Spain: VidaCaixa recognised for excellent pension fund management
VidaCaixa achieved some of Spain’s best pension fund results last year, following excellent results over the previous four years both for individual pension plans and occupational pension plans. In recognition of this, the pension fund management team has won numerous awards over the past five years.
VidaCaixa offers a wide range of pension plans for all risk profiles, from the most conservative, focusing on cash funds, to the most aggressive, using long-term investments in emerging market equities, for example. The company’s active discretionary management style aims to maximise the profitability of the risk level set in the investment mandate. This is done through using tactical asset allocation within the strategic asset allocation, as well as careful selection of the securities within each asset class.
A crucial aspect of VidaCaixa’s management style is its use of third-party funds, which allows it to invest in any type of asset, while identifying the best specialists for each and actively managing its global position. This model has ensured yields above the benchmark indices and the market average.
In 2009, VidaCaixa became the first Spanish life and pension insurer to follow the UN’s principles on responsible investment. This means that our customers are assured of socially responsible investment of their savings and greater returns to society overall.
As one of the very few Spanish entities offering pension funds, life and accident insurance, as well as savings plans, VidaCaixa is a constantly growing market leader (with a market share of 20.5% in 2014, 7.8 points ahead of its nearest competitor) recognised for its high levels of quality by ADECOSE, the Spanish Association of Insurance Brokers.
Recognition of pension fund management
What will be the biggest challenges and changes for you and your clients in 2015?
AON
For Aon, the biggest challenge will be to implement consistent processes and products while meeting our clients’ needs for customized solutions.
For our clients, the biggest challenge will be to delegate some of their decision-making and control to us (or another third party).
KESSLER
We see our challenge as keeping up to date with all the changes going on, and filtering the essential information to our clients along with our advice on possible actions to take. We also see that Swiss companies are beginning to manage Employee Benefits across borders, and here it’s our challenge to give advice so they can benefit from our experience and also from our worldwide network.
MERCER
For us it is to be able to develop and deliver cost-effective, innovative solutions to our clients at an acceptable profit margin. We see that margins are getting slimmer.
Our clients face different challenges depending on their industry. The energy sector, for example, will be especially challenged to achieve cost savings, while many other industries will put greater focus on attracting and retaining the right talent. Selecting and developing the right leadership team in a changing world will also be important this year and in future.
TOWERS WATSON
Towers Watson continues to expand its Global Benefits Management business, which involves a variety of potential solutions to match our clients’ individual needs. It’s incumbent on us to challenge our clients who are comfortable with traditional approaches to governance and benefits financing to explore all their alternatives and actively consider whether the status quo fully addresses their corporate objectives.
What will be the biggest challenges and changes for you and your clients in 2015?
AON
For Aon, the biggest challenge will be to implement consistent processes and products while meeting our clients’ needs for customized solutions.
For our clients, the biggest challenge will be to delegate some of their decision-making and control to us (or another third party).
KESSLER
We see our challenge as keeping up to date with all the changes going on, and filtering the essential information to our clients along with our advice on possible actions to take. We also see that Swiss companies are beginning to manage Employee Benefits across borders, and here it’s our challenge to give advice so they can benefit from our experience and also from our worldwide network.
MERCER
For us it is to be able to develop and deliver cost-effective, innovative solutions to our clients at an acceptable profit margin. We see that margins are getting slimmer.
Our clients face different challenges depending on their industry. The energy sector, for example, will be especially challenged to achieve cost savings, while many other industries will put greater focus on attracting and retaining the right talent. Selecting and developing the right leadership team in a changing world will also be important this year and in future.
TOWERS WATSON
Towers Watson continues to expand its Global Benefits Management business, which involves a variety of potential solutions to match our clients’ individual needs. It’s incumbent on us to challenge our clients who are comfortable with traditional approaches to governance and benefits financing to explore all their alternatives and actively consider whether the status quo fully addresses their corporate objectives.
Striking a balance between low interest rates and performance
An awareness of one's own situation and a systematic assessment of the options for manoeuvre.
In the current low interest rate environment, pension funds and foundations face particular challenges in maintaining their ability to consistently meet the benefit obligations to which they are committed vis-à-vis the insured. On the one hand, the last financial market crisis made risk awareness with regard to investments even more acute whilst it also curtailed any risk appetite for investing, which still persists today in some areas. On the other hand the returns on safe investments are extremely low. How can the decision-making committees for insurance institutions react to this challenge?
The lower the tolerance for bad decisions, the more important an awareness of one's own position and a systematic assessment of the different options for action become.
The starting point for the required active Asset Liability Management (ALM) is the modelling of the future liabilities and payment streams for the insurance institution. These are influenced by many factors, for example: How is the portfolio of insurance beneficiaries made up, in particular with regard to the age structure, the ratio of active insured members to pensioners and of contributions to benefits? How will these develop in the future? How are the benefit commitments defined? Are these defined benefit or defined contribution plans? Do the benefit commitments have a nominal value characteristic or are they indexed (e.g. tied to the last salary)?
In the next step of the analysis, the capital investments made by the investment institution must be fed into the model. What investments cover the liabilities? What characteristics of the investments, such as steady yields or real value character are advantageous when it comes to covering the liabilities? What challenges do the investments face in order to be able to provide for the benefits on a consistent basis and to safeguard the financial stability of the institution?
The third step in ALM regards the optimisation of the investment policy. The more the defined benefit plan predominates in the insurance commitment, the more collective elements it contains, and the further the composition of the portfolio is removed from the state of equilibrium (for example in the case of a closed portfolio with an increasingly large proportion of pensioners), the greater the requirement for complex analysis methods becomes, culminating in parallel and mutually dependent stochastic simulations of assets and liabilities.
In diametrically opposed cases, the methodology boils down to the simple calculation of minimum interest requirements and the sequentially related optimisation of the investments. If the demands placed on the performance of the investments are unrealistic, additional measures must be identified to restore the long-term stability of the institution in the most efficient way. Such an ALM analysis should generally be carried out every two to three years, or sooner if the situation of the employee benefits institution has changed significantly.
The options for action on the investment side in view of the low interest rate environment can be divided into two types: Either adjustments within a traditional benchmark-oriented approach are made or a more flexible risk-based investment policy is introduced. In the case of adjustments within a traditional benchmark-oriented approach, the ALM optimises a strategic asset allocation (SAA) over a time horizon of three to five years. The composition of the SAA has changed, however, in view of the low interest rate environment.
Increasingly, higher yield bond types are being employed, such as corporate bonds, high yield bonds or emerging market bonds, at the expense of very safe government bonds. The higher yields from these bonds offer a greater buffer against the negative effect of rising interest rates. The higher credit risk of these bonds is offset by active management within the segment. Real estate investments are also becoming increasingly popular due to their higher and more stable yields and their real value characteristics. Finally, the equity share can be increased, whereby higher-yield strategies (for example high dividend or overwriting) or lower market risk (for example minimum volatility or hedging via options) are frequently employed. The increased risk in the SAA is generally countered through more active asset management within the segments.
The introduction of a flexible risk-based investment policy is not primarily about optimising the SAA. The authorised investment universe, the bandwidths and the permissible investment risk form the direct basis for the investment guidelines. The asset manager receives the order to achieve the best possible, stable yield within these guidelines, whereby he is given greater flexibility to react to changing market conditions as he sees fit.
This type of investment strategy concerns multi-asset portfolios with absolute return characteristics that are not linked to a benchmark but must comply with absolute risk specifications and allocation limits. The greater flexibility in the investment strategy is flanked by a strengthening of the risk management during the investment activity.
In Germany the demand for multi-asset solutions has increased, whereby they are often used as a supplement to an existing solution. In combination with a benchmark-oriented approach, this strategy can stabilise the performance of the whole portfolio by means of its flexible management of the asset allocation. As part of a liability matching approach, it is ideal as an investment concept for the yield-hungry part of the investment.
Conclusion
The low interest rate environment poses considerable challenges for the decision-making committees of pension funds and foundations. These challenges demand an acute awareness of the actual situation and the systematic assessment of the options for action. From the investment perspective, it is possible to exploit both the traditional benchmark-oriented approach as well as to introduce a flexible risk-based investment policy. As a rule, both approaches entail more stringent risk management during the investment activity.
The Netherlands: Zwitserleven again most sustainable investor
Every year, the Vereniging van Beleggers voor Duurzame Ontwikkeling (VBDO) (Association of Investors for Sustainable Development) publishes its benchmark report ‘Duurzaam Beleggen voor Verzekeraars in Nederland’ (Sustainable Investing for Insurance Companies in the Netherlands). In 2014, Zwitserleven was the winner for the third time in a row. Zwitserleven likes thinking ahead and is deeply committed to helping customers build their financial future.
Progressive investment policy
Zwitserleven is a ‘best practice’ company in the area of sustainable investment. Investing for the customer’s pension scheme with an eye toward creating a better future for people and the environment. Clear information about the Zwitserleven’s investment funds and products is accessible to everyone. Also Zwitserleven is transparent about their choices and the respective outcome, looking beyond the own organisation and encouraging the companies invested in to make socially responsible choices.
“‘Zwitserleven’s efforts in the area of sustainable investment are ‘best practice’.”
Zwitserleven is one of the first insurance companies in the Netherlands to sign the Principals for Sustainable Insurance (PSI) set out by the United Nations. This is only one of the reasons why Zwitserleven is the winner of the VBDO benchmark for the third time in a row.
Progress by staying on the ball
Making it to the top is one thing, staying at the top is another. Last year, Zwitserleven took a number of steps that enabled it to score higher than in previous years.
For example:
• VBDO and Zwitserleven organized a round-table meeting with other insurance companies on sustainable investment in the insurance sector.
• Zwitserleven participated in the community of practice on biodiversity and circular economy together with MVO Nederland.
• Works with Qredits to help starting entrepreneurs in the Netherlands.
Make a difference?
All levels of the company work together on its sustainable investment policy. Both managers and employees are genuinely motivated to look for and find improvements. Zwitserleven actively encourages companies that it invests in to do business in a socially responsible way by talking to them, for example, about how a company can improve its sustainability performance. It also talks to companies that are at risk of breaking laws or rules to prevent them from doing so. If there aren’t any improvements, collaboration with the company is ceased and the investments in the company are sold. Zwisterleven continues to do their best to keep the leading edge. To make a difference when it comes to responsible investing.
