The fifth story is the anticipation of the Jan. 3, 2018, effective date of the European Union's regulatory reform, the Markets in Financial Instruments Directive II, or MiFID II.
The directive expands on trading rules imposed in 2007 and focused on the equity markets. MiFID II reinforces and replaces the existing rules, improving transparency and oversight of derivatives and other financial markets, introducing rules on high-frequency trading and strengthening investor protections.
In the U.S., the upcoming regulations forced both the Securities and Exchange Commission and money managers to make certain concessions. In late October, the SEC issued guidance allowing managers to unbundle research and execution costs without violating their fiduciary duty due to the conflict of U.S. rules that allow for bundling vs. MiFID's rule requiring unbundling.
Money managers preparing for MiFID II have even gone further than simply complying with the new regulations, which call for greater transparency in equity and fixed-income trading.
The rest of P&I's top 10 stories were:
No. 6: It was a year of increased shareholder engagement, with the major event of the year being Exxon Mobil Corp.'s agreement in December to evaluate and disclose the viability of its portfolio under the 2-degree scenario, the concept of limiting the average global temperature increase to 2 degrees Celsius. The agreement followed a successful shareholder proposal filed by the $345.1 billion California Public Employees' Retirement System, Sacramento, and the $201.3 billion New York State Common Retirement Fund, Albany, among other investors. Other ESG issues in the spotlight included greater emphasis on gender diversity, high prescription drug prices and executive compensation.
No. 7: The multiemployer pension plan crisis came to the forefront after the first union plans — including the $1.3 billion New York State Teamsters Conference Pension and Retirement Fund, Syracuse — won Treasury Department approval to reduce benefits under the Kline-Miller Multiemployer Pension Reform Act of 2014. Plans whose applications were denied, such as the $15.3 billion Teamsters Central States, Southeast & Southwest Areas Pension Fund, Rosemont, Ill., face imminent insolvency. Companies like Kroger Co. and United Parcel Service Inc., whose employees participate in such plans, have had to scramble to make new arrangements. In response, Kroger and the International Brotherhood of Teamsters established a new IBT Consolidated Pension Fund. Meanwhile, the Pension Benefit Guaranty Corp.'s multiemployer program's deficit rose to $65.1 billion in fiscal 2017 from $58.8 billion the previous year, and the multiemployer program is expected to run out of money by the end of 2025, with the possibility that it could run out sooner absent any law changes.
No. 8: The move to passive investment and a greater concentration of assets among managers continued in 2017. As asset owners allocate more to passive investments, those assets have become more concentrated with fewer giant managers like Vanguard Group, which zoomed past $3 trillion in worldwide institutional assets as of June 30, just two years after hitting the $2 trillion plateau. Christopher Philips, Valley Forge, Pa.-based head of Vanguard Group's institutional advisory services, in a September interview cited asset owners focusing on costs and risk control as two main drivers for the passive explosion.
No. 9: Corporate pension plan contributions saw an upswing in 2017 as U.S. companies put more into their pension plans with tax reform looming. Because current tax law allows a plan sponsor to deduct a portion of its pension contribution based on its tax rate, sponsors saw an opportunity to deduct at the existing 35% rate with several years worth of contributions in one blow.
"If I'm paying taxes currently and I can get a 35% deduction in the money I put in my plan now vs. a 15% or 20% deduction in the future, it's a lot cheaper to make that contribution now," Michael Archer, Philadelphia-based senior consultant and leader, client solutions group, North America retirement, at Willis Towers Watson PLC, said in a May interview. Companies in that category included Verizon Communications Inc., New York, which contributed $3.2 billion in the first quarter, and Delta Air Lines Inc., Atlanta, which contributed a total of $3.2 billion to its defined benefit plans in March and April. Huge contributions also mean better funding ratios, which lowers variable-rate premiums that corporate sponsors pay to the PBGC for underfunded plans.
No. 10: The IRS announced in October that new mortality tables take effect Jan. 1, 2018. The change will push up the PBGC premiums that sponsors want to keep down as liabilities increase due to new mortality calculations. More large pension contributions are likely as a result. Justin Owens, Seattle-based director of client strategy and research at Russell Investments, in an October interview said, "We expect a meaningful uptick in contributions to avoid PBGC premiums, and this is just one more reason they should do it sooner or later."