Deficit and underfunding at the £6.7-billion ($10.4-billion) pension fund for employees of United Kingdom retailer Marks and Spencer had long weighed down one of the high street’s best known names. But a sustained, conservative investment strategy characterised by a “keen focus on risk management” and “an understanding of the scheme’s liabilities” has helped to turn the M&S scheme around. The fund’s decision to shrink its equity allocation and boost its fixed income portfolio has helped cut the deficit from $2 billion in 2009 to $450 million in March 2012. It has made strategy at the closed defined benefit scheme with around 125,000 members, of which just 14,000 are active, a template for other funds in de-risking mode.

Mixing and matching

In an interview from M&S’s Paddington Basin headquarters in London, Brian Kilpatrick, the head of Marks and Spencer Pension Trust Investments, explains the fund’s liability matching strategy. M&S has portioned 70 per cent of assets to a diversified fixed income allocation that includes investment in global sovereign exposure, a global credit portfolio, a material exposure to gilts as part of its growing liability-driven investment (LDI) strategy and emerging market debt. Here, Kilpatrick is encouraged by the “relative strength” of emerging-economies’ sovereign balance sheets compared with those in the developed world during the financial crisis. In the last year the fund’s best performing mandates have been benchmark-agnostic fixed-income absolute-return strategies.

Kilpatrick explains why not all of the fixed income portfolio is purely matching and the strategy the fund uses to counter this. “Some investments within the allocation have very high matching characteristics like gilts, but other allocations, like sterling corporates, aren’t purely matching because they include a credit-risk premium. When we construct an LDI hedge, we look at the different duration exposures within the fixed income portfolio and then use swaps to plug any gaps, relative to the liability duration at any point across the curve so we get the shape of the hedge where we want it.” Sterling corporate bonds are a good example of this strategy at work, he explains. Their short duration doesn’t match the longer term liabilities of the scheme so the fund uses swaps to “move duration along the curve”.

So far the scheme has hedged the majority of its interest rate and inflation exposure and the LDI strategy will evolve as the scheme continues to de-risk. “We will be opportunistic in our de-risking, de-risking when we are ahead of our journey plan and adding to our gilt portfolio when the trustee considers yields as being attractive,” he says. Explaining the rational behind the strategy, Kilpatrick says, “We have seen some schemes negatively impacted by interest rates falling over the last year or so; the consequent funding level risks can be material. Because we are uncomfortable being exposed to a rewarded risk of this magnitude, we have evolved our LDI portfolio as conditions permitted risk to be reduced.”

De-risking framework

The remainder of the scheme’s assets are portioned to growth investments comprising a 12-per-cent equity allocation, down from 40 per cent in 2006 when Kilpatrick fist joined M&S from the National Association of Pension Funds, where he was investment advisor. The rest is in infrastructure, private equity, hedge funds, property and bespoke opportunistic allocations that were born out of the financial crisis. Exposure to equity markets is largely indexed and the scheme has a dynamic de-risking framework in place, based on agreed funding level de-risking triggers, monitored frequently by the trustee. De-risking trades will be executed when these triggers are hit, but the composition of those trades will depend on respective market conditions when funding-level triggers are reached, Kilpatrick explains.

He says that the scheme’s infrastructure allocation is a mix of low-risk public-finance initiative assets, sought after for their liability-matching and inflation-linkage characteristics, plus more opportunistic allocations in the US. However, it doesn’t include any emerging market infrastructure. Hedge fund exposure includes allocations to two multi-strategy funds of funds and a number of single strategy funds. This includes some “more rewarding” specialised strategies that have focused on picking up distressed assets during the financial crisis and have earned “significant investment returns for the scheme”. Going forward, Kilpatrick says the fund plans to increase its alternatives allocation in private equity and infrastructure. It invests in private equity only via “traditional vehicles”.

Kilpatrick describes the funding level as “integral” to asset allocation at the scheme and the deficit has certainly driven some of the pension fund’s most innovative strategies – none more so than the decision to draw income from a $1.5-billion portion of the company’s property portfolio. Under a property partnership set up in 2007, M&S retains control over the selected properties, however the pension scheme is entitled to receive an annual profit distribution earned through leasing the properties back to M&S. As a result, the M&S Pension Scheme was able to recognize the fair value of these future income streams as an asset in its accounts, leading to an improvement in its funding position.

Marks and Spencer’s large diversified fixed income portfolio contrasts with other UK corporate pension schemes, which still tend to have big equity allocations. For Kilpatrick, it’s the safest strategy to steadily de-risk. “We know the return above gilts we need to meet our glide path,” he says.

 

Sustainable investing may be an activity that increasing numbers of investors want to get involved in, but for Germany’s Deutsche Bundesstiftung Umwelt (DBU) or federal environmental foundation, it has long been an integral part of its mission.

That approach makes sense in at a foundation set up in the early 1990s to use the proceeds of German steel giant Salzgitter’s privatisation to fund green projects around the country. Michael Dittrich, who oversees investments at the €2-billion ($2.6-billion) foundation, says a sustainable investment strategy was launched in 2004 as “it is important that our asset strategy does not contradict the good work of the projects we finance”.

Dittrich adds with a definite touch of pragmatism, “It was also a question of public reputation for us”. Intriguingly, he does not buy into the idea that a sustainable strategy is likely to see an investor outperform an average portfolio. “What we aim for, and what we achieve, is that our sustainable approach does not place us at a disadvantage in generating returns,” Dittrich says.

That assessment is no mere hunch, with DBU playing its own part in the development of the sustainable movement by commissioning studies into the impact on returns. Dittrich is convinced that the principal disadvantage and advantage of sustainable investing effectively cancel each other out – the limits of having a reduced investment universe, but the boon of avoiding the risks associated with unsustainable investments. He cites the kind of impact on BP shareholders following the Deepwater Horizon oil spill as a scenario that a sustainable approach can steer an investor away from.

“Essentially we feel we can get the same kind of returns, but we have the added bonus of having a sustainable strategy,” says Dittrich.

80-per-cent rule

The DBU’s sustainable focus hinges on the simple principal of making sure 80 per cent of equities and 80 per cent of corporate bonds are invested in firms listed on sustainable indices such as FTSE4Good. That has not changed since the strategy was launched in 2004, but Dittrich reflects that the sustainable movement has developed tremendously in the same period.

Back in 2004, there was very little focus on sustainable matters from the world’s biggest investors, he feels, but it has since become a much broader movement with a wider variety of supporters. Despite the increase in interest, he feels that “sustainable investing remains a niche movement”. Nonetheless, Dittrich is sure it has had an influence on corporate culture. “It isn’t possible for a company to be successful in the long term with a business model that the public doesn’t accept.”

While the development of sustainable investing has seen the debate spread to new areas such as sovereign debt assets and shareholder democracy, Dittrich feels it is impossible for most sustainable investors to analyse or act on each discussion point in full detail. That is due to the restrictions that sustainable investors face, he argues. “Sustainable investing requires extra resources and each individual investor has to decide how much they can commit for it,” he says.

Dittrich explains that the handful of investment staff at DBU’s office in Osnabruck, a picturesque city in Lower Saxony, are not able to screen every company the foundation invests in without the help of external rating agencies. Nor are they able to always make use of DBU’s shareholder vote. Being a large foundation with a good reputation can help in its engagement efforts, Dittrich says, but the foundation lacks the assets to give it the same kind of clout or resource base that Germany’s big insurers can enjoy.

DBU does run a blacklist of firms it shuns in common with most sustainable investors, but Dittrich says it is rather small, with the arms industry being the only sector completely avoided on principle.

Taking the direct route

When it comes to DBU’s asset structure, its sustainable credentials are less of an influence than its preference to invest directly as much as possible on cost grounds.

The foundation continues to shun alternatives. “We don’t have any alternative asset classes as we concentrate on those assets we feel most comfortable with as a director investor,” Dittrich says.

There will also be no space for any alternatives as long as the foundation’s asset management guidelines remain unchanged. They currently outline a 73.5-per-cent allocation to fixed income, 21.5 per cent to equities and 5 per cent to real estate.

Dittrich feels that this traditional-looking approach still offers the foundation space to diversify by investing across the spectrum in each of the asset classes. In the fixed income space, it counts covered bonds, and tiers one and two capital among its holdings.

So far, the structure has proved flexible enough to react to a low-yield era in government bonds. The foundation’s exposure to government debt has been reduced from 20 per cent to 6.5 per cent over five years as positions have been allowed to mature. Corporate bonds have been up-weighted as a result, but Dittrich admits low yields on highly rated corporate debt is now becoming problematic too.

An intense European focus – at least 90 to 95 per cent of the assets – has resulted from DBU’s wish to keep investment operations in house. “We don’t have the resources to look at global equity markets,” he adds. The foundation therefore focuses on EuroStoxx 50 and DAX 30 for its equity picks. This approach paid handsomely in the last decade and, despite the euro crisis, the foundation is happy to stick to this position for now.

Where the asset allocation most obviously takes a sustainable flavor is in a 1.5-per-cent allocation to microfinance. The revolutionary funding model popular in the developing world has impressed Dittrich on visits to India, despite some criticism in recent years. “Microfinance seems a great way to help poor people and to help develop their countries,” he says. It also offers returns comparable to equivalent asset classes such as emerging-market corporate debt, he reckons.

The DBU booked an overall return of 17.2 per cent in 2012 as bond prices rocketed with yields lowering and the German equity market thrived. That easily outstrips a performance target that the foundation has set to cover grants and ensure assets grow in real terms – around 4 per cent in total. Dittrich says there is a very good reason the foundation remains cautious though. “We have a lot of bonds that we are not interested in selling, so cash flow and yields are more important than performance for us.” That cash also can be used for the foundation’s grants, and thereby put the good work of DBU’s asset strategy into practice by boosting Germany’s internationally renowned environmental effort.

Renowned academic Ashby Monk said the best way to lure talent to US public sector retirement funds unable to pay Wall Street salaries was to hire the green, the grey or the grounded.

With a 30-year career spanning business, government and media, Theresa Whitmarsh, executive director of the $92.1-billion Washington State Investment Board (WSIB) laughs that her experience could count for the odd grey hair.

But it is a grounding and desire to give back in an area where she has lived for the last 23 years that she says best characterises her loyalty to WSIB, investment manager for 17 retirement plans for Washington State’s public employees from teachers to judges.

After joining in 2003 as chief operating officer, she now heads a fund that is unusual among its peers on several counts: it is one of only four US public sector funds that is funded at 95 per cent or more, and a quarter of its total assets under management are invested in private equity.

Capitalising on an accident

It’s a 25-per-cent allocation, drawing on relationships with over 100 managers, which Whitmarsh attributes as much to “an accident of history” as anything else. The program began with the fund’s first foray into the asset class in 1981 and the subsequent growth of expertise in the strategy led to confidence by the WSIB in an increased exposure.

The portfolio has now built a momentum of its own.

“Because we have three decades of expertise, we believe we have something of a competitive advantage, including both access to the best funds, that perhaps new entrants wouldn’t have, and access to larger allocations in the best partners because we are a preferred investor,” she says. The private equity portfolio has generated $15.8 billion in profits since its inception.

It’s a track record that lends perspective when faced with lacklustre short-term returns.

The portfolio’s 10-year return net of fees was 13.54 per cent, but five-year returns come in at 3.82 per cent and three-year returns at 12.68 per cent.

Whitmarsh attributes the short-term underperformance to private equity lagging public markets, which roared back to life last year. She says WSIB pursues a long-horizon strategy and stays the course through market cycles, though it does make tactical moves such as underweighting Europe and concentrating European allocations to Germany and the Nordic economies during the euro crisis.

More recently the fund sees real opportunity in the energy sector.

“We are putting more money to work here,” she says.

Investing mostly through limited partnerships, WSIB also has a co-investment program with manager Fisher Lynch. Because its limited partnerships span sectors, strategies and geographies, all co-investments are evaluated so as not to trigger concentration risk.

“Our co-investment program has grown but it is not as large as we originally thought,” she says.

Believing in equity risk premium

The public equity allocation accounts for 37 per cent of assets under management at WSIB and returned 11.58 per cent over the last year.

Allocations to domestic and international equity are in low-cost, broad-based passive index funds, with active emerging market and global mandates. The board is mid-way through reviewing its asset allocations, but Witmarsh only expects minor adjustments in the equity allocation.

“The Board believes in equity risk premium,” she says. The fund’s aversion to active equity management, accept these emerging markets and global mandates, partly explains why it doesn’t have any allocation to hedge funds.

“Most hedge fund strategies are active equity with private equity fees. We think it is really hard to consistently outperform passive equity.”

The fact that illiquid allocations already account for 40 per cent of the portfolio also explains why WSIB has neither room nor appetite for hedge funds, she says.

The Board’s 20-per-cent active fixed income allocation is designed to bring diversity and liquidity.

Although Whitmarsh acknowledges rising interest rates as a “concern”, she believes the fund is well positioned to weather expected rates rises.

One of the reasons is the track record of the fund’s 10-strong internal investment team. It has significantly outperformed the benchmark Barclays Universal Index every year for the last 10 years, something she describes as “very hard to do”. During the five years ending March 2013, fixed income was the best performing asset class in the whole WSIB portfolio.

Still defining the investment model

The fund’s 13.8-per-cent allocation to diversified real estate encompasses different geographies, properties and mangers with particular investment styles.

The focus is particularly on privately held properties leased to third parties. A tangible asset portfolio, begun in 2008, only has a 2.5-per-cent allocation despite its 5-per-cent target. The reason for the portfolio’s slow start reflects the fund’s careful approach, says Whitmarsh.

“Finding the good fund managers takes a lot of sorting and we are still defining our investing model,” she says adding that the tangible team is now three strong with two more hires in the pipeline.

“Good investment ideas draw capital, but so do bad ones. When it comes to investing, there is sometimes a first-mover disadvantage.”

Fully funded, WSIB has exceeded its rate of return every year since inception.

It currently has a state legislature-set assumed rate of return of 7.9 per cent, but this will be adjusted down to 7.5 per cent in line with the fund’s latest capital market assumptions. It’s indicative of the state’s flexibility and willingness “to put more money on the table” to meet contributions when economic conditions tighten, says Whitmarsh.

“There have been times when returns have been so great the legislature has been able to take a holiday.

Other times, in tougher economic conditions, it has guaranteed adequate contributions.”

Other signs of the proactive policy to manage funding levels include introducing new defined contribution retirement plans 10 years ago, something other public US funds are only now looking at. It’s a funding strategy that has helped give Whitmarsh and her team the freedom to hone an investment strategy focused on growth and the “real pleasure” of delivering superior returns for beneficiaries.

What is the optimum size for an institutional investor? This is a question foremost in the mind of Jim Christensen, chief investment officer of TelstraSuper, the pension scheme of Australian telecommunications company Telstra. After four years of expansion, he believes he has maximised potential by gaining the optimum level of inhouse investment. Now running 20 to 25 per cent of assets internally for domestic equities, fixed income, cash and property, he is stopping there and says that it is unlikely to change in the near term – if anything, it might decrease.

“Where we are now I would say is the right size. We could scale things up a bit further, but you start getting governance questions, like in Aussie equities: if you are running a quarter internally it is hard to justify taking it to 50 per cent when there is a reasonable number of capable managers in the Australian market.” He also believes $13 billion of assets is a size that enables a fund to afford good governance, to spot market opportunities and be nimble enough to seize them.

“If we were to triple in size, we would have to think about how we cut the cloth. Our size is big enough to be meaningful, but we can still do things that have an impact on the bottom line. A $100-to- $200-million investment does matter; it’s roughly 1 per cent or 2 in terms of the whole fund.”

He adds that it becomes more challenging to add value, particularly in the domestic asset classes as the fund grows.

“It’s very hard once you get to $50-70 billion. If you hire 20 managers, and some are over and some are underweight stocks in the Australian market, they cancel each other out. Even with seven or eight managers you struggle with getting enough active risk in the portfolio to meet your return objectives.”

Size awareness

Having worked in larger organisations, he is also a believer that there are benefits to smaller investors. He contrasts the 15-member team he has now with the 100 or so-member active management team he ran at QIC up until four years ago.

“When you have big teams they can become quite territorial, so it is quite good to have everyone sitting around the table at our weekly meetings and talking about the world and what they are doing, how they can improve things. It is quite refreshing. It makes people focus more on the bottom line of the overall fund.”

The virtue of a smallish team running internal and external mandates is not just in the overall savings on fees, but also in the creation of experience that allows smarter management of external mandates.

A key win he sees as coming from managing property in house and having external mandates.

“If you have got a guy who has done some buying and selling of direct investments, then he knows how he can negotiate with the managers to get more transparency on the fees and more control. Whereas if you have got someone who has never negotiated these things, they are likely to hand the manager a cheque and hope for the best.”

Inhouse investment saves around 10 to 15 basis points for TelstraSuper – “enough to take the edge off things”, says Christensen – and this all adds to the fund’s aim for above average or, at the very least, average performance. The edge is also taken off through running a tight ship on active fees and being successful in the choice of managers. Its active managers have outperformed more often than not, he says, with both the Australian equities and international equities funds ranked in the top quartile over long time periods.

He reckons TelstraSuper is achieving about 1 per cent more than average superannuation funds over the long term and this performance has been reassuring for members, particularly for those that might consider a self-managed super fund. There are road shows for members with balances over $300,000 and the message to those with, say, $500,000 was it would have achieved $1 million in the past 10 years with average growth, but with TelstraSuper’s level of outperformance it would be worth $1.1 million.

Defensive and retirement funds

TelstraSuper has innovated for those approaching retirement with high balances by creating a fund called Defensive Growth. This has a bias towards income and quality – Telstra stock, admits Christensen, could be in the fund – to the extent that it is targeting about three quarters of the return from income and only a quarter from capital gains. Equities, property and infrastructure feature heavily. The fund was not supposed to shoot the lights out, but ironically, says Christensen, it has done “tremendously well, because the whole world wants to own those assets right now”.

Another defensive fund is Diversified Income, launched a year ago, which is aimed at those in retirement and will pay an income or pension derived from dividends and coupons. It too has done well in current markets, despite the initial warning to members that it will only produce a coupleof- per-cent growth along with income of 5 to 6 per cent. It is designed to give transparency about what assets are earning, whereas usually investors are only given the unit price of a pool of assets to follow.

It also discourages the joy and pain that comes from following a unit price and the irrational decisions this can prompt.

“In periods of stress, if a fund’s value falls quite a way, members might look at their balances and say, ‘Hang on! I’m drawing $50,000 a year. If I keep pulling out money at this rate, I will have none left’. So the response then is to change from growth or a balanced option into cash and then they sit there and when the market goes up, they say. ‘I was a fool’ and will jump back in in time to get whip-sawed.”

The fund also has the option to return some income when the payouts are above average.

“So what we are saying to them is there will be times when you will see your price come down, but as long as you don’t sell any of the stuff, hopefully it will keep producing income. As far as we are aware no one is paying out income in a fund like this, everyone else just gives you a unit price.”

General secretary of the International Trade Union Confederation, Sharan Burrow, spoke to the Lowy Institute for International Policy in Sydney, Australia on Thursday August 1 about the need for an effective G20 in a precarious world.

Ladies and Gentlemen,

The global economy is no more stable today than it was six years ago, and the scourge of unemployment and inequality is driving economic instability and social despair.

In 2010 global growth stood at 5 per cent and it was described as the “green shoots” of recovery, but in hindsight it was the highlight of concerted action. The International Monetary Fund just last month again revised down global growth projections to a mere 3.1 per cent.  With the eurozone in continued recession and slow growth in the US, the drag on the BRICS countries is the latest casualty. With projected growth for Brazil at 2.5 per cent and with another percentage point off China’s growth, there is an urgent need for leadership. No nation is an island in today’s globalised economy.

Muddled multilateralism

We are, at best, facing an era of prolonged stagnation. Added to this, the increasing failure of multilateralism must be a call to action for G20 leaders. From the IMF to the United Nations, the failure to understand that the global economic crisis, caused by greed and inequality, required a social response of equal or greater urgency to that of bailing out the financial sector has generated a tidal wave of mistrust in institutions.

For the state of the world for working people and their families is very bleak. Unemployment is again rising above 200 million and youth unemployment is a problem in every nation. For crisis countries and developing nations facing continuing unemployment with youth unemployment levels of 30 to 60 per cent societal tensions are in ferment.

The International Labour Organisation (ILO) estimates a need to create 600 million new jobs in the next 10 years. Without a determined approach to rebuilding economies with sustainable jobs and social protection at the core of a coordinated global effort, we are facing an economic and social time bomb.

The International Trade Union Confederation (ITUC) presented an economic and social outlook based on the ITUC’s 2013 Global Poll, inclusive of China and India, and covering more than half of the worlds’ population to the G20 labour and finance ministers joint meeting in Moscow last week. It paints a frightening picture.

More than half of the world population say their incomes have fallen behind the cost of living in the last two years.

Almost two out of three people rate the current economic situation in their country as bad.

Global citizens feel abandoned by their governments because they are seen as failing to tackle unemployment and prioritise business interests over the interests of working families.

80 per cent of all respondents say their government has failed to effectively tackle unemployment in their country. Even significant numbers of people in the BRICS countries and in Germany say their governments have failed to tackle unemployment. Only 13 per cent of voters believe their government is focused on the interests of working families.

Over half the world’s population don’t feel they have legal protection for job security.  66 per cent don’t feel they have legal protection for fair wages. In Spain, China and Japan the majority of people think they do not have protection for reasonable working hours.

Of critical concern is that only 13 per cent of people feel that their governments are acting in the interest of people and even more worrying almost 30 per cent of people say their governments are not acting in the interests of either people or business. When you consider this with the 2012 findings of the ITUC Global Poll that only 13 per cent of people believe that they have any influence over the economic decisions of their governments, and marry such with increasing social unrest, then the disenchantment and – worse – the disengagement is undermining confidence in democracy. The loss of trust is serious and must be addressed.

Green jobs and government leadership

Our message for the G20 is obvious. We need a plan – we need hope. This requires jobs jobs and jobs: jobs, decent wages and social protection.

Tragically, the demand for jobs, while recognised in communiques has gone unheeded in terms of coordinated action. Despite the anger and frustration we feel concerning the perpetrators of the crisis and equally failed austerity policies the reality is we need to rebuild our economies with jobs – income-led growth in a cleaner and greener future – if we are to secure an inclusive and sustainable global economy.

In this regard the Business 20 (B20) and the Labour 20 (L20) are united in our call for investment in infrastructure, particularly enabling green economy infrastructure.

The L20 has called for a coordinated target of €1 trillion – less than half of the money given to bail out the banks. And, unlike the banks, we do not demand that all this money comes from government, but we do need government leadership.

Indeed we have called repeatedly for a new investment model. With $25 trillion of workers’ capital invested in the global economy, we want our money out of the speculative economy and into patient capital. It is time to push the reset button on our pension funds and draw a line between investment and speculation.

Shifting focus and failure

Let me return to further demands for the Russian G20 and the Australian presidency, but first consider the history of both hope and despair that characterises the G20 leaders meetings.

We have been at all of these meetings and met with the majority of presidents or prime ministers as well as the heads of international agencies.

In 2008, the Washington meeting was an anxious dance of possibility dogged by the dominant but waning presence of George Bush. However the tactical cry from Dominique Strauss-Kahn was heard and a commitment to coordinated stimulus was born.

London drove new levels of ambition. Gordon Brown was a G20 activist and had the support of the majority of leaders, including Australia’s Prime Minister Kevin Rudd. The original Sherpa’s text was cautious, but the leaders themselves were not and the outcome was optimistic.

You will recall that famous quote from Gordon Brown, echoed by others that “Never again will the financial sector be in control of the real economy”. The ambition was there: financial regulation, jobs, the green economy and the inclusion of the ILO and the OECD in addition to the IMF. London indeed set a tone of optimism for global leadership.

Pittsburgh was equally ambitious with Obama’s commitment to jobs – “Quality jobs will be at the heart of the recovery” was his rallying call. He had sponsored the first G20 labour ministers meeting, with both business and labour gaining consultative status, and heeded their advice. There was renewed optimism. Indeed it was the labour ministers who called for joint action with finance ministers, but we would have to wait until Russia for that.

But just six months later in Toronto, key leaders had gone or were distracted and the policy of austerity was born. It was Angela Merkel supported by the OECD, in the absence of Gordon Brown, Lula and Kevin Rudd, who, at our entreaty ensured a commitment to quality jobs.

In Seoul the talk was of growth but not of jobs. It was a strange meeting with the president of Korea, when we needed to provide an historical analysis of the previous 15 years of increasingly jobless growth, to convince him that you could not assume growth equalled jobs and decent work.

It was in fact Australia’s Prime Minister Julia Gillard who brought us the marked-up copy of the communique where she had, with others, negotiated commitments to quality jobs.

But the evidence was already in: from London and Pittsburgh to Toronto and Seoul, or between 2010 and 2011, the almost religious fervour of coordinated global action had been replaced by the failed economic policies of the previous decades of IMF conditionality. Consequently we saw divisions emerge in the G20 as America and China both declined to follow Europe’s path.

Australia continued its path with the common sense to set fiscal consolidation targets to be reached over time and successfully rowed through the worst of the crisis with targeted investment, jobs and income policies, and only marginal slowdown in demand from China.

Nevertheless, unemployment was deepening. Dominique Strauss-Kahn could see the risks and in 2011 after serious consultations with union leaders in January of that year, we put aside differences and in April at the Brookings institute in Washington jointly called for coordinated action on employment. Sadly, a wasted effort.

The frontlines of failed “structural reforms”

Hence, with serious union opposition to austerity emerging in Europe, it was indeed with some trepidation that I led the first labour meeting with President Sarkozy late in 2011 at the start of the French G20 presidency.

To our great surprise, he was increasingly concerned about the social risks and pledged to support employment, labour rights, social protection and coherence. It was in this framework that unions and employer organisations constructed the platform for global social dialogue with an L20-B20 agreement based on these fundamentals. It remains a joint commitment to a floor of principles for the social dimension of the global economy on which we have since negotiated additional specific demands.

On the surface, the Cannes Declaration looked like coordinated action was back with a commitment to employment, decent work and social-protection floors but the tragedy of Greece dominated the agenda. A nation with an economy of just 0.2 per cent of the global economy was a trigger for the disasters to come. Instead of containment, the orthodoxy of IMF and EU conditionality simply embedded contagion and the social and economic crisis we see in Southern Europe today. Rather than recovery in crisis countries, the evidence is a slump in GDP, unemployment at crisis levels, a lost generation of young people, social unrest and higher debt to GDP ratios. The old IMF was reborn, the ILO-IMF commitments of Oslo were abandoned and new partners, the European Commission and the European Central Bank, emerged in the now-infamous “troika”.

With no effective financial regulation in sight, the unregulated ratings agencies, acting in concert with the vigilantes in the bond markets, set themselves up as arbiters of nations’ fortunes and governments and, at the behest of international institutions, went to war on their people. Wages and jobs slashed, collective bargaining and minimum wages attacked along with key social protection measures – a luxury that apparently could no longer be afforded from taxpayers’ own money.

The cowboys in the financial sector who caused the crisis got off scot-free, no one went to jail for perpetration of fraud relating to toxic products, banks were bailed out with taxpayer funds, and working people and their families found themselves in the frontlines of failed “structural reforms”.

The victory of economic dictatorship

This is the backdrop to the Los Cabos summit under the Mexican presidency of the G20. Again we were surprised by the commitment of President Calderon to investment in jobs, in the green economy, social protection and inequality.

The L20-B20 agreement called for three practical initiatives: investment in jobs in infrastructure and the green economy, inclusion of young people through scaling up apprenticeships and extending the model to female-dominated sectors and measures to reduce the informal economy – now at 40 per cent of global output and withering both sustainable business and decent work.

Meeting with some 14 leaders in Los Cabos and presenting, with business, to a leaders’ breakfast gave us a sense of shared frustration, but the tensions among leaders was also becoming more evident, with the US and Europe taking different economic pathways and the BRICS countries seeking coordination among themselves in an attempt to stave off contagion for their own economies.

Our assessment is stark. International institutions have failed: austerity and conditionality have created impoverished nations with increases in both unemployment and inequality and an open attack on workers’ rights. Institutions appear to have conveniently forgotten they failed to prevent a financial sector crisis, which became a debt crisis, at their insistence to use taxpayer dollars only to then demand that the successful social contract emerging from the Great Depression and World War II be torn up with no negotiation and no eye to the resulting social or economic impact. Economic crisis has, at the hands of these institutions, bred economic dictatorship with no respect for rights and no signs of recovery.

Austerity is not working

Despite promises, the new IMF is the old IMF. Even its own research shows that austerity is not working. The announcement by Olivier Blanchard in the annual meeting in Tokyo last year admitted they had miscalculated the multipliers and that the negative impact of measures in Europe was more severe than expected.

In April, as backdrop to the IMF and World Bank meetings, the very premise of research by Reinhart and Rogoff, which underpinned the dominant policies, was challenged by Thomas Herndon, Michael Ash and Robert Pollin of the University of Massachusetts. They say they found some simple miscalculations or data exclusions that sharply altered the ultimate results. According to their rerunning of the figures, “The average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 per cent is actually 2.2 per cent, not –0.1 per cent”. In other words, heavy debts were not associated with the malaise that professors Reinhart and Rogoff – and much of the world’s economic elite – thought that they were.

And Laurence Ball, Davide Furceri, Daniel Leigh and Prakash Loungani in June 2013 examined the distributional effects of fiscal consolidation for a sample of 17 OECD countries over the period 1978 to 2009. The findings? “Fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage-income shares and increasing long-term unemployment.”

Thus while we all agree fiscal consolidation over time is prudent management, the social and economic destruction wrought by pro-cyclical austerity lacks even a credible academic base.

Regulation gone awry

In addition, the financial sector has escaped vital reforms to date.

Four years after the commitment by the G20 leaders in London to re-regulate global finance, The Financial Stability Board (FSB) and its members – G20 finance ministries and central banks, the European Commission and several international organisations such as the Bank for International Settlements (BIS), the IMF, the OECD and the World Bank – have collectively failed to meet deadlines.

All standardised over-the-counter (OTC) derivative contracts – which are traded at 10 times world GDP – were to be traded on exchanges or electronic trading platforms by the end of 2012. Deadline missed.

OTC trading is still not regulated and not supervised as agreed, yet trading is at a record high and still largely disconnected from the value of the underlying assets. According to the BIS, the global value of all OTC derivatives market was at US$630 trillion at the end of December 2012 – the same level as 2007!

The US and the European Commission has some commitment to a coordinated set of reforms across the Atlantic but only a small step, and one that comes very late.

Government leaders also committed to increase both quality and quantity of capital held by banks as collateral to their assets and lending. Yet the new framework, Basel III, has been criticised by many – including the OECD – for being too complex and too reliant on self-reporting and self-assessment by bankers themselves. The phase-in of Basel III spans almost a decade to full implementation by 2019 and yet several G20 countries are already behind schedule.

Work is only just beginning on “shadow banking” – the opaque world of collateral default obligations and overnight “repo” lending market.

And no real recognition of the distortionary costs of high frequency trading equals no action.

Above all, separating the “too-big-to-fail” banks was a public rallying call. It was agreed that there were systemic risks to the entire financial sector. The G20 has an official list of 29 banks considered to be globally systematically important. But “ending TBTF” consolidation is unlikely to be fulfilled any time soon. Their market power has increased post-crisis. In all major OECD economies, assets held by the largest banks as a share of GDP rose significantly in the run-up to the crisis and have continued to do so post-crisis. In the US, JP Morgan Chase, Bank of America, Wells Fargo and Citigroup issue half of all mortgages and two–thirds of all credit cards. They held over a third of all bank deposits in the United States in 2009. It is a similar picture for European TBTF groups. And as self-interested institutions, they are spending enormous sums to lobby against reforms.

There have been similar concentration trends in the derivatives markets. In 1998, the derivatives forward-rate market was dominated by some 30 banks of equal size. In 2010, the market was dominated by 15.

G20 countries also committed to implement legislation on “resolution frameworks” by the end of 2012 to allow government to take pre-emptive action before a bank collapses and so avoid costly bailing out. Deadline missed; with the FSB acknowledging that “significant work remains”.

The US Dodd-Franck Act and the UK Vickers Commission have directed reforms but they are limited and not likely to be accepted globally.

A few countries have moved on taxation, with bank levies now relatively common across Europe, but the under-taxation of the financial sector is still a reality today. It is also because of the under-taxation of the financial sector that the labour movement strongly supports the creation of financial transaction taxation of global scale. Financial transaction taxes (FTTs) exist already in a number of countries. In January 2013 the EU finance ministers gave the green light to 11 member states representing two-thirds of EU GDP to establish a common FTT. Yet the European FTT has been and continues to be strongly opposed by banking and asset management groups.

The Australian G20 opportunities

On a more positive note, there is some renewed interest for long-term investment at the G20 level and in other international forums. The G20 should adopt “High Level Principles of Long-Term Investment Financing by Institutional Investors” when it meets in September 2013. This new agenda on long-term investment is much needed. It will help institutional and workers’ pension funds move away from short-term investment, and increase exposure to long-term projects financing infrastructure, job creation and helping meet climate-change challenges.

With this evident lack of progress, a global growth and unemployment crisis and increasing inequality, Russia has established significant priorities with job creation, labour activation and monitoring of progress. The innovation of a joint labour and finance ministers meeting demonstrated some commitment to coherence. The agenda is, again, not the issue. But with ambition constrained by an overriding priority to just manage the process, the jury is out on coherent commitment to coordinated action.

The Australian G20 must re-establish trust. Re-establishing trust requires a re-commitment to coordinated, concerted action with recognition that national policy is critical but not enough. It also requires inclusion of the representative voices of developing nations beyond individual invitations.

There are key areas of policy and governance where Australia’ experience demonstrates pathways for successful outcomes. These include: government action to prioritise jobs at the onset of the great recession; youth inclusion including the youth guarantee, apprenticeships, skills management and industry partnerships; productivity versus competitiveness; a demand floor with minimum wages and social protection; robust collective bargaining; climate justice; and just taxation measures.

The ITUC Global Poll 2013 tells us the worlds’ people support a five-point plan towards reducing uncertainty and inequality that is very much in line with these areas of focus – a plan offering hope for billions of workers:

1. Jobs: investment in infrastructure, new green technologies and industries. 92 per cent of people support investment in education, research and new technologies to create jobs, develop new industries and reduce unemployment. 88 per cent of respondents support investments in clean energy and environment related industries.

2. Fair wages: ensure reasonable wages through fair prices. Half the world’s population think prices of goods and services must reflect the cost of reasonable wages for the workers who help to provide these products.

3. Strong labour laws: including the right to strike supported by 99 per cent of people, a minimum wage, the right to collectively bargain and the right to join a union. More than 90% of people say workers across the world should receive reasonable wages and be able to work under decent working conditions.

4. A social protection floor: governments must step forward and protect the interests of workers and their families. 90 per cent and above support for active income measures which help to reduce inequality, such as decent unemployment benefits and pensions, affordable access to education, health and childcare.

5. Make large companies pay their taxes. Global citizens want tax evasion to end. They are also open to raising taxes for large companies with more than 80 per cent of people in support of measures to stop tax havens and increase taxes on big business.

However, an ongoing commitment to global coherence based on such priorities must be a certainty and result in coordinated action. The serious breakdown in trust of institutions requires coordinated action and with an often chaotic and increasingly ineffectual leadership of the UN, will the G20, step up?

If it is to do so, the ITUC believes there is an absolute need for international architecture to ensure the potential for an effective G20. Aside from the FSB, concerning financial regulation, there is no home for policy development, monitoring and support of commitments. We had great hope for the “mutual assessment process”, but it is a mere shadow of the original intent as nations watered down independent evaluation and failed to include employment and social protection as risk factors.

Will Australia put coordinated action and governance back on the table to ensure jobs, a new investment model, social protection, financial regulation, climate justice and rights? Or will the G20 simply result in more communiqués and greater loss of trust?

The ITUC, in cooperation with the ACTU here in Australia, as the L20 will continue to engage with both government and business, but a reinvestment by the leaders themselves must drive ambition and implementation to ensure hope.

The alternative is frightening.

The $46-billion Alaska Permanent Fund Corporation (APFC) will launch PCIO, a private equity version of its successful external chief-investment-officer partnerships, and is looking for partners now.

When the fund moved to a risk-based factor allocation a few years ago, it allocated mandates under its special opportunities bucket to five managers – PIMCO, GMO, Bridgewater, AQR and Goldman Sachs.

While the mandates had limits around volatility and tail risk, the idea was the mandates were a best-ideas approach giving managers freedom to invest. The Alaska Permanent Fund Corporation described them their “external CIOs”.

Now the fund will expand this idea to the private markets and is in conversation with Carlyle to be its first PCIO.

“The external CIO model has been good for us; we like it,” Mike Burns, executive director of APFC, says. “We really get a balance of approaches from the different managers and they haven’t performed at the same time or level. We are now looking at the same structure with private investments.”

Give us your best ideasMikeBurns04

Last month the board approved a commitment to Carlyle that is a specifically designed, custom program of private asset investment strategies.

The focus of that program is on global natural-resource investment strategies, including up to $375 million in primary investments to two or three of Carlyle’s private equity funds, with Carlyle International Energy Partners and NGP Natural Resources XI targeted for investment, and a yet-to-be-formed agribusiness or metals/mining fund may also receive an allocation. Also $375 million to pre-fund direct and other direct Carlyle investments, with a focus on the natural resource, metals and energy sectors.

“The Carlyle investment is step-one of a similar program to our external CIO program; the same structure with private investments,” Burns, pictured right, says.

“We are looking for managers to give us a broad multi-discipline platform. It’s pretty wide discretion with a private-equity focus. We want them to give us their best ideas. Carlyle matured quicker than the others.”

Burns says that the fund has had a long history with Carlyle which has created a “long memory bank” due to the ongoing relationship.

“Trust is more important than any strategy,” he says.

Burns says taking the advice of its consultant, Callan, adds a lot to the equation in this process.

The fund also recently awarded Blackstone two $500-million mandates; one to Blackstone Strategic Holdings Fund, a private equity fund with a strategy focused on investing in minority stakes of hedge fund general partnership interests; and an additional $500 million to a no-fee fund, in which Blackstone Alternative Asset Management will make investments in selected partnerships alongside Blackstone Strategic Capital Holdings.

“We feel one of our biggest assets is our ability to handle illiquidity and take a long-term view. We are a truly multi-generational fund and we want to play on our ability to make the most of the illiquidity premium.”

The new mandates will be funded over the next three years, most likely from equities mandates, but possibly from the existing external CIOs.

In addition to the special opportunities allocation of 20 per cent, the other risk-factor based allocations are cash and interest rates (6 per cent), company exposure (55 per cent) and real assets (19 per cent).