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After decades during which pensions in many parts of the world have been de-risked — spurred by scandal, accounting changes and other policy tweaks — the pendulum is fast swinging the other way. In many instances that may be appropriate. In others it may be open to abuse.
Consider the case of Italy’s sales rep pension scheme Enasarco, which was revealed last week to have allocated 67 per cent of its entire European equities portfolio to one stock, Mediobanca. That group is at the heart of a power battle over how the Italian banking sector consolidates. The scheme declined to comment on why, but critics have pointed out alliances with government figures, underpinned by the oddity that the Italian treasury is itself the pensions regulator.
The shareholding may or may not turn out to be a “productive investment”, as the big buzz-phrase of asset management goes (for example if it helps to facilitate a successful bank merger). But it is certainly a sizeable gamble on a transaction that logically has no place in the investment portfolio of a scheme that should be focusing on providing stable retirement incomes for hundreds of thousands of pensioners, not using their funds to play political power games.
More commonly these days “productive investment” is associated with private capital, reflecting the genius of the sector in sequestering the label and then engendering echoes of approval from policymakers on both sides of the Atlantic.
Sure enough, London’s Lord Mayor is this week stepping up his push for pensions to boost their private capital allocations. Building on May’s Mansion House Accord pledge that signatory pension funds would put more into areas such as private equity and debt, he has now coaxed large employers into pledging they will look less at fees and more at the return potential of assets such as private capital when allocating assets.
Legal & General, meanwhile, last week struck a deal with Blackstone to allocate as much as $20bn of its annuity funds to private credit.
Most substantively, one of Europe’s fastest-growing insurance companies went a step further with a big acquisition. Athora, the Apollo-backed insurance vehicle that has been buying up pension schemes across continental Europe, announced the purchase of the UK’s Pensions Insurance Corporation, itself an acquirer of employers’ defined benefit schemes.
Athora is 25 per cent owned by Apollo — both directly and via the private capital giant’s US insurance subsidiary Athene. But even if that line is largely dotted, Apollo’s influence is clear. It controls five out of 11 board seats (though it points out it has a board-level “conflicts committee” chaired by an independent director).
And it has followed a clear modus operandi for the European pension schemes it spent the past few years hoovering up. “Following new acquisitions,” Athora says in its annual report, “we invest and rotate the acquired asset portfolio towards our target Strategic Asset Allocation”. That means ensuring there is a “greater proportion of return seeking assets . . . which are primarily high-quality private credit assets”.
Private capital has clear merits. It tends to be long-termist in structure, in line with pension liabilities. Though fees may be higher, returns may be too. And as a fast-growing part of the corporate finance landscape investors cannot afford to ignore it.
But there are snags. One is that, unlike their publicly traded counterparts, private capital investments are not valued transparently or, in some cases, accurately. In March, the UK’s Financial Conduct Authority, which supervises asset managers, published a detailed study on private capital valuation practices. It found substantial causes for concern. It urged firms to manage conflicts of interest more effectively and ensure that they conduct independent valuations, underpinned by proper governance and documentation systems.
The potential conflicts are all the more acute at insurance companies that are themselves controlled by private capital businesses — either wholly as has become a trend in the US, or partly as in Europe, where regulators appear more hesitant about full-fat alliances.
Twenty years ago, “masters-of-the-universe” bankers were generally seen as the smartest people in finance. But bank shareholders and taxpayers alike learned in 2008 that they had stacked the stakeholder odds in their own favour. Today as the best brains gravitate towards asset management and private capital in particular, it is pensioners who should perhaps be wary.
