In a first formal collaboration, Top1000funds.com and CEM Benchmarking have teamed up to develop the Global Pension Transparency Benchmark (GPTB). The GPTB establishes a new global benchmark that brings a focus to transparency in a bid to improve pension outcomes for members.

Transparency, or lack of it around costs and other issues, has been a problem area for pension funds over many years, and in the industry there is room for improvement in this area. Transparency is a positive word – it is about being honest and open with stakeholders. With this benchmark we offer a standard for global pension systems and funds to aspire to, and in doing so emphasise the importance of the need for clarity and openness.

CEM has had a long history focusing on cost and financial value for money outcomes. This broadens that view and establishes a new global benchmark that also includes key inputs associated with value generation that are obtained from public disclosures such as  governance, strategy and structure.  It also incorporates sustainability/ESG which pension funds and their stakeholders increasingly consider to be an important  and necessary ‘value’ element.

Cost transparency emerged as an important issue for pension funds post-GFC and many in the industry championed it.  With this new benchmark we want to reframe the narrative away from a narrow and negative focus on costs to a more holistic and positive concept of transparency and include value generation, governance and strategy, and sustainability.

The GPTB, which will launch in February 2021, will initially rank 15 countries on public disclosures of key value generation elements for the five largest pension fund organisations within each country.

The GPTB focuses on the transparency and quality of public disclosures with quality relating to the completeness, clarity, information value and comparability of disclosures.

The overall country benchmark scores will look at four factors: governance and organization; performance; costs; and responsible investing, which are measured by assessing hundreds of underlying components.

Why is transparency important?

“A lack of transparency results in distrust and a deep sense of insecurity.” Dalai Lama

There is plenty of evidence that the lack of transparency has negative consequences for relationships and organisations of all types, whether they be individuals, governments, corporations, or pension funds.  Transparency is: “the right thing to do”, but there are many benefits beyond this simple moral imperative:

  • Transparency and accountability go hand in hand and lead to improved decision making
  • Improved clarity of purpose that comes from simplifying and communicating complex issues
  • Improved relationships and interactions across a broad spectrum of stakeholders including beneficiaries, plan sponsors, regulators, suppliers and concerned citizens
  • Ultimately, better outcomes through clarity of purpose, sound goals and accountability for progress.

We have been fortunate to have an esteemed advisory board – all with a unique perspective on the importance of transparency and reporting –who have been instrumental as we have been developing this concept.

The Global Pension Transparency Benchmark advisory board:

  • Keith Ambachtsheer, president, KPA Advisory Services; co-founder and board member, CEM, Canada
  • David Atkin, former chief executive Officer, Cbus, Australia
  • Lorelei Graye, founder, Adopting Data Standards, USA
  • Angélique Laskewitz, director, Association of Investors for Sustainable Development, The Netherlands
  • Neil Murphy, vice-president, communications, Investment Management Corporation of Ontario, Canada

Top1000funds.com and CEM Benchmarking have long had aligned goals – to highlight industry best practice and drive better pension outcomes globally – and we look forward to revealing more about our joint project in the coming months and we will detail the benchmark results, methodology and process next year.

Amanda White is editor of Top1000funds.com and director of institutional content at Conexus Financial; Mike Heale is principal at CEM Benchmarking.

 

A long and challenging list of geopolitical risks already existed before COVID-19 began shaking up the world order. US-China rivalry, weakened global institutions, fragmentation in the EU and a growing intertwining of climate and geopolitics to name a few.

For sure, a rebalanced global order and commitment to multilateralism could return with Biden’s presidency, while a vaccine for the virus will end its rampage of destructive volatility. But as geopolitical risks increasingly stalk developed markets, asset owners sifting through the noise for long-term trends believe a fragmented world is here to stay.

For example, the US election result won’t alter growing US-China tension and accelerating disengagement and de-globalisation trends.

“China remains a problem for the US; that hasn’t changed,” said a bleary-eyed Chris Ailman, speaking at CalSTRS’ board meeting the day after the US election and Biden’s emerging lead.

“The US and China will continue to move apart in a Biden presidency,” agreed David Ross, managing director of the capital markets group at Canada’s C$22 billion OPTrust who notes that China’s path to disengagement was made clear in its objectives for economic self-reliance set out in its 14th Five Year Plan (2021-2025) in October.

Disengagement has also been accelerated by other economies seeking a new self-sufficiency in the wake of COVID-19, said Ross.

“The shift to increased fiscal spending embraced by governments around the world as they sought to buffer their economies to the COVID-19 pandemic is generally inward looking and nationalistic. Overall, this should be expected to increase both geopolitical and economic volatility.”

Others note how the pandemic will also accelerate de-globalisation trends following its exposure of vulnerabilities in global supply chains.

“COVID-19 clearly revealed the implications of having heavy reliance on China as the manufacturer of the world. If there was ever a time to rethink supply chains and regulate changes for strategic and national security purposes, this is the time,” said Bruno Serfaty, head of dynamic asset allocation at the United Kingdom’s £67 billion USS Investment Management.

Tech divide

Disengagement between the US and China is manifesting in technology, as well as trade. US sanctions make working with China’s tech sector increasingly difficult for multinational companies. Elsewhere, OPTrust’s Ross warns disengagement and divergence could lead to investments becoming stranded due to legal or regulatory changes. It could leave pension funds with large and growing allocations to the engines of Chinese growth exposed.

Witness Canada’s C$420 billion CPP Investments, moving towards a 20 per cent allocation to the country which Geoffrey Rubin, senior managing director and chief investment strategist, recently described as “imperative” for both returns and diversification.

“China matters,” said Ailman, pointing to the Chinese companies like Tencent and Alibaba now in CalSTRS top 10 equity holdings. In recognition of the possible risks of holding Chinese assets, the pension fund is about to begin a six-month deep dive analysis.

“This is a risk we want to focus on,” said Ailman.

Economic divergence

The East-West trade and tech divide is also fuelling the emergence of separate economic spheres. Asia-centric and intra-Asian trade and investment flows are increasingly more significant than investment flows into Asia from Europe and the US.

Similarly, total Chinese investment in the US has fallen sharply. However it’s a trend asset owners’ believe could hold exciting opportunities – particularly around diversification.

“As long as the US continues to dominate the reserve currencies and China and its neighbours contribute the most to global growth, a well-balanced currency diversification approach should prove resilient to the emerging geopolitical tensions,” suggested Serfaty. “At USS we have recently reviewed our currency allocations with a view to improving diversification and increasing portfolio resilience at times of stress.”

New economic spheres could also manifest in manufacturing and production opening in alternative countries, he added.

“It could lead to more localisation of supply chains which may have a favourable impact on industrial production for some: for the Americas, some US states and Mexico could benefit, providing their business leaders prove capable of manufacturing as good quality products as their Chinese competitors. Similarly, some nations of Europe – Poland, Czech Republic – could sustain their industrial revival,” he said.

COVID-19 impact

Away from China-US relations, the other geopolitical risk top of mind is COVID-19. Of course, not all investors view the pandemic through a geopolitical lens.

“Geopolitical risks are still elevated, despite the US election outcome,” said Kasper Ahrndt Lorenzen, group CIO of PFA. “But when it comes to running investment portfolios, the COVID-19 development, and the policy reactions in particular, are more important.”

For others however, the pandemic has heightened risk.

OPTrust’s Ross is mindful that unprecedented government spending might soon unravel with geopolitical consequences.

“The market will eventually judge which countries have the credibility and balance sheet to get away with it and which don’t,” he says, predicting that the distinctions will appear in emerging markets first. Kurt Schacht, head of policy at the CFA Institute in Washington is also convinced the pandemic is morphing into significant geopolitical disruption.

“A clear and present danger is its impact on not just public health, but entire economies,” he said. “Predicting the course of biology, vaccines and human behaviour has fundamental investment analysts on their heels.”

Asset allocation

OPTrust’s Ross also believes the geopolitical climate could lead to higher inflation. Huge stimulus to counter COVID and reduced capacity due to lingering COVID issues or global trade friction, mixed with populism-fuelled higher labour and wages, has all the ingredients for stagflation.

“This is something we are spending a lot of time thinking about in our Risk Mitigation Portfolio,” he said. Inflation worries and the collapse in yields has already led the pension fund to reduce its allocation to nominal bonds – running counter to the traditional idea investors favour assets like cash, gold and government bonds in times of crisis.

Elsewhere, CalSTRS is also contemplating changes to its asset allocation in response to volatility. Citing a recent paper from the pension fund’s consultant Meketa advising how best to navigate uncertainty, Ailman said one idea includes a new opportunistic portfolio.

CalSTRS already has an innovation portfolio but abandoned an opportunistic allocation in the 1990s. Unconvinced if the giant fund could ever be nimble enough to be opportunistic, Ailman said his focus remains on diversification, actively managing risk and focusing on fees by pushing a collaborative manager model over expensive traditional partnerships.

Climate change

Investors also note a growing intertwining of geopolitical and climate risk, particularly since the pandemic (seemingly easier to solve by cooperation than climate change) has highlighted the challenges inherent in global cooperation.

“The lack of COVID 19 cooperation – perpetuated by many countries, both in the east and west alike – is a bad omen for other problems which are less knowable and less immediate,” said the head of a US corporate pension fund.

“The continued geopolitical shift away from global cooperation to national or regional approaches would pose direct risks to the coordinated efforts that are necessary to address climate change. We believe that the sustainability of the Plan and the planet are inextricably linked, and we are increasingly focussed on risks that climate change poses to our portfolio,” concluded OPTrusts’ Ross.

Geopolitical risk and the impact on portfolios will be a topic of discussion at the Fiduciary Investors Symposium online on December 8. For more information click here.

In this Fiduciary Investors Series podcast Amanda White speaks to Simon Pilcher the chief executive of USS Investment Management, which manages assets for USS, the largest private pension scheme in the UK about the complexity of a sustainable strategy – including divestment and manager expectations – as well as the opportunistic investments the fund has made in private assets and credit.

About Simon Pilcher
Simon Pilcher was appointed the chief executive of USS Investment Management in October 2019. He started his career in asset management in 1987 at Morgan Grenfell before moving to Prudential in 1998, a year before it acquired M&G Investments. At M&G Prudential, he led the fixed income and alternatives businesses for two decades before being asked to become chair of real estate with a combined team of over 500 employees and around £160 billion in assets. He was also a member of the executive leadership team.

During his tenure at M&G Prudential, he championed innovation and pioneered new products in Europe, for example: leveraged finance, infrastructure private equity, commercial mortgage lending and, more recently, specialty finance and impact investing.

About Amanda White
Amanda White is responsible for the content across all Conexus Financial’s institutional media and events. In addition to being the editor of Top1000funds.com, she is responsible for directing the global bi-annual Fiduciary Investors Symposium which challenges global investors on investment best practice and aims to place the responsibilities of investors in wider societal, and political contexts.  She holds a Bachelor of Economics and a Masters of Art in Journalism and has been an investment journalist for more than 25 years. She is currently a fellow in the Finance Leaders Fellowship at the Aspen Institute. The two-year program seeks to develop the next generation of responsible, community-spirited leaders in the global finance industry.

What is the Fiduciary Investors series?
The COVID-19 global health and economic crisis has highlighted the need for leadership and capital to be urgently targeted towards the vulnerabilities in the global economy.
Through conversations with academics and asset owners, the Fiduciary Investors Podcast Series is a forward looking examination of the changing dynamics in the global economy, what a sustainable recovery looks like and how investors are positioning their portfolios.

The much-loved events, the Fiduciary Investors Symposiums, act as an advocate for fiduciary capitalism and the power of asset owners to change the nature of the investment industry, including addressing principal/agent and fee problems, stabilising financial markets, and directing capital for the betterment of society and the environment. Like the event series, the podcast series, tackles the challenges long-term investors face in an environment of disruption,  and asks investors to think differently about how they make decisions and allocate capital.

For more stories on USS over the past 10 years click here

Social factors are material to stakeholders, especially employees, and can be financially material for companies. The global pandemic and lockdown has honed investors’ attention on these issues and is accelerating a number of the pre-existing long-term trends such as the shift to automation. So what does good employment look like?

Read the paper
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The reallocation of capital towards sustainable companies is happening in real time and will accelerate, according to Larry Fink who is investing in technology and people to develop systems that can prove “climate risk is investment risk”.

BlackRock has partnered with Rhodium Group, an independent research firm which uses climate science, economics, big data and cloud computing to provide evidence-based insights into climate scenarios. And BlackRock plans to add new climate risk metrics to the Aladdin platform.

“We want to show how climate risk does not just impact a region or city but each company and how they will be impacted. We have very lofty goals, but we are not there yet,” he said.  “We are spending a lot to get that data. We want to prove that climate risk is investment risk. And if we do then we will see an even bigger reallocation of capital.”

Speaking as part of a McKinsey/ FCLTGlobal Sustainable Transition Series , Fink said 2020 has shown evidence that if companies are moving forward in a sustainable, durable way their P:Es are better than their industry peers.

“We think this will be a seismic reallocation of capital,” he said. “Exxon Mobile is not the largest energy company in the United States anymore, its NextEra. We are seeing this [reallocation of capital] happening in real time and its accelerating.”

Fink said BlackRock has experienced a doubling of demand for its sustainable strategies this year compared with 2019, with a possible tripling of demand before year end, adding that 80 per cent of sustainable strategies outperformed regular indexes this year.

“That demand is real, it’s growing and it’s consistent. There is so much evidence of this reallocation of capital. This is happening.”

Fink was part of a panel chaired by FCLT CEO, Sarah Williamson, that also included Kevin Sneader, partner at McKinsey, and Bernard Looney, the new chief executive of BP who in August laid out the company’s strategy to achieve net zero by 2050.

Achieving the ambitious strategy requires BP to reinvent the company, Looney said, including the biggest reorganisation of the company in its 111 year history.

“Generally [investors] agree with the direction, and in general they like that the vision is bold, and the world needs some bold solutions,” he said. “But some want to be convinced we can execute on this. This is not altruism, we have shareholders we have to create value for, the question is the timeframe over which that is created. Transparency is the currency for trust and we have to get on with executing the strategy we have laid out and be transparent about it so people can see we are doing what we said. In time, investors will be more convinced we can create value by doing the right thing by the world.”

Fink said it was important to keep in perspective that change takes time.

“This won’t happen in one quarter or one year. This is about the long term and we are helping companies move forward, preserving their business as they evolve their businesses,” he said. “All stakeholders are judging companies more and more on this and the best companies working towards that objective will be trading at higher P:Es. For BlackRock this is a journey not a sprint, we are helping companies moving forward, but also applying pressure.”

Fink said that since his 2020 letter, there had been a 400 per cent increase in companies reporting under SASB.

Through transparency we will be much more able to judge over a long term how a company is moving towards those objectives,” Fink said. “We are making a huge difference in terms of engagement and conversations and moving more companies towards those objectives than we ever have. Through that process of transparency we can evaluate those companies and see how they’re doing. This is not a short-term thing, we don’t want to be destroying capital either.”

BP’s Looney, now aged only 50, became CEO of the company in February this year. He said it is hard to be a successful company “if you are going against the grain of society”.

“That is not a long-term sustainable outcome. We want to have a strategy our staff are highly engaged in and can be proud of. Energy transition is complex, but we like complexity, that’s where we play and can add value.”

In 2007, the C$94 billion Healthcare of Ontario Pension Plan (HOOPP) moved to a liability-driven investing approach, which included a large allocation to bonds and a lot of internal investment management. The approach helped the fund survive the global financial crisis and has served it well for the past 13 years. But now – with the COVID crisis and a very low interest rate environment – that approach is being revisited and the fund is looking to invest more in alpha generating assets.

“In 2007 we shifted to a liability driven approach and had a major allocation to long-term bonds which served us well through the GFC,” says Jeff Wendling, who joined the fund in 1998 and became CEO in April this year.

“Over all those years it also limited the volatility of our surplus, and did a good job of having our assets match our liabilities. That has worked out well through the 13 or so years, but now yields are very low so we are asking two things: does the liability driven strategy still make sense? And how do we build a portfolio that will generate the returns to keep HOOPP fully funded over the long term. Bonds won’t do that for us the same way they have in the past.”

The evolution of this liability-driven investment approach (known as LDI 2.0) is the exploration of what to invest in when interest rates are so low. Wendling says there is no doubt the fund will hold less bonds than it has in the past. In 2009 the fund moved from a traditional 60:40 equities/bond mix to a split of roughly 45:55 and it’s been there ever since.

“We are going to hold fewer bonds in the future. They provide minimal returns right now and also less risk mitigation benefits to the growth in our liabilities,” Wendling says. “Bonds helped us in 2008/09 during the GFC but I don’t think they will act so well if we have difficult markets going forward, so we will hold less bonds.”

Instead the fund is looking to invest in more return seeking assets – in particular increasing allocations to equities, real estate and infrastructure, which the fund is relatively late to compared with its Canadian peers.

“We will invest in more bond-like assets with higher returns such as high dividend-yielding equities. We are also looking for more alpha-generating, uncorrelated sources of return through either internal or external management, and more international diversification. All of that, we think, will help generate returns that we are not getting from our bond holdings.”

The fund started 2020 in a strong position having returned 17 per cent last year, and did buy risky assets in March and April, adding to equities, credit and provincial bond positions pushing assets to an all-time high of C$100 billion.

HOOPP launched its infrastructure program in 2019, coming late to the asset class by Canadian standards. The substantial bond holdings had served that role, but now with bonds decreasing, infrastructure is getting a look in.

The fund is managing its C$1 billion commitments to infrastructure through an internal team and is looking for some select relationships.

“This is a key asset that we think will replace some of those bonds that just aren’t yielding us the returns that we need right now,” Wendling says. “It’s going to be an important part of our assets.”

Overall in private assets HOOPP has a 25 per cent allocation, compared with some of its Canadian peers which have half their assets in private investments, so there is room to grow in private equity and real estate too.

“Those assets also have some of the hedging characteristics we look to hedge liabilities and inflation hedging aspects as well,” he says.

In terms of ongoing risk, inflation has always been something the fund has considered in a meaningful way.

The HOOPP pension benefit is based on employees’ best five years of earnings so if there is wage inflation the fund’s liabilities increase.

“We do want to look at having assets that can perform well in a higher inflationary environment. In our stress testing approach we do test severe shocks including inflation shocks,” Wendling says. “It’s a tough question at the moment and we’ve never had wider range of views on it. Inflation right now has been very well behaved and under shot what policy makers were looking for. We think it will remain pretty well behaved but the reflationary measures of policymakers will mean it will definitely lead to higher inflation, that will happen in the longer term. In a nearer time frame we think it will behave the same way it has in the past couple of years.”

HOOPP has used derivatives for a long time as a way of mitigating risks, including tail risks, but also as a way of getting its equities exposures.

By investing in derivatives it allows the capital to be invested in long-term bonds for example, Wendling says.

“Derivatives as an approach is a key part of our long-term success and will continue to be so,” he says. “We have always been very strong risk managers. The fund is getting larger, more complex and more international and we need to be constantly improving and working out our risk management capabilities.

HOOPP was one of the very early funds to go to internal investment management and move away from external management, and in a sign that the fund is looking at all aspects of the way it invests, that is now under review too.

“That has served us well and where we did use external managers it was generally in private equity. As we go forward I think trying to generate the returns we need we will be looking at new strategies, new absolute return strategies for example and will use external managers where we can in a selective way to find more diversified sources of return. We will still be largely internally managed but not as much as it has been in the past.”