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KAS Selections KAS Selections is a quarterly newsletter from KAS BANK N.V. Although the information in this issue is drawn up with the utmost precision, no rights can be derived from it. Volume 19, Issue 1, February 2012 Contents: KAS BANK and dwpbank form European alliance 3 Duration overlay 6 New Clients 7 Personnel notes 7 Proxy Voting boosts shareholder involvement8 Co-creation: innovating in partnership with pension funds 9 Responsible investing and voting 10 KAS BANK and Social Media 13 Global Custody Network News 14 Solvency II 15 OTC- derivatives under EMIR 16 Pensions lessons from the lowlands 17 Words from Wiesbaden 19 Comments on this issue, suggestions for future articles and mailing list requests should be addressed to: Netherlands Clearing & Banking Services Associate director: jeroen.duijn@kasbank.com

Editorial If followers of the Mayan calendar are to be believed, the world will end on 21 December 2012. Personally, I am not so pessimistic. After all, once that date has passed, the calendar will simply start again from zero. In other words: life will continue as normal. That is certainly true of KAS BANK. We have high expectations for 2012 and beyond. There is just so much happening: AIFMD, Solvency II, EMIR, FATCA, interoperability between CCPs – the list goes on. We have been investigating the implications of these developments for both KAS BANK and our clients for some time. Starting with this issue, our specialists Sandra Könisser and Rutger Abbink will be updating you on topics and activities relating to Solvency II and EMIR. Needless to say, KAS Selections will also be keeping a close watch on all the other developments in Europe. This year, of course, the new, central platform for processing wholesale and retail securities transactions in the Netherlands and Europe, which was announced on 14 December 2011, will be a major focus. At present, we are working with the German dwpbank to develop this initiative. In any event, with plans for around 160 KAS BANK specialists to move to dwpbank, the new platform is assured of the necessary technical knowledge and expertise relating to the Dutch and European market. Conversely, through dwpbank KAS BANK will gain access to the rapidly evolving German wholesale

Fund & Insurers Services Associate director: sicco.plesman@kasbank.com

market. With our wide range of custody and value-added services, we offer German

Institutional Services Associate director: tamis.stuker@kasbank.com

European harmonisation. You can read more about the intended partnership between

Sales & Busines Development (S & BD) Head of S & BD: mark.van.weezenbeek@kasbank.com

business clients solutions to existing governance issues and the increasing degree of dwpbank and KAS BANK on the next pages. Another initiative is our collaboration with the Mallowstreet social media platform. Among

German Branch Managing Director: frank.vogel@kasbank.com

other approaches, we intend to use crowdsourcing to organise debates on this platform

KAS Investment Servicing GmbH CEO & Managing Director: joerg.sittmann@kasbank.com

Dutch pensions sector to come up with joint solutions to the current pensions issues.

UK Branch Managing Director: laurens.vis@kasbank.com Translation: Wilkens c.s. Text editor: Robbert Veltman Editor: Carla Boogers KAS BANK N.V. Marketing & Commercial Development P.O. Box 24001, 1000 DB  Amsterdam The Netherlands +31 20 557 5812 carla.boogers@kasbank.com Graphic Design: Ebbenhorst Design, De Meern Print: KAS BANK, Document & Systems Services

about the latest developments in the pensions and securities industry, thus enabling the We urge you to take part in the debates on this platform. Sustainable investing can do a great deal to prevent the ‘end’ of the world. Institutional investors, for example, can make sustainability criteria a permanent feature of their investment policy. They can also influence the policies of listed companies by actively taking part in shareholders’ meetings. Piet Sprengers explains how ASN Bank uses proxy voting, among other means, to put the bank’s sustainable investment policy into practice. And so the 19th year of KAS Selections kicks off with a diverse range of subjects. As always, we are interested in your feedback, both online and offline. Sikko van Katwijk KAS BANK Managing Board


Cross border partnerships

KAS BANK and dwpbank form European alliance On 14 December 2011, KAS BANK and Deutsche WertpapierService Bank AG (dwpbank) issued a joint press release announcing that they had signed a Memorandum of Understanding. Both parties had reached agreement in principle on a partnership regarding

an alliance. Can you tell us more about the

retail and wholesale securities services. The planned

rationale underlying both parties’ decision to

partnership is for KAS BANK and dwpbank an excellent

enter into this partnership?

opportunity to achieve further growth in Europe within

Walch: “Cross border partnerships are gaining weight in

their fields of specialisation.

Europe. A successful partnership requires two qualified partners. KAS BANK and dwpbank are ideally positioned in

KAS Selections discussed the proposed partnership with

that regard. Our in-house developed transaction platform for

Markus Walch, CEO of dwpbank, and Albert Röell,

the processing of securities is a finely-tuned and efficient

Chairman of the KAS BANK Managing Board, and with

system and KAS BANK has extensive knowledge of the

Karl-Martin im Brahm and Sikko van Katwijk, board

Dutch and European wholesale securities industry. Naturally,

members of dwpbank and KAS BANK, respectively,

there are differences between both companies, but there is

responsible for sales.

also one very obvious similarity: we are both market-neutral and do not compete with our clients. We share the same

KAS BANK and dwpbank are both ‘utility

DNA in that respect. Of course there are still some issues

providers’ with a central role in the securities

we need to discuss, but there can be no doubt we will

infrastructure, a similar business model and

resolve them together. Both parties are fully committed to

a low risk profile. So it’s no coincidence that

taking on this challenge and are totally confident of their

these two parties see benefits in forging

ability to make it succeed.” Röell: “I fully endorse Markus words. The European market is calling out for a solution to the current fragmen­ tation in the processing of securities trans­ actions. At the same time, the market is

From left to right: Sikko van Katwijk, Albert Röell, Managing Board KAS BANK, Karl-Martin im Brahm and Markus Walch, Managing Board dwpbank

KAS Selections • February 2012

3


demanding high-quality solutions in the areas of

a range of custody, compliance and governance services,

governance, compliance and the further harmonisation of

thanks to its global network management capability. This will

the European capital market. We are convinced, and this is

facilitate easier entrance for them in the European market,

also borne out by the responses of our clients as well as

amongst other things.”

from the market, that the time is ripe for an initiative such as this. The market sees and understands the rationality, the

Röell: “I would like to add to those benefits by highlighting

timing is right and KAS BANK and dwpbank are ideally

once again the neutrality we both guarantee. The credit

suited as partners due to their market-neutral approach and

crisis has helped elevate this to a key concept in the

specialised knowledge of the market.”

European market. As partners we are seeking to achieve a natural balance between the growth ambitions we both have

What benefits does the partnership offer the

in Europe. KAS BANK is targeting further growth in the retail

market?

banking market and the accompanying client base. But we

Im Brahm: “We see three distinct benefits for the Dutch

lack the ‘processing power’ that distinguishes dwpbank in

market and Dutch financial institutions: economies of scale,

this regard. Our strength lies chiefly in solutions for risk

economies of scope and reduced operational risks. In the

management and governance and compliance issues that

Netherlands, virtually every bank or financial institution has

are laid down in clear Service Level Agreements. These

its own IT solutions and transaction processing systems. By

same issues also exist in the retail market, in the Netherlands

entrusting their securities processing to the new platform in

as well as Europe. At the same time, our wholesale services

Amsterdam, they can ensure that all those securities

ideally meet the needs of dwpbank’s wholesale clients in

transactions will be processed efficiently via a single central

Germany. They are looking for efficient solutions to custody,

system. But standardised processing does not have to

compliance and network management issues. KAS BANK

mean a mandatory ‘one size fits all’ approach for all clients,

and dwpbank strengthen each other’s specialism, and that

however. While the engine may be the same for everyone, it

ultimately benefits the market as a whole. The client really is

is possible to offer tailor-made solutions to suit each client.

the focal point in this partnership.”

Through ‘white labelling’, for example, or the structuring of the back-office services.

In the proposed first step, dwpbank will

For the German market, the partnership promises to

establish a branch in Amsterdam to handle

significantly boost the quality of wholesale securities services

securities processing for KAS BANK. During

in Europe. Wholesale specialist KAS BANK can provide

the subsequent period, both parties will

German institutional investors with excellent support through

develop a new transaction platform for the central processing of wholesale as well as retail securities transactions on behalf of

Dr. Markus Walch holds a Ph.D. in

third parties in the Netherlands and, later on,

Economics. He is CEO of dwpbank

Europe. How will

since October 2011. His focus areas

this be realised?

are the overall corporate strategy and

Walch: “The market is

IT. Walch started his banking career

looking for a ‘utility

in 1994 at Deutsche Bank Gruppe.

provider’ that does not

From 2001-2007 he worked at Pioneer Investment KAG

compete with their own

and then continued his career as member of the

activities but that does

Managing Board at DAB Bank AG, where he was

offer solutions to help

responsible for amongst others Controlling Risk and

improve their business.

Compliance.

We have an excellent track record and a very

4

KAS Selections • February 2012


broad client base in Germany. Even parties who are competitors, such as the saving banks and the cooperative

Karl-Martin im Brahm is member of

banks for example arrange their securities settlement via

dwpbank’s Managing Board since

dwpbank. They know that their data are secure and are

December 2007, where he is

strictly separated with us. What we envision in our

responsible for the commercial

partnership with KAS BANK, a pan-European transaction

business. Previously, he was board

platform, will take several years to build. We are very aware

member of Sparkassen Broker and

of this. That is why both parties have expressed the clear

before that he was responsible for setting up Postbank

intention to enter into a long-term partnership. Once the

easy trade AG. Im Brahm is an economist and holds the

final, binding contract has been signed, we will set up a joint

title of ‘Bankkaufmann’.

Sales Team that will be tasked with approaching clients and prospects and explaining to them why our set-up will also work on the Dutch market.”

live date is to ensure that our proposition is clear to the market. That is why we will be working hard together in the

Van Katwijk: “As pure specialists, our business models are

coming months to finalise the details of our proposition and

entirely complementary. We do not compete in any way

explain it to the market. This form of service concept is new

whatsoever with our clients’ activities or their revenue model.

to the Netherlands, but we are totally familiar with it. Our

Nor do we have the ambition to displace them in the overall

success on the German market is proof of that. We now

value chain of the securities industry. Our aim is to offer a

intend to ensure its success in the Netherlands and across

high-quality solution to a real and existing problem, namely

Europe.”

the efficient processing of securities transactions throughout Europe. Regardless of how you define the concept of retail

Van Katwijk: “It is important that our clients and prospects

securities processing, essentially it is about how you, as a

can develop a ‘feeling’ for the new platform. We will

provider, facilitate your clients in that regard. In addition to

therefore be organising a series of specific ‘market events’

the processing of securities transactions for retail clients, we

during which we will jointly explain what our solution looks

also see clear opportunities for example in the areas of bank

like and how it works. This initiative can be compared with

and pensions savings as well as in providing services to

the processing of payment transactions such as currently

PPIs. In the Netherlands there is a clearly identifiable trend

performed by Equens in Europe. It reduces the operational

towards individual pension provision. Individual account

risks and ensures market-neutral cooperation for the entire

holders must then be able to rely on their securities trans­

market. The retail market also recognises the benefits and

actions being processed in the most efficient and cost-

necessity of this platform, and KAS BANK’s ‘natural’ role in

effective manner. KAS BANK will facilitate this for them

it. Institutional investors and private investors alike are wary

through this platform.”

to entrust their securities to another party. They want a guarantee of certainty. KAS BANK and dwpbank offer that When will the

certainty. The ‘proof’ of that is in the fact that we are the first

partnership

party in the Netherlands to entrust dwpbank with our own

actually

transaction processing. This ensures that the new platform

commence?

will have necessary specialised knowledge of the Dutch and

Im Brahm: “Our

European securities market from the moment it goes live.”

partnership is scheduled to go live in

Further information on dwpbank’s activities can be found at

summer 2012. But

www.dwpbank.com.

what is more important than giving a precise

KAS Selections • February 2012

5


Duration overlay Looking back at 2011, it is safe

soon becomes evident that the market for bonds with a

to say that pension funds have

duration and interest rate sensitivity comparable to that of

seldom dominated the news

the pension commitments is very illiquid – if it exists at all.1

as much as they have in recent

Moreover, a pension fund would have to sell virtually all of its

times. The carefully constructed

other investments in order to purchase the bonds, thereby

Dutch system of old-age

jeopardising its recovery capacity. The derivatives market

provision came under huge

offers alternative solutions.

pressure, proving considerably more vulnerable than we had

The interest rate swap

Mark Schilstra, Director

previously thought. As well as

The interest rate swap is a derivative whereby two parties

Client Management,

the collapse of the global stock

exchange a fixed and a variable coupon for a specified

KAS BANK

markets, the sharp drop in

duration and, in economic terms, is effectively an investment

market interest rates over recent

in a long-term bond, financed at a short-term interest rate.

years has had an impact on the funding level, which, for

Given its natural interest rate position, a pension fund will

many pension funds, proved considerably greater than

want to pay a variable rate of interest as a hedge in order to

the choice of strategic asset allocation. With their long-

receive a fixed interest rate. If interest rates fall, its

term commitments contrasting with often shorter assets,

commitments will fall as a result, whereas its income will

pension funds, by their nature, run a big interest rate risk

remain the same. Consequently, the initial, zero value of the

on their balance sheet. Some have ‘plugged’ this interest

swap becomes positive. Therefore, the big advantage of

mismatch, while others (consciously or otherwise) have

using a hedge through the medium of an interest rate swap

chosen not to hedge their interest rate risk. Mark Schilstra,

is that the pension commitments can be matched without

Director Client Management explains how KAS BANK can

the need for inwitial capital.

help you hedge this interest rate risk, and the advantages

However, there are two drawbacks to using a swap to

and drawbacks of the different approaches.

hedge against falling interest rates: – Firstly, whilst the pension fund has become immune to

Under the Dutch current Financial Assessment Framework

falling interest rates as a result of taking out the swap, at

(Financieel Toetsingskader, FTK), unconditional nominal

the same time, due to the linear nature of the swap, it

pension commitments are the key factor. These

can no longer profit from any increases in interest rates.

commitments must be valued at current market interest

– Secondly, a swap arranged by OTC introduces a

rates. For a typical pension fund, if the (nominal) market

different kind of risk: the counterparty risk. To reduce this

interest rate falls by 1% point, the market value of the

risk, in addition to the legal agreements as set out in the

commitments will increase by more than 15%, compared

ISDA agreement when the swap is concluded,

with an increase in assets of around 3%. For an unhedged

agreements are also made about the collateral in a

position, therefore, a pension fund runs a substantial

Credit Support Annex (CSA). By making agreements

solvency risk. This risk can, in theory, be limited by buying

about how often, in what quantity and in what form

bonds on the asset side that have a duration concurrent

collateral must be drawn in the event of changes in the

with the term of the commitments. In practice, however, it

market value of the swap, the counterparty risk is

1

In the Eurozone, roughly €65 billion euros of AAA government bonds are available with a duration of 3 or more years. The current Dutch pension commitments are nearly €1000 billion

6

KAS Selections • February 2012


New Clients reduced. Since adequately controlling this counterparty

Stichting Pensioenfonds AXA verzekeringen

risk implies frequently exchanging collateral (collateral

Investment Accounting and Financial Accounting

management), this can create a lot of administration. Many of our clients have therefore chosen to outsource

Stichting Pensioenfonds B&S

this CSA management to KAS BANK.

Custody and Global Fund Services

The swaption As well as the above-mentioned interest rate matching in the form of the swaps, latterly we have seen a growing number of pension funds electing to extend duration in the form of swaptions - an option on a swap. In so doing, the pension

Personnel notes

fund gains the right, at a future point in time, to purchase a swap at a pre-agreed price. Given the asymmetrical structure of the pay-off, the pension fund will only exercise

Client Management

this right if the interest rate has fallen and will allow the

1 November: Ton Moes, Relationship Manager Fund

swaption to expire with zero value if the interest rate has risen. The popularity of this product in recent times seems to be due primarily to the extremely low level of interest rates and the expectation that they will, eventually, rise again. In these circumstances, extending linear duration seems ill-advised. Entering into a swaption is a means of protecting the funding level against falling interest rates, while still benefiting from any rise in interest rates. Consequently, a swaption is similar to using long-dated bonds to extend the duration when interest rates fall and to a traditional bond when interest rates rise. However, this right comes at a

& Insurers Services 14 November: Emma Perry, Relationship Manager trainee UK 1 December: Sytze Bouius, Account Manager Fund & Insurers Services Pim Willemse, Relationship Manager Clearing & Banking Services 1 February: Meta Siersema, Account Manager Clearing & Banking Services Jolien de Jongh, Management Trainee Clearing & Banking Services

price, which depends on various factors, including the duration and the change in interest rates against which

Sales & Business Development

protection is offered.

1 October: Hans-Peter Bauder, Senior Sales Manager German Branch

Conclusion

24 October: Daniel Maycock, Trainee UK Branch

Under the current Dutch FTK, controlling solvency risks is

21 November: Orinn Checkley, Sales & Business

vitally important to pension funds. The use of derivatives for strategic purposes can help to hedge risks that cannot be

Development Financial Intermediaries UK 1 February: Larissa Gabriëlse, Sales & Business

hedged using traditional instruments. The possible

Development Institutional Services

drawbacks, however, are the sometimes complex legal

Netherlands

documentation and the need to control the collateral via the so-called CSA. KAS BANK is more than willing to assist you,

KAS Investment servicing

so feel free to contact your Relationship Manager to discuss

1 October  Benedict Durchholz, Specialist Advice &

how your pension fund could benefit from using derivatives

Outsourcing Management

to manage the interest rate mismatch. KAS Selections • February 2012

7


Proxy Voting boosts shareholder involvement The Multi User function also enables you to give employees from your organisation access to the platform with varying levels of authorisation. Equally, you can use the platform to request attendance cards for shareholders’ meetings or to seek advice from a consultancy firm on how to vote. In a number of countries, the Netherlands and Belgium among them, the shareholder (or his authorised representative) must cast his vote in person during the meeting. At your request, we will act as your authorised representative, voting in accordance with your instructions Listed companies and their shareholders set great store

and then reporting back to you on the meeting.

by maximum participation in the General Meeting of Shareholders. Yet not every shareholder is able to attend

In other countries, you can only participate in the meeting if

the meeting in person. Consequently, Proxy Voting

the shares are registered in the name of the Beneficial

– electronic distance or delegated voting – is becoming

Owner. A Power of Attorney (POA) is needed for this.

more and more popular. (Passive) Proxy Voting enables

If necessary, the Proxy Platform will automatically send you

shareholders to actively participate in shareholders’

the request to issue a POA. You can also issue a continuous

meetings without being physically present. KAS BANK

POA to KAS BANK, via a separate link in KAS-Web.

facilitates Proxy Voting in all countries where shares are held in custody on your behalf.

To encourage attendance at shareholders’ meetings, a growing number of Issuing Institutions are setting a

At KAS BANK, you have two Proxy Voting options:

registration date. Investors who hold shares in the relevant

electronic voting (via the Internet) or authorising KAS BANK

fund on the registration date retain the right to vote on the

to act as your representative.

day of the general meeting, even if the shares have been sold since the registration date.

Electronic voting is very straightforward. You are informed of the agenda for forthcoming shareholders’ meetings via a

In short, with (Passive) Proxy Voting, you avoid the risk of

special link in KAS-Web. These alerts are based on your

missing shareholders’ meetings due to miscommunication

holdings, which are updated daily. Once you have logged on

or because you have received inaccurate or incomplete

to the Proxy Platform, you receive the necessary proxy

information.

information to enable you to decide how you wish to vote during the meeting. You then enter your instructions yourself. For each item on the agenda, you can indicate whether or not you wish to vote. You can view or amend the instructions you have entered at any time prior to the meeting.

8

KAS Selections • February 2012


Co-creation: innovating in partnership with pension funds Dutch pension funds have been making headlines of

Furthermore, the information about Asset Class performance

late due to the turbulent developments on the financial

has been supplemented with several indicators. As well as

markets. DNB (The Dutch central bank) recently offered

the performance, the latest app also illustrates the

pension funds the option of capping pension cuts at 7%.

contribution, attribution and risks of various investment

This will enable pension funds to improve their financial

categories. Charts and tables, for example, show the

position whilst reinstating the funding level above the

contribution made by the various investment categories to

minimum required. KAS BANK supports pension funds

the total return. There is also the facility to check which

with this task by providing up-to-date information about

attribution caused the pension fund to under- or over-

the funding level and other important steering and

perform.

management information. Continually evolving Co-creation

With demand for up-to-date steering and management

At the start of 2011, a special iPad app was launched which

information set to escalate, we will continue working on new

displays information about the current funding level,

features for the app.

compliance breaches, and the risks associated with the investment portfolio. More new features have since been developed and we have worked with several pension funds to ascertain their needs regarding the information provided. A commonly expressed wish was the inclusion of the recovery plan in the app. The evaluation now also takes account of aspects such as accessibility and ease of use. Latest features The updated app was launched in January 2012. Besides information about the latest funding level, the updated app also shows the recovery plan. The chart now illustrates the development in the funding level compared with the long and short-term recovery plan. In short, the current funding level is compared with the targets taken from the recovery plan.

KAS Selections • February 2012

9


Responsible investing and voting ASN Bank is a retail bank with a strong focus on sustainability. Therefore, when selecting funds for the investments made by the bank and its clients, the primary consideration is whether the fund meets ASN Bank’s sustainability criteria. Furthermore, ASN capitalises fully on its voting right to actively implement its sustainability policy at general meetings of shareholders. We talk to Piet Sprengers, Head of ASN Bank’s Sustainability Policy and Research Department, about sustainable investing and proxy voting.

Who is ASN Bank? “ASN Bank has its origins in the former Dutch employer’s organisations NVV (Dutch Association of Trade Unions) and NKV (Catholic Federation of Dutch Trade Unions). We were founded in 1960 and form part of SNS Bank and, by extension, SNS Reaal. ASN has over half a million retail

Piet Sprengers, Head of ASN Bank’s Sustainability Policy

clients and manages 10 billion euros of investments held by

and Research Department

the bank and its clients. Asset management is handled by Impax, Kempen and SNS Asset Management and the fund

listed companies chiefly from the client’s perspective. In

is administered by KAS BANK.”

other words, we veto child labour and dividends from the weapons industry, but seek investments in sustainable

ASN’s sustainable mission is set out in the

energy and fair trade. We have described our policy at great

bank’s Articles of Association. What is your

length in our Issue Papers.

policy with regard to investments and what

We involve our clients in our policy wherever possible.

requirements must the investments fulfil?

Crowdsourcing is one of the instruments we use to help

“As a bank, we want to play an active role in creating a more

shape and refine our investment policy. We recently

sustainable society. To achieve this, we collaborate with

reviewed our human rights policy. During policy reviews, we

various bodies, including social organisations, and actively

discuss the topic directly through social media, i.e. before an

participate in social debate. For example, together with

official policy document has been drafted. For example,

MnServices and APG, we have made a case to the Dutch

whilst child labour must always be avoided, you need to find

parliament for a ban on cluster munitions. In our investment

a solution for the loss of income for families who have no

policy, we focus on sustainable shares. All our own funds

other means of economic survival. How you do that makes

share the same, sustainable objective. We select funds and

for some interesting discussions.

10

KAS Selections • February 2012


Crowdsourcing works really well, as does Twitter. By actively tweeting, our clients can follow what we’re doing, and how we’re doing it. We deliberately encourage the use of social media, because it makes ASN a much more open organisation. Sustainability and transparency go hand in hand. And, needless to say, at ASN we must practice what we preach. We are constantly on the look-out for innovations like social media. For example, our investment policy is also guided by greenhouse gas emissions. We invest less in companies that produce relatively high emissions and more in companies with lower emissions.” What does that selection process entail? “It’s an extremely thorough internal process. The MSCI World index provides the basis for our Universe. Before companies and funds are admitted to the list of approved

liquid and whether they offer adequate potential returns.

companies in the Universe, we gather as much information

Equally, the managers themselves can suggest companies

as possible. This is all desk research, during which we also

that may be of interest to the Universe – although those

use information from external providers. The initial selection

companies must always be assessed against our

criteria are always our absolute criteria, by which I mean

sustainability criteria by the Selection Committee.”

things like whether a company makes sufficient efforts to prevent child labour in the chain or deals in blacklisted

How do you monitor whether the company

products, such as weapons. We have a lot of these criteria,

in which you are investing meets the

so they alone entail a lot of research. We then look at

requirements you have set? And if a company

whether the company really stands out in terms of

takes a direction that does not tally with your

performance on human rights, climate and biodiversity

selection criteria, what measures do you take?

issues.

“At least once every three years, the Sustainability Policy and Research department scrutinises all our investments to

As a bank, we want to play an active role in creating a more sustainable society

check whether they still meet our criteria. We are also subscribed to a range of alert services from providers in the sustainability sphere, which serve as an early warning of anything untoward. And it’s a continuous process. Sometimes, a company makes clear progress with regard to

The Selection Committee meets six times a year to discuss

climate or human rights. In which case, it will be added to

which companies could be admitted to the Universe and

the Universe. The opposite is also true, of course. But we

which should be removed from it. Once that decision has

always inform any company that is about to be removed

been made, the asset managers are given free rein. They

from or added to the Universe. That’s because we set great

decide, for example, whether the companies are sufficiently

store by transparent communication, and that includes

KAS Selections • February 2012

11


communication with those companies. Because we value

Incidentally, we don’t implement our own sustainable voting

transparency, we don’t invest in financial institutions, for

policy – that’s done by SNS Asset Management. They use

example, because we don’t feel the sector is sufficiently

KAS BANK’s Proxy Voting service for this. For certain items

transparent. With banks, for example, it can be very difficult

on the agenda, you can submit standard voting instructions,

to ascertain exactly in which companies they invest. Which

but you can also ask for a different vote to be cast. Each

means we can’t explain to our clients what’s happening with

year, KAS BANK and SNS carry out an audit trail to review

their money.”

the voting process. They check things like: were all the voting instructions safely received, and were votes casts for

Good fund governance also implies a voting

all the notified shares? If not, they ascertain where the

policy. How do you ensure that your opinion

mismatch lies. KAS BANK draws up a report on this review

(and that of your investors) is heard? Do

in ASN Bank’s corporate style, which we then place on our

you attend every shareholders’ meeting, for

website.”

example? “We’re keen to exert maximum influence and, for that

So your clients are always informed about the

reason, we cast our vote at as many as possible of the

outcome?

shareholders’ meetings held by the funds or companies in

“We let them know the results in the form of visit reports and

which we invest. When voting, we always ask ourselves

through the Proxy Disclosure module on our website. Very

what we can achieve through our vote, given the basic

few clients actually enquire about the outcome of our voting

principles in the Issue Papers. We stress our sustainability

behaviour, though. They just seem to trust us to do a good

objectives with respect to every item on the agenda, i.e.

job.”

including routine matters. To give an example, we want directors’ variable pay to be linked to clearly measurable

Are many questions asked about your

sustainability goals, such as saving energy or reducing CO2

sustainability policy at shareholders’ meetings

emissions. If a company is not transparent about its

for ASN Bank’s own funds?

sustainability policy in its Annual Report, we always reject

“Of course. These meetings are very lively events, bringing

the Report. We are also opposed to the purchase of own

together hundreds of people. They ask very specific and

shares, because we prefer a company to invest in

knowledgeable questions. For us, it’s a good opportunity to

sustainability and long-term objectives rather than short-

interact with our clients. After all, as a direct writer, most of

term shareholder gain.

the client contact at ASN takes the form of mail or telephone. So, on meeting days, it’s good to get direct feedback about what we’re doing and how we’re doing it. It Piet Sprengers, Head of ASN

helps us make our criteria even better. In 2012, for example,

Bank’s Sustainability Policy and

we intend to focus even more on formulating concrete

Research Department and

long-term targets, such as reducing the carbon footprint of

member of the ASN

businesses, and making them measurable. Just like

Management Team. He is

KAS BANK, ASN has signed up to the UN Principles for

responsible fot the Sustainable

Responsible Investment. We actively make companies

strategy and the research of the

aware of the PRI and engage in dialogue about them. We

ASN Bank and the ASN

get a lot of very positive feedback about this, which is in turn

Investment Funds.

a major incentive and motivation for our employees to keep up the good work.”

12

KAS Selections • February 2012


KAS BANK and Social Media Social media play an increasingly important role in

So, the challenges are great. But if we all pull together, the

communication between companies, their customers

future is still rosy. For example, considerable progress has

and other stakeholders. In business circles, LinkedIn and

already been made in technology, investments and

Twitter are the most popular sites. One drawback of these

crowdsourcing – the act of sourcing suggestions online for

two platforms is that they do not cover one specific area.

new products and ideas. Mallowstreet has succeeded in

So KAS BANK sought a platform aimed at the specific

bringing together some of the foremost people from the

target groups of the bank and, in particular, the pension

pensions world, with thousands of years of combined

funds. The Mallowstreet social media platform was found

experience. The results are astonishing.

to be the most suitable option, successfully facilitating connections between pension fund managers and

Whether you are looking for the very latest views on

providers in the UK.

investments in infrastructural projects or the downside protection of securities, or whether you want to know how to structure your defined contribution pension scheme best in order to accommodate the personal situation of each member, or whether you are looking for an answer to a

KAS BANK now wants to work with Mallowstreet to expand

pension-related issue, the Mallowstreet platform is a treasure

the platform to the Netherlands, so that Dutch and British

trove of material.

pension funds can learn from each other, for example by discussing issues such as governance, cost transparency

Mallowstreet also has links to other external platforms that

and the Frijns committee report and green papers on new,

users have found useful. For example, there is a link to a

relevant laws and regulations in the Netherlands, the UK and

virtual trading platform that explains the basic principles that

Europe. The platform currently has around 2500 members,

guide investment decisions. Apparently, people are naturally

including pension fund managers, pension advisors, banks,

programmed not to cut their losses, as in so doing they are

asset managers, consultants, lawyers and accountants.

implicitly acknowledging that they made the wrong decision.

There are innumerable blogs, forums, videos and pension

And yet knowing the right time to cut your losses is precisely

products that can be browsed, viewed and read.

what makes you a successful investor. There are consequently countless other examples of such anomalies.

Increasing cooperation between all sectors involved in

This virtual world provides good insight into whether you can

pension-related matters has many benefits. For example, the

handle volatile and unpredictable markets and learn from

parties can jointly seek a solution to the key pension issue,

your mistakes.

namely how to find adequate funding for existing pensioners. With the ageing of the world’s population and the ever greater demands this places on healthcare, this has become one of the most critical issues on the global agenda. At the same time, the precarious economic situation presents the

Mallowstreet connects people and is the fastest-growing

pension sector with the enormous challenge of optimising

platform for global cooperation and innovation in the

investment returns so that they can meet their obligations

pensions world. We urge you to join this community.

with a reasonable degree of probability. Certainly now that

Contact your Client Advisor, or visit www.mallowstreet.com

they can no longer rely on companies and governments to

to see for yourself.

make up the pension shortfall.

KAS Selections • February 2012

13


Global Custody Network News Europe

0.2% that is currently in place

Germany - Adjustment withholding tax on market claims

will continue to

Far-reaching changes to the tax deduction process for

apply until

German securities are effective as from 1 January 2012.

31 March 2012. In

These changes proceed from the implementation in

earlier plans the

Germany of the European guideline UCITS IV which should

CGT was not

prevent fraudulent tax reporting of short selling transactions

applicable to

past the dividend record date. This is achieved by the

foreign investors; however there is still no definite statement

changeover of the tax deduction from the issuer to the last

that foreign investors will be tax exempt.

domestic paying agent.

Outside Europe In Germany, Clearstream Banking Frankfurt (CBF) acts as last domestic payment agent to deduct taxes in case of

Brazil – Change in IOF Tax Rate

dividend and fund distributions for its foreign clients.

The IOF tax rate on foreign exchange transactions has

KAS BANK and all our clients will be known by CBF as

changed from 2% to 0% from 1 December 2011 onwards,

Non German residents, unless otherwise known.

for the following transactions: 1. Variable income instruments that are traded at the

Tax deduction applies to both income from distributions on

exchange, except for derivatives transactions with

the basis of holdings and compensation for market claim

pre-determined returns.

transactions. Market claim transactions are traded before ex-date but settle

2. Public offerings and subscriptions of registered companies.

on or after the

3. Debentures issued by special purpose companies with

ex-date of the

the objective of investments in the infrastructure sector.

dividend. Germany

4. Symbolic transactions for conversion from direct

uses the ex-date

investment to portfolio investment and depository

as the position

receipts (DRs).

determining date. All market claims

5. Investments in private equity funds and emerging market funds.

will be compensated separately till 25 business days from the ex-date. For further information we refer to our Service

The IOF tax rate on

Update dated 9 December 2011.

foreign exchange outflows, collateral

Greece – Implementation Greek Capital Gains Tax

posting, fixed income

postponed until 1 April 2012

instruments, and

The Greek government has approved a legislative act

derivative

through which the implementation of the Capital Gains Tax

transactions with

(CGT) will be postponed until 1 April 2012. The sales tax of

pre-determined return remains unchanged.

14

KAS Selections • February 2012


KAS BANK and Solvency II company’s financial position and reduces the likelihood of solvency problems, now or in the future. Risk management As Solvency II is heavily based on economic principles, insurers will have to pay greater attention to their internal risk management in future. To do this, among other things they will need reliable, traceable and replicable datasets with clear definitions, interpretations and acknowledgements of sources. Transparent reporting to the market and regulators is also essential. Consequently, Solvency II has a lot of Sandra Könniser, Relationship Manager Fund and Insurers

overlap with the directives for pension funds.

Services KAS BANK has wide experience in providing services to The European Solvency II directive comes into force on

pension funds with respect to reports, risk management and

1 January 2014. We will keep you regularly informed about

risk control. Our products and services provide insurers with

related developments through various channels, including

a firm foundation for satisfying the solvency and reporting

KAS Selections.

requirements of Solvency II, and for structuring their internal risk management, to enable the effective and efficient control

Solvency II has a lot of overlap with the directives for pension funds

of risks. Solvency II project team Having elected to be compliant for Solvency II purposes,

Solvency II acts as an incentive for European insurers to

KAS BANK is actively preparing for the directive.

improve their risk management, by setting revised solvency

A dedicated Solvency II project team consisting of internal

requirements. The underlying notion is that the better

and external specialists is undertaking system analyses and

equipped insurers are to manage their risks, the better the

organising knowledge sessions, seminars and discussion

interests of policyholders are protected. Thus, Solvency II

meetings. In addition, we are already working with several

benefits consumers and the insurance sector alike.

insurers to ensure that they meet the Solvency II requirements.

Solvency requirements The directive applies to nearly all European life and nonlife insurance companies, including reinsurers. In this context of prudential supervision by regulators, they must soon meet certain solvency requirements so that they can fulfil their obligations to policyholders. To determine whether those requirements have been met, the regulator applies what is called the ‘total balance sheet’ approach, which values both the liabilities and assets on a market-consistent basis. This approach provides better insight into an insurance

KAS Selections • February 2012

15


OTC-derivatives under EMIR CCP will not default, but the measures taken are, or rather should be, such that this is highly unlikely. In order to provide certain levels of guaranteed safety, these CCP’s will require (daily) margin to be deposited: mostly in cash. As pension funds are typically fully invested, in most cases this means that long-term investments need to be repo-ed into cash or bonds to satisfy the margin obligations. Additionally, this requirement may add operational concerns as well: where collateral for bilateral contracts may have been negotiated to be calculated and deposited weekly or Rutger Abbink, Sales & Business Development KAS BANK

monthly, one-way or even no-way, a CCP will require a daily margin movement.

EMIR is the draft European Regulation that the European Commission has published in order to introduce greater

Reporting obligation

transparency and better risk management to the ‘over

The details of any OTC derivatives contract that has been

the counter’ (OTC) derivatives market. In September

concluded (or modified or terminated) needs to be sent to a

2009, the G20 in Pittsburgh have agreed to an ambitious

Trade Repository. The Regulation dictates that this needs to

program of actions that have led to the EMIR legislative

be done one day after the execution of the contract.

proposal. With regard to OTC derivatives, EMIR aims to introduce both the obligation to report all OTC derivatives

The way forward

transactions to so-called trade-repositories and the

Even though the implementation date has been postponed

obligation to centrally clear eligible transactions.

and uncertainties still exist, we believe that 2012 will be the year that sees the Regulation come into force. Therefore we

Who will be effected?

advise all market participants to use this year to prepare

The Regulation will primarily be applicable to ‘financial

themselves and actually implement an active setup for the

counterparties’, under which fall investment firms, banks,

post-trade CCP clearing setup. KAS BANK as provider for

insurers and (pension) funds. And all other entities, albeit that

the post-trade services will actively lead its clients and

the clearing obligation is only applicable when a certain

prospective clients towards a setup that’s the least

threshold is exceeded and the transaction is not linked to

disruptive for their day-to-day business activities and

the commercial activity of the party.

investment decisions.

Even though pension funds have recently successfully lobbied for a three year exemption, this exemption is now

There are two big question marks surrounding EMIR: which

regarded as less valuable, because of the high capital

instruments will be included in the Regulation and when will

charges for non-cleared transactions as a result of the new

the Regulation go into force.

Basel rules and MIFID2.

Whether the Regulation will be adopted is not a question: that’s a fact!

Clearing obligation The requirement to clear OTC derivatives through a Central Counterparty replaces the risk of default by a counterparty with that of a CCP. Of course, there is no guarantee that a

16

KAS Selections • February 2012


Pensions lessons from the lowlands The vexing problem of how to provide adequate pensions

of the deficits outlined above, it is understandable that

in the UK has been rising steadily up the news agenda.

sponsor firms are anxious to remove pension liabilities from

The credit crunch, recession and government response

their balance sheets. Moving to DC pension schemes

have elevated the issue from near obscurity to the front

achieves this, as it transfers the risk of poor investment

page.

performance, in its entirety, to the individual scheme member. Of course, this risk is heightened in times of

With the vast majority of traditional defined benefit schemes

recession, since the pensioner is hit by the double whammy

closed to new members, it is assumed that defined

of a smaller pension pot and shrinking annuity yields. There

contribution schemes are the way forward. But have

is also the thorny issue of governance; many DC schemes

rumours of the death of DB been greatly exaggerated?

are contract-based, where the fund is effectively outsourced to an insurance company without the oversight provided by

As we in the UK meekly accept our fate, discussions in the

a board of trustees.

Netherlands have tended to be more nuanced. Already an eminent world leader in pensions provision, the Dutch are pursuing a more comprehensive solution in an attempt to provide the optimum outcome for current and future generations. Given the entrenched differences between the

Public engagement as a wellrun collective system reduces complexity and increases confidence

two systems, what can we learn from the Dutch experience? As a nation we are repeatedly warned that we are not saving The state of the union

enough for retirement, and yet the scenario outlined above

Defined benefit (DB) pension schemes in the UK are certainly

will do nothing to increase engagement or confidence in the

in a parlous state. (These are also known as final salary

system. The question should therefore be asked: is an

schemes, where contributions are paid over a number of

all-or-nothing move towards individual accounts in defined

years in return for a defined level of retirement income,

contribution schemes the most appropriate solution?

usually paid by the employer.) According to figures published in the Pension Protection Fund’s Purple Book

Meanwhile, across the North Sea

2010, the aggregate funding level of the 6596 schemes

In debating reforms to their pension system, the Dutch

surveyed was 68.1%. This ignores the 45,000+ defined

government has maintained an emphasis on the triple pillars

contribution (DC) schemes operating in the UK, where

of collectivism, solidarity and mandatory participation.

pension payments are entirely dependent on the timing of

According to the Dutch regulator, the aggregate pension

retirement and performance of each individual’s investments

funding level in the Netherlands as of September 2011 was

over the term of the scheme.

above 101%. Although this falls below the minimum threshold of 105% set by the Dutch Central Bank, it is

In light of increased longevity, falling fertility across much of

significantly better than the equivalent figure for the UK of

Europe and volatile investment returns, the case for

68%.

sustainable DB pension schemes appears weak. The response has predictably been a wholehearted disavowal of

The most obvious difference between our two systems is the

the defined benefit approach to pensions provision. In light

number of pension schemes in existence. In the Netherlands

KAS Selections • February 2012

17


there are currently 483 pension schemes – holding assets of

In a paper for the RSA, David Pitt-Wilson calculated that

some € 790 billion – and this number is expected to fall to

smaller funds paying a seemingly modest 1.5% per annum

376 as those funds that are in deficit are merged with other,

in management fees would lose as much as 38% of their

better funded schemes. Compare this with the UK: as noted

potential income over the lifetime of a pension. Even if this is

earlier, we have 6596 DB or hybrid schemes representing

an extreme example, the savings to be gained from

assets of £ 926.2 billion. Without even factoring in the

collective arrangements – where charges can be as low as

tens-of-thousands of DC schemes in the UK, the

0.5% – are significant. In fact, in a later paper Pitt-Wilson

Netherlands provides universal provision through 93% fewer

suggests that if a “typical British and a typical Dutch person

funds. Similarly, the National Association of Pension Funds

save exactly the same amount for their retirement, the Dutch

(NAPF) calculates average scheme membership in the UK to

person will end up with a 50% larger pension”.

be 2,600 compared to 10,500 in the Netherlands. Going Dutch? That is not to say that the Dutch are not engaged in a similar

The UK pensions provision could clearly benefit by

debate around the sustainability of their system – they face

replicating key elements of the Dutch system, which was

comparative demographic challenges, and investment

rated top in the 2010 Melbourne Mercer Global Pension

returns have also been negatively affected. But the

Index for adequacy, sustainability and integrity.

universality of the system has allowed debate to be more consultative, involving all stakeholders, and the likely

First among these is collectivism and the economies of scale

outcome is set to be a much more balanced compromise

and risk dispersal that this brings. There is a long way to

than that in the UK to date. Moreover, the settlement is

travel to bring the number of pension schemes in the UK in

expected to protect the DB promise, albeit through

line with the Netherlands, but there are a number of options

conditional benefits linked to investment returns.

that could offer immediate benefits. One is the master trust, where a number of employer schemes join under a single

Safety in numbers

trust-based umbrella. This approach, which shares

The positive benefits of a collective system are clear. Firstly,

similarities with the Dutch industry-wide schemes, can lower

the risk of volatile markets is shared between stakeholders

costs, increase bargaining power and vastly improve

and spread among participants and across generations.

governance over contract-based DC schemes.

Larger funds are also better able to diversify their investments without incurring disproportionate costs. Public

Another option, the collective DC scheme, is a type of

engagement, which remains one of the greatest challenges

pooled investment vehicle that many believe can offer better

in the UK, is also enhanced, as a well-run collective system

outcomes than the existing disparate DC structures. This is

reduces complexity and increases confidence. Members

another Dutch concept, combining the features of DB and

also benefit from the enhanced governance of trust-based

DC provision, that potentially offers employers lower risk and

structures, which contribute to making pension funds

uncertainty, and members better governance and lower

influential and socially-responsible investors.

costs.

But most importantly, collective schemes are much more

But whichever approach or combination is eventually

cost-effective to run. Smaller funds require disproportionately

adopted in the UK, it is to be hoped that the best practice

more manpower, while rapid improvements in technology

developed in the Netherlands over numerous years is taken

mean that large funds can be monitored just as effectively.

seriously into account. The statistics, after all, speak

Major funds with billions to invest are also able to command

eloquently for themselves.

much lower fees and higher service levels from their advisors.

18

KAS Selections • February 2012


Words from Wiesbaden Following in Amsterdam’s innovative footsteps with the Spezialfonds app The Pension Fund monitor which was developed in

Solvency II requirements. Going forward we shall be

Amsterdam is an example of how innovative we are as

developing this aspect further to be able to provide

a bank. In Germany we believe it is only a matter of time

additional data which could be used to satisfy Solvency II

before the market is saturated with providers ‘apps’,

legislation. The app is not meant to be a replacement for our

therefore we seized the chance to become one of the

proven online reporting tools, rather an app which builds on

first in the German market to develop an application for

them and delivers clients with additional overviews as well as

Spezialfonds. The app is still in beta phase at the moment;

in-depth information on their accounts on-the-go.

however our demo version is inspiring. Our target audiences are insurance companies and Pensionskassen

For clients holding Spezialfonds our ‘traffic-light tool’ which

who hold Spezialfonds and direct holdings.

shows whether their account is within investment guidelines or not will be especially appealing; green meaning the account is within investment guidelines, red meaning guidelines have been breached. This is accompanied by a drill-down function enabling the client to see exactly which securities are causing the breach. Frank Vogel, Managing Director, KAS Bank German Branch explains: “Our Spezialfonds Monitor - also affectionately called ‘Das App’ contributes to the risk management of our clients and this is what is ground-breaking about our app. Other apps in the market simply focus on performance data but we

Frank Vogel,

What makes this app so practical and user-friendly is that

go that step further and offer

Managing Director,

clients will be able to see at a glance all of their holdings with

institutional investors complete

KAS Bank German

KAS BANK, both their Spezialfonds and direct holdings and

transparency into their funds from a

Branch

therefore receive consolidated reporting on their positions as

performance and compliance

a whole. Data can be extrapolated and manipulated as

perspective.”

clients wish; viewing holdings by asset, country, date or currency for example. The development of the NAV and risk figures can also be viewed as well as performance indicators such as attribution figures. General fund information can naturally also be found on the app, for example the ISIN, WKN, management fees and the TER. All this data is extremely advantageous to our insurance clients who could use this information as a basis for

KAS Selections • February 2012

19


NETHERLANDS

NETHERLANDS

UNITED KINGDOM

KAS BANK AMSTERDAM P.O. Box 24001 1000 DB Amsterdam The Netherlands Spuistraat 172 1012 VT Amsterdam The Netherlands T: +31 20 557 59 11

GERMANY

KAS BANK LONDON 5th Floor 10 Old Broad Street London EC2N 1AA United Kingdom T: +44 20 7153 36 00

KAS BANK WIESBADEN Biebricher Allee 2 65187 Wiesbaden Germany T: +49 611 1865 3800

www.kasbank.com


KAS Selections February 2012