 countries – not including neighbouring Luxembourg and the Netherlands – would “divert financial activity”.The Belgian government is of the view that this is contrary to the Capital Markets Union (CMU) project, and it is going to take this up with the Commission, according to Feys.“We are more and more convinced this should be done at the right level, meaning at least at the level of EU 28 – 27 – countries, or even at the OECD level, because it would distort competition in an incredible way,” said Feys.PensioPlus has argued strongly against the FTT, saying it would have a “devastating” impact on Belgian pension funds.The financial transactions tax was on the agenda of a meeting of member state finance and economy ministers in early December; a new proposal is awaited from the Commission but has yet to be released, IPE understands.
The PPF is actively increasing the amount of assets it runs in-house. In 2015 it hired Trevor Welsh to lead its liability-driven investment strategy, and Ian Scott joined from Barclays in 2016 as head of investment strategy. Earlier this year the fund brought in Tim Robson as head of alternatives.Barry Kenneth, the PPF’s chief investment officer, said: “Purna brings a wealth of experience and expertise, and will play a vital role as we continue to grow and evolve our investment function. Attracting professionals of Purna’s calibre to join our award-winning team is an endorsement of where we are going.”Aviva Investors – David Cumming was this week named CIO for equities at the asset management arm of UK insurer Aviva. He will join the firm on 2 January and assume responsibility for equity teams managing £69bn (€78.4bn). Cumming was head of equities at Standard Life Investments until March this year. He worked at SLI – which merged with Aberdeen Asset Management at the start of the year – since 1998.NZ Super – Adrian Orr, CEO of New Zealand’s sovereign wealth fund, has resigned to become governor of the Reserve Bank of New Zealand. He will leave in March after more than 10 years at the helm of the NZD37bn (€21.9bn) fund.Catherine Savage, chair of the Guardians of New Zealand Superannuation, which manages NZ Super, praised Orr’s “strong leadership, commitment to responsible investment and exceptional communication skills”. She added: “Adrian leaves the NZ Super fund in good heart, with a strong team and with an enviable track record of world class performance.”NN Investment Partners – The Dutch asset manager has hired Eric Verret as head of corporate loans within its alternative credit team, as it continues to grow its alternative credit expertise. Verret joins from GE Capital where he worked for 13 years, latterly as head of a team originating and structuring loans. He also worked as managing director for business development and capital markets, overseeing a fund jointly created by GE Capital and Abu Dhabi’s Mubadala Development Corporation.In addition, NN IP has appointed two independent external members to its alternative credit investment committee. Uwe Seedorf is chief credit and risk officer at GE Capital, where he has worked since 2001, while Hein Brand is a former CEO of ING Real Estate. They join existing investment committee members Han Rijken, Patrick den Besten and chair Gabriella Kindert.Actuarial Association of Europe – The AAE has announced the nine members of its new board of directors. Chaired by Thomas Béhar, president of France’s actuarial industry body, the board also includes Finland’s Esko Kivisaari as vice-chairperson and Denmark’s Kristoffer Bork, the previous chair of the board. Other members include Mária Kamenárová (Slovakia), José Manuel Medinhos (Portugal), Wilhelm Schneemeier (Germany), Kartina Thomson (UK), Falco Valkenburg (The Netherlands), and Lutz Wilhelmy (Switzerland).Jupiter Asset Management – Ash Ray has been appointed to the newly created role of head of governance research. Ray has worked at the UK listed asset manager for 10 years. In the new role, he will lead a team of governance analysts providing research and guidance on regulatory requirements and best practice, Jupiter said.Fulcrum Asset Management – London-based Fulcrum has hired Matthew Roberts from Willis Towers Watson to create a new alternative assets team. The Alternatives Group will invest in real assets and credit, according to the company. At Willis Towers Watson, Roberts was a portfolio manager for the Towers Watson Partners Fund and related strategies, and was previously in charge of the consultant’s multi-asset and multi-strategy hedge fund research teams.Andrew Stevens, Fulcrum chief executive, said: “Given our macro focus, clients are increasingly asking us for help with their real asset and credit allocations. These asset classes will continue to grow in their importance as investors diversify and strengthen their portfolios. Led by Matthew, the new Alternatives Group at Fulcrum will provide an attractive investment solution for our clients.”FMO – Jürgen Rigterink is to leave his position as chief executive of the €9.8bn Dutch development bank FMO as of 1 April, following his appointment as first vice president of the European Bank for Reconstruction and Development. During his nine years at the FMO, Rigterink helped launch the Climate Investor One fund and the bank platform Arise in co-operation with Norfund and Rabobank. During the search for a new CEO, FMO’s chief investment officer Linda Broekhuizen and chief risk and financial officer Fatoumata Bouare will be in charge of daily management.Deutsche Asset Management – The German asset manager has hired Michele Gaffo to lead its insurance coverage from 1 February. He joins from PosteVita Insurance Group in Italy, where he was chief investment officer. He was previously CIO of Allianz Italy and has also lead Allianz’s asset-liability management operations in Munich.Fidante Partners – The investment manager has appointed Joachim Klement as head of investment research, based in London. He is currently chair of the board of trustees for the CFA Institute Research Foundation, and was until recently head of thematic research at Credit Suisse. He has also worked as CIO at Swiss consultancy Wellershoff & Partners, and as head of strategic research and equity strategy at UBS.The Investment Company Institute – ICI Global, the international arm of the US asset management industry body, has appointed Jennifer Choi as chief counsel. She was previously associate general counsel for global capital markets policy at ICI, playing a leading role in the group’s work on MiFID II compliance. In her new role she will lead the ICI’s global policy work on cross-border legal and regulatory matters, the association said.M&G Investments – The £275bn asset manager has hired Oliver Wilson as head of asset-based lending in its direct lending team. He joins from Royal Bank of Scotland’s asset-based lending team where he was a member of its management board and head of operations in London and the south.Axiom Alternative Investments – The French investor has appointed Samuel Laidi as risk controller and Mariya Peykova as marketing manager. Both are based in Paris. Laidi joins from Phileas Asset Management where he held a number of roles including compliance controller, risk controller and head of middle office. Peykova joins from HSBC.OppenheimerFunds – Patrik Silfverling has been appointed head of the Nordics and Benelux at OppenheimerFunds, based in Stockholm. He will be responsible for growing the firm’s sales and distribution with institutional and high-net-worth clients in the regions. He joins from Franklin Templeton where he was director and head of the Nordics. OppenheimerFunds recently opened a new office in London and hired Dicken Watson as EMEA COO. ATP, PPF, Aviva Investors, NZ Super, NN IP, Actuarial Association of Europe, Jupiter, Fulcrum, FMO, Deutsche AM, Fidante Partners, ICI, M&G, Axiom, OppenheimerFundsATP – Torben Andersen, professor at the Department of Economics and Business Economics at Aarhus University, has been nominated by ATP’s supervisory board as its new chairman, following the resignation of current chairman Jørgen Søndergaard after 15 years in the role. The election will take place at a meeting of the pension fund’s board of representatives on 7 February next year.Andersen has held many official roles in the Danish pensions and welfare sector. He was notably chairman of the Pension Commission, which was set up by the last Social-Democrat government in the summer of 2014 with a view to system reforms. It was then disbanded by the centre-right Venstre-led government a year later under the current prime minister Lars Løkke Rasmussen.PPF – The UK’s Pension Protection Fund – the lifeboat scheme for defined benefit funds – has hired a head of credit as it continues its insourcing drive. Purna Bhudia joins from Legal & General Investment Management where she was a senior credit analyst. At the PPF, Bhudia will help expand the investment team’s capabilities within sterling investment grade credit.
Average-rate pension plans received a 0.9% return in the first half, and PFA’s pre-tax total return related to average-rate products was 0.5%.However, PFA has seen an influx of new business since the end of last year, gaining 237 new corporate customers and 39,000 private customers, according to the interim financial report.Regular contributions were up 7% from the same period last year, the firm said.Allan Polack, PFA’s group chief executive, said he was pleased with the results even though the financial markets had been particularly challenging.“The fact that our contributions are increasing by 7% is great in a mature market and proves that we are able to gain market share and that the customers have confidence in PFA’s ability to generate more value for their savings,” he said.He said PFA’s increased focus on unlisted assets had proved advantageous in challenging markets. Alternative investments contributed a 1.6% return in the first half, while real estate gained 4.3%.“This is an area we anticipate will generate high returns going forward,” Polack said.PensionDanmark ekes out return in first halfMeanwhile, labour-market fund PensionDanmark, which mainly covers blue-collar workers, also described the first half as “challenging”. Torben Möger PedersenThe pension fund reported a slight increase in regular premiums, to DKK6bn from DKK5.9bn in the same period last year, and a small positive investment return of DKK1.1bn before tax – translating into a 0.5% gain for 40-year-old scheme members and 0.6% for those aged 65.The pre-tax return for average-rate products was 0.8%.The highest contributions to PensionDanmark’s total investment return came from real estate at 4.4%, private equity with 4.2% and infrastructure which generated 2.7%.Torben Möger Pedersen, chief executive of the Copenhagen-based pension fund, said: “The half-year has been challenging with moderate investment returns close to zero for both equity and bonds alongside with substantial fluctuations, especially in share prices.”Total assets rose to DKK239.7bn at the end of June from DKK 224.1bn 12 months earlier.Membership numbers climbed to 721,000 at the end of June, from 705,281 at the same point in 2017.Möger Pedersen said the 1.9% increase in ongoing premiums indicated “continued positive development in employment for our members”. Two of Denmark’s largest pension funds struggled to generate returns in the first half of the year, according to their interim reports.PFA, the country’s largest commercial pension fund, reported a slim overall profit on its investments in the first half, leaving some customers with losses.The total return on investments was DKK838m (€112.4m) in the January-to-June period, down from DKK9.5bn in the same period last year. Total assets reached DKK718bn at the end of June, up from DKK622bn.Pre-tax market rate returns amounted to between -0.5% and zero, PFA reported, with these figures inclusive of the “CustomerCapital” share of profits that, as a mutual company, PFA passes on to its savers.
“As suggested by other commentators, alternative ways of arriving at a valuation of technical provisions are open to USS and should be explored,” the JEP’s report said.The panel questioned one of the key building blocks of the controversial 2017 valuation – which resulted in proposals to close the defined benefit section of the scheme, prompting nationwide industrial action. A panel of experts scrutinising the valuation of the UK’s biggest pension scheme has recommended a series of changes that could reduce its reported deficit significantly and cut planned contribution increases.The Joint Expert Panel (JEP) – appointed earlier this year to assess the 2017 valuation of the £64.4bn (€73bn) Universities Superannuation Scheme (USS) – yesterday published its first report, in which it argued that the scheme had been too cautious with assumptions used to value its liabilities and set contribution levels.The panel also criticised the Pensions Regulator (TPR) for not recognising the collective strength of the 350 higher education establishments that sponsor USS. This had also encouraged an overly cautious approach as USS’ trustee board worked to keep the scheme in line with changing regulations.According to the report, the expert panel’s suggestions, if implemented, could result in combined contribution levels rising from 26% of salary to 29.2%, a significantly smaller rise than under USS’ current plan, which will see the contribution rate hit 36.6% in 2020. Source: University of SouthamptonUniversity of Southampton, one of USS’ 350 sponsoring institutionsA test that informed the future investment strategy and discount rate for the scheme was given too much weight and had been used as “a constraint on benefit design and a driver of investment strategy”, according to the panel.The test used by USS – part of which involved a detailed survey of the 350 employers – drove the scheme towards a low return investment strategy “that results in a higher deficit and higher contributions than would be the case if the current investment strategy were maintained”, the panel said.It questioned whether employers’ appetite for risk had been assessed appropriately, saying that the way in which it had been applied through this test had contributed to the adoption of strong risk aversion.More risk-taking possible The panel argued that the unique features of USS and the higher education sector had not always been consistently considered, either by TPR or by USS itself.“In particular, the panel believes that insufficient weight has been given to the fact that USS is a large, open, immature scheme which is cashflow positive and cap adopt a very long-term time horizon.“By giving this strength and diversity a greater weight, the panel believes that the trustee and the employers may be able to agree a larger risk envelope.”“Our observations, conclusions and recommendations are intended to be constructive and should be read in that spirit.”Joanne Segars, chair of the joint expert panel The scheme is three years into an investment strategy that is set to de-risk the portfolio over the course of the next 20 years.The report unanimously recommended “four areas where adjustments to the valuation should be considered”:re-evaluating employers’ attitude to risk;adopting greater consistency between the 2014 and 2017 valuations;smoothing future service contributions to ensure fairness and equality between generations of scheme members; andensuring the valuation used the most recently available information, such as the latest data on mortality.Joanne Segars, the expert panel’s chair, emphasised that the JEP – unlike the trustee – had had the luxury of the benefit of hindsight and had not sought to be critical of any party involved in the valuation.“Our observations, conclusions and recommendations are intended to be constructive and should be read in that spirit,” she said.ReactionsUSSThe scheme for the higher education sector said that the solutions proposed by JEP reflected its terms of reference, but would require employers to take on higher levels of risk and pay higher contributions “than has been expressed to us to date, through the valuation process”.“There may well be areas where our opinion and understanding differs from that of the panel, but we will want to reflect on the report in due course,” it said.It reiterated its hope that the JEP report could provide the basis for employees and universities to agree a way forward, but said that “unless and until alternative has been agreed, consulted upon, and implemented”, the move to higher contributions under its current cost-sharing process would continue.UCUThe trade union’s general secretary Sally Hunt hailed the report as “a significant landmark in our ongoing campaign to defend members’ pensions”.“We welcome the JEP’s proposal that the valuation should be adjusted and are also encouraged that the panel now wishes to look in detail at alternative methods for future valuations,” she added.UUKUUK said it would start to consult with scheme sponsors next week on their views on the panel’s recommendations to inform talks with UCU and the USS trustee.“This will include examining employers’ willingness to accept greater levels of risk and to pay more into the scheme than their current contribution level of 18% of salary,” said Alistair Jarvis, UUK chief executive.The full JEP report can be downloaded here.