We asked three pensions specialists to share their views on market changes and the pensions industry – from diversity, to climate change and data challenges
There is a lack of diversity in trustees / pensions governance structure. Things seem to be moving in the right direction at last, but will it be a profound, lasting trend?
M. Nicolas J. Firzli (NF)*– Boardroom diversity is an essential component of both the ‘S’ and the ‘G’ in ESG, and they straddle key Sustainable Development Goals (SDGs), including, of course, Gender Equality (SDG 5) and Reduced Inequality (SDG 10). Until recently, say 6 or 7 years ago, except for a handful of union-nominated trustees sitting on the boards of industrial companies like British Steel or the National Grid, many Northern Hemisphere pension boards were very much masculine, ‘white’ and upper-class bodies. Even amongst the large Californian and Ontarian public pension funds, gender, social and ethno-cultural diversity was often a pious wish.
Many of them said: “Enough complacency! … For the blue-chip companies whose shares we own, how can we vote against board members at corporations with no women or minority directors, when we don’t even hold our own pension board to the same standards?” In the past 18 months, we’ve seen an acceleration towards diversity in pension fund governance. I was recently in New York, where the World Pensions Council (WPC) held a series of ESG-focused discussions with pension board members from across G20 nations, on the sidelines of the 73rd session of the UN General Assembly and I’m happy to report that many pension trustees are now playing for keeps.
Florence Fontan (FF)* – I agree pensions funds are serious about diversity. But I still see too few women on their boards, which is frustrating. Even when diversity is written into the law, it still gets overlooked. There have been various government initiatives to push for female representation. Pension funds need to accelerate the effective implementation of those intentions.
How can pension funds best enhance yield and manage risk prudently?
Philippe Tassin (PT)* Pensions Funds have faced real dilemmas in managing their liabilities over the last decade and investments strategies have been pushed to their limits. And now we’re seeing instability in stocks and bonds as markets become nervous about the shift away from central bank support. Investment strategies need to pay attention to under-appreciated liquidity risks while adopting more active (versus passive) strategies.
Aside from asset allocation there is securities lending, which is potentially less ‘extreme’ because it can add value to a portfolio within the boundaries of acceptable risk (limited counterparty credit risk, secured collateral risk and intraday settlement failures risk but no market risks). Time has demonstrated that it’s a convenient way to generate higher returns. A 2017 survey by the publication Funds Europe, reported that two thirds of survey respondents who lend securities are motivated by superior returns and over a third see it as a way to cover costs.
In parallel, regulators are pursuing improvements in transparency whereby details of transactions and collateral will have to be reported in Europe in 2019.
How do you think pension funds should feel about climate risk? Are there pronounced geographic variations, or different approaches?
FF* – Pension funds represent US$41 trillion and are hugely exposed to an unsustainable future. Their level of engagement and commitment can be incredible. I read recently that responsible investing (RI) assets under management (AUM) in Canada have increased by 42% in the past two years and for the first time represent over 50% of all Canadian AUM. Some pension funds, such as AP4, have started mapping the impact of their investments against the SDGs and others, such as APG and PGGM, are defining taxonomies for SDG related investments. But there’s a long way to go. According to the most recent OECD survey of large pension funds, most funds still allocate less than 1% of their total investment towards green investments.
I also think the financial industry has a real responsibility to support an accelerated energy transition to limit global warming. BNP Paribas has put in place policies against certain investments and we are developing the tools that help institutional investors analyse the ESG risk in their portfolios.
Have you seen recent examples of pension funds going into some interesting asset and/or geographic diversification strategies?
NF*: In the past year there’s been an acceleration in the “rise of passive and quantitative strategies” including ETFs and factor-based solutions and a steady rise in demand for non-listed assets: infrastructure, property, private equity, SME corporate bonds and private debt.
We’re also seeing a partial rebirth of truly active long-term equity investment, moving away from the benchmark – a financial approach which Benjamin Graham (Columbia University, CFA Society of New York) called “intelligent investment”. A new breed of US equity-orientated asset managers inspired by the Columbia–Buffett school has emerged, and they have received interest and money from US, Canadian and Asian pension and endowment investors: an encouraging sign for the future of non-robotic investment!
Sometimes, geographic, asset class and investment vehicle diversifications come together: this is exactly what happened in the 4th quarter of 2017 for the Tennessee Consolidated Retirement System (TN CRS), a USD 56 billion public pension fund. Despite recent massive sell-offs during which South Korean, Thai, Vietnamese and Taiwase blue chips lost 30% or 35% of their value very abruptly, the Tennessee public pension fund and other intelligent investors took the smart, contrarian view that South Korea and neighboring ASEAN countries are and will remain among the most interesting markets to invest in for the long term. By using nimble, cost-effective ETFs tracking broad equity indices in the Asia-Pacific area, they were able to preserve or increase their South Korea and emerging Asian equity exposure, in record time, and they reaped very handsome rewards in the Spring of 2018.
What are some of the key data challenges faced by pension funds and how can they mitigate these?
PT* There is now a common maxim that more data has been generated in the past two years, than in the entirety of human history. So data is a challenge for all organisations. A pension fund’s investments and liabilities generate hundreds of thousands of data points. Traditionally it has been extremely difficult for a pension fund to distil value from this information, because of issues around storage, accessibility, and lack of sheer computational power. Advances in technology mean that data is now stored in ‘places’ such as lakes and clouds to ease the means by which users can extract it.
In order to create the full view of their investments and liabilities, pension funds have to harmonise data into a common format, and then scrub and aggregate it. This is a time-consuming and challenging task. The biggest challenge lies in the aggregation of data, primarily because data comes from multiple sources.
A custodian, however, is able to aggregate that data and create new services designed to leverage data by identifying and creating previously hidden signals.
*M. Nicolas J. Firzli is Director-General of the World Pensions Council (WPC), an international association of public and private retirement institutions, Co-Chair of the World Pensions Forum (WPF) and Cofounding Member and Advisory Councillor of the World Bank Global Infrastructure Facility (GIF). The data, conclusions and opinions expressed here only indicate the author’s personal perspective and thus do not necessarily reflect the views of the World Pensions Forum, the World Pensions Council or the Global Infrastructure Facility.
*Florence Fontan is the Head of the Asset Owners client line at BNP Paribas Securities Services, where she is responsible for the strategy (target markets, product solutions and value proposition) for pension funds, insurers, and official institutions. Previously she was Head of Strategy, Change and CSR.
*Philippe Tassin is Head of Pension Funds & Official Institutions Strategy at BNP Paribas Securities Services. Previously he was Head of Private Equity and Real Estate services.