Tuesday, December 26, 2006

Candidate pensions

IPN has a piece about ongoing pensions reforms in Turkey. Although Turkey is currently involved in difficult and lengthy negotiations about its accession to the EU, it is interesting to observe the model character that the Pensions Directive apparently has developed for accession candidates.

Monday, December 25, 2006

On small steps

While it's difficult to generically denounce Germany's recent decision to raise the retirement age from 65 to 67, the chorus of criticisms about the hesitant way with which this is implemented gains traction. Deutsche Bank Research has a short comment which nicely demonstrates the negative results of an inconsistent implementation.

Wednesday, December 20, 2006

Swiss worries

The periodically updated Swiss Worry Barometer gives a representative view of the most pressing worries in the Swiss population at large and is thus carefully monitored by politicians. My visual reading of the graph indicates that retirement provision (AHV/Altersvorsorge) seems to be the only problem with a positively sloped trend line, so it's just a question of time until it overtakes Health and Unemployment as more dominant worries.

Tuesday, December 19, 2006

The role of the pension sector

In his recent speech about the role of the pension sector in the economy, Nils Bernstein (Chairman of the Board of Governors of the National Bank of Denmark) traces the path of the small, open Danish economy with its development towards a sustainable budget and private sector savings leading to Denmark going from a debtor to a net creditor nation with a multi-pillared private retirement system. But all is not well: The pension sector is divided in two subsectors of almost the same size - commercial pension companies and labour-market pension funds. While there is practically no competition in the latter, the former shows a strong concentration with 90% of the market under control of the five largest firms. Yet, the commercial sector has a higher average cost base.

Monday, December 18, 2006

The Purple Book

The UK Pensions Regulator in cooperation with the Pension Protection Fund has issued the first edition of the Purple Book, a comprehensive overview of the British DB pension universe risk profile which is to be updated annually. The overview is based on detailed information of ca. 5'800 schemes which represent about 50% of all schemes or 85% of members. It contains information about scheme demographics, funding, funding sensitivities, insolvency risks, asset allocation and short term risk concentration.

While the aggregate deficit is quoted as GBP 33.8 bio per 31 March 2006, this number needs to be seen in the context of its sensitivities:
  • "A 0.1% point increase (reduction) in gilt yields reduces (increases) aggregate scheme underfunding by around £13bn. A 2.5% increase (reduction) in equity prices reduces (increases) scheme underfunding by around £11bn. A 10% increase in equity markets would eliminate the deficit as would a 0.3% rise in gilt yields.
  • Each year added to the longevity assumption used in the s179 valuation would add 3 - 4% to pension scheme liabilities, raising the deficit by around £20bn."

  • The aggregate asset allocation continues to show a massive concentration in equity (61%), although this has come down from 73% in 1997. The share of UK equity has fallen disproportionately, as shown in the chart.

    Securitising mortality

    SwissRe's latest issue of Sigma is dedicated to Securitisation - new opportunities for insurers and investors. It presents a good overview of structures, instruments and recent developments in the market for insurance linked securities (ILS), which has been booming in recent years, and is expected to continue to do so because of its more favourable regulatory treatment in the context of Solvency II and a dearth in insurance capacity otherwise.

    The hitherto virtually untapped market segment of extreme mortality might prove to be exceptionally interesting for pension funds because of its potentially long duration, its size and its natural hedging capacity for pension funds: a mortality bond's payout is negatively related to longevity, which is one of the principal risk factors affecting pension funds' liabilities. To be an effective hedge, the populations covered need to overlap significantly, though. SwissRe estimates a current market size of USD 5'500 bio, which it expects to grow to USD 7'000 bio by 2010.

    A word of caution is in order, though (which is notably absent from the SwissRe paper). Insurance capacity is a highly cyclical asset with short cycles and high variance. Therefore it is likely that broader capital markets will be tapped when capacity is relatively scarce & expensive. Insurers will thus tend to offer relatively less favourable terms in order to take advantage of the broader market's limited sophistication & knowledge of insurance cycles.

    Wednesday, December 13, 2006

    Pensions risk

    Mercer HR has a new Global pensions risk survey which looks at the way corporations perceive their pension plans with regards to their risk exposure. It contains a fresh view in so far as it doesn't consider plan coverage, but rather the risk that the sponsoring corporation is exposed to through its plan. Those risks are widely considered significant, with important differences between the US and Europe. Furthermore, a majority of corporations either doesn't know how analysts assess the impact of pensions on corporate valuations, or they think it's done inaccurately.

    In the light of forthcoming pensions accounting that is set to better represent economic reality, this survey is relevant. It indicates that the market is already moving in that direction, but possibly also that risks are currently overestimated (or advantages consequently underrated) because of a lack of precise information about corporate pensions exposure and ways to manage it.

    P.S. CFO.com has another good summary.

    Monday, December 11, 2006

    Funding requirements across EU15

    IPE refers us to a new comparative study of the minimum technical provisions for DB pensions in the EU by GCactuaries. The paper's title is somewhat misleading as it only covers the EU15 at this point, even though it purports to be up to date, in fact looking into the future (31 December 2006 according to section 2). More likely though is that the results rely entirely on the pre-Directive transposition scenario of 31 December 2005. The study does explicitly not cover demographic assumptions.

    It finds a very wide variation between countries in the methods and assumptions for assessing minimum technical provisions, and it expects that subsequent to the transposition in particular of Art. 15 of the Directive, there will be significant changes in the way discount rates and other assumptions are determined, especially where discount rates are not set with consideration to market rates, as is the case in the majority of countries.

    Thursday, December 07, 2006

    Stability or transparency?

    Here is the text of a short presentation I gave this morning on the occasion of the General Assembly of the European Federation of Accountants in Brussels. The general consensus emerged that there is no direct connection between financial reporting at the micro (firm) level and macroeconomic stability. This differentiation is crucial in the debate.

    The subsequent Panel on the Internet - An opportunity to empower investors through accessibility or a risk for the reliability of financial information? with the US SEC's CIO Corey Booth among others made me doubt whether the European profession is really aware of the drastic impact that XBRL as a disruptive technology is going to have on the financial reporting value chain.

    P.S. Other conference documents are available at the FEE's website.

    Tuesday, December 05, 2006

    IAS 19 to enter the risk-return continuum?

    epn has an fascinating article about a possible approach to new pensions accounting, based on deconstructing any plan's risks into four distinct risk categories, accounting for them separately:
  • asset value risk
  • interest rate risk
  • mortality risk
  • compensation risk.
  • This way, it should be possible to move away from the current standard's black or white approach to classifying pension plans as DB if they do not match distinct DC criteria. Much of the article is dedicated to the analysis of Swiss and Belgian plans which by law feature a mix of DB and DC characteristics that force such plans to be accounted for as DB.

    Faithful representation of the economic reality of plan liabilities appears to be much better warranted under such a structured approach. Furthermore, corporate sponsors' risk management towards pensions liabilities will be much improved, if not enabled, since the industry has built a lot of experience in structured instruments. Some preparers may be fazed by the approach's additional complexity, but once they realise that it might actually help them to better mitigate risk, they ought to embrace it.

    Monday, December 04, 2006

    Global pensions survey

    While Allianz already enters the fray, dutch competitor Aegon prepares the ground with an extensive survey, a summary of which is available here. The report's hardly surprising key findings are:
    1. Complexity of pension regulations affects European competitiveness: Dealing with disparate national regulations of pension plans is especially difficult in Europe, affecting all multinationals with sizable operations there. Three out of four experts surveyed consider the complexity of pension regulation in Europe as a factor affecting labour competitiveness. According to the study, this has resulted in increasing the determination of multinationals to seek a greater level of consolidation of pension affairs in Europe.
    2. Multinational firms will lead the way: The survey shows that although pension systems currently remain country-specific, multinational firms have taken the lead in driving cross-border pension integration. They have influenced the direction of the market into designing and implementing pragmatic solutions for the management of global pension arrangements.
    3. Clear shift of risk from company to individual: Although there are differences between countries regarding the relative use of defined benefit and defined contribution plans, there is broad consensus among experts surveyed that the global trend of shifting risk and choice from a company's balance sheet to individual employees will continue.
    P.S. Thanks to Aegon for sending a copy of the full report. It is striking that despite of the Swiss pensions market's relative size and maturity, none of the 115 experts queried represent a Swiss firm. Have Swiss pensions entered the dubious realm of insignificance?

    European ComPension by Allianz

    In line with our earlier note, Allianz has kept word in presenting a pan-European pensions product called ComPension. As the product is only on offer in Germany, Italy and France, the pan-European aspect is rather limited at this point, but the offering is intended to be expanded gradually to further EU member states.

    The product is based on a universal investment concept and seems to cater for the German Durchführungswege fund and direct insurance, thus is limited to defined contribution. It seems to enable corporations to offer comparable provisions across the countries covered by the plans, and it offers an annual overview of effective implementation.

    Available investment vehicles are Luxembourg based Allianz European Pension Balanced or Dynamic. According to Allianz' statement, these vehicles are invested primarily in European shares and pension funds, which is rather surprising since the equity portion ought to be allocated globally. We will try to get a closer look at the detailed product features.

    Friday, December 01, 2006

    FSA not to use XBRL [UK]

    There have been a number of reports recently (example) that gave rise to the perception that the UK FSA "ditched XBRL" in the context of its new Mandatory Electronic Reporting (MER), and that this was new news. Given the FSA's weight as a leading European financial regulator, this would appear like a major setback to XBRL's global momentum.

    However, this perception needs to be qualified. A recent FSA statement maintains that the stated position is a simple reïteration of a policy established earlier, hence the reports are repackaged old news. The FSA continues to develop its MER system using XML, which can be described as a related, but more generic file format version of XBRL. A later migration from XML to XBRL is thus by no means precluded, especially seeing the FSA's main concern that there is not "sufficient XBRL experience within the UK currently to develop this system without incurring additional cost and risk". This assessment is transient by nature.

    That being said, it appears unfortunate that the FSA backtracks behind its 2004 committment to XBRL, namely to develop and publish an XBRL taxonomy. This would be a more appropriate way going forward, rather than deploying a mature technology in a newly implemented financial market infrastructure project, with which the FSA could play the rôle of an essential catalyst.

    Thursday, November 30, 2006

    A Commissioner's philippic

    Here is the text of Commissioner McCreevy's speech at today's IPE Awards. He expresses his disappointment in some member states' defective implementation of the Pensions Directive, especially with regards to national investment limits. He describes the Directive as a "harmonising framework" "to allow the best pension fund managers to administer pension schemes across the single market and pension providers to compete fairly on a pan-European basis". He also announced that court cases have been initiated against three member states today - these are probably Slovenia, the UK and Italy. Interestingly, he singles out Liability Driven Investment as a market innovation to better manage risks. Clearly, deficient implementation will not be cut a lot of slack.

    The core focus of the speech was dedicated to the third pillar and forthcoming changes in the regulatory environment as well as existing challenges in the marketplace, such as insufficient availability of annuity products. (More from IPE)

    Wednesday, November 22, 2006

    Asset management under the Directive [CH]

    Here are the slides of my presentation held today at the IZS seminar on Pan-European Pensions from a Swiss perspective. The main focus of that presentation was on the prudent person rule, which is a new concept in the Swiss market. Co-sponsoring (together with Winterthur) Bank Sarasin's auditorium in Basle was fully packed, and I have a feeling that this was a rather important event for the Swiss market place with most participants' awareness of the challenge raised.

    Sunday, November 19, 2006

    How long do we want to live?

    In its 50th anniversary issue, the New Scientist has forecasts for the next 50 years from over 70 of the world's most brilliant scientists. Three of those forecasts deal with ageing. The common theme is as extension of life expectancy "by about 40%". It is possible that a half-century from now, the most urgent question facing our society will not be "How long can humans live?" but "How long do we want to live?" This would amount to a considerable acceleration in the long running 2.5 years per decade growth rate of life expentancy, as discussed in an earlier post.

    Wednesday, November 15, 2006

    One European retirement market [CH]

    Swiss economics half-weekly Finanz und Wirtschaft has my article about the EU pensions directive and the Swiss position relative to it in today's edition.

    A user's view on XBRL & assurance

    Please find attached the slides from a short presentation I gave at the World Congress of Accountants in Istanbul this morning.

    Friday, November 10, 2006

    Taboo topic retirement age [CH]

    Credit Suisse weighs on the debate about the retirement age in Switzerland by challenging the uncharacteristically disconnected political consensus that a retirement age of 65 is sustainable in the present demographic situation. In its recent study, it argues that only an increase of the working life can return social security and retirement provision systems to sustainability and addresses widely held contrary beliefs, especially concerning higher flexibility in retirement as long as it does not lead to an increase of retirement age on average.

    Wednesday, November 08, 2006

    Accounting changes

    It doesn't happen often that the debate about changes in accounting rules makes the Financial Times' front page. Today is the exception to the rule. The CEOs of the global Big Four audit firms (KPMG, PwC, Deloitte, Ernst & Young) together with their colleagues from smaller siblings Grant Thornton and BDO, are calling for wide ranging changes to global accounting and auditing in a Paris Symposium. The discussion paper is available online.

    While initial comments tend to be skeptical, I share the thrust of the self-proclaimed conversation starter. Comprehensive change, including efficient delivery via XBRL and fair value reporting in real time is on the agenda, but will be strongly opposed by forces opposed to change. Unfortunately, using utopian language along the lines of Huxley's Brave New World is playing right into their hands.

    XBRL has been a recurring theme at today's meeting of the IASB's Analyst Representatives Group, for instance. This is no Utopia, it's just fast change. Have a look at the SEC's Chairman's comment to a blog post (via CFO.com).

    Tuesday, October 24, 2006

    New mandatory pensions in Norway [NO]

    epn has a concise summary of recent important developments in the Norwegian pensions market, which is characterised by the introduction of mandatory occupational pensions and the debate about moving to the prudent person rule in asset management. Remember that Norway, together with Iceland and Liechtenstein, is part of the European Economic Area which has committed to implementing the Pensions Directive into their own regulation.

    Tuesday, October 17, 2006

    Allianz goes pan-European

    Allianz-CEO Diekmann reveals in an interview that Allianz is going to launch a "new pan-European pensions offer" later in the year (i.e. soon). He declines to give any details at this point, so it is not clear how this offering will be structured, but evidently demand from corporate customers has been sufficiently strong to warrant this development.

    Sunday, October 15, 2006

    Of latency trading & algo-busters

    This IBM report about algorithmic trading may not appear to be immediately relevant to any investor with a time horizon greater than a business day. But if you have fiduciary responsibility for best execution, it certainly helps to be aware of these developments.

    Friday, October 13, 2006

    EU Commission sues Italy [IT] [CZ] [HU] [PL]

    Following action against the UK and Slovenia, the Commission has decided to refer Italy to the European Court of Justice for non-transposition of the Pensions Directive. Apparently Italy has also not responded to the Commission's reasoned opinion - why it has taken the Commission four months longer than in the case of the UK and Slovenia to discover that they had not received a response is not quite clear.

    IPE adds, although it is unclear on what source this information is based, that the Commission has sent letters of formal notice to the Czech Republic, Hungary and Poland. At any rate, the latter two countries have not been involved in infringement proceedings regarding the Pensions Directive to date, even though Poland definitely deserves attention as we noted earlier.

    Sunday, October 08, 2006

    European Pensions from a Swiss perspective

    The programme for the one day seminar on pan-European pensions from a Swiss perspective in Basle on 22 November 2006 is now available. Please register here, mentioning Tertium. Alternatively, you can download & send in a registration form.

    Wednesday, October 04, 2006


    The International Accounting Standards Board has redesigned its website and has taken its cue from the XBRL subdomain to offer an RSS feed. Welcome to Really Simple news distribution!

    Monday, October 02, 2006

    Recent research

    (IPE) A recent paper from the Centre for Research on Pensions and Welfare Policies (CeRP, not to be mistaken for the CEPR) looks at the effectiveness of pensions reforms in Austria, Belgium, Finland, France, Germany, Italy, Portugal, Sweden & the UK in the 1990ies by evaluating the changes in private savings rates these reforms caused. Researchers worked on the assumption that the pensions reforms aimed to make public PAYG systems more fiscally sustainable in the light of demographic ageing, thus reducing public saving. This in turn should raise the propensity for private saving. Unfortunately no such significant increase in the private savings rate could be found. Thus, these reforms appear to have been largely ineffective from a macroeconomic point of view.
    In my view, there could be two explanations for this: 1) The reforms effectively lowered public saving, but the public has not yet become aware of the need for correspondingly higher private savings. The consequences of this would be dire. 2) The reforms did not have the effect intended to reduce public saving. In any case, this paper's macroeconomic perspective on policymaking is rather refreshing.

    Initially mistaking the CeRP for the CEPR, I subsequently checked their (also not RSS equipped!) site and found two not so recent, but even more interesting and fascinating reports focusing on the respective microstructures of two highly relevant markets for European pension funds: the European corporate bond market and the European government bond market. Those markets' structures are analysed with a view to increasing their transparency, liquidity and efficiency, ostensibly by means of EU regulation. A combination of an up-to-date description of market structures and a game theoretical assessment of the impact of regulation on said criteria make for a highly educational read for everyone who is interested in European fixed interest markets.

    Sunday, October 01, 2006

    Danish changes [DK]

    This article describes the circumstances of the recent changes in the Danish retirement provision system in a bit more detail than I've summarised earlier. It appears that the public debate in Denmark takes place at an appropriate level.

    Saturday, September 30, 2006

    More aggressive pension funds?

    nrpn has a good story about pension funds having to become more assertive in pursuing their fiduciary duty towards their members, even if that means joining class actions, which are so despised in Europe, against firms they're invested in. Often times, this is the most effective means to bring about changes in corporate governance.

    ECB calls for Pensions Treaty

    In an unprecedented move for an institution whose independence is so vital to its cause as it is in the case of a central bank, Mr Lorenzo Bini Smaghi, member of the Executive Board of the European Central Bank has called for legal constraints on democratic institutions to ensure the intergenerationally sustainable funding of pensions systems in Europe. The call comes with a succinct analysis of the poor performance of democratic institutions with regards to intertemporal distribution, using the examples of inflation, where the cure is independent central banks, and public debt, where it is the Maastricht Treaty. The objective of such a Pensions Treaty would be to "link in a quasi automatic way benefits and the retirement age to contributions and to the average life expectancy, so as to prevent one generation from being paid its pension by the next generation, with benefits that the latter generation could not itself hope to enjoy".

    This important speech is another proof that the fictitious generation treaty has been introduced and broken at the same time by the present generation, and it proposes an interesting and perhaps workable solution, which will probably also require an independent Pensions Authority to supervise the implementation of the Pensions Treaty. It is however very courageous and uncharacteristic of the ECB to take on this contentious issue.

    Friday, September 29, 2006

    XBRL article in CFA Magazine

    After this week's important SEC announcement, there is no more doubt as to whether XBRL is an established standard for financial reporting. Following our article in Professional Investor, the CFA Centre for Financial Market Integrity is voicing its official support for XBRL in an article in the latest edition of the CFA Magazine.

    Tuesday, September 26, 2006

    IFRS from an analyst's perspective

    By popular request, here are the slides from my presentation (now complete with notes) about the Financial Analyst's perspective on Financial Reporting Standards which I gave this morning at the World Standard Setters' Meeting in London.

    I've also made a recording of the introduction by Warren McGregor, my presentation and the subsequent Q&A session. Unfortunately the questions are not very easily understood, and the recording cuts off after an hour. But it works pretty well for being recorded on a simple mobile phone.

    Monday, September 25, 2006

    SEC to Rebuild Public Disclosure System

    Wow! The US SEC is rebuilding its public disclosure system entirely based on XBRL, thus "paving the way for universal XBRL filings by companies". This in effect is just short of announcing that once the three announced contracts have been completed, the SEC will introduce mandatory disclosure based via XBRL. More about this on CFO.com.

    Thursday, September 21, 2006

    Accounting precepts

    These are the 11 Precepts of the IASB and the FASB, which I've picked up during a recent meeting. They are very reasonable and appear applicable beyond accounting.
  • Concentrate on converging and fixing what's broken.
  • Reason from "first principles".
  • Don't confuse concepts with conventions.
  • Focus on the underlying real-world economic phenomena.
  • Weigh alternatives comprehensively and evenhandedly.
  • Press naysayers for better alternatives.
  • Be clear what the concepts mean - and don't mean.
  • Resist the temptation to "peek ahead".
  • Remember the consequences of diverging.
  • Acknowledge that changing thinking will take time.
  • Don't "Paper Over" Real Differences.
  • Monday, September 18, 2006

    150 years of volatility

    Researchers at the Bank for International Settlements have come up with 150 years of financial market volatility history of stock and bond returns for Australia, Canada, France, Germany, Italy, Japan, UK and the US, starting in 1850 to 2005. Their main conclusions are of interest to investors with a long investment horizon such as pension funds:
  • First, volatility is dominated by large, temporary increases that appear correlated with episodes of economic weakness, political instability and financial turmoil.
  • Second, volatility has been much higher from the 1970s onwards than it was previously. This finding appears surprisingly robust across countries and financial instruments. Seeking to explain it would be an important topic for future research.
  • Third, the movements in volatility that have been observed in recent years are small from a historical perspective. These findings suggest that financial institutions and policymakers alike would be well advised to note that a sharp increase in volatility from the level observed in the last few years would not be unprecedented.
  • An inconsistency between bullet points 2 and 3 is only apparent in so far as volatilities have risen considerably above their long term historical averages since 1970, but have come off their peak levels in recent years, which suggests that a rekindling might not at all be out of the question.

    Sunday, September 17, 2006

    Pensions reform extremely urgent

    This is the assessment of Jean-Claude Trichet, President of the European Central Bank, in an interview with L'Espresso. This assessment is important because despite of the problem's long time horizon, we're dealing with a compound interest issue, which renders an early solution implicitly less expensive than a later one.

    Friday, September 15, 2006

    Pension (asset) pooling

    Dpn has an excellent story about pension asset pooling which looks into how to achieve pooling efficiency gains without going all the way to a pan-European pension fund (i.e. pension pooling). Based on the results of Deloitte & Touche's 2005 Pension Pooling Survey for Multinationals, the article addresses different approaches to asset pooling as well as available vehicles and issues, such as fiscal transparency and the complexities of Double Taxation Treaties. Finally, it looks at case studies with Shell, Unilever & Suez-Tractabel. Good stuff!

    Tuesday, September 12, 2006

    Commodities in Pensions

    NRPN has an good story about pension funds' investments in commodities. It displays the strategic benefits of the asset class, but also questions the timing of entering the asset class at this point, given its recent bull run.

    Monday, September 11, 2006

    XBRL news

    Professional Investor has printed a review article about XBRL, written by Mike Willis and myself. Feedback is very welcome!

    Furthermore, here is a presentation I used recently. Thanks to XBRL Europe for sharing it!

    Monday, September 04, 2006

    Dynamic investment strategies [CH]

    The recently published study Dynamic Investment Strategies for Swiss Pension Funds by the Swiss Institute of Banking and Finance at my alma mater has caused a bit of a stir in the Swiss media. But naturally, the stir does not come from the study's main tenets - it's far too technical for that - but rather from some marginal comments which hit an environment rife with discontent about pension funds' investment behaviour.

    Materially, the study assesses alternatives to the current common practice of buy and hold strategies. There is quite enough material for disagreement not to have to take recourse to marginal political squabbles. My main points of critique are the following:
  • The expected annual growth rate of the funding ratio is the key variable studied. The model pension fund's liabilities are a key component of this ratio. Yet, the model never revalues the liabilities during the whole simulation period of ten years, despite of changes in the discount rate. Starting from an initial value, the fund's liabilities are simply bearing the technical interest rate. This is not just a model simplification, it is a critical omission. If the model were corrected for that factor, the shapes of the central charts probably have to be modified, which might easily change the conclusions of the study.
  • Leveraged Constant Proportion Portfolio Insurance (CPPI) is one of the strategies recommended. This strategy implies that the fund uses leverage, probably in the form of a loan. Strategic borrowing is not permissible for pension funds, though.
  • Another strategy uses long straddles without mentioning that there cannot be net leverage without recourse to art. 59 BVV 2.

  • P.S. The authors comment offline that they assumed a constant technical interest rate and a closed fund. Unfortunately the assumption about the technical rate was tacit.

    Sunday, September 03, 2006

    BIS on fair value

    Great timing! The Bank for International Settlements (BIS) has just published a series of four papers on fair value accounting:
  • 208: Including estimates of the future in today's financial statements
  • 209: Fair value accounting for financial instruments: some implications for bank regulation
  • 210: Institution-specific value
  • 211: Do accounting changes affect the economic behaviour of financial firms?

  • Why is this great timing, you may wonder? Well, it is very useful material for my upcoming presentation at the World Standard Setters Meeting in London on 26 September.

    Pension deficits: up & down

    What I wouldn't find myself on Mercer's website, Google did for us: Here is Mercer HR's recent summary report about top UK and European companies' pension exposures and trends as at 30 June. The charts & findings are interesting, but I am not entirely convinced about information consistency, what with this being rather novel concepts for many of the preparers.

    IAS 19: new draft interpretation

    On 24 August, the International Financial Reporting Interpretations Committee (IFRIC) has released a draft interpretation of IAS 19 for public comment until 31 October. To quote from the IASB's website: The proposals clarify how to determine in normal circumstances the limit on the asset that an employer’s balance sheet may contain in respect of its pension plan as well as how the pensions asset or liability may be affected when there is a statutory or contractual minimum fu nding requirement.

    As Swiss pension schemes are subject to statutory minimum funding requirements, this new IFRIC interpretation should come under close scrutiny in Switzerland.

    Thursday, August 31, 2006

    ECB discusses ageing

    In its Occasional Paper 51 - Macroeconomic implications of demographic developments in the Euro area, the European Central Bank looks at the impact of ageing on long term growth rates, labour market policies, financial markets and public finance. The thrust of measures proposed is not surprising:
  • to increase labour participation by closing a gender gap, raising average hours worked and raising the effective retirement age,
  • to prepare for a more important role of financial intermediation in retirement provision, taking into account an expected further decline in the real equilibrium interest rate,
  • to take measures against public expenditures rising above 3% of GDP in most countries in the wake of increased pensions and healthcare costs, especially by increasing the importance of (partially) funded retirement systems,
  • to monitor the impact of ageing on monetary policy via the aggregate savings rate and real interest rates.
  • Disquietingly, the ECB does not fully discount the theory that ageing will lead to a decline in asset prices due to increased unsaving of retirees - it only provides several technical caveats. Food for thought indeed!

    Liechtenstein joins the fray [FL]

    On 23 August, the Liechtenstein government has decided to join the competition to become the most favourable location for pan-European pension funds by adopting a bill to transpose the Pensions Directive into national law. The report 78/2006 should become available here shortly. It is expected that the bill will become law on 1 January 2007, together with the attached regulation which is in the final stages of being drafted.

    Thursday, August 24, 2006

    Demographic leporello [CH]

    Swiss think-tank Avenir Suisse has published a comprehensive leporello (a.k.a. leaflet) about the demographic challenges in Switzerland and Europe. It is also available in French.

    Netherlands as pensions location? [NL]

    According to a story in IPE, the three main Dutch pensions associations have called on political parties to position the Netherlands as the country of choice for European pension funds. Here is the position paper in Dutch.

    This statement is important for two reasons. 1) In the Dutch self-perception, the regulatory framework is insufficient at this point to qualify as a country of choice, as opposed to Ireland, Luxemburg - and probably Liechtenstein, we might add. 2) The most important players in the most important continental pensions market recognise the importance of that status, and, implicitely, of the market.

    More sustainable Austrian pensions [AU]

    Today, NZZ has an article (not available online) referring to an assessment of the recent triad of pension reforms in Austria, published by the Austrian National Bank. (The article is likely to appear in English here soon, too.)

    In essence, the authors conclude that the reforms have improved fiscal sustainability in Austria. The most important factors to that end were - unsurprisingly - higher average pension age and lowered pensions.

    Sunday, August 13, 2006

    Transposition issues in Finland [FIN]

    Nordic Region Pensions & Investments News had an informative story on the debate about the Pensions Directive transposition in Finland (and other countries), which is evidently in place, albeit to a minimalistic extent. It seems however that the debate is far from concluded, thus modifications to the transposing legislation are to be expected within the year.

    Thursday, August 10, 2006

    XBRL top priority in CESR / SEC cooperation

    The recently published work plan of the regulatory dialogue between the European CESR and the US SEC consists of three main topics:
  • implementation of IFRS and US GAAP by internationally active issuers,
  • modernisation of financial reporting and disclosure, and
  • discussion of risk management practices.
  • While the first and the third bullet point are evidently crucial and as such unsurprising topics, the middle one is noteworthy. The world's most influential regulators join forces to promote the use of interactive data in financial reporting. Interactive data is SEC parlance for XBRL.

    Wednesday, August 09, 2006

    Mandatory pensions in Ireland? [IE]

    (IPE) As indicated earlier, the Irish Department of Social & Family Affairs has now come forward with the report "Special Savings for Retirement".

    At first blush the report appears to be a valuable comparative analysis of policy options, deserving of a closer look. It is not entirely clear however what the substantive recommendation would amount to, even though it appears to include a new mandatory supplementary component. But this constructive ambiguity is probably part & parcel of the political process in Ireland, which is expected to be advanced by the arrival of a subsequent Green Paper on pensions, due within a year's time.

    Tuesday, August 08, 2006

    No Prudent Investors in Switzerland? [CH]

    In Monday's edition, NZZ had an article advocating the introduction of the prudent investor rule to Swiss pensions regulation, thereby abolishing the current rules prescribing fixed limits per asset class. This proposal is in line with the recent criticism of Swiss regulations by the IMF. While it is true that the strict limits can be dispensed with by IORPs declaring their specific purpose, the article introduces a very valid argument: IORPs which operate within the boundaries of those limits will typically not fulfill their fiduciary duties because their investments are not tailored to their individual economic requirements - they are "only" in line with legal requirements. Therefore these legal limits are inherently contradictory to the purpose of the regulation.

    Incidentally, the Prudent Investor is not only advocated by Messrs. Skaanes & Hauser in conjunction with the IMF, but also by the Pensions Directive, of course.

    Friday, August 04, 2006

    Accounting for Pensions [UK]

    The Economist has a summary of the recently published Annual Survey 2006 of Accounting For Pensions UK & Europe by actuaries Lane, Clark & Peacock. Unfortunately, the summary only covers the British part of the survey, which continues the proud tradition of differentiating between the UK and "Europe".

    LCP has surveyed the component firms of the DJ STOXX 50 index. While the disclosure quality has risen overall, it is not yet at the same level as the UK's, which has been substantially improved following a recent appeal by financial analysts based in London. A similar appeal obviously is required at a pan-European level now! The common denominator of the survey's findings is that despite of a considerably more narrow basis of reporting standards (from 12 sets down to 4), the amount & quality of information vary as widely among the sample as the material information itself, as can be seen from the interesting table above (click to enlarge). Strangely though, an entire section of the report is dedicated to to the analysis of an unadjusted corporate average deficit per country. This ratio does not seem to have any relevance whatsoever.

    Monday, July 31, 2006

    Italian pensions [IT]

    epn has an interesting article about the occupational pensions situation in Italy, another laggard country. Fortunately, there is an Association for the development of the market in pension funds!

    Saturday, July 29, 2006

    FSAP transposition database

    (IPE) The EU Commission has preëmpted our plans by making available a database of member state legislation transposing Financial Services Action Plan (FSAP) directives (see new link in the sidebar). While this looks like a very useful tool indeed, providing original documents and linking to their original location, it remains to be seen how well the database is being kept up to date. The recently enacted Belgian legislation for instance does not show up in the database. It seems that country notification triggers an update. Also not included is EEA transposition legislation.

    Rising retirement age north & south [DK] [GR]

    The political debate about the sustainability of static retirement age in the face of rising life expectancy in European countries is beginning to bear fruit. While Alpha Bank of Greece expects (according to this article in Handelsblatt) that the retirement age for recent job starters will have to rise to 75 from the current average of about 60, the local politicians apparently do not grasp the seriousness of the situation quite yet.

    Meanwhile, up north in Denmark, a broad consensus among the most important political parties has resulted in an agreement to reform the country's social security system. According to a recent article in NZZ which is not available online, the average productive period of a Danish person went from 40.5 years in 1979 down to 38.5 years in 2005, while at the same time, life expectancy rose by 2.25 years, resulting in the prolongation of the average pension duration from 19.25 years to 21.5 years.

    The pragmatic Danes have resolved to raise the retirement age to 67 (from 65) by about 2025. Thereafter, the retirement age will be adapted dynamically to the average life expectancy, which is probably the most sustainable approach.

    Friday, July 28, 2006

    Belgium transposes Directive [BE]

    According to IPE on its redesigned website, Belgium has now escaped further sanction by the EU Commission for non-transposition of the Pensions Directive by passing the law 51K2534 on 13 July.

    Evidently, the Belgian Association of Pension Institutions has been instrumental in designing that bill, but search as we might, there was no functioning website of this Association to be found.

    Wednesday, July 26, 2006

    Legal commentary

    It may not be the very latest news, but it's still a quite useful resource that is available online: the legal commentary of the Pensions Directive by Simon Arnot, published by the EFRP in 2004.

    Sunday, July 23, 2006

    Investment regulation in Poland [PL]

    If this recent story about regulatory constraints in Poland is confirmed, it would mean that the Pensions Directive is not materially implemented there, yet. The fact that Poland is not among those countries that the Commission has decided to take action against would seem to have to be interpreted along the lines that the Commission has not yet assessed the material compatibility of Polish regulation. It will be interesting to observe further developments in this important market.

    Friday, July 21, 2006

    US Pensions accounting

    Since David Zion's piece Analyzing the Impact of Retirement
    has pensions accounting under US GAAP for object, it is prima facie not relevant for the purposes of this blog. However, such a standpoint would clearly be too short sighted. Both the US FASB and the IASB are currently preparing to revise their respective pensions standards with a view to a converged standard, fully cognisant of the very large importance of pensions on the corporate balance sheet, and the potentially even more severe impact on its cash flow statement. I am sure that standard setters will read such scathing criticism from investors of the current standard very carefully, especially since most of the provisions addressed are common to both sets of standards.

    Thursday, July 20, 2006


    As we know, static old age retirement systems are under severe stress due to increased longevity (ca. 2.5 years per decade). But that's not all: the World Future Society has an article about superlongevity. The proponents of superlongevity expect that the trend of increasing longevity will not remain stable, but will actually accelerate due to technological progress. Michael Zey reckons that life expectancy will rise to ca. 125 years by 2075 from the current ca. 80 years. This averages to rate of increase of about 6.4 years per decade. With that kind of perspective, the absolute necessity for more flexible and, most of all, delayed retirement should be painfully clear.

    Saturday, July 15, 2006

    Above average life insurance growth

    In its latest issue of Sigma dedicated to the global insurance industry 2005, SwissRe sees above average growth of life insurance in Western Europe and in Middle and Eastern Europe if adjusted for a massive short-term policy downturn in Russia. The major trend observed in all those markets is a shift from traditional life business to tax favourable retirement provision business.

    Amplifying pension funds [UK]

    (Via IPE) In the latest issue of its Financial Stability Report, the Bank of England refers to pension funds as amplifiers of financial market shocks in two instances: It quotes anecdotal evidence of a feedback loop between the prices of long term UK government bonds and of similarly long term liabilities of pension funds. The continuing duration mismatch between pension fund assets and liabilities leads to demand for long term bonds, driving down their yields, which in turn drives down the discount rate with which fund liabilities are valued, thus increasing that position.

    The second, and novel, feedback mechanism referred to is described in Working Paper Nr. 289. This paper demonstrates a statistically relevant amplification mechanism of DB pension schemes in the UK stock market. The transmission works via a) the additional leverage provided by pension schemes to their sponsors' balance sheets, if those schemes' underfunded status is considered to be ordinary debt, and b) the substantial cross-holdings of equity of other UK corporations in pension funds. Very interesting!

    Pensions Review [IE]

    Earlier this year, the Irish Pensions Board has reviewed the nation's pensions system. This week, it has delivered a more in-depth analysis of options for mandatory and quasi-mandatory second pillar system enhancements to the Minister of Social Affairs. This analysis does not appear to be available at this point.

    It is of particular relevance to the Liechtenstein and Swiss point of view because those countries' mandatory second pillar systems are technically (and erroneously, in our view) considered to be first pillar by the EU Commission. This has some wide ranging implications.

    Thursday, July 13, 2006

    Pensions Directive part of EEA

    It is a formality, and it has been expected, but it's nonetheless noteworthy: The EEA Joint Committee has added the Pensions Directive to the EEA body of law, effective 7 July 2006. Therefore it is also formally applicable to Iceland, Norway and the Principality of Liechtenstein now.

    Monday, July 10, 2006

    OECD Guidelines on pensions funding

    The OECD is looking for comments on its draft Guidelines on Funding and Benefit Security. The 11-pages short document presents a very high level summary of best practices in the pensions funding field which is not binding to its member states. Without precise definitions, the provisions appear to retain a laundry-list character to pick & choose from, so it is somewhat difficult to be sure of the document's purpose. The Guidelines claim to be consistent with the Pensions Directive.

    Saturday, July 08, 2006

    Ageing & financial stability

    This week's Third Conference of the Monetary Stability Foundation in Frankfurt has been dedicated to the challenges to the financial system arising from ageing and low growth. Prof. Weber, President of Deutsche Bundesbank, has given a rather thought provoking opening address, sketching the key transmission factors by which ageing impinges on financial stability.

    Monday, July 03, 2006

    Liability Driven Investment

    JPMorgan has a very interesting new survey of liability driven investment (LDI) across Europe (via epn). LDI uses characteristic parameters of scheme liabilities as benchmark and is therefore most relevant to DB and guaranteed return schemes (such as the Swiss).

    The survey has the best coverage in the UK, the Netherlands and Denmark / Sweden (where the regulatory environment are rather similar). The survey looks into attitudes towards LDI, asset allocation impacts, the ongoing duration mismatch between liabilities (ca. 20 years) and assets (still below 10 years), derivatives strategies (mostly the usage of swaps) and funding levels with a significant difference between UK deficits (74% of schemes in deficit) and other countries' schemes mostly covered or in surplus.

    Sunday, July 02, 2006

    Pensions accounting

    This interesting overview article in epn discusses the current state of affairs and expected developments in accounting for pensions in US GAAP, UK GAAP and IFRS (changes to IAS 19), largely from the perspective of users of financial statements. As the proposal to revise IAS 19 is currently working its way through due process, it is expected that the revised standard should become effective in four years.

    Turkey raises retirement age [TR]

    In a commendable show of resolve, the Turkish Parliament overturned a presidential veto against its intention to raise the retirement age from 58/60 to 65 by 2048. This is seen as an important step to align retirement provision with the EU accession to which this important country strives for very resolutely. The investment provisions of the Pensions Directive appear to be quite another challenge to the Turkish pensions industry with its penchant towards government bond investments.

    Europe Report 2006 [CH]

    The Swiss Government has published its impatiently expected Europabericht 2006, an update to a similar analysis of the complex relations between Switzerland and the EU done last in 1999.

    The Report mentions the Pensions Directive in several instances as a business opportunity not currently available to Swiss providers, or as a substantive vector for change in the non-mandatory segment of the second pillar in case it became applicable. In other parts of the report, the Directive is seen as related to a possible future Services Agreement, the negotiation of which has been adjourned in 2003. This policy stance evidently is detrimental to the interests of the Swiss pensions industry and therefore requires adjustments in several respects.

    Friday, June 30, 2006

    Commission acts on laggards [UK] [SLO]

    The EU Commission has decided to refer the United Kingdom and Slovenia to the European Court of Justice for partial or non-transposition of the Pensions Directive into their respective statute book. This follows its earlier reasoned opinion and is a swift consequence of those two countries not responding to the Commission's challenge. The other nine countries (Belgium, Cyprus, Czech Republic, Finland, France, Italy, Lithuania, Slovakia, Spain) at least seem to have sent a response, to which the Commission will react in the near future (via IPE).

    Wednesday, June 28, 2006

    Usefulness of IFRS in Europe

    A new PwC survey of UK fund managers offers a rare & differentiated, therefore highly relevant glimpse of the usefulness to users (i.e. investors) of the first wave of European financial statements that are prepared under mandatory application of IFRS. The survey looks at diverse issues like the usefulness of IFRS vs. UK and US GAAP, support for fair value, the impact of the IFRS angle on investment decision making etc and displays the change of such perceptions over the recent past. I hope this survey will be continued in the future and will be extended to other European countries!

    Tuesday, June 27, 2006

    Pan-European Pensions in Zürich [CH]

    The British-Swiss Chamber of Commerce in association with the Association of Foreign Banks in Switzerland will be hosting a lunchtime presentation about Pension Fund 2nd pillar - borderless: A Swiss Perspective in Zürich on 6 July. I am honoured to have been asked to speak at that event, which is open to non-members also. The invitation is available here.

    Ageing hits politics [NL]

    Demographic ageing is no longer approaching, but effectively starting. The Dutch Ministry of Finance receives recommendations of a fiscal policy study group charged with assessing the impact of ageing on Dutch government finance. The recommendations are tough: The next Cabinet should reduce expenditures by some EUR 15 bio (3% of GDP) in order to remain sustainable. Nonetheless, addressing the issue head on is exemplary.

    Monday, June 26, 2006

    Convergence conference materials

    Regular readers of this blog will be aware that my contribution to the IASCF's Frankfurt conference was available online. The IASB has now published all conference materials on their own website.

    Wednesday, June 21, 2006

    IZS Seminar on Pensions Directive

    IZS invites to a full day seminar on the consequences of the Pensions Directive for the Swiss market. The seminar will take place in Basle, Switzerland on 22 November 2006 and will be held in German. An invitation can be downloaded here.

    Reproductive technologies to address demographic challenge?

    Rand Corporation has looked into utilising Assisted Reproductive Technologies (ART) as a component of population policy to mitigate falling fertility rates and thus unfavourable demographic developments across Europe. To do that, the researchers transposed parameters from Denmark, where ART are more widely available than in the UK. They found ART to be three to four times more cost effective than child benefits for instance (via BBC).

    Tuesday, June 20, 2006

    IMF proposes reform to Swiss pensions system [CH]

    In an additional Selected Issues paper to its recently published, periodic Article IV consultation, the IMF has analysed the Swiss occupational pensions system, comparing it to the Dutch and the British system.

    While the analysis inevitably remains at a high level of abstraction (for instance, there is no mention of the fact that many pension plans that are nominally classified as DC need to be reclassified as DB to stay in line with IAS 19), the international comparison permits important conclusions concerning the fragmented supervisory structure in Switzerland and its outdated regulatory framework with a set of parameters that are defined without much recourse to actual market developments.

    It will interesting to follow the IMF's more detailed exploration of these issues, announced for the Financial Sector Assessment Program update scheduled for the end of this year!

    Monday, June 19, 2006

    Pensions Directive to enter EEA

    We hear that it is pretty certain now that the EEA Joint Committee will formally decide to let the Pensions Directive become part of the EEA legal body in its forthcoming meeting of 7 July. The long delay is said to have been caused by Norwegian difficulties in implementing the Directive.

    Wednesday, June 07, 2006

    Court action [DK]

    IPE reports today - lacking some precision - that the European Court of Justice has made an "initial judgement" in a case pertaining to pan-european pensions.

    To be reported in fact is an opinion of the Advocate General in the case C-150/04 EU Commission vs. Denmark. While it is certainly true that the Court usually follows the reasoning of the Advocate General, it is wrong to speak of it as an "initial judgement".

    Materially, the opinion confirms the Court's earlier positions concerning the tax deductibility of retirement premium payments as stated most prominently in the Danner case. The "somewhat diffuse" justification of coherence of a country's system of taxation continues to be weakened, putting additional stress on Denmark's and Sweden's taxation which is not in line with the EET Principle. However, the opinion heavily relies on Double Taxation Treaties to extend said coherence to other Member States. This is a further indication of the functional importance of as dense a network of DTTs as possible.

    Thursday, June 01, 2006

    Demographics to hurt banks / insurance? [D]

    The German branch of consultancy Booz Allen Hamilton projects a draw of up to 25% on revenues of banks and insurances by 2030, caused a shift in the German age structure which will reduce savings rates and related demand. The German financial services industry is considered to be ill prepared for changing demand (via FTD).

    Proposed changes to FRS 17 [UK]

    The British Accounting Standards Board has issued for comment proposed changes to its FRS 17 Standard on Retirement Benefit reporting. These modifications would take into account recent changes in the UK regulatory environment and would align FRS 17 more closely with IAS 19, its international counterpart. Both IAS 19 and FRS 17 are subject to an ongoing fundamental review which is expected to result in the removal of valuation corridors. This will lead to a more faithful representation of the economic nature of the relationship between pension scheme and its sponsor.

    Tuesday, May 30, 2006

    Contingent assets in UK pensions [UK]

    The UK Pensions Regulator has issued guidance today on the usage of contingent assets in funding pension schemes. This is of particular interest to pan-European schemes since they require full funding.

    A contingent asset of a pension scheme generally will be treated as a contingent liability of the employer. According to IAS 37, such contingent liabilities usually will not need be recognised in the employer's balance sheet, but require disclosure only. Therefore funding pension schemes by means of contingent liabilities may be an attractive funding option for employers.

    Big Mac index

    The Economist announces the 20th anniversary of its famous Big Mac Index, expressing the relative over- or undervaluation of currencies by reference to the price in local currency of a certain US fast food chain's flagship product. While the Economist claims that "burgernomics has an impressive record in predicting exchange rates", it doesn't offer any statistical proof, unfortunately. It is nonetheless interesting to note that the Swiss Franc is significantly overvalued (+68%) relative to the USD, beaten only by Iceland & Norway, where special explanations will likely apply. The Franc's overvaluation is still significant if compared with the EUR zone (+22%), Sweden (46%), Denmark (+54%), Britain (+18%). Time to put that unused foreign currency allocation to work?

    Monday, May 29, 2006

    IMF on Swiss pensions supervision [CH]

    NZZ in its Saturday Reflexe points us to the Concluding Statement of the IMF Mission dating back to March, which we've completely missed. Not only do the IMF staff underline the need to extend working life further, in line with increased life expectancy.

    More importantly, they will look further into several second pillar issues, namely -
  • understatement of underfunding due to discounting of liabilities with non-market-based interest rates,
  • fragmented cantonal supervision, opening up opportunities for regulatory arbitrage,
  • regulatory distortions relative to the insurance sector, because regulation is not risk- and market-based as in the insurance industry.

  • From an international practitioner's standpoint, these are all valid issues that deserve close examination. Regulatory arbitrage is a fact, as is the lack of a fair value based approach to funding issues.

    Friday, May 26, 2006

    Transposition complete this year?

    epn has a fairly good, albeit anecdotal status report on the progress of transposition of the Pensions Directive in some of those countries where it is still lacking.

    Thursday, May 25, 2006

    UK reforms

    The British government has today presented proposals for a wide ranging reform of that country's retirement provision system (via BBC). At first reading, the reform seems to address improving retirement income by raising the first and the third pillar. This is to be achieved by introducing default personal accounts with an opt-out option, but also recognising the increased life expectancy by raising the so-called state pension age to 68. Changes to recently modified occupational pensions are not in evidence.

    The BBC has an in depth dossier on pensions.

    Thursday, May 18, 2006

    EFRP view of Switzerland

    Here is an interesting presentation about EFRP and its view of the Swiss retirement provision system.

    Monday, May 15, 2006

    Directive to cause "significant disruption"

    IPE recently reported this news item, which is based on an online survey of the UK Society of Pension Consultants. 52% of respondents indicated that the DIrective's implementation had caused significant disruption.

    I just enquired about the background to this news item. The press release is based on 31 responses to a one question online survey sent to the SPC's membership base of about 130 members. While this is a pretty good response ratio, it is notoriously difficult to interpret. According to John Mortimer of SPC, those significant disruptions are attributable to the UK implementation of the Pensions Directive, and they are not indicative of a generic problem. Mr. Mortimer quoted a UK specific issue with foreign secondments of employees which, if handled wrongly, can cause the secondment to be treated as a cross border case the consequence of which would be that the IORP in question needs to be fully funded. That might indeed work out to be a severe disruption - but for the time being, this news item's impact is limited.

    Sunday, May 07, 2006

    Interactive financial data in Switzerland

    The Chairman of the US SEC has dedicated a considerable portion of his testimony before the US House Committee on Financial Services to interactive financial information and XBRL. Personally I am convinced that XBRL in conjunction with the IASB's IFRS taxonomy is the next big thing in financial reporting, so I recommend to attend the Swiss CFA Society's forthcoming free seminar on the issue.

    Thursday, May 04, 2006

    Plan harmonisation by 2010

    Rauser Towers Perrin have studied the pension plan harmonisation perspectives of multinationals, given that regulatory harmonisation is not on the agenda quite yet. Unsurprisingly, the study concludes that plan design is still mostly performed at the national level with some mandatory guidelines from HQ. Nonetheless, plan harmonisation is firmly on the agenda with a target date of 2010. The most important arguments in favour of harmonisation are increased employee mobility within the group and integration into a group-wide total compensation system as well as increased transparency and greater efficiency in risk control while the reduction of admin costs is not considered to be quite as important.


    In a very commendable display of user-friendliness and transparency, the Austrian Financial Market Authority publishes, among many other relevant things, the relevant social & labour law applicable to IORPs resident in other Member States (equally available in German of course).

    Wednesday, May 03, 2006

    Liechtenstein draft

    Liechtenstein has now opened a public comment period until 5 July for its draft law transposing the Pensions Directive into its national law.

    Friday, April 28, 2006

    Supervisory cooperation EU/CH

    Earlier this month, CEIOPS and Swiss FOPI have signed a Memorandum of Understanding (press release) covering the procedures of cross border supervision of insurance groups. This MoM is interesting in that it is the logical consequence of the 1989 Insurance Agreement between Switzerland and the EU, which extends the EU's freedom of establishment to Swiss insurance undertakings.

    From a pensions viewpoint, there are two relevant aspects: 1) The MoM might serve as a blueprint for cooperation in the pensions arena. This presupposes however that there is 2) a supervisory body of Swiss IORPs which is capable of filling the same rôle. Currently, it is questionable whether that rôle might be filled by the FSIO, which does not act as a direct supervisor to IORPs. We note however that, generally speaking, insurers seem to be well ahead of the "pensions pack" with regards to European market access. Their specific advantage with regards to market access to the new pan-european pensions market seems to be limited, though, since Appendix 2 of the Insurance Agreement appears to exlude such business lines from the scope of the Agreement.

    Transparent longevity assumptions

    Interesting! Following a January call of an informal group of London's leading investment bank and fund management analysts (the "Corporate Reporting Users Forum"), a number of companies have started publishing and thus exposing to be challenged their longevity assumptions used for the valuation of pensions schemes, which are obviously critically important (via FT). Virtually at the same time, an assessment of pensions liabilities of 26 Swiss SMI-component firms has been published (via Vorsorgeforum). The average discount rate applied, while being in line with Swiss legal requirements, is an unsustainably high 4.25% (down from 4.61%). I suspect that longevity assumptions are not published.

    This is precisely the way ahead with full fair value valuations as well, especially in those cases where price information is not directly attainable. There needs to be a critical dialogue between users and preparers of financial statements concerning assumptions used. This dialogue obviously checks preparers' position of power, which is probably why they are often reluctant to participate in that dialogue.

    Swiss discussions

    Here is an interesting discussion paper by Nestlé's Martin Wagner which has gone to all members of the Swiss Chamber of Pensions Experts, without generating a great deal of discussion, unfortunately.

    Meanwhile, I've joined IZS's project group on Pan-European Pensions, which has held a very productive meeting yesterday. An in-depth public information event on the subject matter is probably forthcoming shortly.

    Wednesday, April 26, 2006

    Pensions in M&A

    While this highly acclaimed new Corporate Finance textbook with its fresh angle from political economy doesn't even mention pensions as an index entry, this interesting IFRS update article makes the point that - even under the regime of IAS 19 - pensions need not be a deal breaker, they are merely an important pricing factor.

    If that is so, then there is probably a case to be made for consolidating a firm's pensions operations in one European IORP, especially if the transaction reaches across borders. In a takeover, the seller will be able to put a price tag on improved transparency and risk management capabilities of such a structure, as opposed to the incumbent compartmentalised country solution. This better price tag is likely to go some way in covering the set-up cost of setting up such structures.

    Tuesday, April 25, 2006

    Second pillar without frontiers

    Here is an article (German) that I've published in Schweizer Bank a while back. Unfortunately, there wasn't much feedback on it to date.

    Monday, April 24, 2006

    Norway / EEA

    As mentioned earlier, the EEA, or more specifically, the EEA Joint Committee is still labouring with the transposition of the Pensions Directive into EEA law (via IPE). The expectation remains that the Norwegians will have worked out their difficulties until the next meeting of the JC, scheduled for 2 June.

    Sunday, April 23, 2006

    Live long & prosperously

    It is a truism that increasing longevity (as documented strikingly here) will put static retirement provision systems under severe stress.

    It is all the more interesting to compare different institutions' approaches to the issue, as represented by UBS' recent research focus Demographics: a coming of age and Ageing and Pension System Reform: Implications for Financial Markets and Economic Policies, a November 2005 supplement to the OECD Financial Market Trends publication.

    UBS evaluates ageing from a macroeconomic model point of view, apparently employing steady state equilibrium models. With these, it is attempted to establish the impact of ageing on several countries' economies as a whole (production, productivity, income, consumption), on financial markets (asset allocation, emerging markets, real estate) and on different industries (consumer, technology, health care and financials). From the magnitude of the task and the nature of the tools used, it is hardly surprising that the results of their work barely scratch the surface of the obvious. Given the study's ready understandability and pedagogic outreach to the general public, this would not be so bad, if only public policy implications were less fuzzy. There are no useful items with regards to pan-European pensions.

    The OECD paper has a very different approach, given its G10 Executive target audience. Where UBS works with theoretical models, the OECD looks at empirical data and deploys microeconomic concepts to come to relevant policy conclusions. There are many interesting considerations of the current supply situation of fixed interest instruments given the ongoing shift in funds' asset management due to liability matching objectives and up to date cross country comparisons. Comparing the paper's general thrust to the Pensions Directive, it appears that the Directive is in line with state of the art best practice, especially as far as the Prudent Person rule is concerned, which it introduces to EU legislation and many member countries which have hitherto used quantitative restrictions (as are still in effect in Switzerland). This paper is an interesting read for the expert.

    Thursday, April 20, 2006

    Speed & Transparency 2015

    I like this IBM interpretation of a recent EIU study of "Financial Markets 2015". In short: Financial Services are characterised by increasing speed & transparency, which leads to the evaporation of agency trade profitability. This shifts the balance of power towards the investor. Ultimately, the industry distinction between buy/sell side & processors may be replaced by principals & advisers. But of course, there's lots of other useful insights.

    European Pensions for Switzerland

    A project group of Innovation Second Pillar is currently evaluating options for extending the Pensions Directive's cross border regime to Switzerland and vice versa. With Switzerland not being part of the EU nor of the EEA, this constitutes a major impediment for otherwise highly experienced Swiss service providers. It also dispossesses Swiss firms with employees in the EU of potential economies of scale by forcing them to maintain dual structures.

    The Pensions Directive is technically still not part of the legal body of the EEA at this point. This technicality is expected to be removed by May of this year, however. Nevertheless, the Principality of Liechtenstein, with which Switzerland has close ties, is part of the EEA and plans to transpose the Directive into its law by 1 January 2007. We are keeping a close watch on what is happening in the neighbourhood.


    The July 2004 issue of PWC Investment Management Perspectives (Google has stumbled across it only now for some reason) has a good section on pan-European pensions. While some of the transposition information is naturally dated by now, the fundamental arguments remain the same. I also like the figure on page 45 which displays the tax regimes of non-EET countries with regards to occupational pensions.

    Wednesday, April 19, 2006

    Commission takes action

    The EU Commission has issued a reasoned opinion against Belgium, Cyprus, Czech Republic, Finland, France, Italy, Lithuania, Slovakia, Slovenia, Spain and the United Kingdom for non- or partial transposition of the Pensions Directive into their national law, thereby capturing all the member states that it has identified earlier for lagging. The next step in the infringement proceedings according to Art. 226 EU Treaty would be court action in front of the ECJ after two months time (via IPE).

    Saturday, April 08, 2006


    I've been invited to speak at the IASC Foundation Conference in Frankfurt about financial analysts' views on convergence of accounting standards, specifically the convergence of US GAAP and IFRS. Rather than going into the details, I addressed the direction which convergence should take in the longer term by summarising the 12 principles of the Comprehensive Business Reporting Modell of the CFA Institute. There were a lot of sceptic vibes to be felt from the huge audience (some 400 people), especially from preparers of financial statements about the full fair value postulate. But there you are: debate is only advanced by bold ideas - I think I can say that since those ideas are not mine alone. The presentation is available online.

    Saturday, March 25, 2006

    The end of net income?

    It was very interesting to participate in a rather controversial roundtable organised by Université Paris-Dauphine on the subject of net income and performance reporting. The fact that the event was held in French posed quite a challenge, but I hope that my presentation was comprehensible nonetheless.

    Monday, March 20, 2006

    Coming of age of pan-European Pensions

    Being on the CFA Institute Retainer Speaker Programme, I was invited to give a presentation to CFA Romania, following the Head of the Bucharest Stock Exchange. It was a pleasure to comply with that request of course, especially since the event was combined with the CFA Award ceremony. After Warsaw, Vienna, Budapest, Madrid and Sofia, this was already the sixth opportunity for me to advance my topic of preference. The presentation is available online.

    Tuesday, February 21, 2006

    IFRS convergence & consistency

    The documents and transcripts of the FEE Seminar on IFRS Convergence & Consistency are finally available. The seminar took place on 1 December 2005 in Brussels and I was asked to represent the views of financial analysts.

    Thursday, February 02, 2006

    Spinning pensions

    This excellent article in the Economist reminded me of an important paper that has been on my To Read List for way too much time without careful consideration. The paper evaluates DB pensions schemes from a strictly economic point of view, which has striking - and disagreeable, in the present environment - consequences. Much of the British pensions crisis can be attributed to changed views as a consequence of this.

    What is the situation in Switzerland? In the UK, it is mostly actuaries who evaluate pension schemes, and the profession has a bit of a cartel in opinion making. This cartel has decided to adopt an economic view. In Switzerland, critically important rates (technical interest rate, the conversion rate) are defined legally and subject to political opinion making. This rates have been fixed in a period when interest rates were considerably higher, and to adapt them to economic reality now would create a lot of pain. But this is the nature of the ficticious contract of generations: the present generation fixes the terms of the contract for its own benefit.