Year: 2015

Digitise or die: why fund houses need to embrace technology

Posted on by Ashton Wenborn

Since its invention back in the 1990s, digitisation has pervaded its way into every conceivable sector of commerce; none more so than the service industry. In financial services in particular, the rise of digital technologies has dramatically changed the manner in which institutions deliver information to their clients. Retail banks have led the way in this regard; developing a wide range of online services and mobile banking applications that have transformed the way people manage their money – ensuring that they can make payments or transfer funds without ever needing to visit a branch again. Online investment platforms, along with the recent rise of equity crowdfunding sites have democratised and demystified a once intimidating world for the average investor. But while the pace of digitisation has been rapid across so much of the financial services industry, fund and asset managers have been slower to react to the new digital landscape.

“During my 10 years of working within the investment industry, there’s probably one thing that frustrated me more than anything else, and that’s the delivery of fund information to investors”, writes Jeremy Mugridge, Marketing Director at Instinct Studios, a FinTech company that is helping the investment industry implement effective digital strategies. “Years ago the printed fund factsheet ruled the world – two glorious pages of investment enlightenment for the end investor… well perhaps not. Riding on the crest of the digital wave, a new innovation emerged in the form of the factsheet pdf – certainly a credible alternative to paper but hardly an earth shattering development.”

The failure to offer accurate fund information is the next regulatory time bomb waiting to happen

But what frustrates him most is the fact that in 2015 very little has changed. Research by Instinct Studios has revealed that 92 percent of these fund factsheets for some of the UK’s biggest funds contained one-year performance data that was a month and a half out of date.

“Why is it”, asks Mugridge, “that Nike, a sports footwear, apparel and equipment company, can use digital to visualise data in a clearer way than a company that wants me to invest many thousands of pounds into [its] fund[s]?”

It is a question that he and his team are hoping to help answer with their investment information visualisation service, Fund Explorer, which is designed to help investors make better-informed financial decisions and hopefully do away with the antiquated factsheet. Technologies such as this will hopefully help bring the investment industry closer to digital parity with others organisations in the financial services industry.

Digital adoption
The proliferation of smartphones and the general advancement of digital technologies are pushing investors expectations increasingly higher. Investors expect funds to provide services that allow them to consume information in new, innovative ways. The digital movement has taken a little longer to take hold in the investment industry, but as clients grow more accustomed to the digital landscape and a new generation of investors join the market, the requirement for funds to offer a more sophisticated digital offering grows. The application of digital technologies, therefore, is essential if firms want to survive. They must be willing to adopt, evolve and grow their use of these platforms and incorporate these systems into the very heart of how they do business if they hope to cater to the digital appetites of the market.

“Increasingly people want to engage with their investments”, says Tom Hawkins, Head of UK Proposition Marketing at Old Mutual Wealth. “In all areas of life we expect information and data to be readily available to us electronically. This was one of the principles we took into the development of our WealthSelect investment service.”

The ability of digital technologies to better convey information is not just positive for investors. It will also help funds with compliance. From a regulatory standpoint digitisation will assist the investment industry to comply with chapter four of the Financial Conduct Authority’s Conduct of Business (COBS) handbook. COBS 4.2 states, “a firm must ensure that a communication or a financial promotion is clear, fair and not misleading”. While the FCA’s Retail Distribution Review has paved the way for greater transparency, digital technologies provide customers with live investment information, which can be displayed in ways that bring data to life in a way that fund factsheets cannot.

“The failure to offer accurate fund information is the next regulatory time bomb waiting to happen”, says Majid Shabir, founder of Instinct Studios. “The financial services market hasn’t been reacting quickly enough to digital; companies need to be doing more to deliver the kind of digital experiences that customers are already receiving from other industries. We believe Fund Explorer will help empower investors with a new level of knowledge and understanding, by allowing them to peel back layers of financial information whenever and however they want.”

Disruptive forces
Fund houses are clearly aware of their anachronistic practices and working with companies like Instinct Studios is testament to this fact. For some time now, there have been fears from inside the industry about technology companies such as Google or Apple choosing to enter into the market and take advantage of the industry’s technological shortcomings.

“Asset management does need to up its game, as we are lagging behind other sectors in terms of the adoption of digital technology”, said Martin Gilbert, Chief Executive of Aberdeen Asset Management in an interview with the Financial Times. “Increasingly, customers will want to engage and transact with us online via their handsets. We need to learn from other businesses but not just those in IT. Airlines, for example, have successfully transitioned much of the ticketing element of their business online – selection, booking and payment of flights together with the issuing of a ticket via QR codes.”

While it is good to see that investment funds are acknowledging they need to improve their offering to customers, a recent report by Create Research has played down the threat of technology giants shaking up the market. Instead, Amin Rajan, CEO of Create Research and author of the report, believes that any type of digital transformation will need to be led from within the industry.

In the report, titled Why the Internet Titans Will Not Conquer Asset Management, Rajan explains that a Google-like technology giant is unlikely to be able to disrupt the industry’s business model from the outside, as reputation in this industry is everything.

“Asset managers will remain in the driving seat because risk management is in their DNA”, says Rajan. “Investing is a bet on an unknown future: investment products have neither replicable outcomes nor a defined shelf life. In this age of dynamic risk, investors will be unwilling to entrust their money to outsiders without a strong risk culture and an associated brand.”

Outsiders, he contends, will still be able to enter into the industry and make their digital mark on it, but they will not be able to do it without the assistance of well-established brands. Therefore, it is likely that a number of joint ventures or partnerships between large investment organisations and technology companies will start to emerge in the coming years.

Alliances and bedfellows
The report does issue a word of warning about the damaging effect of what he calls DIY digital applications. These applications will allow investors to bypass traditional investment channels, which could hit the industry hard. However, the report argues that the main losers are likely to be registered investment advisors (RIAs) in the US, independent financial advisors in the UK and wealth managers on the Continent.

“Digitisation will demystify their craft and erode their competitive edge. Technology will clearly be the driving force behind such transformational changes. It is also likely to give rise to rather unexpected alliances and bedfellows over this decade”, writes Rajan.

Such an alliance may already be afoot, with Aberdeen Asset Management seeking the counsel of Google in order to help them better server their investors. Rob Sanders, Group Head of Marketing at the fund house told the Financial Times that “the big challenge asset managers face in digitising their business will be customer data. Do we have a full understanding of our customers’ behaviour to communicate to them and service them better? This is something that Aberdeen is focusing on, and we are in dialogue with Google to help us move forward.”

Other fund houses would be wise to do the same, as for the moment at least they find themselves well positioned to fend off potential threats from outsiders. But considering the trend of inaction towards digitising its services, along with the continued prevalence of the fund factsheet, the industry appears to lack the will to evolve. One thing is for sure, however, and that is that technology, whether fund houses recognise it or not, is going shake up the investment industry just as it has done with every other.

It worked! Spain’s GDP up thanks to austerity measures

Posted on by Ashton Wenborn

At 0.9 percent, Spain’s GDP growth for the first quarter of 2015 indicates a robust return to the nation’s economic expansion. The figure, which was published on April 30 by Spain’s National Statistics Institute (INE), is more than both the 0.8 percent predicted by economists for the period and the 0.7 percent rate achieved in the previous quarter.

According to the INE, the annual GDP growth for Q1 2015 is 2.6 percent, which is significantly greater than the 2.0 percent rate for the same period last year.

Higher-than-expected job creation has also
been achieved

Growing domestic demand and strong levels for both private consumption and investment can be largely attributed to Spain’s current economic spurt, which is at its fastest pace since before 2008, when the country’s dire economic crisis set in.

Public spending cutbacks and structural reforms have also been effective, leading to predictions of further growth over the course of the year.

According to a report published by the European Commission in February, “The recent overall economic and financial developments confirm the stabilisation that has been unfolding over the last two years in Spain”. The report explains that a more conducive financial environment, rising market confidence and lower energy prices have all helped to prop up the economic growth exhibited in 2014 and so far this year.

Higher-than-expected job creation has also been achieved, although Spain’s unemployment rate is still considerably high at 23.7 percent for the first quarter of 2015. In addition, public and private debt remains elevated, which can limit continued fast growth in the long-term unless tackled in the short to medium term. Furthermore, “the country remains vulnerable to sudden changes in global investor sentiment,” reads the Commission’s report.

Earlier this week, Prime Minister Mariano Rajoy announced that the government expects the economy to grow by 2.9 percent in 2015, higher than the 2.3 percent year-on-year GDP growth predicted by the Commission – making Spain the fastest growing economy in the Eurozone. Although the country still faces several fiscal challenges, as listed above, it would seem that it could actually be on track to achieve this feat – a remarkable achievement given Spain’s financial position just a few short years ago.

BankServe on protecting marine assets

Posted on by Ashton Wenborn

Shipping is attracting money from all sorts of different places – with new investors and lenders entering the market looking for high returns and the promise of asset play. These new investors and lenders consider the projects presented carefully, using the best lawyers, ship valuers and surveyors to make deals as watertight as possible. They check borrowers as much as they can – obtain detailed reviews on the insurances arranged on the assets and insist on the best. However, they are then making a huge mistake – they let someone else arrange their contingent insurance protection and as a consequence devalue that protection by over 50 percent in the process. Why?

Until a claim is made on an insurance policy it is simply a piece of paper in a file, which gives some comfort on dark stormy nights

The best place to start is to examine what the insurance does that the investors should be buying. All marine assets will have three basic types of cover that the owner will buy – these are hull and machinery, war and protection and indemnity (P&I) cover. All of these will be checked by investors and their advisors for both their breadth and the security of the underwriters accepting the risk. This is standard and those covers are correctly the responsibility of the owner or operator of the vessel. The loan documentation will contain a general assignment and notice of that assignment will be signed at drawdown so that the world at large can be told of the investor/lender interest and the relevant policies endorsed accordingly.

This is fine so far, but as with all contracts of insurance there is the possibility of avoidance of claims by underwriters. It doesn’t happen often, thankfully, and the vast majority of insurance claims are processed without dispute as to liability or quantum. Even where there are disputes they are invariably resolved by compromise without financial detriment being suffered by investors or lenders. The problems come when underwriters don’t pay or the compromise available is not sufficient to satisfy investors and lenders. It is this position that contingent insurance protections are there to deal with – they step in to pay investors and lenders when the owner’s policies don’t and it is the very infrequency of such claims that means the correct attention is not being given, to either the wordings used or who is arranging the cover.

The problem
The contingent insurances available fall basically under two headings: Mortgagee’s Interest Insurance (MII), which is for lenders securing their position with ship mortgages; and Lessor’s Interest/Innocent Owner’s Insurance (LII/IOI), which is designed to protect finance investors who buy vessels and give them to third party operators by way of lease, bareboat or management. Requirement for these insurances is included in loan documentation, but securing cover is frequently simply a box just to be ticked and failure to tick the box correctly can be a very expensive hobby.

Until a claim is made on an insurance policy it is simply a piece of paper in a file, which gives some comfort on dark stormy nights. Only when money is needed does the adequacy of that piece of paper get tested and only during the claims process are cracks and deficiencies found. Those cracks may be overcome with legal argument, but at the same time may be fatal to a claim. Lessons are learned with every claim and the marine insurance world has a habit of throwing up unique problems. MII and LII/IOI insurances are not like the hull and machinery policies purchased by owners – underwriters of MII and LII/IOI covers don’t expect claims. Rejection of claims made by owners on their insurances is a rare occurrence and as a consequence claims on contingent protections are rare too.

Any contract, whether by way of insurance or not, will never be perfect and there will always be debate about the meaning of words and the obligations of each party. The more debates there are the more the contractual terms will be defined and arguments rehearsed about what the contract actually does. That is a hugely useful part of the process – if you like a form of evolution. A learning process with different points being raised each time a claim or dispute arises and changes made to reflect the needs of the parties in the future. The more disputes there are the more a contract gets examined and the quicker the learning process becomes, such that each side gets to know more and more about the product they are buying.

Difficulties to overcome
The difficulty for MII and LII/IOI assureds is that the evolutionary process is slow and largely unpublicised, occurring quietly out of the glare of the public eye and it is because of this snail like pace of development that wordings and coverage available vary, perhaps more than any other type of insurance cover.

By way of example owners buy their hull and machinery cover on various sets of international clauses with standard amendments, which are understood by both those arranging cover and those giving the cover. In contrast MII is arranged either on the standard Institute Mortgagees Interest clauses (there are two sets dated 30/5/1986 and 1/3/1997) or on a myriad of wordings designed by brokers in conjunction with their clients. The Institute MII clauses should be avoided by lenders and investors at all costs and if the piece of paper reached for in times of trouble is based on such clauses, then simply ticking the box has turned out to be no tick at all. Other sets of clauses may look similar but there will be subtle variations based on pieces of experience and assureds looking at wordings and saying “what if this happens – can we amend to take account of that?”

The difficulty is that no matter how long you sit in a room trying to think of every eventuality to close possible gaps, the marine world will produce a situation that no-one has thought of – or a lawyer acting for underwriters will read a clause in an entirely different way to that which is intended. Interpretation of wordings is both an answer and a problem, and even if wide wordings are used those tasked with collecting claims may have no idea of what weapons they have at their disposal; a little like having a gun but not knowing how to fire it.

Advice going forward
The first part of the advice then is to use the right wording to give the best chance of recovery. The second part of the advice is never to let an owner, operator or manager arrange the cover on behalf of a lender or investor. Defences used by the underwriters of owners’ or operators’ policies rely on an act or omission of that owner or operator – that act or omission may be entirely innocent but mistakes happen nevertheless and claims may be declined as a result. All MII and LII/IOI protections are based on the premise that they are protecting an innocent lender or investor who is unaware of the issues affecting the owners’ or operators’ insurances. The required innocence or lack of knowledge is blown away though, if the owner or operator acts as agent for the lender or investor who will be fixed with the knowledge of their agent. Immediately the lender may be deemed to be aware of an act of non-disclosure, breach of warranty or breach of condition and if that is the case the widest wording available won’t save the MII or LII/IOI claim, which is destroyed before it even starts. The box has been ticked, but ticked by the wrong person and the complete lack of attention to this highly important part of the process can be very costly.

When mistakes happen the usual response is ‘this must never happen again’ or ‘we’ll get this right next time’. The problem with contingent policies like MII and LII/IOI is that most lenders or investors may never see more than one claim and there may never be a next time to get it right. It is a quite unique experience in that this has to be done correctly first time and plugging one of the various policy holes for ‘next time’ will be little consolation as the experience purchased at such a high cost, with an MII or LII/IOI claim not collected, will never be used. Shipping is a great business for lenders and investors alike, but they shouldn’t let such a large part of the insurance process be left to chance.

MII and LII/IOI claims can be thought of like London buses – you may wait for ages for one to come along and when it does you must get on, as the next one may never arrive. Use the right wording – which has been stress tested for claims and your own broker who knows how to collect those claims – and you’ve got a chance of enjoying the ride. It’s like anything; if you want something done properly, do it yourself.

American hegemony or American primacy?

Posted on by Ashton Wenborn

US-military-power

No country in modern history has possessed as much global military power as the US. Yet some analysts now argue that the US is following in the footsteps of the UK, the last global hegemon to decline. This historical analogy, though increasingly popular, is misleading.

Britain was never as dominant as the US is today. To be sure, it maintained a navy equal in size to the next two fleets combined, and its empire, on which the sun never set, ruled over a quarter of humankind. But there were major differences in the relative power resources of imperial Britain and contemporary America. By the outbreak of World War I, Britain ranked only fourth among the great powers in terms of military personnel, fourth in terms of GDP, and third in military spending.

The British Empire was ruled in large part through reliance on local troops. Of the 8.6 million British forces in WWI, nearly a third came from the overseas empire. That made it increasingly difficult for the government in London to declare war on behalf of the empire when nationalist sentiments began to intensify.

By World War II, protecting the empire had become more of a burden than an asset. The fact that the UK was situated so close to powers like Germany and Russia made matters even more challenging.

$17.78trn

US GDP 2015 (current prices)

Power hungry
For all the loose talk of an ‘American empire’, the fact is that the US does not have colonies that it must administer, and thus has more freedom to manoeuvre than the UK did. And, surrounded by unthreatening countries and two oceans, it finds it far easier to protect itself.

That brings us to another problem with the global hegemon analogy: the confusion over what hegemony actually means. Some observers conflate the concept with imperialism; but the US is clear evidence that a hegemon does not have to have a formal empire. Others define hegemony as the ability to set the rules of the international system; but precisely how much influence over this process a hegemon must have, relative to other powers, remains unclear.

Still others consider hegemony to be synonymous with control of the most power resources. But, by this definition, 19th century Britain – which at the height of its power in 1870 ranked third (behind the US and Russia) in GDP and third (behind Russia and France) in military expenditures – could not be considered hegemonic, despite its naval dominance. Similarly, those who speak of American hegemony after 1945 fail to note that the Soviet Union balanced US military power for more than four decades. Though the US had disproportionate economic clout, its room for political and military manoeuvre was constrained by Soviet power.

Fact and fiction
Some analysts describe the post-1945 period as a US-led hierarchical order with liberal characteristics, in which the US provided public goods while operating within a loose system of multilateral rules and institutions that gave weaker states a say. They point out that it may be rational for many countries to preserve this institutional framework, even if American power resources decline. In this sense, the US-led international order could outlive America’s primacy in power resources, though many others argue that the emergence of new powers portends this order’s demise.

But, when it comes to the era of supposed US hegemony, there has always been a lot of fiction mixed in with the facts. It was less a global order than a group of like-minded countries, largely in the Americas and Western Europe, which comprised less than half of the world. And its effects on non-members – including significant powers like China, India, Indonesia, and the Soviet bloc – were not always benign. Given this, the US position in the world could more accurately be called a ‘half-hegemony.’

Of course, America did maintain economic dominance after 1945: the devastation of WWII in so many countries meant that the US produced nearly half of global GDP. That position lasted until 1970, when the US share of global GDP fell to its pre-war level of one-quarter. But, from a political or military standpoint, the world was bipolar, with the Soviet Union balancing America’s power. Indeed, during this period, the US often could not defend its interests: the Soviet Union acquired nuclear weapons; communist takeovers occurred in China, Cuba, and half of Vietnam; the Korean War ended in a stalemate; and revolts in Hungary and Czechoslovakia were repressed.

A new era
Against this background, primacy seems like a more accurate description of a country’s disproportionate (and measurable) share of all three kinds of power resources: military, economic, and soft. The question now is whether the era of US primacy is coming to an end.

Given the unpredictability of global developments, it is, of course, impossible to answer this question definitively. The rise of transnational forces and non-state actors, not to mention emerging powers like China, suggests that there are big changes on the horizon. But there is still reason to believe that, at least in the first half of this century, the US will retain its primacy in power resources and continue to play the central role in the global balance of power.

In short, while the era of US primacy is not over, it is set to change in important ways. Whether or not these changes will bolster global security and prosperity remains to be seen.

Joseph S. Nye, Jr.is Chairman of the WEF’s Global Agenda Council on the Future of Government.

© Project Syndicate, 2015

HSBC on tackling Brazil’s retirement plan deficit

Posted on by Ashton Wenborn

Since 2005, HSBC has been looking in-depth at retirement, and how pre-retirees are able to save in today’s market. The bank’s research is based on a nationally representative survey of 1,001 people into understanding and supporting all retirement plans – including working age people (see Fig. 1), along with pre and current retirees. The independent research study is a driver for HSBC Fundo de Pensão in achieving its desired standard of living in retirement. Conducted in August and September last year, the study is the 10th in the series, revealing many findings that confirm some of the actions that have been taken by HSBC Fundo de Pensão to improve members’ wellbeing.

Retirement concerns
Many retirees feel that they have an annual household income well below what they deem necessary for a comfortable retirement. The outlook for the next generation is even less optimistic: 10 percent of working age people believe they will never be able to fully retire and more than 43 percent believe that they will not be able to maintain a comfortable lifestyle if they retire. A total of 29 percent say they will not be able to afford to do the things they want later in life.

Brazil’s age structure:

Median age:

29.9 years

Male

31.5 years

Female

Life expectancy at birth:

73.8 years

Population average

69 years

Male

77 years

Female

Source: Index Mundi
Notes: 2014 figures

Maintaining a comfortable standard of living during retirement is a real concern for many. Almost 32 percent of pre-retirees are not confident in their ability to maintain a good living standard once they have stopped working. For those aged 45 and over this figure rises to 40 percent compared with over 26 percent of 25 to 44 year olds. These retirement lifestyle concerns are an issue across all income levels – even among pre-retirees with a household monthly income of more than $4,890 a month, as over 28 percent are not confident that they will be able to maintain a comfortable standard of living through their retirement years.

What’s more, the majority of those of working age have more fundamental concerns about funding their retirement. The majority at 83 percent worry about having enough money to live comfortably, and 81 percent are concerned about having enough money to live day-to-day. Running out of money is a concern for 80 percent of those at working age people. All of this suggests that pre-retirees fear that life after work may be less comfortable than they might have hoped. Almost 49 percent of working age people say they fear financial hardship in retirement. A similar proportion at 46 percent expect that when they retire, they will have to cut down on everyday spending, and 28 percent believe that they will not be able to eat out as much.

Working age people are worried about their financial preparations for retirement. More than 41 percent think their preparations are inadequate for a comfortable retirement. There is concern from retirees too, with 43 percent saying their preparations were insufficient.

Some of the main reasons why people are not preparing adequately to maintain a comfortable standard of living in retirement are because they:

  • Cannot afford it: more than 29 percent of pre-retirees say they cannot afford to prepare adequately for their retirement years.
  • Have more immediate financial commitments: more than 34 percent of pre-retirees say they are paying off other non-mortgage debts and almost 23 percent say they had an unexpected expense.
  • Did not start saving early enough: around 54 percent of pre-retirees and 42 percent admit they did not start saving early enough.
  • Were not aware of how much to save: over 22 percent of retirees say they did not realise how much they needed to save.
  • For 87 percent of working age people, saving for retirement is not their main priority. Other priorities include paying off debts at 18 percent, saving for holidays at nine percent, saving for a rainy day also at nine percent, and carrying out home improvements at eight percent.
  • Even with the best intentions, major life events have affected 81 percent of pre-retirees’ retirement saving. While some of these events can be planned for, such as buying a home or paying a mortgage (28 percent), starting a family (18 percent) or paying for children’s education (21 percent), unexpected events can also have a significant impact. Almost 17 percent of working age people faced an unexpected illness that stopped them or their spouse from working, with a knock-on effect on their retirement saving.

Factoring in external conditions
The global economic downturn has also had a far-reaching impact. More than 27 percent of pre-retirees say it had a direct and significant impact on their ability to save for retirement. It is also likely to have had an indirect effect on pre-retirees’ economic wellbeing, with 35 percent saying that losing their job, getting into debt or having severe financial difficulty would greatly affect their ability to save for retirement.

With the benefit of hindsight, many retirees would have done things differently before they retired, to improve their standard of living in retirement. For example, over 36 percent of retirees know better than pre-retirees that you need to start planning for retirement early – 38 percent of retirees say they would have saved more, and 35 percent would have developed a financial plan for the future. A total of 33 percent would have saved a small amount regularly and 31 percent would have started saving earlier.

While almost 29 percent of pre-retirees say you can start planning for retirement in your 40s and still maintain a similar standard of living after retirement, significantly less of those retired at 22 percent think you can start at this age. Moreover, more than half at 53 percent of pre-retirees are either not currently saving for their retirement or do not intend to start. Even among pre-retirees nearer to retirement – those aged 45 and over at more than 42 percent are not saving or do not intend to start saving specifically for retirement. There is a noticeable gap between pre-retirees’ intentions towards saving for their retirement, and the reality as experienced by current retirees. Over their working life, pre-retirees on average plan to save 19 percent of their income towards retirement savings and investments, excluding pensions. In reality however, today’s retirees actually saved only 15 percent of their income over the course of their working lives.

Brazil's population breakdown

Working age people plan to save a constant 20-23 percent of their income towards their retirement savings and investments – excluding pensions – throughout most of their working life. Again, the current reality is different. Retirees saved a considerably lower share of their income – eight to 14 percent – when they were younger (between the age 18 and 44), and only later in life, at age 45-59, they increase the share of their income closer to their intended level, missing out on the full benefits of compound growth.

Working age people do not have enough savings and investments to last them through their retirement. On average, pre-retirees expect that their retirement savings and investments that exclude pensions will run out 11 years into their retirement. With retirees on average fully retiring at age 55 and a typical life expectancy in Brazil of 74 years, pre-retirees face an eight-year gap when they will be solely reliant on any state, employer or personal pension provisions they may have.

Among pre-retirees, women in particular do not have enough savings and investments to last them through their retirement. Women expect their retirement savings and investments will last just 10 years, but with an average retirement period of 22 years, this leaves 12 years when women will be reliant solely any pension provision they may have. The situation is better for men as their savings and investments should last them for 13 years of an average 15-year retirement. However, if men retire before the age of 55 then their retirement funding gap will widen further.

The recognition by retirees that a different path in working age savings would have driven to a more comfortable retirement only reinforces the understanding of HSBC Fundo de Pensão that there is a need to educate members to start early and save for retirement, as well as spend an adequate amount to retirement savings. With life expectancy getting longer, it becomes even more important to adequately save for retirement. The first step to be taken is to create awareness and HSBC Fundo de Pensão is constantly making efforts to make it happen. It also insists on placing specialised consultancy services to guide customers in their choice of the most appropriate products for their company and its employees.

HSBC is a member of the Associação Brasileira das Entidades Fechadas de Previdência Complementar, and has been selected by Associação Nacional dos Contabilistas das Entidades de Previdência as the best multi-sponsored pension fund in Brazil. Its administrative services are provided by HSBC Administração de Serviços para Fundos de Pensão (Brasil), while assets are managed by HSBC Global Asset Management, one of the largest managers of third-party assets in Brazil.

Germany’s first Islamic bank opens for business

Posted on by Ashton Wenborn

Europe’s first fully-functional Islamic bank will soon open its doors in Frankfurt, offering German’s Muslim population the opportunity to use a bank that complies with sharia law for the first time.

The branch, which will operate under the name KT Bank, can only be backed by tangible assets and shall refrain from speculative investments, in accordance with Islamic banking rules. Charging interest on loans is also not permitted, although the bank is allowed to purchase and sell assets for a profit.

[S]ervices will also be available for non-Muslims, including retail and wholesale customers

Additionally, activities that are considered un-Islamic, such as participation in forbidden goods, services and projects, including businesses within the gambling and alcohol industries, are strictly prohibited.

Kuveyt Turk Bank currently has another branch in Mannheim, although it is not fully functional under sharia law.

As well as the four million Muslims living in Germany that form the targeted customer base for the bank, services will also be available for non-Muslims, including retail and wholesale customers.

Islamic bonds, known as sukuk, have become increasingly attractive for both Muslims and non-Muslims in recent years, given their fast rate of growth. According to Gulf News Banking, the global sukuk market has doubled in the last three years – with no signs of slowing down at this point.

Kuwait Finance House, which owns a majority stake in Kuveyt Bank, has remarked on this latest move as confirming its leading position in Islamic banking. “This new achievement shall open vast scopes of business and investment in Europe’s largest economies, thus indicating that the bank is the first bank that obtains a full function license to practice deposits and credit finance facilities in Germany as per Islamic rules and regulations,” read a company press release.

Kuveyt Turk Bank plans to make multiple investments in the coming years in order to expand its portfolio of financial products, as permitted by sharia-banking regulations, as well as to grow its global reach. If the Frankfurt model proves successful, the bank hopes to open more fully functional Islamic branches within Germany, and elsewhere in Europe also.

Nightingale: US interest hike frightens China

Posted on by World Finance

Economist Roger Nightingale tells World Finance that Chinese premier Li Keqiang’s recent exclusive interview with Western media reveals a country that is bracing for economic calamity as the US dollar rises in the months ahead.

World Finance: What do you make of the Premier’s statements on the prospect of China’s formalised QE program, and the US’s hike in rates? He said: “When QE is in place, there may be all sorts of players managing to stay afloat in this big ocean, yet it’s difficult really to predict now what may come out of it when QE is withdrawn.” Would you say that he’s right on the money?

Roger Nightingale: He quite clearly is worried about the level of activity in the Chinese economy. If he hadn’t been worried about that he wouldn’t have found it necessary to talk about throwing liquidity into the pot.

So quite clearly there’s been some change in view, because a year ago, two years ago, the Chinese authorities thought they had everything under control, they thought they didn’t need to do the sort of stuff that the Brits and the Americans were doing. They acknowledged that the economy is somewhat weaker, perhaps substantially weaker, that’s on the one hand.

Meanwhile you’ve got the Americans, as you rightly point out, talking about the possibility of doing the opposite, talking about the possibility of tightening money and raising interest rates. Well if they do that, you’re going to pull up the dollar hugely and pull down the yuan enormously. That’s going to cheapen the Chinese product selling into America.

World Finance: What he’s really not willing to admit outright is they’re engaging in their own easing programs, you don’t have to call it QE, but the Chinese are as powerless as the Americans are to market forces.

Roger Nightingale: Yes, absolutely.

World Finance: So what are we going to see in the next decades among these two economic giants?

Roger Nightingale: Depression. You can’t always have a nice solution to every scenario. Sometimes, you have to take a bit of pain, grit your teeth, tighten your belt, put your head down, and live through it. It won’t last forever. The Depression of the 1930s didn’t last for ever, the depression of the 1890s and the 1820s didn’t last forever, it will end. It just may be that we’re dead before it does.

NCB adapts to Jamaica’s reformed pensions sector

Posted on by Ashton Wenborn

A sharpened focus on Jamaica’s pensions sector has brought with it a wave of improvements, as the government has taken major strides towards implementing a regulatory framework for private pension plans. Beginning with the passage of the Pensions Act, this changed marketplace has created a host of new challenges and opportunities for providers, whose job is poles apart from that of only a few short years ago. World Finance spoke to Vernon James, Managing Director and CEO of NCB Insurance Company, about the pensions landscape and what steps have been taken so far.

The reform of the private pensions sector is in two phases, with the first – pertaining to the passage of the Pensions Act and any related operational, registration, licensing and governance issues – completed, and the second, termed the ‘adequacy stage’ still to address portability and vesting concerns. “Prior to the passage of the Pensions Act”, says James, “the local tax authority, Tax Administration Jamaica, had the sole task of monitoring, regulating and approving pension plans under the Income Tax Act. The Income Tax Act, however, is inadequate when it comes to handling basic issues specific to private pensions, such as management of trustees, benefit payments, complaints, solvency and funding requirements and compliance.” It is in this department, therefore, that the ruling administration will be aiming to rectify some of the underlying issues, and a quick look at the progress made thus far shows that the situation is improving.

9%

Of the employed labour force in Jamaica are covered under a pension plan

“The Pensions Act signalled a sea of changes to the operation of private pension plans in Jamaica. It designated the Financial Services Commission (FSC) as the regulatory body charged with regulatory and supervisory powers”, says James. The Pensions Act also codified many of the common law fiduciary duties owed by trustees and regulated the governance of pension plans, including the requirement that the composition of all boards of trustees include those nominated by the members of the plan and, in certain prescribed circumstances, a trustee nominated by the pensioners. Add to that prescribed prudential and quantitative limits for different classes of investments and the imposition of significant filing requirements, and the changes made so far are clearly worth a look.

Pension potential
Although the reforms have been bold and the scale of ambition admirable, the government has been slow to enact what many call necessary changes to Jamaica’s pension sector. “There have been a number of setbacks in getting phase II legislation before parliament”, says James. Both the FSC and Ministry of Finance and Public Service are working towards bringing a draft bill before parliament in the not-too-distant-future, which is at least a step in the right direction. The FSC has also prepared its recommendations and is currently soliciting feedback from stakeholders in the industry, including the Pension Fund Association of Jamaica, the Caribbean Actuarial Association and the Insurance Association of Jamaica. And while the reforms have faced criticism, namely with respect to the pace at which they’ve been brought forward, there is a tangible sense today that the sector is beginning to change.

“The Pensions Act and Regulations (to cover phase I) were passed only after significant and substantive dialogue and feedback from interest groups in the pension industry, and although all stakeholders did not see eye-to-eye on all issues, the act and regulations that are presently in force represent a solid legislative platform for us to continue to build on”, says James.

According to one report published in 2009 by the OECD and cited by James, entitled Core Principles of Occupational Pension Regulation, the organisation encourages both members and non-members alike to establish, amend or review their pension regulations according to the principles laid out in the paper. Included in the so-called core principles were: conditions for effective regulation and supervision; establishment of pension plans and pension fund managing companies; plan liabilities, funding rules, winding up, and insurance; asset management; rights of members and beneficiaries and adequacy of benefits; governance; and supervision. “To one degree or another, the core principles, are reflected and incorporated in our Pensions Act”, says James.

Room for improvement
“There are, however, a few key areas in which the legal and regulatory landscape for private pension plans can be improved; particularly in the area of reform of the prudential and quantitative limits for investment of plan assets. The manner in which pension assets are invested and the regulation of those investments bear a direct relationship to the success of private pension plans”, says James. “While the current landscape of restrictive investment regulations has as its primary focus the safeguarding of assets of private pension plans it simultaneously fails to create an environment in which those assets can be managed in order to obtain the best returns at an acceptable level of risk. Movement away from regulation based on quantitative criteria to a prudential or prudent person approach will allow pension plans greater flexibility in the investment management process and a better opportunity to leverage higher returns on investments of plan assets.”

In Jamaica, the reform of the private sector remains very much a continuous process, and a failure to do so could affect the adequacy of pension coverage, the adequacy of retirement benefits and the financial sustainability and affordability of pension arrangements on sponsors of private pension plans. Still, there is a sizeable opportunity for pension providers in Jamaica to grow their pension portfolio, given that only nine percent of the employed labour force is covered under a pension plan, says James. The challenge in the main, therefore, is to educate the remaining 91 percent on the importance and relevance of securing their pension benefits, which, if done successfully, could bring a wealth of opportunities their way.

Catering to the community
With the government focused on reforming the sector and providers looking to make good on the country’s untapped potential, focusing first on the financial and social wellness of Jamaicans is paramount. “NCB Insurance Limited (NCBIC) is cognizant of the ways in which our products and programmes cater to the welfare of the communities we serve”, says James.

“This year we launched our ‘I benefitted’ campaign, which showcased some of our customers who, despite tough economic times, made the sacrifice to put aside monies to support the tertiary education needs of their children. These parents shared how Omni Educator, through our special 20 percent grant, assisted in making it possible for their children to successfully complete college and elevate themselves up the social and economic ladder.” This focus on education can be seen on display again in various other company-led initiatives, not least NCBIC’s ProCare and grant giving programmes, as well as their sponsorship of the Junior School Challenge Quiz.

Apart from education, NCBIC has and will continue to engage with a range of corporate social responsibility programmes, which have each highlighted just how far the firm is willing to go to extend its benefits to the wider community. “Additionally as a wider social responsibility mandate, the parent company National Commercial Bank Jamaica Limited (NCB) through its strategic philanthropic arm – NCB Foundation demonstrates its social responsibility embraced by the businesses within the NCB group of companies to build the communities in which it serves”, says James. “Since its formalisation in 2003, NCB Foundation has donated in excess of JMD 1bn ($8.67m) towards several activities and is actively involved in the socio-economic development of the Jamaican society and providing an avenue through which our over 2,700 employees can give back.”

Testament to the group’s success is that this responsible culture coexists with financial solidity and a willingness to bring innovative advances to the Jamaican pension sector. The company’s segregated pension fund management style is perhaps the clearest indication that NCBIC sits at the cutting edge of Jamaica’s pension sector.

“NCBIC currently manages pension funds on a segregated (as opposed to pooled) basis, with investment portfolios being customised to reflect the liability profile of the respective pension funds”, says James.

“This pension investment management methodology offers trustees the flexibility to rebalance the pension asset portfolio and to take full advantage of changing market conditions on a timely basis. Trustees may extend partial or full discretion to NCBIC in this regard. In the segregated pension fund management model, the assets of funds are not co-mingled (with those of any other fund or with the proprietary funds of NCBIC). This allows trustees, guided by relevant regulations, to align the composition of the pension portfolios under their purview to their particular risk appetite.”

In continuing to abide by a series of innovative pension fund management styles and techniques, the company will stay on this same path, which benefits all of its clients. “Three years ago we embarked on new strategic imperatives designed to grow our penetration in the customer base of the NCB Group through product innovation, sales productivity improvement and maximising the use of technology as an enabling force”, says James.

“Through this process we expect to improve our value proposition to our customers and increase the channels of our service delivery. We have already launched one new product and are proud of our progress so far. Over the next year we expect to launch more products and make significant progress in the pursuit of our goals.”

‘I welcome their hatred’, says expelled Varoufakis

Posted on by Ashton Wenborn

After months of negotiations with international creditors, Greek Prime Minister Alexi Tsipras has overhauled his negotiating team. The reshuffle has meant that Greece’s finance minister Yanis Varoufakis – known to be outspoken and described as a maverick – has been sidelined. The move comes as Greece failed to meet its own self-imposed deadline of April 24, as many predicted, with the country quickly running out of funds.

“They are unanimous in their hate for me; and I welcome their hatred”

Nikos Theocarakis, the handpicked representative of Varoufakis has been replaced by George Chouliarakis who is seen as a close ally to Tsipras. The new negotiating team will be led by deputy foreign minister Euclid Tsakalotos, an economist who, according to Reuters, is well liked by officials of creditor nations.

Varoufakis is said to have fallen foul of his counterparts due to his uncompromising negotiating style. CityAM reports that Spain’s finance chief Luis de Guindos said that all ministers involved in the negotiations told Varoufakis that “this can’t go on.” After negotiations, the finance minister tweeted on April 24:

According to Mujtaba Rahman, Head of European Analysis at the Eurasia Group risk consultancy, reports the Financial Times, “Varoufakis has become the single biggest impediment to a Greek deal,” and that his “relationship with Tsipras and Tsipras’s willingness to cut him loose has been the central question investors have been focused on.”

Markets reacted well to the sidelining of Varoufakis. The Athens stock market saw a 4.4 percent bump, while the German Dax rose nearly two percent. Greek 10 year bond yields also fell by a percent and borrowing costs on Greece’s July 2017 bonds were down by almost four percent.

A promising year for pension funds

Posted on by Ashton Wenborn

If 2014 was a big year for pension funds, 2015 looks set to be even bigger. As countries across the globe continue to recover from the financial crisis, funds across nations at all stages of development are capitalising on new opportunities and increased coverage. Emerging economies are improving their pension systems with wide-reaching reforms and game-changing liberalisation, while new regulations across a number of countries in the EU are helping pension fund managers to optimise and stabilise their long-term returns.

Pension funds remain the biggest institutional investors in a number of countries across the world, and that looks set to continue as their capital is boosted yet further through various key factors. Last year the UK experienced its biggest annual fall in unemployment in more than 40 years, according to data by the ONS, while the US saw its highest level of job creation since 1999 – meaning both could see record levels of employees contributing to pension schemes in 2015 and beyond.

The favourable prospects are also evident on a wider scale; according to the Mercer Global Pension Index 2014, schemes have improved globally, and Professor Deborah Ralston, Executive Director of the ACFS, is confident this is a sign of things to come. “It’s pleasing to note average scores are increasing over time, suggesting pension reform around the world is having a positive effect”, she said in a statement.

According to the report, the number of people between the ages of 55 and 64 still in employment has risen across the majority of countries surveyed, indicating another promising development for pension funds. And they’re likely to be further bolstered when the pension age rises over the coming years – a trend set to take off across a number of key markets in the near future.

Brimming with opportunity
The situation is particularly exciting in emerging economies, where GDP growth is set to hit 4.8 percent this year (up from 4.4 percent in 2014), and 5.4 percent by 2017, according to the World Bank. India, China and other oil-importing countries are expected to receive a boost from lower oil prices, and pension funds in the region will likely reap the benefits.

In wider Asia, pension systems have been going from strength to strength; Singapore ranked in the top 10 of the Pensions Index for the first time ever in 2013, benefiting from relatively high levels of coverage, and it has maintained its place in the top 10. “Pension systems in many Asian countries are in an embryonic phase and we expect them to gradually strengthen in coming years”, said David Knox, Senior Partner at global consulting firm Mercer.

Pension funds are also growing rapidly across a number of African nations. Increased stability in the political sphere and rapid economic growth are leading to a rising number of partnerships with Western pension funds, and there’s enormous scope for further growth in the region; while 80 percent of the population in North Africa already come under a compulsory pension scheme, only 10 percent in sub-Saharan Africa are covered.

“Within three, four years you’ll see a transformative industry”, Hubert Danso, CEO of African Investor Group, told Institutional Investor. Growth in the near future is set to be especially strong in Nigeria, where the pensions industry is now almost three times the size it was in 2009, as a result of pension systems being liberalised and opened up to competition. South Africa continues to account for the largest pensions sector on the continent, with an estimated $252bn in assets.

There the state recently proposed a government-sponsored pension fund that would make contributions obligatory – a move other developing countries have also started looking towards as a means of increasing coverage and further boosting funds.

Among those is Peru, where some are pushing for regulation that would make contributions for everyone under the age of 40 compulsory – a ruling appealed in September. There remains huge potential for more coverage in the country, and that’s likely to be gradually tapped into as the focus moves towards educating people about the importance of pension saving. Elsewhere in South America, countries are seeing strong pension prospects, headed up by Chile and Brazil, which both scored well in the Mercer Pensions index.

Reform and diversification
It’s not just in emerging economies that pension reforms are starting to take effect; a new system in the UK comes into force in April 2015, offering pension savers greater freedoms – which could prove an incentive for more people to opt into schemes. Last May, Finland launched an alternative investment fund managers (AIFM) directive, encouraging the diversification of asset portfolios – something Sweden is also focusing on. The latter implemented new regulations last July, detailing standard debt investments versus alternatives, and widening out the definition of the latter.

Moving towards alternative investments and diversification is a trend being seen throughout the wider investment field across much of the globe, as fund managers adapt to changing market conditions and seek out the wisest possible investments; according to the Financial Times’ MandateWire, alternatives are attracting more attention than other major asset classes. A report by consultancy Mercer showed a similar trend, stating that investors were trying out “less familiar” investments for long-term payoffs.

A number of pension funds are capitalising on the potential benefits of those alternatives – including strong yields and less volatility – in order to optimise funds and achieve greater flexibility. Private equity is becoming an increasingly popular choice – as evidenced in Japan, where the Government Pension Investment Fund recently sold JPY 6.67trn ($55.4bn) in domestic bonds, shifting its focus onto equities to boost long-term returns. African pension funds are likewise strengthening their focus in this area.

Infrastructure too is predicted to attract greater interest from pension funds in the coming years, with other countries projected to follow in the footsteps of the UK’s Pensions Infrastructure Platform (PIP). Set up in 2012, the PIP sees pension funds pooling their funds together to approach challenges in a constructive, inventive way so as to secure larger, long-term investments with lower fees. “The basic philosophy of the PIP is infrastructure assets as a match for long-term inflation-linked cashflows”, said its CEO Mike Weston, who was appointed in September. “You are trying to match a long-term liability stream, so you want long-term predictability”, he added.

 

Pension Fund Awards 2015

Posted on by Ashton Wenborn

Austria
Victoria Volksbanken Pension

Best Pension Fund, Belgium
Amonis OFP

Brazil
HSBC Fundo de Pensão

Canada
Ontario Teachers Pension Plan

Caribbean
NCB Insurance Company

Colombia
Colfondos

Croatia
PBZ Croatia Osiguranje

Chile
AFP Capital

Czech Republic
Ceske Sporitelny

Denmark
Industriens Pension Fund

Finland
ELO

France
EADS

Germany
Allianz

Iceland
Almenni

India
Tata AIG Nirvana

Ireland
Allianz

Italy
Fonchim

Mexico
Profuturo

Netherlands
Pensioenfonds Horeca en Catering

Norway
Nordea Norge Pensjonskasse

Peru
Prima AFP

Poland
ING

Portugal
CGD Pensoes

Serbia
Dunav

South Africa
Sentinel Retirement Fund

Spain
Ibercaja

Sweden
Kapan Pensioner

Turkey
Groupama Sigorta

UK
Pension Protection Fund

US
Arkansas Teachers Retirement System