focus on the future: designing tomorrow's pension plan - State Street

FOCUS ON THE FUTURE: 

DESIGNING TOMORROW’S 

PENSION PLAN 

PUBLISHED BY 

FEBRUARY 2013 

This report, commissioned by State Street, takes a holistic look at the needs of pension plans, pension sponsors, 

trustee groups and life insurers as they adapt their organisation to modern-day challenges. 

Sponsored by 

This report features data from the State Street 

Survey of European Pension Funds conducted 

by the Economist Intelligence Unit.

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This document is for marketing and/or informational purposes only, it does not take into 

account any investor’s particular investment objectives, strategies or tax and legal status, nor 

does it purport to be comprehensive or intended to replace the exercise of an investor’s own 

careful independent review regarding any corresponding investment decision. This document 

and the information herein does not constitute investment, legal, or tax advice and is not a 

solicitation to buy or sell securities or intended to constitute any binding contractual arrangement 

or commitment to provide securities services. The information provided herein has 

been obtained from sources believed to be reliable at the time of publication, nonetheless, we 

cannot guarantee nor do we make any representation or warranty as to its accuracy and you 

should not place any reliance on said information. 

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CONTENTS 

Focus on the Future: Designing Tomorrow’s Pension Plan 

06 Foreword – State Street 

Shifting Sands: Turbulent Times for European Pension Funds 

09 Section 1 

Developments in investment strategies to meet liabilities 

10 1.1 White Paper 

How to develop the most suitable asset blend and investment 

selection to diversify your portfolio and meet liability needs 

Chirag Patel – State Street, Raymond Haines – State Street 

Global Advisors, Steve Carrodus – Pitman Trustees, 

Henrik Olejasz Larsen – Sampension 

13 1.2 Roundtable 

Is investment strategy within the DC environment constrained by 

poor member communication and contributions — or is there simply 

a shortage of investment products that members can believe in? 

Derek Rushton – Virgin Media Pensions, Steven Robson – 

United Utilities Group PLC, Philip Mendelsohn – Atkins Ltd 


Strategies for managing funding gaps and tackling shortfall as 

an active response to low market returns 

Raymond Haines – State Street Global Advisors, Don Hanson – 

University of Manchester Superannuation Scheme, Anne Broeng – 

PFA Pension, Ingrid Albinsson – AP7 


Managing risk, return and cash fl ow in a volatile environment 

Philip Mendelsohn 

Director of Corporate Pension 

Plan Trustees, Atkins Ltd 

Ingrid Albinsson 

Head of Strategy, AP7 

Gustaf Hagerud 

Head of Asset Management 

and Deputy CEO, AP3 


How do pension schemes balance the <strong>focus</strong> on long-term confidence 

in asset allocation strategies vs. short-term reactions to market dips? 

Peter Griffin – Allied Pension Trustees, Chirag Patel – State Street, 

Pieter Westland – Blue Sky Group, Niall O’Leary – State Street 

Global Advisors 

31 2.2 Case Study 

How are Swedish pension schemes creating long-term confi dence 

in their asset allocation strategies while reacting positively to shortterm 

market dips? 

Gustaf Hagerud – AP3 

Chris Verhaegen 

Chair, Occupational Pensions 

Stakeholders Group, EIOPA 

FOCUS ON THE FUTURE: DESIGNING TOMORROW’S PENSION PLAN • 3


Developing technology and operational structures to compete 

in the age of data 

Paul Todd 

Head of Investment Policy, 

NEST 


What operational strategies, tools and processes can be adopted 

to improve risk mitigation? 

Niclas During – CDC Group, Peter Kohler Lindegaard – Danica 

Pension, Niels Hagemans – State Street 

39 3.2 White Paper 

Pension Funds: The Data Challenge 

Jeff Conway – State Street 


Challenges of current and future regulation: creating robust 

compliance and governance 

Guus Warringa 

Board Member, Chief Counsel, 

APG Asset Management 


As regulatory complexity increases — both at a local level and 

Europe-wide — how can you build a rigorous compliance framework 

that satisfi es regulators while enhancing member protection? 

Alan Pickering – BESTrustees, Christian Boehm – APK Pensionskasse, 

Sven Kasper – State Street, Chris Verhaegen – EIOPA 

50 4.2 Interview 

Innovate for success: How are UK government initiatives driving 

a new model for pension provision? 

Paul Todd – NEST 

Tim Caverly 

Executive Vice President, 

State Street 

54 4.3 Case Study 

How are Dutch pension schemes delivering a rigorous 

compliance framework? 

Guus Warringa – APG Asset Management 


Meeting objectives across markets 

Expert Debate 

What are the challenges and opportunities for pensions operating 

as multinational plans? 

Tim Caverly – State Street Global Services, Nikolaus Schmidt- 

Narischkin – Deutsche Asset Management 

Nikolaus Schmidt-Narischkin 

Managing Director and 

Head of Fiduciary Management, 

Deutsche Asset Management 

62 EU trends: 

What is the future for pension funds? 

Country profiles: 

62 Netherlands 

Gerard Riemen – Federation of the Dutch Pension Funds 

65 Norway 

Rolf Skomsvold – Norske Pensjonskassers Forening 

67 United Kingdom 

Mel Duffield – National Association of Pension Funds (NAPF) 

4 • FOCUS ON THE FUTURE: DESIGNING TOMORROW’S PENSION PLAN

TAKE 

CONTROL 

87% of pension funds believe that governance demands will escalate 

over the next five years. 

With the changing dynamics of the financial industry, access to experts who have a 

clear view of the future has never been more important. State Street’s thought leadership 

provides insight into the markets, themes and trends shaping our world. For the findings 

of the State Street European Pension Study conducted by the Economist Intelligence Unit, 

see the Foreword of this report. 

statestreet.com/vision 

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and services outlined herein are only offered to professional clients or eligible counterparties. State Street Bank and Trust Company, London Branch, is authorised and regulated by the Financial Services 

Authority, details of which are available from us on request. 

This document is for marketing and/or informational purposes only, it does not take into account any investor’s particular investment objectives, strategies or tax and legal status, nor does it purport to be 

comprehensive or intended to replace the exercise of a client’s own careful independent review regarding any corresponding investment decision. This document and the information herein does not constitute 

investment, legal, or tax advice and is not a solicitation to buy or sell securities or intended to constitute any binding contractual arrangement or commitment by State Street to provide securities services. The 

information provided herein has been obtained from sources believed to be reliable at the time of publication, nonetheless, we cannot guarantee nor do we make any representation or warranty as to its accuracy 

and you should not place any reliance on said information. The forecasted information in the document is not a reliable indicator for future performance. State Street Bank and Trust Company London Branch 

hereby disclaims all liability, whether arising in contract, tort or otherwise, for any losses, liabilities, damages, expenses or costs arising, either direct or consequential, from or in connection with the use of this 

document and/or the information herein. 

This communication is not intended for retail clients, nor for distribution to, and may not be relied upon by, any person or entity in any jurisdiction or country where such distribution or use would be contrary 

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©2012 STATE STREET CORPORATION 12-16112-1212

FOREWORD – STATE STREET 

Shifting Sands: Turbulent Times for European Pension Funds 

The data featured in this article comes from the State Street European Pension Study conducted by the Economist Intelligence Unit. 

Responses were received from 150 DB and DC schemes in Germany, Italy, Netherlands, Switzerland, UK and the Nordics. 

The global economic crisis, longer-term trends around longevity, and pressure 

for tighter regulation and risk management procedures are converging to create a 

challenging environment for European pension funds — and inspiring a search for 

new solutions. 

There is little doubt that the current environment for 

European pension funds remains tough. Schemes 

are battling to combat high defi cits and a low-yield 

environment in many asset classes. 

These, however, are not the only headaches keeping 

fund managers awake at night. Increased longevity, 

accompanied by the acceleration in the move from 

defi ned benefit (DB) to defined contribution (DC) 

schemes, and individuals increasingly choosing 

or being forced to work much longer throughout 

Europe is having an impact on the future structure 

of the industry. Meanwhile, regulatory changes such 

as the review of the Institutions for Occupational 

Retirement Provision (IORP) Directive — with 

a potential read-across to pension funds of the 

Solvency II requirements for insurance firms — are 

also contributing to a changing landscape. 

To understand more about the pressures and 

expectations placed on European pension funds, 

State Street commissioned in-depth research with 

schemes from across Europe, including a survey 

of 150 European pension funds conducted by the 

Economist Intelligence Unit. 

Funding Gaps — the No. 1 Concern 

Drawing on responses from six European markets, 

this research identifi ed a number of key trends 

and concerns. 1 Not surprising, the main challenge 

identifi ed was closing funding gaps during a period 

where low returns have become expected. Some 

75 percent believe ongoing funding challenges 

will see more DB schemes close, while 69 percent 

think national governments will take aggressive 

action to help close the gap in retirement savings. 

From an investment perspective, some 60 percent 

of DB respondents suggest they will look at 

increasing their exposure to alternative strategies 

over the next three years, with a similar number 

likely to hone in on emerging markets. Our insights 

indicate that this trend is particularly strong in areas 

such as the Netherlands and Nordics, although 

less pronounced in countries such as the UK and 

Germany. Encouragingly, however, there is a degree 

of optimism that the funding challenge can be overcome: 

62 percent say they think funding levels will 

improve over the next fi ve years. 

1 The State Street European Pension Study was conducted by the Economist Intelligence Unit during October 2012. Responses were received from DB and DC schemes in Germany, 

Italy, Netherlands, Switzerland, UK and the Nordics. All of the data contained in this article comes from this study. 


Risk Challenges Driving an Improvement in Transparency 

Managing risk, while simultaneously attempting to 

reduce defi cits, is another challenge for pension 

funds. The majority of schemes (73 percent) 

already say demands from internal governance and 

risk management functions are diffi cult, with a third 

(33 percent) describing this as a “signifi cant challenge”. 

This scrutiny is only likely to become more 

intense in the future. Some 62 percent believe 

corporate CFOs will become more involved in the 

running of their organisation’s pension schemes 

over the next five years — a trend exacerbated by 

accounting changes and other factors that impact 

the overall company balance sheet. 

Central to the issue of managing risk is that of data. 

Only 60 per cent of respondents from DB plans 

currently feel they have access to suffi cient portfolio 

data to allow them to understand their total risk 

exposure, and just 42 percent of such schemes 

say they have enough information to be able to gain 

an insight into their total investment costs. Despite 

this, some 79 percent of respondents predict there 

will be an improvement in pension transparency 

over the next five years, as investors seek better 

information on which to base retirement decisions. 

Regulation: A “Challenge” for Nearly 80 Percent of 

Pension Funds 

Regulation and compliance is also a major concern. 

The past few years have seen a wave of new rules 

and procedures, many of which were introduced 

as a response to the global financial economic 

crisis. Measures such as Solvency II, Basel III and 

the Markets in Financial Instruments Directive 

(MiFID) have all directly or indirectly impacted 

European schemes, while US regulations such as 

the Dodd-Frank Act and the Foreign Account Tax 

Compliance Act (FATCA) also have implications. 

One-third of scheme respondents say it has been 

diffi cult to keep pace with the amount of regulatory 

changes that have been implemented since 

the fi nancial crisis, with 79 percent highlighting 

demands from regulators and ratings agencies as 

a challenge. The expectation is that such scrutiny 

is only likely to become more intense. Eighty-seven 

per cent believe governance demands will increase 

over the next fi ve years. 

Focus on Operational Efficiency 

Other concerns are closer to home. The fi nancial 

crisis resulted in schemes themselves coming 

under pressure to become more effi cient, and 

two-thirds report feeling under constant pressure 

to cut their operating costs (see Figure 1). Many 

multinational plans (63 percent) also highlighted 

diffi culties in maintaining consistency in administration 

platforms across markets as an area with 

which they struggle, with 27 percent seeing this as 

a signifi cant challenge. 

Such internal pressures could lead to a new wave 

of interest in outsourcing. Seventy-six percent 

of respondents believe smaller funds will look to 

increase the amount of activity undertaken by a 

third-party provider — including that of fi duciary 

responsibility — over the next fi ve years. 

While the above themes were commonly referenced 

by schemes across Europe, our research 

highlighted differences in emphasis among countries. 

In the Netherlands, nearly half of respondents 

(48 percent) regard demands from regulators 

and rating agencies as a “signifi cant challenge”, 

while German and UK pension funds consider 

the requirements of internal governance and risk 

management functions as the primary challenge. 

Amid the current tough environment, respondents 

are candid about potential operating effi ciencies. 


While only 44 percent of Nordics plans say there 

is scope to reduce costs further, this figure rises 

to 56 percent in the UK and 76 percent in 

the Netherlands. 

62% 

of European pension schemes think funding levels will 

improve over the next five years 

2013: A Year of New Approaches 

Given the tumultuous upheaval that has taken 

place within fi nancial services and the global 

economy as a whole over the past few years, it 

is perhaps unsurprising that pension funds begin 

2013 with more than a degree of trepidation. Longterm 

trends and shorter-horizon pressures are 

combining to create powerful forces that will have 

a lasting impact on the European pension horizon, 

and those funds that can react with new solutions 

and approaches will inevitably be best placed to 

prosper in the new landscape. 

For schemes today, operational effi ciency and 

rigorous data management and governance 

structures are essential, particularly as they seek 

greater consolidation and oversight of multiple local 

country plans. Meanwhile, funds will need to better 

understand the drivers of performance through 

79% 

of European pension schemes report that demands from 

regulators and rating agencies are a challenge 

more advanced analytics tools when it comes to 

managing volatility, reducing risk and defi cit, and 

delivering strong returns in the wider economic 

environment. As pension funds tackle these issues, 

State Street is committed to supporting the industry 

and helping to drive the next stage in its evolution, 

through a combination of proven expertise in this 

sector, sophisticated tools and solutions, and our 

deep understanding of European markets. 

Figure 1: Operational Priorities for European Pension Funds 

Our cost structure is in line with the rest of the industry 

There is still scope to reduce our operating costs 

There is consistent pressure to reduce our costs further 

We conduct cost reviews frequently 

1% 6% 36% 39% 

6% 15% 39% 17% 

5% 9% 37% 29% 

3% 11% 35% 31% 

40% 20% 0% 20% 40% 60% 80% 

Strongly disagree 

Somewhat agree 

Somewhat disagree 

Strongly agree 

Source: State Street European Pension Study conducted by the Economist Intelligence Unit. 


SECTION 1 

Developments in investment strategies to meet liabilities 

1.1 WHITE PAPER 

How to develop the most suitable asset blend and 

investment selection to diversify your portfolio and 

meet liability needs 

1.2 ROUNDTABLE DEBATE 

Is investment strategy within the DC environment 

constrained by poor member communication and 

contributions — or is there simply a shortage of 

investment products that members can believe in? 


Strategies for managing funding gaps and tackling 

shortfalls as an active response to low market returns 



How to develop the most suitable asset blend and investment 

selection to diversify your portfolio and meet liability needs 

Chirag Patel 

Head of State Street Associates 

EMEA 

Raymond Haines 

Head of European Strategy and 

Research, Investment Solutions Group, 

State Street Global Advisors 

Steve Carrodus 

Director, PTL 

Henrik Olejasz Larsen 

Chief Investment Offi cer, 

Sampension 

As they look to the future, pension funds find 

themselves facing strong headwinds. With their 

attention <strong>focus</strong>ed on measures to address potential 

funding gaps, pension scheme sponsors must also 

heed evolving standards for managing risk against 

returns while successfully clearing higher regulatory 

hurdles. 

In the debate over plan design, concerns about 

portfolio diversifi cation and tactical asset selection 

inspire a range of perspectives, as the following 

interview excerpts illustrate, representing the views 

of Raymond Haines, Head of European Strategy 

and Research, Investment Solutions Group, State 

Street Global Advisors; Chirag Patel, Head of the 

EMEA Regional Offi ce, State Street Associates; 

Steve Carrodus, Director of PTL (Pitmans Trustees, 

Ltd.); and Henrik Olejasz Larsen, Chief Investment 

Offi cer, Sampension. 

Existing vs. “new” asset classes 

A central question in this debate is the extent to 

which pension scheme sponsors should consider 

further hedging their risk by shifting from traditional 

to “new” asset classes in light of recent 

developments such as the Eurozone crisis. Haines 

observes that the question is not so much “about 

new asset classes, but more about taking different 

approaches to existing asset classes including 

thinking about strategies that are more risk aware, 

while also taking into account the risks of the 

past few years. For example this means potentially 

moving away from market cap weights and 

benchmark indices into areas that actually refl ect 

the underlying risks of the underlying credit.” 

Patel agrees, adding, “It is not so much new asset 

classes that are attractive as a result of the Eurozone 

crisis but, more importantly, the lesson learnt that 

schemes should have greater asset diversifi ca- 

Pension scheme 

sponsors should consider further hedging their risk by 

shifting from traditional to “new” asset classes 

Raymond Haines, State Street Global Advisors 


tion.” At the same time, Larsen notes that “from a 

European standpoint, emerging markets still seem 

attractive...in relation to equity, debt and less liquid 

assets like infrastructure or private equity.” In addition, 

he says, increasing securitisation in response 

to efforts toward recapitalisation by Europe’s banks 

“could present new alternatives to the lower-end 

risk of one’s portfolio.” 

While a shift toward alternative assets is evident, 

there is a variety of opinion on which asset classes 

are most likely to support pension schemes in their 

core objectives. Carrodus says the <strong>focus</strong> should be 

on “a combination of strategies to look for better 

growth and avoid defaults in the bond market.” 

On a per-unit-of-risk basis, Larsen points to bank 

debt, “with a little credit risk but low liquidity,” 

and asset classes such as private equity (versus 

public), “having a lower risk in the future while 

retaining a substantial premium to more liquid 

alternatives.” For Patel, the importance of taking 

“a holistic approach with a long-term investment 

horizon” rules out <strong>focus</strong>ing on one particular asset 

class, although he suggests “a case to be made for 

tactical allocations away from [the] long-term strategic 

asset allocations which have historically been 

held by most pension plans.” 

Yet even as they seek to diversify, funds fi nd themselves 

impeded on the regulatory front. “One of 

the greatest challenges is that diversifi cation is 

currently very expensive from a regulatory perspective,” 

says Patel. “Liquidity constraints are also a 

challenge.” Overall, says Haines, “the regulatory 

structure is making it more diffi cult for pension 

Emerging markets 

still seem attractive...in relation to equity, debt and 

less liquid assets like infrastructure or private equity 

funds to achieve their underlying objectives.” In 

addition, reports Larsen, “the uncertainty around 

Solvency II is limiting our capacity to make longterm 

commitments.” 

In any event, says State Street’s Haines, “the question 

of [assessing] the risks and dangers of so-called 

‘new asset classes’ remains vital.” What “vogue 

asset classes, such as infrastructure” may offer “in 

principle, is more diffi cult to achieve in practice.” 

These asset classes also call for greater governance 

and management resources, as in the case of 

bank debt, for example. Although, says Patel, “the 

internal expertise to thoroughly understand what 

such exposures entail” may be lacking, industry 

expertise does exist to help investors understand 

precisely what these allocations mean, for example 

by tracking how capital requirements governing 

private equity may affect a fund’s liquidity risk. 

Tactical asset allocation: Striking the balance 

While tactical asset allocation plans for pension 

funds vary, there is general agreement about 

useful guiding principles in today’s environment. 

For Haines, this means starting with a strategic 

asset allocation fi rst and “establishing a glide 

path and considering the amount of risk budget 

you have. Then move to hedge those unrewarded 

risks within the portfolio.” He says the next step 

would be tactical allocation within the context of 

the market’s risk appetite. Carrodus points out 

the importance of “a more dynamic asset allocation 

strategy” that addresses particular risk areas 

while allowing managers “wider ranges within 

which they can work [to] infl uence issues on a 

tactical level.” Larsen emphasises a preference 

for “more rule-based strategies as well as more 

discretionary, dynamical tactical allocation strategies,” 

a view echoed in Patel’s support for reliance 

Henrik Larsen, Sampension 


on “systematic rule-based approaches” complemented 

by pursuing alpha through differentiating 

across “multiple risk factors at play”. 

As pension scheme sponsors consider paths to 

diversifi cation that can provide this balance of risk 

and return, they face the question of how large a role 

to assign asset classes such as equities, especially 

in light of recent volatility. “Equity,” says Haines, 

“is the cornerstone of the return-seeking portfolio.” 

Patel agrees, but “make[s] a distinction between 

public and private equity. Public equity should be 

the cornerstone of the surplus return-seeking positioning 

in any portfolio.” For Carrodus, the volatility 

of equity markets in recent years makes it “more 

popular to look at diversifi ed growth funds. A lot 

of these will have equities but with a much lower 

allocation than you might have had previously, 

and there is much more diversifi cation with other 

assets.” At the same time, Larsen observes that, as 

“many funds have seen their capacity to take risks 

depleted,” portfolio construction should be aware of 

the drastic recovery measures that signifi cant equities 

losses can invite. 

Gilts 

will continue to be an important 

part of pension assets 

Chirag Patel, State Street 

While Carrodus believes schemes will look to switch 

between the different types of matching assets as 

opportunities arise, he foresees that “there will 

always be room for gilts within a DB portfolio.” Even 

as the diversifi cation and asset selection landscape 

grows more complex, effective pension scheme 

design more than ever holds the key to the future. 

“Overall it is currently a very difficult environment 

for growth assets,” says Carrodus, who suggests a 

<strong>focus</strong> on “trying to spot opportunities in individual 

stocks rather than overall asset classes.” 

Gilts also pose issues for UK funds, given their 

current low-yields. Patel anticipates that “gilts 

will continue to be an important part of pension 

assets, perhaps in terms of their relative weights, 

compared to the current allocations” since “their 

core function...is to hedge liabilities that are often 

linked to similar durations.” Larsen expects gilts to 

“play a smaller role”, in view of their low returns. 



Is investment strategy within the DC environment constrained by 

poor member communication and contributions — or is there simply 

a shortage of investment products that members can believe in? 

Moderator 

Maxine Kelly 

Group Production Editor UK, 

FT Asset Management 

Panellists 

Derek Rushton 

Group Pensions Manager, 

Virgin Media Pensions 

Philip Mendelsohn 

Director of Corporate Pension Plan 

Trustees, Atkins Ltd 

Steven Robson 

Head of Pensions, United Utilities Group 

PLC 

Maxine Kelly: In the current economic climate 

what are the three biggest constraints in developing 

the optimal investment strategy? 

Philip Mendelsohn: One of the biggest issues I 

see is the lack of meaningful products that actually 

fit the defined contribution (DC) market. Another 

issue is that of engaging members in making 

real decisions and ensuring that they recognise 

the importance of their personal decisions in a 

DC world. Finally, getting employers to provide 

contributions of a meaningful level or to meet the 

other costs associated with delivering pensions are 

equally challenges. 

Steven Robson: Certainly, the products for DC are 

remarkably poor compared to the time and effort 

that a lot of companies have put into their defi ned 

benefi t (DB) schemes. We have spent many hours 

looking at the risks and trying to implement a better 

strategy for DB and are now beginning to explore 

how you can use some of this for a DC strategy. On 

the company side we also have high DC contributions 

but tend to concentrate on what is the bigger 

fi nancial risk for the company: interest in DC stops 

once the company has paid a contribution, as they 

feel that there is no risk in DC. 

Derek Rushton: We also tend to give DB the most 

attention because of the wider risks to business but 

we are moving DC along. We have a group personal 

pension in place that does have a strong governance 

procedure to ensure that we are replicating 

a more trust-based environment. By doing this we 

have ensured that there are at least three reviews 

a year of the membership make-up and administration 

provided by the insurer to them, as well as 

the progress of the investment strategy in terms of 


oth the three “lifestyles” and the wider products 

available to the member. I agree that the number 

of products are limited and so as a result we are 

developing products by selecting appropriate funds 

to move into lifestyle strategies rather than picking 

them off the shelf. This replicates in many ways 

the approach of trust based schemes and in some 

instances is more <strong>focus</strong>ed on members’ needs. 

There is also a major issue regarding the perception 

of the general public, as well as our employees, 

around the idea of pensions. This is because bad 

pension news is presented by the media more 

often than good news. We need to get education 

in place for employees to give them the facts and 

the industry needs to adopt a more proactive and 

positive promotion of pensions as a solution to 

the long-term needs of the UK population. If we 

don’t do this we will be failing in our job 20 to 30 

years down the road when our current cohort of 

employees retires. 

Maxine: Do you feel that the legacy of DB is 

hindering the progress of DC in terms of the 

money that is dedicated to promoting DC plans 

and trustee time? 

Steven: When we moved new employees from DB to 

DC we effectively set a contribution structure which 

was roughly the same as what we were previously 

paying under the DB scheme. Many companies 

have seen the opportunity to reduce contributions. 

We offer a position where the employee pays up 

to 7% and the company will double the employee 

contribution (i.e., up to 14%). This is affordable for 

us because we were paying the same for DB and 

The employee pays 

up to 7% and the company will double the employee 

contribution. 

Steven Robson, United Utilities Group PLC 

take on no extra risk. We specifi cally have a DC 

sub-committee which concentrates on DC because 

at trustee meetings there is never enough time. 

Within the pensions team we also spend a lot more 

time on what is the correct DC strategy and developing 

communication plans because a successful 

DC plan is only possible with effective member 

communication. 

Maxine: How do you feel these communications 

should take shape because with DB there was no 

need for them? 

Philip: We have created a new DC platform using 

entirely white-labelled funds and are offering funds 

that are purpose related. People do not want to 

have to decide whether they should invest in UK 

assets, North American bonds or emerging markets 

and so we have created funds which use cautious, 

balanced or even adventurous approaches alongside 

more specialist funds. This allows employees 

to decide what they are ultimately trying to achieve 

and the levels of risk they are willing to take. 

The idea behind this new transition is that we are 

then going to engage in “nudge” strategy communications. 

This is where we prompt people to 

make decisions at key points, such as when they 

get a pay rise or promotion, and review their level 

of contributions. 

Steven: We have just implemented a communication 

exercise for the people who are either not in the 

scheme or not following the scheme very closely. 

The idea was along the lines of “get your free 

money here” and another was with tongue-in-cheek 

pictures of people sitting at a roadside cage versus 

others sitting in a fancy restaurant with a bottle of 

wine. The idea being that it compared those who 

had signed up against those that had not. We have 

moved away from trying to encourage people to 

make investment decisions and instead are quite 


comfortable in people following the default. Over 

90% of our members follow the default and so our 

<strong>focus</strong> has been on trying to develop an appropriate 

default strategy. We do have options for members, 

half of them are white labelled but we have hidden 

them to reduce complexity. We have given members 

the option to join by completing a form, pick what 

they want to pay in and not consider investments. 

This strategy has been paying dividends with the 

take up rate. 

Derek: I agree. We have just developed a series of 

road shows. These will be launched in November 

and December as a kick off to informing employees 

what a basic pension plan is. It will be very simple, 

nothing too complex and we certainly will not go 

into detail around investments; although we may 

deliver an education piece during our next annual 

reward choices window, encouraging people to 

review their pension options. 

I doubt very much that our scheme members really 

understand that our default lifestyle option has 

management charges of only 0.33%. Members 

do not know how helpful the company is being 

in terms of their long-term conditions, we have 

maximum matched contributions of up to 10%, 

and are making sure that all our contributions are 

as simple as possible and have introduced half 

percentage stages to ensure that they are totally 

compliant and future proofed for auto enrolment 

levels. We have also ensured that there is one 

scheme available for all new entrants and everybody 

is being treated exactly the same no matter 

what their status within the organisation. We hope 

this will encourage people enough to enrol in 

advance of auto-enrolment, occurring in March. 

Steven: This is exactly what we have also been 

doing. We have about 700 people currently not 

in the scheme but we have had roughly 400 new 

entrants in the last nine months and this has been 

as a result of us pushing this advertising for joining. 

We are using our default scheme for auto-enrolment 

and because this means we will be paying 

lots of money, we would prefer people to make the 

decision rather than be forced into it. 

Philip: In the transition that we have just done we 

targeted ourselves with trying to improve member 

engagement. In the active membership we achieved 

over 50% making a decision, even if that decision 

was to be in the default option. Although you can 

only have one default we have created what we call 

three “life time journeys”; one being the default 

option, one having a lower risk profi le and the 

other with a higher risk profi le. This makes it easy 

for people to make investment decisions without it 

becoming too complicated so far it has paid off with 

the extra level of member engagement. 

The challenge is going to be to maintain this. Our 

contributions are good but people are not going 

to get enough to meet the traditional level of DB 

pensions, unless they commit to increasing contributions 

at some point in their career. Employers are 

now more open about this issue, e.g., our sponsor 

acknowledges that their contributions are at a 

level that they need to offer in the current marketplace 

to recruit staff, and are not measured from 

our idea on the adequacy of pension provision. 


Steven: Another issue for us is our large manual 

workforce who do their jobs for a certain number 

of years but cannot continue working in such 

roles for 40 to 50 years. This means that the idea 

of working longer does not fit and we either end 

up providing decent pension arrangements and 

let these members work for us for 35-plus years 

and retire gracefully or you end up with material 

HR issues in that they cannot do the role 

but also cannot afford to retire: this does not feel 

right. This was one of the reasons that we kept 

DC contributions relatively high because we felt 

that if we did not, then there will be material issues 

to deal with in 20 years. 

Philip: There is a slight difference for us in that we 

are primarily a white-collar organisation, although 

there is a small blue-collar element. There are 

different levers that you can pull in the white-collar 

area as people can decide to retire later and have 

more flexibility. Steven’s members, with no disrespect, 

have the underpinning of the state pension 

as a larger proportion of their retirement income 

and so it is easier to achieve these goals. 

Derek: The developments and relevance of 

DC-based pensions moving forward has to have 

a fundamental base on which to build, along with 

a degree of certainty around this base. This base 

has to begin with certainty around what members 

are going to get from the state to build on and 

how comfortable they can be in retirement without 

additional savings. Recent prevarication around the 

proposed £140 per week pension is not helping our 

cause. Members turn around to us and say that if 

they save for their pension they can then lose £1 

from their state benefi t for every pound they receive 

in private pension, and so why would they then 

invest in a pension? It becomes about engaging 

them, altering that mind set and providing them 

with some certainty but doing so with honesty. One 

could also argue that it is not our job to give them 

fi nancial advice and fi nding where that line is drawn 

around how much information we can give them in 

terms of advice is very diffi cult. 

Steven: I have not given advice to anyone but if 

you give factual information most people can make 

a sensible decision. A lot of people have hidden 

behind this idea that they are not allowed to give 

any information, whereas if you were to give factual 

information most can fi gure it out for themselves. 

Maxine: Do you feel that the idea of meanstesting 

puts a lot of people off joining their 

pension schemes? Also, as regulation and legislation 

can all change between now and retirement, 

are prospective members put off by not having 

a clearer explanation of what they will be entitled 

to? 

Steven: Yes, because people do not know what they 

will retire with and as such are put off. However, if 

there was more certainty around this area then it 

might be something which they could consider. 

The state pension needs to be the foundation so 

that people can ask themselves whether they can 

live off of £140 a week, which would probably be 

just enough, and know that anything else they save 

would be on top. 

Three ‘life 

time journeys’: 

one being the default option, one having a lower risk 

profile and the other with a higher risk profile 

Philip Mendelson, Atkins Ltd 


Philip: In our case, as we are largely a white-collar 

organisation these are not quite the thoughts that 

most of our staff will have. Most people here will 

come from a background of expecting to contribute 

to a pension but the challenge for us will be in 

making them realise that the adequacy of that 

pension is in their hands and not in the sponsor’s 

hands as it used to be within DB schemes. 

Steven: People are scared about what size pension 

pot they actually need and, as an industry, we are 

very scared of telling people because we think it will 

put them off from starting one. Putting inheritance 

aside, to have a decent income during retirement 

people do need to have large amounts of money 

in their pot. 

Derek: We are trying to take the approach whereby 

instead of looking at the end game, you look at the 

frontend of that contribution and show members 

that for every £100 that they have in their pot, this 

is actually only going to cost them around £60 or 

even less depending on the contribution rate and 

method. If the member were to make a matched 

contribution they need to understand that they are 

going to get tax relief. We operate salary sacrifi ce 

and so from their point of view they are looking at 

a cost to them of as little as 68% of their contribution 

which is then being doubled anyway. So the 

employee will pay roughly 40% of the overall cost 

of the contribution for a 20% tax payer. This is the 

message that we are trying to get across, not to 

advise them, but to point out that for every £100 

they have saved in their pot, they will be putting in 

only £40. This is a 150% return on day one and 

where else can you get such returns? Also, you can 

currently access 25% of that pension pot tax free 

back in your pocket at retirement. 

Steven: One of the slides that we use is that for 

every £1 that a member puts in, £3.20 goes into 

their pot. It is true that nowhere else would give you 

that kind of deal. 

Maxine: Do you feel that communications or 

media reporting on market volatility has a greater 

detriment to pension savings? 

Philip: The red tops tend to give you scare stories 

rather than positive messages while the broadsheets 

will present fi nancial columns that discuss 

what people should do about their pensions. 

Raising people’s interest in pensions has to be 

done positively and although employers can try and 

communicate this, if the general message coming 

from the media says pensions are scary it undoes 

all the good work that employers do. 

Steven: I agree. I like the “I’m in” advertisements 

that are currently showing because although 

not much is said, the idea coming across is 

certainly positive. 

Derek: It is unfortunate that there are some high 

-profi le people within the industry who tend to 

<strong>focus</strong> on criticism of the current pension provisions 

rather than putting forward a more positive aspect 

of even the limited contribution that auto-enrolment 

is creating. It would be nice to see the industry 

itself being more positive and creative in the way in 

which it publicises itself to the general public. 

Maxine: Do you feel that there is still scepticism 

around the performance of the products that are 

currently available? 


Steven: The DC investment area is one which 

needs to develop rapidly. There are plenty of products 

out there and the idea of using passive funds 

and lifestyles does not work towards the idea of 

what one will receive at the end. This is the area 

that needs to be developed and I have spoken to 

some investment companies who are looking at 

how you can join up the investment to decumulation 

phase and achieve greater certainty within that. 

The state pension 

needs to be the foundation so that people can ask 

themselves whether they can live off of £140 a week 

Steven Robson, United Utilities Group PLC 

Within our DB scheme we have put in place 

substantial risk management techniques but none 

of them are currently available in DC or at best, 

very few are available and to a limited extent only. 

This needs to change in order to bring the costs 

down and to have the ability of Liability Driven 

Investments (LDI) for DC type products. There are 

companies who are starting to consider this but 

they remain about 10 years behind the DB status. 

Philip: Yes, we are beginning to see talk of LDI 

products in DC. We have some staff members who 

have both DC and DB pensions and if they put their 

DB pension into payment and can qualify for the 

minimum income requirement, they can cash in 

their DC part as part of their disinvestment strategy. 

The legislation allows all sorts of tactics to be used. 

But for different people in different places, we need 

to develop solutions that work for everyone. I would 

hope that group deaccumulation schemes become 

the norm because they could offer very costeffective 

ways for people to access the pension pot 

that they have built up in a way which meets their 

individual needs. 



Strategies for managing funding gaps and tackling shortfall 

as an active response to low market returns 

Moderator 

David Rowley 

Editor, Pensions Week, Financial Times 

Panellists 

Raymond Haines 

Head of European Strategy and Research, 

Investment Solutions Group, State Street 

Global Advisors 

Don Hanson 

Chairman, University of Manchester 

Superannuation Scheme 

Anne Broeng 

Group Executive Vice President and 

Chief Financial Offi cer, PFA Pension 

Ingrid Albinsson 

Head of Strategy, AP7 

David Rowley: To what extent are funding gaps 

impacting on current liabilities and future asset 

allocation strategies? 

Anne Broeng: We do not have a problem with 

funding gaps as we have been managing our assets 

and liabilities in 10 years with the solvency requirements, 

and as a result we have a ratio of more than 

200%. However, our investment strategy is certainly 

impacted by this method. 

Don Hanson: We have a funding gap, although if 

we did not we would change our asset allocation 

strategies to match our assets according to our 

liabilities in a more efficient manner than we are 

currently doing. Since we do have a funding gap 

our liabilities are affected – however, we do not 

allow this gap to drive our future asset allocation 

strategies. The drivers of our future asset allocation 

strategies are to do with how we see the future in 

terms of investment and where we place our assets 

in accordance with this view. 

If we let the gap drive our investment strategies 

we could end up with a situation where we forced 

ourselves to take undue risks to achieve very high 

returns in order to reduce the gap, which would be 

the completely wrong way to approach investment 

strategies. We do our best to maximise returns on 

our investments in light of how we see the markets 

and economies changing, along with keeping the 

funding gap in our minds all the time. I am aware 

of our funding gap each day because we measure 

it by a gilt discount rate. We don’t let this gap drive 

our investment strategies, and although we are 

unfortunate in having a gap because we use gilts, 

we are fortunate in having a very strong and ethical 

employer who is very supportive of reducing the 

gap over a period of time and is putting in additional 


contributions. This gives us the ability to look at 

long-term returns rather than having to be guided 

by very short-term market movements. 

Ingrid Albinsson: AP7 manages funds in a DC 

scheme called the Premium Pension System and 

this means that we do not have the liability side in 

the same way as others do. Consequently, we also 

do not have a strict funding gap. For our fund we 

are taking our starting point as the total government 

pension level and the funded part in the system 

is only 15%, which gives us the direction towards 

higher risk in the asset allocations compared with 

others who are managing pension money. 

David: With the collective DC there is the key 

element of how big the bonus is? 

Ingrid: No, it is a funded system whereby each 

individual has a funded part of the state pension. 

We manage the pension for those who are not 

actively selecting how to allocate this portion of 

their pensions. 

David: Raymond, three very different views so 

clearly not all pension funds are alike. Are you 

seeing this among your clients? 

Raymond Haines: It is certainly true that no two 

pension schemes are alike but the real question is 

how has the investment strategy changed to reflect 

the deterioration in funding levels? Even if you do 

not have a funding gap this is certainly something 

that has affected us all. 

Looking at the Danish experience, they have had to 

change their asset allocation because of discount 

rates moving. Moreover, their need to maintain 

solvency levels has been reflected in how they 

have hedged their liabilities. It is a problem of 

accounting because discount rates have fallen to 

unprecedented levels, pushing the liability valuations 

upwards such that even schemes who were 

fully funded would have suffered because they may 

not have been fully hedged or matched in terms of 

their assets and liabilities. 

In truth, the whole issue will affect strategy: contributions 

will have to increase to fi ll the gap, returns 

will have to improve or benefi ts will have to fall 

and there are not any other possibilities. In the UK 

changing accrued benefi ts is virtually impossible 

although in some other jurisdictions, most notably 

the Netherlands, this has happened. 

David: What specific solutions are you using to 

help clients effectively manage funding gaps and 

improve the rates of real return? 

Raymond: One has to recognise that the problem 

is not going to go away. It is a question of developing 

a dynamic approach in how to de-risk the 

fund as and when funding improves. This means 

looking at what you are doing to the asset side of 

your portfolio, to increase diversifi cation on your 

return-seeking portfolio, adding asset classes that 

have little or no correlation; to improve the tactical 

approach by being more sensitive to changes in 

market dynamics and regimes. While at the same 

time improving hedging structures and bringing tail 

risk management into the equation. All of this to 

reduce drawdown rather than simply volatility. 

One of the elements that we have been looking at 

is factor-based asset allocation which in some ways 

is the approach that the Danish pension fund ATP 

adopted some time ago. 

Don: One method that we employ to deal with the 

funding gap is to raise additional contributions from 

employees in addition to specifi c contributions from 

that employer to cover the gap over a longer period 

of time, roughly 20 years in our case. 


Another tactic we use relates to benefi ts. Where the 

employer, or sponsor perhaps, has changed the 

benefi t structure quite dramatically this will, over 

the longer haul, along with the higher contribution 

rates, reduce the funding gap although this can only 

affect future benefi ts. When, and if, the funding gap 

disappears, we will certainly change our investment 

strategy and move more into hedging mode. 

However, with our present deficit there is no point 

in hedging the situation because it would freeze in 

the gap. 

David: Ingrid, you don’t have a funding gap 

so what are you doing to improve the rate of 

real returns? 

Ingrid: AP7 is under the UCITS regulations which 

limit our ability to allocate very broadly across 

different asset classes. At the same time, the guidelines 

given to AP7 are to take slightly higher risk 

in our funded scheme. We are very much seeking 

more risk in terms of the equity risk premium for 

younger members. For the older generation we 

have a specific lifecycle profile to gain less volatility 

or drawdowns as people become older and are 

closer to pay out. Remember that the complementary 

pay-as-you-go part of the state pension system 

is roughly 85% of the system. 

David: Anne, with a DC scheme perhaps there is 

not the urgency to change your strategy? 

Anne: It is important to stress that our schemes 

are DC but we have to manage them as defi ned 

benefi t (DB). We do not have a funding gap, but 

we do have the three solvency rules with Solvency II 

coming up as well as the older rules which all have 

to be applied. 

Developing a dynamic 

approach in how to de-risk the fund 

as and when funding improves 

Raymond Haines, State Street Global Advisors 

Eighty-fi ve percent of our total assets are within 

a guaranteed system where we have guaranteed 

a certain benefi t. We have managed this during 

the last 10 to 12 years because we have had 

market values on both assets and liabilities. It does 

take time to incorporate risk management into 

the investment decisions and your team need to 

discuss collectively any market changes. What has 

benefi ted our strategy is to have a well-diversifi ed 

portfolio and to not look at risk only as equities, but 

also having credit for the last six or seven years as 

a major part of our assets. Even with assets like 

government bonds, where you may not expect a 

high return, it has been a great benefi t because 

rates have come down dramatically in both 2011 

and 2012. 

David: Despite the bailout talks gripping the 

Eurozone periphery what direct investment opportunities 

persist and how can they be capitalised 

on to deliver above benchmark returns within an 

acceptable risk level? 

There has also been talk of pension funds effectively 

acting as lenders to step in where banks 

are no longer lending. Is this something that your 

fund is considering? 

Anne: We have been considering this but only to 

a small extent because you are punished on the 

solvency side. It costs us a lot of money to invest in 

unrated loans, therefore we cannot have a lot of this 

within our portfolios. We are also looking at liquidity 

and have been investing in corporate bonds, high 

yield, investment grade as well as emerging market 

bonds, both of which have proven valuable. In 


peripheral Europe we have had close to nothing on 

both the bond and the equity side. 

David: Raymond, this is where the fund managers 

can act in gathering together these opportunities? 

Raymond: The problem with direct investment 

opportunities is that it is a political imperative without 

actually reflecting what happens to solvency and 

accounting. They are actually asking pension funds 

to move out of their comfort zone. The governance 

structure for operating directly in loan markets is 

wholly different to that which a normal UK-based 

pension fund has. The National Association of 

Pension Funds’ (NAPF) efforts to bring together 

an infrastructure fund is struggling because UK 

pension funds do not have the governance structure 

that allows them to take a 20-year view. There 

are certainly opportunities in this area, but they will 

have to be structured in a different way to fit into 

pension fund portfolios. 

There are plenty of European companies who are 

high quality and not expensive historically or against 

their peers, are less dependent on domestic economies 

than the market as a whole and generate cash 

and pay dividends. There are always areas within 

traditional asset classes where there is good value. 

David: Ingrid, the UK Prime Minister David 

Cameron recently asked pension funds to invest 

more in UK infrastructure – is the same happening 

in Sweden? 

Ingrid: For our portfolio we feel it is important to 

have global diversifi cation to take away the potential 

home bias. It isn’t really a discussion or issue for us. 

In terms of other investment strategies, like direct 

loans, our funds are required to have transparency 

and liquidity, so we are not able to take on these 

types of investments. 

Don: As a small fund, it is impossible for us to make 

direct investments by loans to companies where the 

banks are withdrawing, or to make infrastructure 

investments. Funds are being set up by many fund 

managers to fi ll the gap that has been left by the 

banks withdrawing and we are investing in some 

of these funds as they fi t our future criteria. They 

have an element of illiquidity but it is less than 

people think because they pay out cash annually 

and, as we take a fairly long view, we can afford 

some illiquidity in 10–25% of our portfolio because 

we are still not a mature fund. The problem that we 

have in complying with David Cameron’s requests 

is regulation. If we were not regulated at all we 

could take a very long view because we are an 

immature fund and we have a good sponsor who is 

willing to meet the gap, but regulation forces us to 

think much more short term. This is because of the 

three-year valuations, rules on prudence and not 

concentrating too few assets in areas and so on. 

Regulation does tilt us more to the short term than 

we would like but it is impossible for any fund of 

our size to make a direct investment in companies. 

Raymond: The University of Manchester is in the 

glorious position of being open and taking in new 

members but as schemes mature and become cash 

negative, liquidity becomes increasingly important. 

It is certainly a feature of local government pension 

schemes in that the point at which they become 

cash negative is fast approaching and this changes 

what can be done. If you are cash fl ow negative 

then you cannot afford to have a minus-40% year 

as you are eating the seed corn. 

David: In the next 12 months how do you envisage 

the DB space developing and what processes and 

investment strategies are you actively implementing 

in order to hedge against future risk and 

stabilise funding? 


Anne: In Denmark we have seen that some funds, 

primarily labour market pension funds, have 

changed their products from being “guaranteed” 

to being “market” products. With the upcoming 

solvency rules we cannot advise our customers to 

make pension savings in a guaranteed environment 

and instead are advising all of our new customers to 

change their product to a market environment. We 

do have to get approval from every single person, 

whereas with a labour market scheme we don’t 

have to get approval from everyone and thus it is 

easier for them to change their product. 

The problem in Denmark with a guaranteed 

product is not necessarily the guarantee itself but 

the life annuities because people are living longer. 

These kinds of guaranteed environments will be 

completely “packed in” so that you will hedge 

movements in interest rate levels in order to achieve 

what you are promised but no more. This brings 

me back to my first point: that we are advising all 

of our clients to go into a market environment with 

a lifecycle product as this is the new way of doing 

products in Denmark and is much more effective in 

order to get a decent pension scheme. 

Ingrid: The trends in Sweden are similar to those 

in Denmark in the changes from guaranteed to 

annuity products and moving more towards market 

environment products. 

prices index (CPI), which is a slower moving index, 

as well as fi nal salary to career average, and are 

making what adjustments they can. 

I feel that the future of DB schemes is quite limited 

and I doubt that any private sector or new public 

sector company will ever set up a new DB scheme 

in the UK. 

David: Raymond in terms of fund management 

products what do you envisage for the next 

12 months? 

Raymond: The two key infl uences over the next 

12 months are rates and regulation. Regulation 

because we have changes in how over-the-counter 

derivatives are managed and handled, along with 

regulation of banks and insurance companies. This 

will also change market dynamics. Rates will be an 

infl uence because of the valuation issue that funds 

are facing. I still feel that people are looking for 

improvements in returns to fi ll gaps when for the 

past 10 years this approach hasn’t worked. Sooner 

or later patience will run out and people will have to 

take action to manage their risks on a solvency-type 

basis. The continual search for yield has and will 

create bubbles in some credit areas going forward. 

David: Don is Solvency II on your radar? 

Don: Yes, all of these regulations and restrictions 

will limit our course of action. There are very few DB 

schemes left in the UK private sector and we are 

one of the few industries that still have DB schemes. 

They are basically unaffordable now to most private 

sector employers and the way that the university 

schemes are dealing with the problem of cost is to 

tinker around with the benefi ts. They are changing 

from the retail prices index (RPI) to a consumer 

85% 

of our total assets are within a guaranteed system 

where we have guaranteed a certain benefit 

Anne Broeng, PFA Pension 


SECTION 2 

Managing risk, return and cash fl ow in a volatile environment 


How do pension schemes balance the <strong>focus</strong> on long-term 

confi dence in asset allocation strategies with short-term 

reactions to market dips? 

2.2 CASE STUDY INTERVIEW 

How are Swedish pension schemes creating long-term 

confi dence in their asset allocation strategies while 

reacting positively to short-term market dips? 



How do pension schemes balance the <strong>focus</strong> on long-term 

confidence in asset allocation strategies vs. short-term 

reactions to market dips? 

Moderator 

Maxine Kelly 

Group Production Editor UK, 

FT Asset Management 

Panellists 

Peter Griffin 

Director, Allied Pension Trustees 

Niall O’Leary 

Managing Director and 

Head of EMEA Portfolio Strategy, 

State Street Global Advisors 

Pieter Westland 

Senior Investment Strategist, 

Blue Sky Group 

Chirag Patel 

Head of State Street Associates 

EMEA 

Maxine Kelly: Are your (long-term) asset allocation 

strategies at odds with (short-term) reactions 

to market volatility and how can you protect 

against such risks? 

Peter Griffin: In some respects this is more a question 

for fund managers than consultants, but our 

starting point in assessing asset allocation decisions 

made by fund managers is to analyse what 

asset markets are priced at to deliver in terms of 

return. While valuation will not protect your portfolio 

against short-term fluctuations, capital markets are 

called that for good reason, in that they are about 

the effi cient allocation of capital. That allocation of 

capital by market forces will prove consistent and 

reasonably effi cient over time. 

Volatility creates opportunities as well as risk and 

that is the reason why real assets offer a risk 

premium. When assessing active and passive 

managers we would look at all of these issues and 

assess what fund managers are doing to create 

opportunities to manage volatility risks. 

Niall O’Leary: The confl ict between longer-term 

investment and short-term volatility is ever present 

for investment managers, investors and their advisors, 

and I do not believe that this challenge will 

change. An investor should start off with an asset 

allocation that is appropriate to their risk budget 

and has the potential to deliver the returns they 

need. There are ways and means of ensuring 

that you can protect your portfolio to some extent 


against short term volatility; approaches such as 

tactical allocation which is cognisant of the risk 

regime and the market conditions at a given point 

in time. Absolute return strategies and target volatility 

type strategies can help investors marry their 

longer-term asset allocation goals while protecting 

against shorter-term volatility. 

Pieter Westland: Within any allocation there are 

always different horizons. The tactical allocation is 

more short-term <strong>focus</strong>ed while the strategic tends 

to be for the longer term and these decisions lie at a 

different point in the investment decision structure. 

The pension board decides on the strategic asset 

allocation which is about the long term. They then 

hand over a part of their risk budget to portfolio 

managers who manage the individual portfolios, 

and to people who handle the tactical asset allocation. 

By <strong>focus</strong>ing on the shorter horizon down in the 

investment tree structure, faster reaction to market 

developments is possible. Therefore, making this 

distinction becomes more appropriate. Different 

strategies and positions within strategic and tactical 

allocation do not have to be completely aligned at 

any moment in time. 

Chirag Patel: I agree that from the asset owners’ 

perspective, in determining the strategic asset allocation, 

they are identifying, in the simplest sense, 

the asset allocation that generates a surplus return 

in excess of the liabilities they face over a given 

duration. The challenge is that in practice the 

short-term volatility meaningfully alters their downside 

risk preferences. Rather than thinking about 

the end-of-horizon outcomes, pension schemes 

are instead thinking more about within-horizon 

outcomes. This means incorporating elements like 

liquidity and funding level targets that are driven by 

changes in the regulatory environment; all of which 

give rise to a unique utility function that they are 

each trying to maximise. 

Maxine: What kinds of asset allocation strategies 

are you currently implementing to optimise longterm 

investment performance? 

Peter: The answer depends on the type of scheme 

you are considering, defi ned benefi t (DB) or defi ned 

contribution (DC). If we consider DB schemes, 

because of their individual dynamics, a one-sizefi 

ts-all solution will not work. When implementing 

long-term investment strategies we have to look at 

what the scheme sponsor’s requirements might be. 

A tailored investment strategy refl ects the required 

return, the contribution rate of the scheme, the 

liability structure membership, the funding position 

of the scheme and the attitude of the scheme sponsors 

to risk. Most scheme sponsors are ultimately 

looking to manage volatility. For us this would 

be met by a mixture of asset classes including 

corporate bonds, hedged global equity funds and 

absolute return strategies. 

On the DC side, it would be a similar mix of funds 

using a default strategy of index and absolute 

return funds. For freestyle strategies we would 

look to provide a wide range of funds, from low to 

high volatility exposure, to ensure that individual 

membership requirements were met. 

Pieter: We feel that you should not only look at 

asset classes or risk drivers, but also at the costs 

of implementing such strategies. This is why we 

are <strong>focus</strong>ed on cost reduction. Consequently a part 

of the portfolio is managed on a “buy and hold” 

basis. This is possible because as a pension fund 

we are a long-term investor. Lower turnover within 

the portfolio will lead to cost reduction. We aim 

to limit the number of investment management 


mandates and portfolios because the more parts 

you have to oversee, the more governance you 

need. Every addition to the portfolio should give a 

distinct advantage in order to help optimise longterm 

performance. 

Chirag: One of the themes we are seeing is a rethink 

of how illiquid assets blend into long-term asset 

allocation plans. This links back to the idea that the 

benefi ts derived from liquidity vary from investor to 

investor. For example, some benefit by being able 

to rebalance their portfolios and exploit new investment 

opportunities, others from being able to meet 

capital calls and liabilities. The emerging thinking is 

that during the portfolio construction process there 

does need to be a quantification of the benefi ts 

attributable to the liquidity associated with each 

of these assets, and how it can help investors 

maximise long-term returns while also taking into 

account the liabilities associated with illiquid investments 

like real estate. Certainly thinking about 

liquidity within the portfolio construction framework 

is becoming an increasingly important theme. 

Maxine: For a DB scheme could you quantify 

in percentage terms how much of the portfolio 

should be illiquid versus liquid? 

Chirag: That would be precisely the objective – that 

we should approach this in a structured fashion 

rather than steering away from any illiquid assets. 

This is simply because you may face capital calls 

at an inopportune time which many pension funds 

in recent times have certainly faced and which has 

perhaps made them more hesitant than funds who 

have not allocated to illiquid assets previously. The 

industry is certainly thinking about how we can 

quantify – in terms of risk and return – the liquidity 

benefi ts of each asset class and how this impacts 

on your long-term performance. 

Niall: I agree that concerns around volatility, the 

cost of implementation and exploiting the illiquidity 

premium for long-term investors are all ideas that 

we consider. One theme where we are seeing 

considerably more engagement from our clients 

is using tail-risk mitigation strategies to dampen 

volatility and protect capital values in bear market 

environments. While tail-risk strategies can have 

both positive and negative characteristics, there 

have been a number of strategies which have been 

proven to work well through the recent crisis. We 

are seeing a growth in demand for strategies such 

as managed futures, or trend-following strategies, 

which provide the opportunity for signifi cant positive 

returns in dislocated markets, but also offer the 

possibility of modest returns in more normal market 

conditions. Strategies such as managed volatility 

equity strategies, which have superior risk/return 

characteristics and provide downside protection in 

equity bear markets, are also good strategies for 

protecting against tail risk. 

Maxine: To what extent is portfolio diversification 

a solution to immediate market dips and 

how can the right asset blend meet long-term 

performance targets? 

Niall: I am a believer in portfolio diversifi cation 

when you are thinking about the long term. If you 

are breaking your portfolio down into risky assets 

and matching assets from a pension scheme’s 

perspective, the matching assets, whether they be 

government or corporate bonds, should provide 

some diversifi cation benefi ts when markets dip and 

history has shown that to be the case. Obviously 

we would have seen a high correlation within risky 

assets through the recent crisis and, therefore, 

pension returns were somewhat disappointing, but 

it is about having the right asset mix for the longer 

term. If you know what it is that you want to achieve 


in the longer term, then part of the solution should 

be diversifi cation, which should help ensure that 

the long-term performance meets the needs of 

the various stakeholders. If you overlay this with a 

degree of prudent tail-risk mitigation strategies and 

perhaps some tactical asset allocation capabilities, 

then diversifi cation is a longer-term solution. 

Maxine: So you are saying that diversification 

works if it’s approached actively rather than in a 

passive manner? 

Niall: The assets that you buy at a given point will 

be acquired because of predicted returns and as 

markets play out over time you need to look at 

whether the asset allocation that you have remains 

appropriate from that point in time forward. You 

have to constantly reconsider what the right asset 

allocation is, along with the appropriate level of 

diversifi cation. 

Liability matching 

and diversification is important — 

a “one size fits all” solution does not work 

Peter Griffi n, Allied Pension Trustees 

Chirag: In principle, diversification for a long-term 

investor is something that is worth pursuing but 

I would argue that most investors have come to 

realise that, in practice, preferences for diversifi 

cation tend to be asymmetrical. We desire 

diversifi cation in downside markets but not in 

upside markets when we are chasing surplus 

returns to meet our funding level requirements. It 

is certainly the case that over the years investors 

have started to make more granular asset allocation 

decisions, and it is no longer a case of simply 

allocating at a high level to asset classes such as 

equities and bonds. This development gives rise to 

the problem where we now have to think about risk 

factor diversifi cation because many fail to consider 

commonality in the risk factors that drive volatility 

in each of those granular market segments. I would 

argue that it is insuffi cient to consider diversifi cation 

at the asset class level alone. We should be looking 

at the risk factors that are driving the performance 

of the individual segments within the assets we are 

allocating to. 

Peter: Portfolio diversifi cation may well reduce your 

exposure to immediate dips in fi nancial markets, 

however it is important not to diversify your return 

potential away. It goes back to the core question 

of what the scheme sponsor/employer’s objectives 

are and and what the scheme’s requirements are. 

When real assets are offering a signifi cant risk 

premium this will often mean that the so-called 

“risk-free” assets can be quite expensive – for 

example, assets such as German or US bonds offer 

a negative real return at present. 

From the context of the Irish market, pension funds 

here tend to be quite small, so getting into the 

granular level of detail is not as common here as it 

might be for much larger schemes who may need 

to diversify to that extent. Our issues would be at a 

more macro level; liability matching and diversifi cation 

is important – a “one size fi ts all” solution does 

not work. 

The validity of common investment structures 

remains but they have to be actively managed in 

order to ensure that the portfolio will meet the longterm 

performance objectives of the scheme. 


Pieter: The asset owner, which in our case would 

be the pension fund board, should be aware of 

what the risk is, what the reason is for accepting 

this risk, and how diversifi cation can help, particularly 

against the potential impact of non-systemic 

risks. It is also important to be aware of the risk of 

being forced to alter the strategy. Prolonged periods 

of bear markets can lead to measures such as 

cutting pension benefi ts, increasing pension contributions 

and even de-risking the portfolio. So they 

must understand the potential risks and what they 

could mean for all stakeholders. 

As a pension fund you have a very long-term 

perspective, but when you encounter longer 

periods of headwinds you could be forced to take 

measures. In such moments you become more of 

a short-term investor. 

Maxine: Do you think there are any solutions or 

providers who are currently meeting this careful 

balance in the market place? 

Pieter: A lot of market participants are working on 

these themes in their own way. We have not yet 

found the “holy grail” and so I cannot mention a 

specifi c provider or product. However, what I see 

happening now is that a lot of parties are thinking 

from a product perspective when, in fact, they 

should be addressing this topic on a portfolio level. 

You should be looking at the total portfolio of an 

investor and not only at the 2% or 3% allocation 

to an asset class which may have great diversifi cation 

potential. 

The solution does not lie in individual products but 

rather in the way in which the portfolio strategy is 

aligned to the pension fund board or asset owner’s 

current thinking about their investments. I feel that 

the solution lies on a higher level than products, 

and perhaps more concerns beliefs fi rst than technical 

details. 

Niall: We recognised a number of years ago 

that being product providers was not the way to 

engage with our clients when they faced these 

types of challenges. We created a business within 

State Street Global Advisors called the Investment 

Solutions Group, which works with our clients and 

their advisors to try and create solutions that are 

appropriate to their particular needs. 

In terms of current solutions, recently we commissioned 

a survey by the Economist Intelligence 

Unit entitled “Managing Investments in Volatile 

Markets – How Institutional Investors are Guarding 

Against Tail Risk Events”. We found that there is a 

greater willingness on the part of investors to look at 

strategies such as managed futures and managed 

volatility, and that strategies that may not have 

worked quite so well in the recent fi nancial crisis, 

such as fund of fund hedge fund allocations, are no 

longer as popular. 

Investors are more conscious of the need to 

diversify, and tail-risk solutions, in addition to 

individual tailored solutions, are resonating more 

with investors. 

Chirag: At State Street Associates, we work in an 

advisory capacity with pension funds around the 

world on portfolio construction and investment 

strategy. From our perspective, the challenging 

market environment in recent years has led to 

a broad change in the way that investors think 

about their investment decisions. We see our role 

Managed volatility 

equity strategies have superior risk/return 

characteristics and provide downside protection 

in equity bear markets 

Niall O’Leary, State Street Global Advisors 


as helping provide thought leadership in the form 

of cutting-edge academic research, as well as 

innovative tools that are necessary to build investment 

solutions for practitioners. These include, for 

example, tools and methodologies that can help 

investors identify periods of elevated systemic 

risk where markets are in a macro-driven risk-off/ 

risk-on environment, in order to position their portfolios 

for downside risk. We also have a robust suite 

of investor behaviour measures that help measure 

the impact of institutional investors’ behaviour on 

short-to medium-term market moves. 

Innovative tools 

including investor behaviour measures 

to judge the impact on market moves 

Chirag Patel, State Street Associates 

Peter: There are plenty of solutions but I would say 

that short-term volatility is always going to happen 

and it is important that scheme sponsors and 

trustees do not have a knee-jerk reaction to periods 

of short-term volatility. 

Many funds use complex hedging strategies that 

appear to diversify away risk, however when market 

volatility increases dramatically, particularly as seen 

in the recent past when tail risks are driving market 

volatility, correlations between asset classes can 

increase. What we like to see as investment consultants 

are fund managers who have produced the 

tools and funds that will meet the needs of the 

ultimate client: the scheme’s trustees. 

I do not feel that any single product will meet these 

needs. The solutions we implement are delivered 

by fund managers who have the range of funds, 

wherewithal and the expertise in-house to help 

trustees manage volatility and create portfolios 

using some or all of their own funds. 


2.2 CASE STUDY 

How are Swedish pension schemes creating long-term confi dence 

in their asset allocation strategies while reacting positively to 

short-term market dips? 

Interviewer 

Jessica McGhie 

Publisher, Clear Path Analysis 

Interviewee 

Gustaf Hagerud 

Head of Asset Management 

and Deputy CEO, AP3 

Jessica McGhie: Are your long-term asset allocation 

strategies at odds with the short-term reactions 

to market volatility? How can you protect against 

such risks? 

Gustaf Hagerud: No, our long-term asset allocation 

strategy is to continue to diversify our portfolio 

into risk assets which are not highly correlated with 

listed equities. 

We are in a normal return environment but one 

where there are spikes in volatility and this is a 

concern for us in that in any one year we could 

get negative returns. Therefore, we do take these 

different elements into account during our investment 

process, and our long-term strategy is to 

reduce our allocation to listed equities. 

There is a lot of market volatility behind and in 

front of us and so we are continuing to diversify 

away from those markets which contain an extreme 

amount of volatility. 

Jessica: Are you continuing to do this on a 

shorter-term basis or is this part of your longerterm 

investment strategy? 

Gustaf: This is over the longer term as we are 

continuously trying to fi nd alternative investments 

that give us a return to match global equities but 

with an overall lower volatility. 

Jessica: Are there any diversification strategies 

that you are currently deploying? 

Gustaf: Our diversifi cation strategies are mainly 

around investing in less liquid assets. We are 

looking at real estate, infrastructure, timberland and 

insurance-linked securities, but I do not believe that 

this is necessarily a general trend across Sweden. 

Jessica: So you are taking a unique approach? 

Gustaf: To some extent yes. The other AP funds are 

following similar investment strategies and they also 

want to diversify out of liquid equities but for a lot of 

the other pension funds in Sweden, who are under 

solvency-type rules, it is a different story. 

We do not have to adjust our asset allocation just 

because long bond yields are falling, and in this 

sense we can be a much more long-term investor. 


The problem for us is that because bond yields are 

so low, in order to achieve a decent general return 

across our portfolio we will have to have a very large 

allocation to risky assets. The number one risky 

asset is listed equities, which we have a lot of, and 

this is why we are currently trying to diversify out 

of these, but at a slower, more manageable pace. 

I am quite positive in terms of risky assets, and 

so I do not want to follow a strategy where we are 

reducing risky assets. 

Jessica: Are there any other asset allocation 

strategies that you are implementing 

or developing in order to optimise long-term 

investment performance? 

Gustaf: We are working actively with asset allocations 

to ensure that we have a dynamic asset 

allocation process where we try to change the 

risk level in our portfolio, depending on what our 

medium-term view of the market is. This is a macro 

valuation approach. 

Jessica: On a micro level is there anything else 

you are using? 

Gustaf: Yes, we have a programme for 

tail-risk protection. 

Jessica: How popular is this both within 

the Swedish market and across other 

Scandinavian funds? 

Gustaf: I cannot be sure how many pension funds 

actually have a tail-risk protection programme but 

many are under regulations on issues like solvency 

and as a result their hedging strategies are very 

much <strong>focus</strong>ed on this. 

Jessica: To what extent do you feel that portfolio 

diversification is a solution to immediate 

market dips? 

Gustaf: The problem in these markets is that when 

you get these spikes in volatility, when equities and 

credit markets are extremely weak, you get very 

high correlations between risky assets and very 

strong negative correlation with safe assets. In listed 

markets it is very hard to diversify. What you can do 

is to invest in government bonds as a hedge but 

because the real returns on government bonds are 

negative, it does become a very expensive hedge. 

Jessica: What are you exploring as an 

alternative then? 

Gustaf: We are trying to fi nd other risky assets 

which are less liquid and not affected by these 

really short-term volatility spikes. 

Jessica: Do you consider there to be any solutions 

or providers in the market place who are meeting 

this careful balance? 

Gustaf: Some of the larger investment banks have 

performed a lot of research in this area and they are 

extremely aware of the possibilities that they have 

within this environment. 


SECTION 3 

Developing technology and operational structures to 

compete in the age of data 


What operational strategies, tools and processes can 

be adopted to improve risk mitigation? 


Pension funds: the data challenge 



What operational strategies, tools and processes can be adopted 

to improve risk mitigation? 

Moderator 

Noel Hillman 

Managing Director & Head of Publishing, 

Clear Path Analysis 

Panellists 

Niclas During 

ESG Manager, CDC Group 

Peter Kohler Lindegaard 

Chief Investment Offi cer, Danica Pension 

Niels Hagemans 

Vice President, Alternative 

Investment Solutions, State Street 

Noel Hillman: In the light of the current market 

turbulence how have you adapted your operational 

strategies to protect portfolios from balance 

sheet volatility? 

Niclas During: Our situation is slightly different as 

we are a private equity fund operating in emerging 

markets. While there is market turbulence, the 

tenures of our funds are usually 10 plus one years 

or even longer than that, and so while it does 

impact our valuations it does not infl uence us quite 

as immediately as it would for an asset manager 

with listed equities in equally turbulent markets. 

We try to have some flexibility on entry and exit 

in general to compensate for market turbulence, 

and it is important to retain an open mind when 

having discussions with general partners (GPs) to 

avoid making investments during periods of high 

valuations. We also want to avoid exiting at certain 

times which could be low valuation periods. We 

also have internal processes to instil the necessary 

discipline to our investment process and to avoid 

undue infl uence of short-term market dynamics 

and fl uctuations. 

Peter Kohler Lindegaard: We have been helped 

by the regulator who have introduced the ultimate 

forward rate from the Solvency II proposals in our 

discounting curve. This means that some of the 

fi xed-income volatility which we have suffered from, 

particularly with the falling interest rates before, has 

now been taken care of via legislative measures. 

We have become much more instrumental in 

derivatives in general, meaning that we use traded 

instruments more frequently than we used to, both 

on the equities and bonds side. We are heavy users 

of index futures in liquid markets, on the Euro 

Stoxx, etc., and on the fi xed income side, bond 


futures and futures in German Schatz and Bobl as 

well as any other instruments there might be in that 

category. In these strategies we look at what the tail 

risks might be so that a lot of the hedging is really 

done to mitigate any potential tail risk. 

Niels Hagemans: The measurements used by the 

regulators to value liabilities have contributed to 

volatility, and so our clients need to hedge this volatility 

more than they had to before the introduction 

of these new frameworks. This requires them to 

be on top of what is happening as any information 

gaps can cause problems. Information is needed 

much more quickly than before to evaluate the 

current situation, and certainly within alternative 

asset classes it becomes a significant issue. This 

means that much more effort is being put into 

information gathering and delivery in order to make 

these decisions. 

Noel: Would you say that there is a marked 

difference in the information gathering that goes 

into an alternative strategy versus what might be 

termed a traditional asset class strategy? 

Niels: When talking about illiquid investments for 

hedging and derivative strategies, the availability 

of the data itself is different. Certainly, this kind of 

volatility matching is not done through these illiquid 

measures, but more on the exchange-traded side. 

Valuations of complex derivatives and so on are 

defi nitely an issue. 

Noel: Peter, have you found that you have needed 

to make marked improvements to your information-gathering 

techniques to be successful? 

Peter: Most of our investments are not in the 

alternatives space and so we have a very good overview 

of what is in our portfolios. We have ramped 

up on the alternatives investments over the last 

year, which does give us new challenges, but we 

have two asset managers in this space who have 

extensive knowledge in looking after these kinds of 

investments already and we rely on them to keep 

us totally informed, and they are very good at doing 

so. There are some issues with alternatives, as it is 

more diffi cult to understand what is going on, but 

they are a smaller part of the portfolio and, as a 

result, we do not have to be ahead every minute but 

can collect monthly statements instead. 

Noel: Niclas, Peter makes a point about the reliance 

on a fund manager for providing information. 

What balance do you give to having a strong information 

gathering system as part of your internal 

structure versus relying on the external manager? 

Niclas: Given that in many cases we invest in 

emerging and frontier markets it is more important 

for us to have information disclosure stated explicitly 

and to include this as a requirement in our legal 

agreements, in addition to continuous conversations 

with our fund managers. We are invested with 

82 GPs in around 74 countries including Sierra 

Leone, Liberia, Pakistan, Peru, etc., and what you 

get from these markets, along with non-listed entities, 

is quite limited in terms of publicly available 

information. We are therefore very keen to get as 

much information as we can. 

What is fundamental in these discussions is that 

there is an understanding and alignment between 

the GPs and the limited partners (LPs) of why you 

need certain types of information along with what 

you will do with that information. There is a danger 

in going after more information. The purpose with 

our requests for information is to track risks and 

how they change over time, fi nancial performance, 

development impact, compliance with key clauses 

within the legal agreements, etc. If we can’t answer 

ourselves why we would need a certain type of 

information then we have to think again as to why 

we are asking for it. 


In terms of ongoing trends, this is a heated topic 

and there is an initiative between some 40 of these 

countries and 20-plus private equity and venture 

capital associations, along with a large number of 

GPs, around the guidelines for information disclosure 

between GPs and LPs. This is led by Tom 

Rotherham of Hermes and I feel that this will help 

a lot in setting parameters and reference points 

around how much, and what type of, information 

could and should be expected to be disclosed 

between GPs and LPs. 

Noel: What trends are you seeing to address 

the challenges in satisfying the ever-increasing 

demand for detailed information? 

Niels: While the availability of data might be more 

limited in the alternatives space, owners of traditional 

assets also require more information points. 

Where before they may have been looking at core 

functions such as administration and accounting, 

they now want much more granular data; not only 

in order to make better investment decisions, but 

also to satisfy new regulations and governance 

issues. This requires an increased effort from asset 

owners to acquire this information within similar 

types of asset classes, and trying to achieve such 

a holistic overview is quite a challenge. Our clients 

ask for our help in devising a complete solution for 

this type of data management. 

Peter: We recently had the Financial Services 

Authority (FSA) here and what they were mostly 

worried about was the risk management in how do 

Diversification 

is something to be done with moderation 

Niclas During, CDC Group 

we stress-test the different asset classes and is the 

risk management up to the task? We were able to 

demonstrate that we had this under control, and so 

from the outside it is a question of being able to tell 

people that you have the right models in place to 

have the right risk ratings on these asset classes, 

and that you do understand what you have in 

your portfolio. 

One trend is that all companies are being asked 

whether they really understand the risk that a 

particular company is running, and the FSA is 

currently asking the boards whether they do truly 

understand what the risk means. 

I am not sure that this demand will continue to be 

an ever increasing one but I suppose it is currently 

increasing as there is a lot of hysteria around what 

has happened over the past couple of years, but it 

will abate again in the coming years. 

Noel: Do you consider an outsourced Chief 

Investment Officer (CIO) model to be a credible 

risk management strategy or would it be considered 

more as an administrative burden? 

Peter: We felt that we could have some kind of 

outsourcing of the investment responsibility some 

years back with a semi-fi duciary manager or the 

like. Our take though is that the various parameters 

that you use to assess the risk that is being taken in 

a business like ours changes all the time because 

there are so many stakeholders. This means that 

one day you may be <strong>focus</strong>ed on limiting risk and the 

other you may be <strong>focus</strong>ing on maximising returns or 

<strong>focus</strong>ing on having the right regulatory composition 

of the portfolio, etc. As this surrounding universe 

changes continually, it is actually impossible to 

outsource, and I feel that it is a good thing because 

it is your business. It is simply not possible to get 

anybody else to assume this responsibility and 

understand what it truly entails. 


Noel: As a pension scheme you are responsible 

for achieving the best returns for your members 

and, therefore, there is a certain pressure to 

understand risks which may be difficult to do so 

internally. With this in mind is it not a fiduciary 

and ethical duty to turn to outsourcing where 

specialists can provide better returns? 

Peter: Of course we do rely on outside advice when 

looking at what the potential risks may be but we 

do work with people who have risk models and who 

have an outside view on what the risks are that we 

are running. The CIO role in putting the portfolio 

together is not something that you can outsource, 

but of course you can outsource the eyes on the 

risks and the surveillance of these risks. 

Niels: In the Netherlands there has been a variety 

of different trends among pension funds, and so 

the <strong>focus</strong> does shift from time to time. While there 

was a trend toward outsourcing fiduciary management 

decisions to external parties, the industry has 

seen that this approach is ultimately not possible. 

From a regulatory point of view, those accountable 

within the pension fund cannot absolve themselves 

from that responsibility. When you outsource to a 

third-party manager they are still responsible and 

therefore, the regulators are saying, quite rightly, 

that they need to understand the risks associated 

with investing in specifi c asset classes. 

Niclas: I have had internal discussions relating to 

this because to me it seems quite odd to entirely 

outsource what is supposed to be one of your 

key responsibilities. Of course one of the positives 

in doing so would be that you get independent 

views, free from your organisation’s internal politics 

and other infl uences which may impact the pure 

intellectual and sound thinking on a particular 

matter. You do also obtain outside experience and 

avoid mainstream thinking, which otherwise has a 

tendency to become increasingly conformist over 

time within any organisation. However, outsourcing 

the CIO function is still something that we feel 

makes no sense at all as it is something that needs 

to be done yourself and what you can do, and 

perhaps should do, in certain circumstances is to 

also get external advice on board to provide that 

independent, external and intellectually different 

view to inform and enhance your thinking. 

Noel: What operational strategies, tools and 

processes should be in place to support decisionmaking 

with regards to asset allocation strategies 

and fund manager selection in order to enhance 

long-term returns? 

Niels: It boils down to information. From a holistic 

point of view, you can put in place your strategy 

and the framework around it to monitor everything 

on an ongoing basis. However, ultimately with the 

complexities and the low-return environment that 

we are in, along with the need to diversify into new 

asset classes, a good information delivery system 

becomes critical. 

Noel: How would you define a good information 

delivery system? 

Niels: We are a provider of these kinds of solutions 

and there is a very broad range available. In generic 

terms, data collection, management, augmentation, 

etc., are required. Certainly, outsourcing is 

something that we see a lot, as the expertise of a 

lot of pension funds and asset managers in making 

decisions is not necessarily in the areas of data 

management or in maintaining the various technologies 

required. 


Niclas: I would break it down into three areas: 

measurement, diversifi cation and definition of risk. 

On measurement it is important not to get caught 

up in the moment and in looking at quarterly 

returns, but actually comparing to the markets 

overall and when valuations seem to be jumping all 

over the place to look at the underlying drivers and 

external dependences of each investment to see if 

they are still sound. 

On diversifi cation, this is something to be done 

with moderation and although this is fairly standard 

thinking, it is easy to get caught up in it 

and diversify ever more. While in this instance 

you end up spreading your risks you also spread 

your attention to more assets and, as a consequence, 

you end up having less time to follow each 

investment individually. 

Finally, with redefi ning and reassessing risk, 

providing you have no immediate liquidity 

constraints, volatility is not a risk in itself but, on the 

contrary, a permanent impairment of the principal 

is a risk. Provided you are an active owner (especially 

in private equity) the amount of risk that you 

are faced with, and what you can actually address 

and manage, should in most cases leave you with a 

reduced amount of residual risk. One simply needs 

to take a slightly different view of risk over the long 

term than that of the short term by looking more at 

impairment of principal and the extent to which you 

can expect to control and possibly reduce that risk. 

latest trends within the markets so that you can 

change the overall risk in accordance with market 

changes, is benefi cial as well. This means having 

frequent meetings with the investment committee 

and discussing all of the available news in the 

market because, at the end of the day, although 

the model can give you some direction of how to do 

things you need to be on the ball all the time. 

One needs also to have all of the fi nancial instruments 

available so that you can trade extensively 

across all derivatives in order to be able to control 

all of the risks. On the fund manager selection side 

we work with two main fund managers, BlackRock 

and our own in-group manager which is Danske 

Capital. This means that we do not have a lot of 

asset fund manager selection in Danica because 

we only work with these two companies. 

Noel: Niels, do you have any thoughts on what has 

been said regarding operational strategies? 

Niels: As a service provider, these are not decisions 

that we have to make and our clients really 

defi ne their toolbox – our <strong>focus</strong> is on helping them 

to create and implement these tools. It is about the 

provision of information. If Peter says they need to 

do modelling on certain asset classes, then they 

need input into that model, which is data. What I 

am seeing is that these models are getting more 

and more refi ned, which creates a bigger opportunity 

for us to support our clients on this side. 

Peter: We work off the limits that we get from the 

board so that on the asset allocation side it coincides 

with their overall risk appetite. We model 

this and try to figure out how to get the highest 

return within that framework. Having clear limits 

and having the tools in the modelling framework, 

along with a set-up where you can discuss the 



Pension Funds: The Data Challenge 

The data featured in this article comes from the State Street European Pension Study conducted by the Economist Intelligence Unit. 

Responses were received from 150 DB and DC schemes in Germany, Italy, Netherlands, Switzerland, UK and the Nordics. 

Jeff Conway 

Executive Vice President and Global 

Head of Investment Manager Services, 


Pension funds’ demand for data has increased 

exponentially amid the renewed <strong>focus</strong> on governance 

and transparency of the last fi ve years. 

Not surprisingly, these requirements emerge as 

a strong theme in our 2012 European Pension 

Study conducted in association with the Economist 

Intelligence Unit. 1 

Several interlinked factors are forcing funds to 

revamp their approach to data and seek out 

new solutions for managing and analysing data 

to support better decision making. Regulation 

is among the key drivers. At country level, local 

regulators increasingly require both more frequent 

and more granular reporting than ever before. In 

addition, the prospect of overarching regulatory 

initiatives affecting pension funds at a European 

level, such as the potential for Solvency II-style 

reporting of asset data, could create a signifi cant 

additional burden. 

Shift to More Complex Investment Strategies 

Investment trends are also driving the need for 

data. Against a backdrop of sometimes large 

funding gaps, the persistent low-yield environment 

is compelling pension funds to look at new sources 

of returns, including alternative assets. While alternatives 

accounted for just 5% of global pension 

fund assets in 1995, this fi gure rose to 20% in 

2011. 2 As funds adopt new strategies, they fi nd that 

reporting grows more complex and risk becomes 

harder to measure. Indeed, the growing popularity 

of managed accounts as a way of structuring their 

exposure to hedge funds is proof that pension 

funds are exploring new ways of maintaining transparency 

over more complex strategies. 

Gaining a Consolidated View of Risk 

Given the desirability of removing volatility from 

portfolios whatever the investment strategy, 

pension fund managers are becoming increasingly 

vigilant when evaluating their investment 

managers’ performance. 

In addition, being able to gain a consolidated global 

picture of their exposure to a particular market 

or asset class — on a near, real-time basis — 

is paramount. Some funds struggled during the 

fi nancial crisis to source this information quickly 

enough to take corrective action and, according 

1 

The State Street European Pension Study was conducted by the Economist Intelligence Unit during October 2012. Responses were received from DB and DC 

schemes in Germany, Italy, Netherlands, Switzerland, UK and the Nordics. 

2 

Towers Watson, Global Pension Assets Study 2012. 


Figure 1: Data Capabilities of European Pension Fund 

Percent disagree 

Is accurate 12 

Is timely 

9 

Is comprehensive 

7 

Is easy to interpret 

12 

Allows us to understand our total risk exposure 

16 

Allows us to understand our performance attribution 9 

Provides insight into all investment costs 

23 

Helps us identify investment opportunities 

19 

percent agree 

60 

70 

67 

58 

60 

70 

42 

44 

40% 20% 0% 20% 40% 60% 80% 

100% 

Strongly disagree 

Somewhat agree 

Somewhat disagree 

Strongly agree 

Source: State Street European Pension Study conducted by the Economist Intelligence Unit 

to our research, it remains a top concern. Only 

60% of defi ned benefi t (DB) fund managers, 

who responded to our survey, feel that they have 

access to portfolio data that allows them to understand 

their total risk exposure, and only 42% 

are confi dent their data provides full insight into 

their investment costs (see Figure 1). 

Corporate pension fund managers are also feeling 

pressure at a business level. Accounting changes 

that require mark-to-market valuation of pension 

assets and liabilities bring the pension defi cit 

onto the corporate balance sheet. And, with the 

regulatory <strong>focus</strong> on recovery plans, corporates 

can be required to provide additional funding to 

their pension schemes if funding levels drop below 

a prescribed point. It is, therefore, no surprise 

that CFOs are <strong>focus</strong>ing more attention on and 

demanding more reporting from their organisation’s 

pension scheme. 62% of our survey respondents 

expect their CFOs to be more involved in the 

running of their scheme over the next five years. 

Data Management and the Role of the Custodian 

In addressing these needs, pension fund managers 

fi nd that the data challenge effectively has two 

components. First, there is the question of how to 

collect and manage data from across an increasingly 

complex investment universe; and, second, 

the challenge of analysing and interrogating this 

data to the required degree. It is critical that both 

elements are done well, and the need to consider 

both the asset and liability sides of the pension 

“balance sheet” further complicates this task. 

Pension funds have a number of options. Some 

larger schemes have embarked on their own data 

warehousing projects, but such initiatives can be 

sizeable and costly undertakings and may come 

with signifi cant deployment and execution risk. 

Aggregating data from a range of different portfolios, 

managers and asset classes, as well as 

refl ecting the unique structure of investments such 

as private equity, is a massive challenge. 

Increasingly, pension funds are turning to their 

custodians for an effective solution. With a critical 

mass of data already at its fi ngertips, the custodian 


While alternatives 

accounted for just 5 percent of global pension fund 

assets in 1995, this figure rose to 20 percent in 2011 

can fill the gaps, through proprietary insights, links 

to market sources or advanced analytics to deliver 

a complete picture. And, as technology enables 

this data to move to a real-time platform, there is 

huge scope to support critical front-offi ce decision 

making in areas such as risk management 

and compliance. 

Reflecting this trend, pension schemes’ investment 

functions are increasingly involved in choosing a 

custodian, as they consider the data capabilities of 

the custodian as critical in helping them deliver on 

their own governance needs. 

In addition, by using an external provider, pension 

funds can access expertise and solutions that are 

already being successfully leveraged by a range of 

funds, rather than having to design and develop 

their own approach and continue to invest in those 

technologies for the long term. At a time when 

pension funds may struggle to recruit the expertise 

required to build internal capabilities, outsourced 

solutions can look particularly compelling. 

Analysing the Data 

The tools needed to analyse the data universe are 

equally critical, and this is a fast-evolving area. 

Whereas a traditional report would provide a static 

analysis of a single snapshot in time (perhaps based 

on a template that was several years’ old), new 

dashboard-style tools allow managers to explore 

the data in a way that is dynamic and intuitive. 

They can use the information to drive their navigation, 

and identify the key areas where decisions are 

required. And they can create the exhibits required 

for internal and/or external reporting through simple 

“drag-and-drop” techniques. 

Increasingly, a wide array of analytics tools are 

available to support investment decisions and 

compliance requirements. These solutions include 

performance attribution to provide detailed analysis 

of portfolio composition, performance results and 

underlying exposures; trade cost analysis to help 

reduce trade costs and meet fi duciary and bestexecution 

obligations; and pre-trade compliance 

systems to check for breaches ahead of execution. 

Emerging areas of functionality include exposure 

monitoring tools for measuring issuer and counterparty 

risk, with limit-setting and alerting capabilities 

that indicate overexposure to a particular legal 

entity. Whatever tools are being deployed, it is critical 

to understand how to use them most effectively, 

as well as recognise any limitations. 

Risk is an increasing area of <strong>focus</strong> for pension 

funds. “What if” analyses are helping funds test 

their portfolios against multiple scenarios. Such 

tools allow pension funds to judge the impact of 

a change in asset allocation or mix of managers, 

replay the effect of historic events such as the 

Lehman Brothers collapse, and capture trends in 

critical variables such as Value at Risk. And this 

analysis goes further: these tools can help them 

“future proof” their portfolios and ask questions 

such as, is the plan diversifi ed enough? They can 

respond to emerging sensitivities early enough to 

head off more fundamental consequences. 

Managing data via a warehouse approach is critical 

not only so that information can be easily retrieved 

and reported on, but also to enable these modelling 

and decision support tools to be easily incorporated 

and applied to the data. 


Focus on Multinationals 

For multinational organisations that are looking to 

gain improved oversight and economies of scale 

across multiple in-country funds, the data challenge 

takes on a new urgency but, inevitably, added 

complexity. While individual plans may be trusteed 

and run independently, the corporate headquarters 

ultimately has a high degree of responsibility and 

accountability. Solutions must balance corporate 

priorities with the desire of the local plans to remain 

autonomous. Multinationals increasingly see that 

by having their local plans subscribe to the same 

analytics tools, and drawing on a single multicurrency 

performance and risk engine — aligned 

with a data warehousing capability — they can 

deliver on local reporting needs while gaining a 

single “headquarters view” in a timely fashion. 

Finding the Right Partner 

As pension fund managers face up to the investment 

challenges created by the current environment and 

by demographic shifts such as longer lifespans, it 

is clear that external support and solutions will play 

a growing role. Given the complexity of the data 

issues, funds should <strong>focus</strong> on the following criteria 

when selecting a partner: 

• Can they provide your required perspective 

on the data? While your custodian can be the 

most effective hub for your overall data solution, 

it is critical that they can provide the specifi c 

perspective you need on your data, not one that 

is restricted to a custodial view. 

• Can they plug the gaps? No single provider will 

have every piece of the data jigsaw you need to 

create a consolidated picture. Does your provider 

have the technologies and connectivity required 

to fi ll those gaps? 

• Are risk technologies an integrated part of the 

solution? At State Street, our proprietary risk 

engine, truView, enables us to integrate risk tools 

into the overall data solution. Otherwise data 

would need to be passed to a third party for 

analysis before being reintegrated into the main 

warehouse. 

• Is the liability side covered? As pension funds 

increasingly manage themselves directly against 

future liabilities, including through liability-driven 

investment strategies, it may be benefi cial to 

cover both asset and liability data in one solution. 

• Do they match your geographic presence? As 

organisations drive greater consolidation of their 

multiple local plans, they require a servicing 

partner with similar local presence allied to the 

expertise to maximise the potential benefi ts. The 

potential benefi ts of having a single, authoritative 

source of data — in terms of improved governance, 

control and resilience throughout the 

value chain — can outweigh the required investment. 

Rather than having to conduct their own 

data analysis efforts, consultants, trustees and 

others can instead <strong>focus</strong> exclusively on their core 

responsibilities. In essence, you enable stakeholders 

to do the most effective job they can. 

With a critical mass 

of data already at its fingertips, the custodian can fill 

the gaps, through proprietary insights 


As pension funds look to find a way through 

the current complexity, and reap the benefi ts of 

enhanced data management and analysis, State 

Street is committed to supporting the industry with 

the highest levels of expertise, insight and solutions. 

This commitment is refl ected in our mission to build 

a dedicated data and analytics business, giving 

unprecedented support to our clients throughout 

the investment value chain. 

Solutions 

must balance corporate priorities with the 

desire of the local plans to remain autonomous 

Jeff Conway is executive vice president and global head of State Street’s 

Investment Manager Services business, overseeing investment manager 

operations outsourcing globally. 


SECTION 4 

Challenges of current and future regulation: creating 

robust compliance and governance 


As regulatory complexity increases — both at a local 

level and Europe-wide — how can you build a rigorous 

compliance framework that satisfi es regulators while 

enhancing member protection? 

4.2 INTERVIEW 

Innovate for success: How are government initiatives 

driving a new model for pension provision? 






As regulatory complexity increases — both at a local level and 

Europe-wide — how can you build a rigorous compliance framework 

that satisfies regulators while enhancing member protection? 

Moderator 



Panellists 

Alan Pickering 

Chairman, BESTrustees 

Christian Boehm 

Chief Executive Offi cer, APK Pensionskasse 

Sven Kasper 

Vice President, Director EMEA, 

Regulatory, Industry and 

Government Affairs, State Street 

Chris Verhaegen 

Chair, Occupational Pensions Stakeholders 

Group, EIOPA 

Jessica McGhie: How are regulations changing 

on a national and European level and have you 

encountered any opportunities or challenges for 

your organisation as a result? 

Alan Pickering: Sadly most regulation is backward 

rather than forward looking. It is diffi cult when 

regulation is born in individual countries and on 

a European level. I am chairman of a company 

that provides trustee services for pension schemes 

and adopts best practice and anticipates regulation. 

I am also a trustee of six or seven pension 

schemes, some of which are purely UK <strong>focus</strong>ed 

and others which have an international dimension. 

Each of these schemes has to anticipate 

what regulation means for them. But I encourage 

them to decide what it is that they want to do 

and then check for regulatory compliance afterwards. 

Starting to design a pension scheme on the 

regulatory compliance end of the spectrum will not 

create something that is fi t for purpose, but what we 

want to do is make a decision and then test it for 

regulatory compliance. 

Jessica: From those that you advise, are you 

finding that they are struggling with regulations 

from national and European levels? 

Alan: Regulation is starting to bite afresh in the 

DC space, including guidelines from the UK 

Pensions Regulator. These are currently “good 

practice” but there is a fear that they might 

be converted into regulatory obligations. These 

obligations often do not fi t comfortably on 

a country-by-country basis. It is hard to have 

regulations that make equal sense in every jurisdiction 

because of different tax, social security and 

cultural considerations. 


Christian Boehm: We are implementing amendments 

to the new pension fund law which came into 

force on 1 January 2013. We have had a lot of work 

to do and I question whether this has added value 

for our customers. We have had to increase our 

costs for staffi ng, risk management and reporting 

requirements. We need more capacity in caring for 

our investments but have to adjust our ambitions to 

fi ll in all of these new regulations which cause a lot 

of data producing. I am not sure if this additional 

data that we deliver to our supervisory institutions 

can be handled by them in the proper way because 

of the sheer amount of files. I do not see the benefi t 

in delivering this data if we do not follow up with a 

proper discussion or add value. It is a lot of work 

that is not benefi ting our customers. 

On the European level there is discussion on the 

amendment to the Institutions for Occupational 

Retirement Provision (IORP) directive. In preparation 

for this, the European Insurance and 

Occupational Pensions Authority (EIOPA) is 

preparing a Quantitative Impact Study and I am 

very happy that Austria has decided not to take 

part in this volunteer study presently. Our supervisory 

institutions have told us that at the beginning 

of 2013 we may have to take part in this exercise 

but the specifi c situation of a pension fund is not 

considered in these studies. It seems to be very 

similar to those exercises that insurance companies 

participated in within the Solvency II framework and 

may not fit well for the pension fund business. This 

will bring no additional value for our customers and 

be nothing more than a data mining exercise. 

Jessica: Are the data challenges you have experienced 

at a national level a problem in a 

European context? 

The education 

of the members is very important but we cannot expect 

all of our members to become financial experts. 

Christian Boehm, APK Pensionskasse 

Christian: Yes, it is affecting both. Some of the data 

fi les we supply are given to the national supervisory 

institution because they need to deliver them to 

European institutions and I can understand that it 

may be of interest for them to know which pension 

funds have increased their bonds, for example. If 

we have a well-diversifi ed portfolio and delivered 

them data on our positions, which were below 1%, 

there would be the problem of delivering too much 

data, which would give an inaccurate picture of our 

situation. I also do not know what they are doing 

with this data. 

Sven Kasper: While there are regulations that <strong>focus</strong> 

specifi cally on pension funds and the pension 

industry, pension funds are also impacted by 

regulations where they are not the primary target. 

Particularly at the European level, there are pieces 

of regulation that will change the future landscape 

and environment in which pension funds operate. 

The question is: to what extent do regulators take 

into account the implications for the pension fund 

industry? There are examples, such as the new 

derivatives framework, where these concerns have 

been expressed and taken into account but this is 

not always necessarily the case. Another example 

is the fi nancial transaction tax, which is likely to be 

implemented in 11 member states. It is still unclear 

whether the pension industry will be impacted or 

whether it will be exempt. One of the general implications 

of all of this is, as Christian mentioned, the 

new phenomenon of increased data and reporting 

requirements. The unintended consequences of 

regulation — and the need to stay on top of the 


Think more 

about the internal governance of the scheme 

than the reporting or complex legislation 

Chris Verhaegen, EIOPA 

various regulatory initiatives — creates challenges 

and puts a lot of stress on resources. We are seeing 

this pressure across the financial services industry. 

Cost increases are another issue, particularly in 

the current low-return environment. Overall it is an 

increasingly complex environment and this sentiment 

is echoed by our clients. It is important to 

keep up with all of these changes while <strong>focus</strong>ing on 

enhancing effi ciency overall. 

Jessica: How can a balance be struck between the 

regulators’ demands for compliance and the need 

to enhance member protection against a backdrop 

of continued market volatility? 

Chris Verhaegen: I agree with what has been said 

so far. I question whether you can protect members 

through regulations and especially against market 

volatility as it is such a specific issue that not even 

a government has been able to protect savings. 

Politicians think that regulations, particularly for 

pension schemes, will protect members. You have 

to think more about the internal governance of the 

scheme than the reporting or complex legislation. 

We have to look at the national specifi cities because 

each state will have different social security protection 

systems on which they have built additional 

schemes like occupational pensions. It is often 

forgotten that when there is a financial regulation 

coming up it can become very diffi cult for pension 

funds. Occupational pensions are not really a fi nancial 

product and this is something that needs to be 

clear in people’s minds. 

Jessica: Are there specific provisions being made 

by regulators to protect members? 

Chris: From the IORP directive we have a number 

of principles relating to governance, and when 

you issue prudential regulation it is always made 

with the interests of the members being taken into 

account. This is the same way that investment 

tools are made to protect investors, although these 

have yet to be proven effi cient. The proper requirements 

of both executives and board members are 

something that we could improve on and put more 

stress on. National legislation can sometimes not 

be detailed enough with the requirements, and 

simply sending a stack of papers or fi les may not 

be enough to protect members. 

Alan: I agree wholeheartedly that the regulatory 

interface should be between regulators, supervisors 

and those bodies that govern pension arrangements. 

This means you then have a business-to-business 

relationship and use tests, which then allows you to 

put the onus on those governing bodies to provide 

a report on their stewardship. You can then scrap 

an awful lot of the massive data that simply sits 

on the computer and actually gets in the way of 

other issues. 

One good development in the UK is a greater <strong>focus</strong> 

on the quality of the membership data. We have a 

history of membership protection here that goes 

back 20 or 30 years and many of these member 

records are incomplete. If you don’t know who your 

members are, or what their entitlements are, then 

they will lose out. 

Governing bodies, whether they be trustees or 

directors, will have to demonstrate that they have 

modern, robust procedures for running pension 

accounts. They should also be under some obligation 

to bring all the legacy arrangements up 

to speed. 


Jessica: What are your thoughts on achieving a 

balance between member communications and 

continued market volatility? 

Sven: Investor and member education is a key area 

that needs to be looked at. Pensions are still not 

considered to be the most attractive topic, but it is 

increasingly important that people are much better 

educated in terms of their responsibilities within 

their own pension provisioning. With the move 

to DC, the educational element becomes even 

more important. 

Jessica: In light of regulation, what operational 

changes need to be made to deliver a competent 

multi-jurisdiction reporting system? 

Christian: We have to increase our staff within the 

risk management team and we need additional 

personnel for reporting. This means additional costs 

without additional value; however it does mean that 

we are being forced into making the business more 

effi cient. We cannot increase our costs due to the 

demands of the current regulatory system, so we 

have to carry on with what we are already receiving, 

which adds signifi cant pressure for us. 

The education of members is very important but 

we cannot expect all of our members to become 

fi nancial experts. Our members trust what we are 

doing with our investments for them, and so during 

these diffi cult times we have to rebuild the trust 

between pension funds and members. This is not 

an easy exercise due to the fact that we currently 

have media who are not favouring financial institutions 

(even though pension funds are not really 

part of the institutions that have been responsible 

for the financial crisis). The issue of risk and return 

is very important and so this is another area where 

we have had to increase our efforts to communicate 

this to our members. 

Jessica: How do you think pension funds need to 

adapt to deliver that competent multi-jurisdiction 

reporting system? 

Chris: It is a hard job. Establishing a competent 

multi-jurisdiction reporting system is of course 

the objective of the European supervisory system 

embodied in EIOPA. However, for the bulk of 

pension funds, it may be too burdensome because 

the European level is requiring too much data and, 

with the upcoming review of the IORP directive, 

it is at risk of increased complexity. Next to this 

aspect, namely the size as well as the national 

action range of the vast majority of IORPs, one has 

to consider the diversity of occupational pension 

schemes and corresponding funding institutions. 

Any streamlining of EU-level reporting will have to 

deal with those national specifi cities. This will not 

prevent supervisory authorities from fostering their 

cooperation and building convergence in supervisory 

practice. 

Sven: Multi-jurisdiction reporting and the 

increasing complexity of cross-jurisdiction oversight 

is a challenge. Streamlining and harmonising these 

requirements would help, but cost is becoming a 

factor. There will be a drive to increase effi ciency 

simply because, unless a company is of a certain 

size, it may struggle to deal with the administrative 

complexity of these new requirements. What 

we see from our client base is that they are 

looking at outsourcing to third-party providers 

that have the benefi t of scale. It is important to 

remain fl exible and to adapt quickly enough while 

ensuring effi ciency. 

Alan: There is no such thing as a risk-free pension. 

You cannot insulate members against every risk 

whether it be their own longevity risk or market 

risk. Members (or those who organise schemes 

for them) have to decide what risks they want to 


ensure against to determine whether insurance 

represents value for money. We should not impose 

obligations on members that cost members money. 

In a DC environment every cost spent on administration 

or reporting undermines the value for money 

that members actually get from their pension 

scheme participation. We all need to make sure 

that politicians and pensions regulators understand 

that no pension can be risk free, and every burden 

placed on the scheme undermines the value for 

money and, ultimately, the confidence and trust 

that members have in their schemes. 

Jessica: Ultimately, it is about finding that 

balance between the inevitable risk and 

ember protection? 

Alan: Yes, and that balance will vary from situation 

to situation. Some people may be financial experts 

and others won’t be, so we have to be sensitive to 

who needs protection against what. 

Sven: Yes, and at the same time communicating 

clearly what decisions are being taken on the 

balance between risk and return. 

Jessica: Taking into account these factors, how 

do pension plans need to evolve their compliance 

systems in order to stay ahead of the regulatory 

minefield? 

Christian: You need an efficient organisation to 

tackle these issues. In the DC fi eld, we have to take 

note of communication. One need is to take care 

that all of the members have an understanding 

of these issues so they can decide for themselves 

what they would like. We have to make clear the 

balance between risk and return (complete safety 

means that at the end you will have negative real 

returns, which is a big risk in terms of delivering 

a good pension at retirement). We do not exist 

in a risk-free world, and we have to protect our 

members from certain issues and take care within 

our organisation that we are prepared to make 

proper investment decisions and communicate the 

reasons for them. 

Chris: The regulations have become a minefi eld 

because we do not know what is coming, and so it 

is diffi cult to prepare. It is still possible to re-steer, 

at the European level, the direction of the review of 

the IORP directive. It has taken a very wrong start 

but I feel that it is possible to change its direction. 

This will require a lot of effort from the industry and 

perhaps if the economy takes a turn for the better it 

will also help. For the moment, it is very diffi cult to 

know what direction future regulations for pension 

funds at the European level will take. 

Alan: I agree with Chris that we must not give up the 

political fi ght. We must make sure that politicians 

and regulators understand what we are trying to do 

and that there are some unavoidable costs; cheap 

does not mean good. If money spent on regulatory 

compliance is diverted from good administration, 

communication and sensible investment strategies 

then it really is an own goal. We need to spend 

money wisely and each group of trustees and directors 

should be under an obligation to explain where 

they have spent their money, why they have spent it 

and to prove that they have spent it wisely. 

Sven: I would echo all of the comments made. 

Communication with members is key, but also with 

European legislators, so that the understanding of 

the industry is improved. It is important that any 

changes to the regulatory regime are considered 

and appropriate, and do not have any unnecessarily 

negative impact on the industry. 

Investor 

and member education is a key area 

that needs to be looked at 

Sven Kasper, State Street 


4.2 INTERVIEW 

Innovate for success: How are UK government initiatives driving a 

new model for pension provision? 

Interviewer 



Interviewee 

Paul Todd 

Head of Investment Policy, NEST 

Jessica McGhie: The Department for Work and 

Pensions (DWP) will be consulting with employers 

on whether the rules on a newly created low 

cost pension scheme are too restrictive. What 

initiatives does NEST currently have underway 

for making pensions affordable and how are you 

reacting to the DWP? 

Paul Todd: The government consultation is about 

NEST and whether the restrictions in place should 

remain. This is clearly a decision for government, 

but we have provided evidence to the Work and 

Pensions Select Committee regarding employers’ 

feedback on using NEST. The idea of <strong>focus</strong>ing 

NEST on the target audience of medium-to-low 

earners has been extremely successful so far. You 

can see this in our innovative approaches, ranging 

from the way in which we invest members’ money 

and communicate with our members, to the way 

in which our website tackles communication challenges 

for the new generation of savers. All of these 

elements mean that for the first time a pension 

scheme has been designed specifi cally for a mass 

market of people earning between £7,000 to 

£35,000. We await with interest the response to the 

consultation as to whether any of the restrictions 

should be changed, but whether they do or not, 

our <strong>focus</strong> will remain on our core membership of 

medium to low earners. 

In terms of charges, another part of the reforms was 

ensuring that high-quality pension schemes were 

available to all workers, regardless of their employer’s 

size. NEST has demonstrated that it is possible 

to provide high-quality investment solutions and a 

savings experience at a low charge. Our charges 

are currently a 30-basis point annual management 

charge, with a contribution charge of 1.8%. Over 

time, this will be equivalent for most members to a 

cost of 50 basis points. This is a change from past 

charges – for example stakeholder charges could 

be up to 150 basis points. 

Jessica: Within your initiatives do you categorise 

the low and medium earners together or do you 

separate them out in order to target those at the 

lowest end of the spectrum? 

Paul: We feel that our investment approach is 

suitable for everybody within the earnings band 

between £7,000 to £35,000 and do not feel that 

there are signifi cant differentials in how we would 

invest the money for lower earners in this income 

bracket. The most important differential from the 

evidence we have collated is people’s age profi le. 


With this, we take very different approaches by 

using our target date fund approach. We carefully 

manage the risk of members’ money in accordance 

with their distance from retirement in a sophisticated 

and age specifi c way. Our strategy is carefully 

tailored whether you are 22 or 62. 

The medium-to-low-earning target group for whom 

we have designed our investment and communications 

approach represent 80% or the working age 

population in the UK, so it is genuinely a massmarket 

product that we are talking about. 

Jessica: In terms of those age profiles presumably 

the way that you communicate to each one 

is different? 

Paul: Certainly; how you speak to someone in their 

fifties, when they are perhaps thinking about their 

retirement plans versus how you speak to someone 

in their twenties, who are <strong>focus</strong>ing on the importance 

of starting saving, is very different. 

Our communication approach mirrors our approach 

to investing with different objectives, for different 

times of life. For people in their thirties to fi fties, our 

<strong>focus</strong> is on growing pots as quickly as possible but 

without taking inappropriate risk. Our objectives for 

people in their late fifties to sixties are more <strong>focus</strong>ed 

on investing in the right way for how they will be 

taking their incomes in retirement. 

Jessica: How are government initiatives for 

improving pension plan provisions impacting the 

way in which pension plans are operating? 

Paul: Automatic enrolment, which came into force 

for larger employers from October 2012, has been 

an enormous shift in the way that UK pensions 

operate. We’re moving from a position where 

pension saving was becoming a minority pastime 

to a culture where saving for retirement is the new 

normal. It is a huge cultural shift that employers, 

Our communication 

approach mirrors our approach to investing with 

different objectives, for different times of life 

Paul Todd, NEST 

providers, workers and advisers are expected to 

grapple with. 

The second initiative will be The Pensions Regulator 

and DWP guidance regarding what decent pension 

provision and default investing should look like. 

Detailed principles about the importance of good 

governance, that people making decisions on the 

running of pension schemes are accountable and 

that schemes are well administrated, and so on are 

important additions to the regulatory landscape. 

The Pensions Regulator and DWP have spent a lot 

of time producing guidance to make sure that the 

millions of new people who will be saving for the 

first time are saving in suitable, well-administered 

vehicles. 

In May 2011, the DWP issued guidance about 

the default investment approach for DC pension 

schemes. This is a very helpful document for 

employers and advisers when considering which 

schemes they should be automatically enrolling 

their workforce into. It addresses issues such as 

the importance of diversifi ed investment strategies 

to understanding members’ risk profi les, appetites 

and needs. It also gives very clear guidance about 

the importance of clear and realistic investment 

objectives and offering an alternative to default 

strategies where the default strategy may not be 

suitable, for example because of ethical or religious 

considerations. The DWP guidance says 

automatically enrolled savers should have some 

investment choice. 


NEST is confi dent that it meets this guidance and in 

many areas has gone further than these minimum 

standards. We have had the time to research and 

think about what is in our members’ best interests 

and to design a scheme that is purely designed to 

meet their needs. 

Jessica: How will the additional operational 

and data demands create new challenges for 

pension plans? 

Paul: The regulator has said that all new data 

relating to pension plans has to be 100% accurate 

and any legacy data should be at least 95% accurate. 

The onset of employer duties and automatic 

enrolment has been a game-changer in terms of 

the quality of data provision. It is no longer acceptable 

to have it “nearly right” — it needs to be 100% 

correct. While the onus is on pension plans to be 

very accurate in the data that they file to the regulator, 

part of the challenge will be for employers in 

that they will need to ask fundamental questions 

as to how they are going to comply with the new 

duties. One of these questions is making sure that 

they have picked a suitable scheme that meets 

their workers’ needs, but they also need to make 

sure that their payroll systems are in place to meet 

the new duties. 

Jessica: What type of investment strategy will 

NEST be adopting in the future in order to lead 

innovation in work place pensions and maximise 

returns for the benefit of members? 

Paul: NEST recently won an award from IPE magazine 

for our innovative approach to DC pensions. We 

believe we are being recognised within the industry 

as a positive influence on the way DC provision 

will be made in the future precisely because we 

had a chance to consider what needed to be done 

differently in an automatic enrolment world. Our 

primary <strong>focus</strong> has been on understanding who 

our members are and how we can act in their best 

interests at all times. 

One of our key investment beliefs is the importance 

of diversifi cation. As our assets under management 

grow we will be able to access different asset 

classes in a more granular fashion and therefore, 

take an even more sophisticated and dynamic 

approach to the way in which we diversify risk. 

How a new generation of savers will approach 

retirement is likely to be the next big challenge for 

the pensions industry. So a big part of our future 

work will be fi nding innovative ways to invest in the 

last decade of the accumulation phase. 

Another thing on the immediate horizon is the 

paper published by the DWP on reinvigorating 

workplace pensions. We feel that NEST has gone a 

long way in meeting some of the challenges set out 

in the paper with our investment strategy and we 

are keen to work with the industry and government 

to look at what other products and strategies can be 

developed in order to help meet the needs of the 

millions of new savers. 

Jessica: Do you feel that workplace savings are 

going to continue shifting? 

Paul: It seems to me that most of the big changes 

have been made and that the framework is in 

place and stable for the foreseeable future. There 

are likely to be changes to elements of the state 

pension to further encourage a culture of long 

term saving. 

The discussion around workplace pensions today 

is more about the ways in which you can improve 

products within this overall framework. These 

are not really fundamental changes, but more 

about consolidating and improving on the overall 

cultural shift. 


The last five years have seen a substantial shift in 

the roles and responsibilities of provider’s employers 

and individuals. The next five years are likely to be 

about ensuring these changes are successful but 

there will always be space for improvement. 

Jessica: How would you advise plans to adopt a 

long-term view of their investment strategy and 

harness tax breaks along with other pension associated 

reforms? 

Paul: Our investment horizon is 40 or 50 years and 

so the importance of making decisions is not predicated 

by current events and short-term trends. We 

always want to make long-term decisions in the 

interests of our members; this is why we are interested 

in discussions around longer-term investing 

in equities, infrastructure, real estate and property. 

These are areas where DC has not traditionally 

tended to <strong>focus</strong>, but which can and should have a 

signifi cant role to play in achieving long-term, stable 

returns. We are interested in long-term sustainable 

performance and in working closely with 

the companies that we are invested in, to ensure 

that their strategies are in-line with our members’ 

interests. We like the concept of shortening the 

investment chain, so that we can align the interests 

of our investments with the interests of the ultimate 

benefi ciaries – our members. 

Jessica: Do you have any final thoughts on 

this topic? 

Paul: Delivering successful solutions means 

ensuring the interests of our suppliers and stakeholders 

are aligned to the interests of our members. 

We work with third parties like State Street who 

share our perspective on our members’ interests 

and we only enter into arrangements that are based 

on fair commercial value for our suppliers. We wish 

to build sustainable and equitable partnerships. 

We want to encourage companies to think long 

term and are interested in the different kinds of 

risks and opportunities that long-termism provides 

to pension funds. This is why we take a strong 

interest in less traditional risk factors such as environmental, 

governance and social issues because 

these are likely to have material impacts over longer 

time periods. 





Interviewer 



Interviewee 

Guus Warringa 

Board Member, Chief Counsel, APG Asset 

Management 

Jessica McGhie: How is the current Dutch regulatory 

landscape impacting your clients? 

Guus Warringa: The question is really whether 

there is a Dutch regulatory landscape at all considering 

that all of the key legislation is coming from 

Brussels. It is this legislation that is impacting 

our clients. 

Jessica: So, what then, are the implications 

of such centralised European regulations for 

Dutch funds and do they dictate the national 

regulatory landscape? 

Guus: Europe is increasingly covering pension 

funds through its avalanche of regulatory initiatives 

that affect the financial markets in which we are 

active. From the Dutch side, there is legislation 

aimed at the structure of the pension funds themselves 

but this creates entirely separate issues. 

Jessica: In what way is such legislation affecting 

the structure of pension funds? 

Guus: In the Netherlands there are many initiatives 

concerning whether or not there should be 

tax deductions for the pension premiums paid over 

and above a specific amount. There is also talk of 

decreasing the deductible amount of the yearly 

percentage by which pensions build up, along with 

changing the corporate governance of pension 

funds whereby pensioners are, for example, given 

a seat on the fund’s board. These national initiatives 

will impact greatly on the Dutch pension landscape 

together with those initiatives coming from Brussels 

that will also have a great, or possibly greater, 

impact too. 

The directives coming from Brussels primarily 

concern the investment side of pensions, whereas 

the relationship between pension funds and 

their members remains arranged at a national 

level. As there is no such thing as an average 

European pension fund, European countries all 

have their own type of pension systems and 

management structures. 

Jessica: Among your clients are you seeing 

different reactions to both EU and national 

regulations, depending on whether the fund is 

private or public sector? 

Guus: The difference is not so much between 

private or public sector funds but between active 

and passive funds. There is a small group of 

European pension funds who are active in monitoring 

all of the changes and even trying to 


infl uence them, but the majority of these funds are 

rather passive, which unfortunately is not having 

any impact. 

In general, the Dutch pension fund sector is pretty 

active in Brussels and has a very strong presence 

in The Hague, but this doesn’t necessarily apply to 

other European pension funds. 

Jessica: I understand that one of the largest 

clients of APG is the ABP, the Dutch government 

workers fund. What does the Institutions 

for Occupational Retirement Provision (IORP) II 

Directive mean for the relationship between APG 

and ABP and how is this legislation impacting on 

your custody and counterparty relationships? 

Guus: The way in which Europe will evolve remains 

cloudy but if we are to be confronted with rules 

on solvency and valuation then this will certainly 

impact on the way of investing. If it applies to the 

fund then we and the funds that we serve will 

simply adapt. 

Jessica: Are there specific processes in motion for 

this at present ? 

Guus: It is too early to see exactly what the impact 

will be. With this kind of regulation the devil is in 

the detail, and while you can oblige and agree on 

the high-level principles, you can only achieve good 

impact analysis if you know the details. 

Jessica: How would you say a balance can be 

struck between the regulators’ demand for compliance 

and the need to enhance member protection 

within Europe’s continued market volatility? 

Guus: In general, we welcome all of the initiatives 

because they are all intended to protect the 

end investor. However, simultaneously we feel the 

rulemakers have a highly politically driven agenda, 

which at times neglects proper market impact 

analysis and consequently we should be scared 

that we might not always achieve what we set out 

to do. This is a true danger in terms of the speed 

with which the Commission wants to develop, along 

with the political weight behind it; there is a lot of 

ideology involved. Instead, the emphasis should be 

put back on the core objective: people’s pensions 

and savings. These should not be over-infl uenced 

by politics and instead be a very neutral calculation. 

Jessica: Is there still a lot of work to be done to 

make sure that such decisions are not too heavily 

influenced by the political landscape? 

Guus: Absolutely, and this is why we need 

pension funds to raise their voices more than 

they are currently doing on both a national and 

European level. 

Jessica: Do you anticipate that the Alternative 

Investment Fund Managers Directive (AIFMD) 

will have far-reaching implications on 

depository services? 

Guus: There will be some implications but these 

will differ for each pension fund and custodian. 

There will be pension funds who will outsource 

everything under this legislation while others will 

retain most operations in-house. Both routes will 

mean the pension fund deciding with their custodians 

who will be doing what and whether there will 

be a marginal or material check in order to create 

a tailor-made solution. Ultimately, this outsourcing 

will be the choice of the fund, and it is not automatically 

determined by the size of the fund. 

Jessica: What operational changes do 

you feel pension funds need to be making 

in order to deliver a competent governance 

system that aligns national interests with 

Brussels’ stipulations? 


Guus: I hope that pension funds, or national 

associations of pension funds at least, will increasingly 

take the changing regulatory landscape into 

account and carefully decide whether regulations 

intended for other parts of the sector than the 

pension fund industry are actually impacting them 

as well. This avalanche of regulatory initiatives 

within the financial sector as a whole does impact 

the activity of pension funds too, and it would be 

wise if more pension funds organised themselves in 

such a way as to effectively monitor these changes 

and, if needs be, try and infl uence them. 

Jessica: How should pension funds be preparing 

from an operational and structural point of view 

in updating their funds so that they can comply 

with new legislation? 

Guus: It is imperative that their organisation is 

well aware of what is playing on the minds of 

European and national politicians. They should be 

more proactive and have employees who are solely 

devoted and dedicated to that activity. 

Jessica: Would you take the same line when 

advising pension funds on updating their compliance 

systems? 

Guus: With compliance only you are already too 

late. I am speaking of new regulatory initiatives, 

while compliance deals with existing regulatory 

initiatives. If there are new regulatory arrangements 

then you would need to comply with them but it 

is much better to recognise what is coming and 

in this respect a compliance officer will not be of 

much assistance. 

Europe is 

increasingly covering pension funds through its 

avalanche of regulatory initiatives 

Guus Warringa, APG Asset Management 


SECTION 5 

Meeting objectives across markets 

EXPERT DEBATE 

What are the challenges and opportunities for pensions operating 

as multinational plans? 

Moderator 

Bob Campion 

Freelance Financial Journalist 

Panellists 

Tim Caverly 

Executive Vice President, 


Nikolaus Schmidt-Narischkin 

Managing Director and Head of 

Fiduciary Management, Deutsche 

Asset Management 

Bob Campion: What are the objectives and 

benefits of approaching pension management on 

a pan-European basis versus a per country basis? 

Tim Caverly: There are several benefi ts to 

approaching pension management from a Europewide 

basis. The first is achieving economies of 

scale. Smaller funds effectively increase their 

“buying power” — they can leverage relationships 

which they may not have been able to 

access previously, as a way of obtaining intellectual 

capital, best practice and good ideas for pension 

fund management and servicing. There are also 

economies of scale around pricing as it is more 

important than ever that pension funds look closely 

at their costs. Another benefi t is around oversight 

of pension plans. Chief financial offi cers (CFOs) 

are getting much more actively involved in their 

organisation’s pension plan — they are reviewing 

the risks and potential exposures that the plan 

represents to the corporation, from both an asset 

and liability perspective. 

Nikolaus Schmidt-Narischkin: I agree, although 

we are currently talking about an organisational 

set-up where pension assets of one multinational 

plan sponsor are being pooled from one or more 

countries or locations and, for this, what Tim just 

said holds true. However, the core question for me 

is: will we have a multinational plan? You have the 

IORP directive that allows for cross border pension 

plans, which is more than the simple pooling of 

assets. A true “next step” would be the development 

of a single, pan European cross-border 

plan with a cohesive administration platform and 

support for the plan members. By having all of 

these elements we would be able to enter a phase 

where, on a European basis, there would be more 

cohesiveness in plans. 


Bob: How close do you think the industry is to 

achieving a multinational European pension plan? 

Nikolaus: When talking about asset pooling I do not 

feel that we are very far away because there have 

been a number of corporate initiatives such as the 

one from Deutsche Bank. This is the first phase but 

it is a complex topic and is not something that has 

been truly established by a significant number of 

multinational players. The next step for a multinational 

pension plan is lagging even further, as even 

though there are a number of platforms like the 

German insurance regulated Pensionsfonds or the 

Dutch PPI which have the potential to be multinational, 

there is currently not one single plan doing 

exactly this. There are a number of multinational 

companies who are trying to pool the management 

and asset management of different Tier 2 and Tier 

3 into locations like Belgium but again, these are 

only baby steps. 

Tim: Yes, I agree. My previous comments relate to 

approaching individual plans on a multi-domicile 

basis in order to obtain economies and improve 

oversight. The next step is to find harmonisation 

across the market in order to pool assets together. 

Currently, there are two primary methods of pooling. 

First, there is asset pooling where pension funds 

invest in tax transparent vehicles in collective funds. 

In addition, there are vehicles that enable pension 

plans to pool both assets and liabilities using the 

Institutions for Occupational Retirement Provision 

(IORP) compliant structures, as noted by Nikolaus, 

that are available in countries such as Belgium, the 

Netherlands and Luxembourg. Some progress is 

being made in making it easier for pension funds 

to adopt these approaches, but there needs to be a 

continued push by the industry at a European level, 

because ultimately these improvements will benefi t 

a fund’s individual unit holders. 

Bob: What data do you need to set up one of 

these structures? 

Tim: From a status quo multi-domicile perspective, 

as opposed to pooling, trustees, chief investment 

offi cers, CFOs and chief risk offi cers require a lot 

of data both locally and on a pan-European basis 

to gain a consolidated picture – including analytics, 

attribution data, risk reporting and exposure 

reporting in terms of counterparty and concentration 

risk. 

There is also an increasing trend for more consolidated 

headquarters reporting, where corporates are 

centralising and examining their global exposure 

and accounting reporting. Chief fi nancial offi cers 

(CFO) and chief risk offi cers (CRO) increasingly 

need this type of data on a daily basis. 

We are also seeing a need for consistent valuation 

and pricing sources across multiple markets, in 

particular for companies running multiple pension 

funds. This trend is similar to what the asset 

management industry has already achieved with 

regard to investment funds to achieve consistency 

across the board when pricing securities. 

We are also starting to see a real need for “lookthrough” 

data for holdings of unitised portfolios, 

so that if pension funds are buying into collective 

vehicles they are able to look through to the 

underlying assets. 

More centralised data is important, but you have 

to make sure that you are using data to primarily 

look after each individual plan’s local requirements 

before then rolling them up into a centralised basis 

for the plan’s chief fi nancial offi cer, chief operating 

offi cer and trustees. 


Nikolaus: The idea behind pooling and the centralised 

vehicle system is economies of scale, best 

practice and better servicing and pricing, although 

all of these are underpinned by the attempt to 

manage risks. Assets and liabilities are sensitive 

to changes of interest rate, inflation, credit, etc. In 

order to manage these risks in a “liability-driven” 

way you have to know the numbers on both sides 

and stress them with different market scenarios. 

If pension plans look further down the road they 

see Solvency II for IORPs and the data needed 

here has already been specifi ed very clearly. 

Gathering this data is already best practice for most 

multinational plans. 

Bob: Presumably the objective for such data 

gathering is, first, governance and, second, risk 

management. How does a multinational plan help 

a pension scheme or company with governance? 

Nikolaus: Risk management and governance are 

hard to separate. They imply control of strategy 

and information. Pooling exercises normally give 

a central office the chance to better see whether 

local investment decisions are compliant with 

global strategies – for example to de-risk or to invest 

only passively. This is being done by creating a tax 

transparency vehicle situated in Belgium, Ireland 

or Luxembourg for all investments. There would 

then be one umbrella vehicle with different sub 

funds for each location or plan which would in turn 

invest into a combination of individual and shared 

asset pools for different asset classes. Having 

that implies having one set of data that basically 

covers the active side of things while passively you 

will still have other data to cover along with the 

regulatory side. 

Bob: Presumably this helps to reduce the overall 

risk of error if you are centralising everything, 

as you will be reducing the amount of data in 

different files, folders and jurisdictions which 

should improve the safety of your process? 

Tim: Yes it does, and it also gives you a good handle 

on your total exposure across portfolios because it 

provides you with a centralised view of your holdings 

and performance from an analytics standpoint. 

This insight can then be delivered to the various 

constituents who are looking for this data, whether 

it’s the asset manager, chief investment offi cer or 

COO of the plan. Moving from an individual plan 

basis to a centralised reporting system makes for 

a more streamlined process while reducing the 

risk. Information and data are key given the current 

volatile markets. 

Nikolaus: You may also be protecting the assets. 

If, for example, you look at a large multinational 

tobacco fi rm operating its pension plans especially 

in periphery countries such as Greece or 

Albania. In these countries you’ll continue to have 

local plans but pooling those assets in a European 

core country would give a different handle on risk 

once more. 

Bob: Do you feel that the governance and 

risk management benefits outweigh the 

costs and challenges brought on by 

multinational structures? 

Supporting a 

multi-domicile plan 

on a Europe-wide basis, you leverage a much larger 

pool of assets made up of individual portfolios 

Tim Caverly, State Street Global Services 


Tim: To a certain extent, yes. You are reducing risk 

while also creating economies that reduce overall 

costs and expenses by either pooling assets or 

looking at multi-domicile pension funds in a holistic 

way, as opposed to on an individual basis. Through 

asset pooling structures, or even just by supporting 

a multi-domicile plan on a Europe-wide basis, you 

leverage a much larger pool of assets made up 

of individual portfolios, which in turn means you 

would also benefi t from better pricing in addition to 

reducing risk. Ultimately it is about creating economies 

of scale balanced against risk reduction with 

better data and better reporting. 

Nikolaus: The first thing you achieve is greater 

transparency. Deutsche Bank’s pension risk 

committee, for example, supposedly covers all local 

plans or at least the Tier 1 and 2. Their former information 

levels were basically zero. The liability side 

was eventually covered, but on the asset side you 

had local plans invested in a range of mutual funds, 

highly priced with different standards of communication 

or reporting. As a result you had minimal 

transparency on asset allocation at retail prices for 

the smaller plans. By pooling these assets greater 

transparency is created because you have larger 

vehicles, with a better choice of investment and a 

“look-through” approach that opens a completely 

new world of pension governance. So yes, potential 

benefi ts should definitely be worth the challenges 

of setting up such a structure. Costs actually should 

be reduced. 

Bob: What are the regulatory changes that would 

need to be made in order to enable true pension 

pooling across borders? 

Tim: We are approaching this in two ways. The first is 

to support businesses from a non-pooling perspective, 

by rolling up individual plans and creating 

centralised headquarters reporting analytics. The 

next step would be to try and develop a pure, 

pan-European asset pooling structure, but there 

are no easy solutions because of the different tax 

treatments and regulatory reporting requirements 

locally. There are also some issues around the 

portability of pension funds on a cross-border basis 

that are not yet completely worked out. The largest 

issue is the lack of harmonisation across European 

member states. 

Nikolaus: When we began pooling our assets, we 

started with the German plain plan, followed by 

Luxembourg. Dutch, Belgium and Swiss plans were 

to be next. However, due to different tax systems 

we encountered problems because the transfer of 

assets into a different location would result in a 

tax penalisation. Consequently we had to exclude 

Switzerland for the time being. 

As far as pooling of UK assets is involved, the plan 

sponsor might see issues with trustees. It’s not so 

much a question of regulation but one of how much 

we trust one another in terms of making plan assets 

portable and truly transporting them to a different 

location, so you don’t even need diverse regulation 

to make things cumbersome – cultural issues and 

different forms of taxation are totally suffi cient. 

Bob: If you were starting from scratch now would 

you follow the same route, starting with Germany 

and then spreading outwards? 

Nikolaus: Starting from scratch in a greenfi eld 

situation I would probably opt for a single defi ned 

contribution scheme for all my locations across 

Europe. I would arrange the plan to be localised 

in the Netherlands, using a Premium Pension 

Institution (PPI) with guaranteed life-cycle funds 

for the accrual phase and annuities paid out by an 

insurer for the pay-out phase. This is a truly inter- 


national vehicle which de-risks the employer, is very 

transparent and is “open platform” as it can offer 

services from a number of providers. 

In the situation most of my clients are currently in 

having different defi ned benefit plans in locations I 

would want to pool assets in a centralised vehicle 

under a centralised investment guideline; probably 

in Ireland or Luxembourg. 

Pooling exercises 

normally give a central office the chance 

to better see whether local investment decisions 

are compliant with global strategies 

Nikolaus Schmidt-Narischkin, Deutsche Asset Management 

Tim: These ideas sound great, particularly if you 

are starting from a blank piece of paper. Most 

companies are now entrenched in existing plans 

and some are looking at Nikolaus’ second idea as 

the most practical in terms of rolling out effi cient 

structures for their plans. 

One of the key marketplace trends we are seeing 

is that both the trustees and managers of pension 

funds are looking for efficiencies across the board. 

The key is to drive economies of scale through 

either new vehicles or by combining assets in the 

best way that you can, to drive down costs and 

improve your reporting. 

The driving force behind all of this is cost reduction 

and better control over assets and data in the most 

effi cient vehicles possible. 

The industry is heading in the right direction but 

we do have to keep pushing the EU to harmonise 

across borders. 


EU TRENDS: WHAT IS THE FUTURE FOR PENSION FUNDS? 

Future Pension Arrangements: Netherlands 

Gerard Riemen 

Acting Director, Pensioenfederatie 

(Federation of the Dutch Pension Funds) 

The Euro crisis has had a unique impact on pension 

arrangements in the Netherlands. Never before 

were pension funds obliged to skip indexation of 

pension benefi ts and rights for so many years; and 

never before have so many pension benefi ts and 

pension rights had to be cut. 

In 2013 pension rights and pension benefi ts will 

decrease by between 0.5% and 7% for millions 

of people. Thanks to the three-pillar system, the 

effect of the cuts in the second pillar will be less 

severe on total pension benefi ts because those 

benefi ts derived from the first-pillar state pension 

will remain unimpaired. 

Such measures are unavoidable since most pension 

funds are now facing a funding gap of more than 

four years. The direct cause of this funding gap is 

the all-time low interest rate which pension funds 

have to use to calculate their liabilities. In addition, 

there are more structural problems such as 

an ageing working population and the longevity 

of pensioners. An ageing workforce implies that 

the premiums paid by workers are less powerful 

to counter setbacks on the return of investments 

or to catch up with longevity. Longevity risk simply 

means that benefi ts have to be paid for a longer 

time period while the receivers of those benefi ts 

have never paid for it in the past. 

The new pension arrangements in the Netherlands 

will provide answers to the two main problems 

listed above, with the key issue being risk transparency. 

The number one lesson learned from the 

current situation is that people are unaware of the 

uncertainties of pension rights and benefi ts. People 

expected a full guaranteed pension and a cut in 

benefi ts and rights was beyond their imagination. 

People have no clue about the implication of a 

security level of 97.5% for pension funds, as is the 

case in the Netherlands. Pension funds have never 

communicated that a cut of pension rights and 

benefi ts is, in fact, possible. As far as indexation is 

concerned, there was communication that indexation 

is conditional, but that said, this message has 

not been fully understood by people. 

Therefore, for the new pension arrangement, a 

new approach is necessary. The pensioner and the 

pension fund participant want to know only these 

things: what will they receive when they retire, 

what they can buy from it (purchasing power) and 

what are the chances that the benefi t will be lower 

or higher? 

This new approach means that the pension 

arrangement and communication should place 

the participant as the starting point. It should be 

entirely clear in the pension arrangement itself what 


the participant can expect and what the chances 

are that their benefi ts will be lower or higher. This 

should be clear in real, not nominal terms. The 

arrangement should be a “complete” arrangement: 

risks should be specifi ed in advance, and steering 

methods to countervail these risks should be clearly 

specifi ed in the contract. Such a complete contract 

should, therefore, outline what the process will 

be in the event of poor investment returns or low 

discount rates, and what will happen where there 

are large returns on investments or high discount 

rates. It should also be clear how the risks are 

shared between the generations and it is important 

that a balance is achieved in this risk sharing. 

This new pension arrangement also introduces a 

new approach for a financial assessment framework. 

In this new legal framework, the funding 

ratio of the pension fund will no longer be the 

main instrument by which to measure the fund’s 

financial situation but, instead, the chance to reach 

the agreed benefi ts. These controls mean that 

each pension fund is working towards achieving 

the agree benefi t. It is essential that the member 

realises that there is no guarantee that the agreed 

benefi t will be reached. It is an ambition but the 

pension fund has the obligation to do everything to 

reach that ambition. 

So what is the core of the new pension arrangement? 

There is an agreement on the goal; let’s say 

70% of the average income during the working 

period. The goal is that the rights and benefi ts 

will be indexed to prices. The participant of the 

pension fund is aware that there is no guarantee. 

In the agreement it is also clear what the probabilities 

are and that the targeted benefi t will be lower. 

Therefore, the best and worst case scenario for 

the targeted benefi t is 5%, even if the probablities 

Pension rights 

and benefits will decrease by between 

0.5% and 7% for millions of people in 2013 

Gerard Riemen, Pensioenfederatie (Federation of the Dutch Pension Funds) 

appear higher. The pension fund has to show that 

it reaches the defi ned indexed benefi t with all the 

steering instruments that it has. As the premium 

control is no longer that powerful, it instead is 

mainly down to a trade-off between higher risk and 

higher expected benefi ts, or lower risk and lower 

(but also more certain) pension benefi ts. 

In this line of thinking a lot of questions still have 

to be answered. How does a pension fund show at 

the beginning of the pension arrangement that all of 

the control means point in the right direction? How 

does a pension fund show that at the beginning 

it is realistic to reach the benefi ts as agreed upon 

in the pension arrangement? At what time must 

the pension fund come to the conclusion that the 

targeted benefi ts are not realistic anymore? What is 

a reasonable discount rate for calculating the liabilities? 

Should this discount rate depend on the risks 

the pension fund takes? Apart from these technical 

questions, the big legal question in the Netherlands 

is: can the accrued pension rights be a part of the 

new pension arrangement? 

With this new pension arrangement, the distinction 

between defi ned benefi t (DB) and defi ned 

contribution (DC) schemes is blurred. These new 

arrangements are no longer, in the classical sense, 

DB. Benefi ts are still related to the early earned 

income and there is still risk sharing over the whole 

period (from the beginning of paying the premiums 

until the last paid out benefi t). The Netherlands 

Bureau for Economic Policy Analysis (CPB) calculated 

that, with the new pension arrangement, 


over a period of 20 years the benefit will be higher 

than in the current DB pension arrangements in 

the Netherlands. 

The new pension arrangement is the compromise 

between DB and DC where all of the risks 

are shared collectively. There is a clearly defined 

ambition for a benefit and there is total transparency 

to the participants about what the chances 

are for a higher and lower benefit than targeted. 

The control instruments of the pension fund steer 

these chances and the funding ratio is equally 

important beacuse of the influence of the overall 

economic situation. 

Pension 

arrangement and communication should 

place the participant as the starting point 

Gerard Riemen, Pensioenfederatie (Federation of the Dutch Pension Funds) 



Future Pension Arrangements: Norway 

Rolf Skomsvold 

Managing Director, 

Norske Pensjonskassers Forening 

(Norwegian Association of Pension Funds) 

A new law on public (first-pillar) pensions was 

passed on 1 January 2011. This new pension 

system was intended to “solve the problem of 

longevity” and the lower birthrate 1 by encouraging 

people to work longer. Consequently, several 

mechanisms were introduced. Today, members 

earn pension rights at a certain percentage of their 

income for every year that they work up to 75 years 

of age. The aggregated “savings” is the basis for 

any pension and it is calculated by dividing the 

member’s savings by the number of years that they 

are expected to live as a pensioner. 2 The longer an 

individual works, the higher his or her pension. But 

at the same time, as life expectancy is increasing, 

people are working longer in order to avoid their 

pensions from decreasing (compared with previous 

generations). Pension age is flexible: starting to 

draw on a public pension can be whenever the 

individual wishes from the age of 62 — while at the 

same time continuing to work. This new system is 

supposed to have incentives that — at least to a 

large extent – counter the problem of longevity by 

making people work longer. 

Traditionally, defi ned benefi t (DB) has been the 

most common form of occupational pensions 

(second pillar) in Norway. All public servants and 

a large part of private employees used to have this. 

A traditional DB pension aims at a total pension 

(public pension and occupational pension together) 

equal to, say, 66% of fi nal salary. This, however, is 

not coherent with the new public pension system. 

As a consequence, The Banking Law Commission 3 

was asked to propose new kinds of occupational 

pension schemes in the private sector. 4 The diffi culties 

of pension funds and life insurance companies 

in handling longevity also formed part of the 

background, as did accounting rules requiring 

recognition of future pension rights as liabilities. 

This, and the fact that low returns on investment 

— particularly low interest rates — has led to a 

transition from DB to defi ned contribution (DC) 

schemes, spoke for new occupational pension 

schemes where cost and risk were distributed 

differently between employers, employees and 

pension funds/life insurance companies. 

1 

Compared to the large cohorts born during the fi rst 10 – 15 years after the war. 

2 

It is just a calculated (virtual) amount – public pensions are still “pay as you go”. 

3 

A semi-permanent commission proposing laws and regulations on banking, insurance, pensions and other fi nancial market questions. 

4 

The pension scheme for public employees has been declared untouchable for the time being. 


The Commission forwarded a proposal on 18 June 

2012. The proposal recommended a hybrid occupational 

pension scheme based on the following 

principles: 

The basis is a yearly contribution from the employer 

between 2% and 7%/8% of salaries. 5 To compensate 

for the fact that salaries above a certain level 

do not earn the member a higher public pension, 

the percentage can be increased for income above 

this level. The pension fund/life insurance company 

has to guarantee a minimum return on pension 

savings of 0% – if the plan is not based on individual 

choice of investment (unit-linked). 

Life expectancy 

is increasing, people are working longer in order 

to avoid their pensions from decreasing 

Rolf Skomsvold, Norske Pensjonskassers Forening 

Accumulated savings are to be revalued in one of 

two ways: the employer may guarantee that funds 

increase in line with wages, and pay an extra 

premium if the return on funds is not suffi cient; or 

members have to rely on these returns. 

Funds released as a consequence of members 

dying are to be shared between remaining members 

(mortality inheritance). 

When retiring, each member’s saved amount will 

be the basis for his or her pension, either as a 

lifelong pension or one which is over at least 10 

years. The yearly pension will be calculated based 

on expected lifetime, similar to the rule of the public 

pension system. As in the public pension system, 

employees can draw on pensions from the age of 

62, whether they retire or not. 

The Banking Law Commission is at present working 

on the problem of transition from the old DB 

scheme to this proposed new hybrid scheme. 

5 

There is a mandatory lower level of 2%, but between this and the upper level the employer may choose. 



Future Pension Arrangements and Ambitions for the UK 

Mel Duffield 

Head of Research & Strategic Policy, 

National Association of Pension Funds 

(NAPF) 

Over the last five decades, successive legislative 

changes, turbulence and economic developments 

and increasing longevity have all increased the 

costs of defi ned benefit (DB) pensions to UK 

employers. Looking back to the start of the last 

decade, while the Dutch were busy collectivising 

their average wage DB schemes, the UK was 

busy strengthening the protections and insurance 

mechanisms in place for members of existing DB 

schemes and, as a result, did relatively little to 

make it easier for employers to offer these schemes 

and manage their risks. Meanwhile, the trend away 

from DB has, if anything, accelerated. Ten years 

later, the majority of employers have now closed 

their DB schemes and only around 10 per cent of 

private sector workers are saving into one. 

The decline of DB provision, a move towards defi ned 

contribution (DC) pensions and the prevailing 

economic conditions appear to have infl icted some 

lasting damage onto the UK as a nation of savers: 

• Less than 50 per cent of people currently pay into 

a workplace pension scheme. 1 

• Average total contributions to a DC scheme 

are only 9.1% compared with 20.9% for 

DB schemes. 2 

Consequently, the UK faces a potential pensions 

crisis over the next 20 to 30 years, with fewer 

people saving for retirement than in the past and 

those who do contributing much less than their 

predecessors. 

But there is good news on the horizon. The 

UK government, the Pensions Regulator and UK 

employers have been working tirelessly over the 

last few years to introduce automatic-enrolment – 

the most signifi cant pension reform we have seen 

for decades. Starting in October 2012, the largest 

employers in the UK have been placing their 

workers into a pension scheme of the employer’s 

choice. If opt-out rates are suffi ciently low this will 

recreate a long-term savings habit in the UK, and 

not before time. 

Into what sort of pension plans will workers be 

enrolled? The vast majority of the 6 to 9 million new 

savers are expected to be placed into a DC scheme, 

where it is the individual who bears all the investment, 

infl ation and longevity risks. 

Fundamental to the success of the reforms will 

be the contribution rates that both the employer 

and individuals make. The statutory minimum for 

automatic enrolment is a 4% contribution for the 

1 

ONS Annual Survey of Hours and Earnings 2011. 

2 

ONS Pension Trends Survey: Chapter 8, July 2012. 


individual and a 3% contribution for the employer, 

matched with a further 1% in tax relief. So at a 

“default” savings rate of 8%, that contrasts poorly 

with some of our European neighbours who have 

already developed a healthy culture of “work a day 

a week for your pension”. A consensus is beginning 

to build here that the 8% savings rate will 

not be enough for many to achieve an adequate 

pension. This has been exacerbated by the carefully 

designed implementation of the reforms, 

which aims to smooth the costs on employers and 

will see employers being “staged in” by size, and 

contributions being “phased in” over time. 

Ahead of automatic enrolment, employees in 

occupational DC schemes are contributing on 

average only around 4% of their salary to pensions 

compared to 5.1% in DB schemes. 3 At the same 

time, a number of employers have used the move 

from DB to DC as an opportunity to reduce their 

pension costs – the average employer contribution 

to a DC scheme is 7.7% compared with 17.1% to 

DB schemes. 3 

This, combined with increased volatility in market 

returns and rising annuity costs, has developed a 

perception of poor value for money and negative 

outcomes for those retiring today with only DC 

benefi ts. The average retiree buying an annuity with 

a DC pension pot has around £26,000 – enough 

to buy an annuity income of around £1,400 a year 

based on today’s annuity rates. 

There is also growing evidence of disengagement 

from savers, which leaves them likely to feel disappointed 

at retirement. The NAPF recently funded 

new research by the Institute for Fiscal Studies 4 

which found that: 

• Women in their fi fties are undershooting their life 

expectancy by around four years and men by 

around two years, when compared to national 

projections of life expectancy. 

• Around six out of ten (59%) have never thought 

about how many years of retirement they might 

need to fi nance. 

• A third (32%) of those aged 52 to 64 could not 

offer even a rough estimate of what their private 

pension income in retirement might be. This was 

worse for those with DC pensions (at 37%) but 

still worryingly high for those with DB pensions 

(at 28%). 

• Those approaching retirement (aged 50 to 64) 

with a DC pension are too optimistic about what 

their retirement income will be. On average their 

DC pension pot would need to grow by 77% to 

reach their expected income by retirement. 

Much-needed reforms to establish a single-tier 

state pension are still in the development stage but 

should eventually provide more certainty around 

what people will receive from the state and the 

benefi t they will get from making additional savings. 

This will provide a real incentive for individuals to 

save more for retirement. Encouraging individuals 

to save even just 1% more into their pension 

each year could increase their projected pension 

by 13%. 5 

3 

NAPF Annual Survey 2011. 

4 

IFS report: Expectations and experience of retirement in defi ned contribution pensions: a study of older people in England. 

5 

Pensions Policy Institute report for NAPF: Closing the gap: the choices and factors that can affect private pension income in retirement. 


The Pensions Minister for the UK, Steve Webb, 

has rightly started to ask the industry whether 

“pure” DC is the optimal pension plan design going 

forward, or whether there is a fertile middle ground 

between DB and DC where a better sharing of the 

risks can be struck and where consumers can be 

more confi dent of what they will get out of their 

pension at retirement. 

What could so-called defi ned ambition pensions 

— as mooted by Steve Webb Minister of State for 

Pensions — mean in practice? Whether it’s a more 

flexible DB scheme or a strengthened DC scheme 

that provides more certainty for the saver, there 

are clear options and solutions to bridge the gap 

between the current extremes. These include: 

• Allowing DB schemes in the UK to have truly 

discretionary pension increases, death benefi ts 

and adjustments to pension accrual to refl ect 

improving life expectancy. Some of the mandatory 

requirements around DB schemes currently 

prevent employers making adjustments that 

could help them to manage the costs. 

While much of the <strong>focus</strong> is likely to be on strengthening 

DC to provide more certainty for members 

and encouraging employers to again take some 

of the risks that have so far been transferred to 

members, it is important not to forget the merits 

of the more traditional forms of DB provision 

which, with appropriate reforms, can achieve the 

same objective. 

Public confi dence in pensions in the UK is at an alltime 

low. Current efforts to boost saving, including 

auto-enrolment, are a positive step towards reinvigorating 

workplace pensions in the UK. A drive 

towards greater governance and scale in DC should 

also improve outcomes for savers. Going beyond 

that, making defi ned ambition a success will 

require a wholesale change in attitude and crossparty 

support for major reform and relaxation of 

some of the current legislation. 

• Streamlining regulations to allow “cash balance” 

schemes to thrive where the employer carries the 

pre-retirement investment risk and the individual 

shoulders the longevity risk and post-retirement 

investment risk, with or without internal conversion 

rates. 

• DC schemes offering some form of minimal 

underpin or guarantee, e.g., on the savers’ own 

contributions into the scheme. 

• DC schemes that offer greater certainty of 

outcome through, for example, the purchase of 

deferred annuities ahead of retirement or the 

guarantee of a minimum annuity rate. 



PLAN FOR 

THE FUTURE 

As a pension fund, you see challenges everywhere — but also opportunity. Now’s the 

time to tackle long-standing concerns and build a plan for the future. Whether you’re 

looking for better data, improved operational efficiency, or effective ways of managing 

risk, State Street can provide the solutions, expertise and insights you need to succeed. 

See more at statestreet.com. 

State Street Bank and Trust Company London Branch is the marketing name and a registered trademark of State Street Corporation used for its financial markets business and that of its affiliates. The products 

and services outlined herein are only offered to professional clients or eligible counterparties. State Street Bank and Trust Company, London Branch, is authorised and regulated by the Financial Services 

Authority, details of which are available from us on request. 

This document is for marketing and/or informational purposes only, it does not take into account any investor’s particular investment objectives, strategies or tax and legal status, nor does it purport to be 

comprehensive or intended to replace the exercise of a client’s own careful independent review regarding any corresponding investment decision. This document and the information herein does not constitute 

investment, legal, or tax advice and is not a solicitation to buy or sell securities or intended to constitute any binding contractual arrangement or commitment by State Street to provide securities services. The 

information provided herein has been obtained from sources believed to be reliable at the time of publication, nonetheless, we cannot guarantee nor do we make any representation or warranty as to its accuracy 

and you should not place any reliance on said information. The forecasted information in the document is not a reliable indicator for future performance. State Street Bank and Trust Company London Branch 

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FOCUS ON THE FUTURE: DESIGNING TOMORROW’S PENSION PLAN • 71 

©2012 STATE STREET CORPORATION 12-16113-1212

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Information in this report is based on current understanding of legislation at the time of print. 

Product code: 056-ffdtpp-2013 

© Clear Path Analysis 2013

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