Internal risk models could help clear up differences of interpretation on investment policies under the current ‘prudent person’ approach between pension funds and Dutch regulator De Nederlandsche Bank (DNB), according to Tjerk Kroes, chairman of the committee for alternative financing arrangements for the housing market.Stef Blok, the minister for Housing and Government Services, recently asked Kroes to assess whether the DNB’s supervision hindered investment in non-regulated rental property in the Netherlands.In a letter responding to Blok, Kroes said he focused on the importance of internal risk models after holding talks with the three largest pension funds – ABP, PFZW and PMT – as well as the supervisor.He said the DNB was willing to discuss the application of internal risk models and suggested they could reduce differences of interpretation on parameters for investment. In the opinion of pension funds, the caps for returns on alternative investments, such as non-listed property, private equity and infrastructure, have been a problem, Kroes said.“After costs, only a risk-free return remains, whereas these investments carry greater risks,” he said.The chairman added that internal risk models could be useful for assessing whether real and matching assets would fit in the investment mix for inflation-proof pensions under the future hybrid pensions contract.Kroes emphasised that the government should be willing to adjust its own policy to increase the attractiveness of local investment for pension funds.As an example, he recommended relaxing the current rules for the sale of blocks of rental property, as well as allowing an inflation compensation on loans to building societies.Bram van Els, spokesman for the €90bn asset manager MN, pointed out that the application of internal risk models was already possible.“But, because of the often rigid interpretation of the prudent person [rule] by the DNB – in particular, on illiquid investments – many schemes have ceased submitting their models,” he said.In his opinion, Kroes’s letter should generate debate about the issue.The €145bn asset manager PGGM said it was assessing the options of taking over rental property from housing corporations.According to its spokesman, this would approximate a matching asset.“However, these assets are already subject to extra solvency conditions,” he said.“Internal risk models might be a better fitting solution in this case.”Harmen Geers, spokesman for the €337bn asset manager APG, stressed that the prudent person principle in itself offered “welcome leeway” for pension funds to optimise the risk/return ratio at portfolio level.“In the case of an internal risk model – to be approved by the DNB – schemes are responsible for the portfolio construction,” he said.“Within this framework, they can decide on the exact allocation. This way, the freedom of investment under the prudent person principle could remain.”
Dutch pensions funds performed well in 2012 relative to their peers in other countries, generating the highest returns against the lowest costs, according to Canadian benchmarking firm CEM.It said Dutch schemes reported returns of 14.3% on average over the period, while pension funds in Europe and the US returned 12.5% and 11.4%, respectively. The benchmarking firm compared costs at 344 pension funds worldwide, including 60 schemes in the Netherlands, the UK, Ireland, Norway, Sweden, Finland and Denmark.The 29 Dutch schemes that took part in the survey represented almost 6m participants and more than €600bn of assets. CEM also looked at 193 pension funds in the US, 82 in Canada and nine in Asia.The company found that the Dutch pension funds spent 0.44% of their assets on asset management on average, including 6.4 basis points on governance.Schemes elsewhere in Europe and the US reported asset management costs of 0.48% and 0.59%, respectively, it said.In contrast, on pensions administration, Dutch schemes incurred costs of €93 per participant, against a worldwide average of €65.CEM Benchmarking attributed the difference chiefly to the smaller scale of the participating Dutch funds, which had 204,000 participants on average against 444,000 for the other pension plans.It said it found that costs per participant decreased by €149 if the number of participants increased tenfold, adding that this appeared to be true in particular for pension funds with fewer than 100,000 participants.According to the benchmarking firm, Dutch company pension funds and industry-wide schemes reported administration costs of €249 and €90 per participant on average.Between 2008 and 2012, administration costs at Dutch pension plans increased by 3.1% a year on average, against an annual increase of 4.2% at schemes elsewhere.CEM said it also saw much variation between costs and added value, but stressed that it had been unable to identify a statistical link between these two variables.CEM’s survey also found that Dutch schemes generally invested less in equity and more in fixed income – in particular in euro-denominated government bonds – than other schemes.Whereas Dutch schemes had the largest allocation to property and commodities, their investments in hedge funds, tactical asset allocation (TAA) and private equity were the lowest.CEM also found that Dutch schemes contracted out more active and passive asset management than schemes elsewhere.
Norwegian pension provider KLP has divested four companies over “unacceptable” risks of human rights violations but re-admitted internet company Yahoo nearly a decade after exclusion.As part of its twice-yearly review of holdings, the local authority pension provider said it decided to exclude South Korean steel-maker POSCO, its subsidiary Daewoo International Corporation and Singapore-listed supply chain manager Olam International.All three companies were excluded due to their use of cotton sourced from Uzbekistan, which the provider said increased the risk of its contributing to human rights and labour law violations.In a statement, it said: “The use of child labour to harvest cotton has long been widespread in Uzbekistan. “In response to international pressure, the country has reduced the scale of child labour but has done so by increasing the use of adult forced labour.”KLP said all three companies acknowledged they were aware of the risks of Uzbek cotton but gave no indication that they would change their sourcing.Jeanett Bergan, head of responsible investment at KLP Kapitalforvaltning, said the companies should seek to introduce systems that “uncover and prevent” child and forced labour within supply chains.“Where violations of human and labour rights have been identified, KLP expects companies to respond by implementing reasonable measures to stop such abuses from continuing,” she said.The provider also excluded Canadian agricultural retailer Agrium over its use of phosphates from Morocco, and announced that Yahoo would be re-admitted to its investment universe after a 2005 exclusion triggered by the company handing over data to the Chinese authorities that led to the arrest – and jailing – of a journalist.Of the decision to once again invest in Yahoo, Bergen said: “Yahoo admits the incident that formed the original grounds for exclusion was worthy of criticism, and has introduced a number of measures to strengthen user privacy.”She said KLP still felt there was a need to engage with the internet giant over freedom of expression but that the exclusion was no longer required.KLP was not the only Nordic investor with concerns over Yahoo’s behaviour, with the Swedish AP funds engaging with the company over the incident in China.The decision to divest the four companies comes weeks after the provider divested several dozen fossil fuel companies and re-allocated capital to renewable energy.
Timo Ritakallio, the pension provider’s new chief executive, noted that the shortfall would need to be addressed by investment returns in future, rather than increased contributions.While Ilmarinen’s long-term investment strategy foresees a reduction in fixed income in favour of both infrastructure and real estate, the fund nevertheless saw its bond and money market holdings increase to nearly 40% of assets, up by 1.1 percentage point year on year.The asset class returned 2.4% overall, with money market instrument returns at zero for the second year running.Notably, the provider saw its corporate credit portfolio decline by one-sixth over the course of 2014, citing less interest by companies to take on loans funded by pension providers due to Finland’s struggling economy.Having issued nearly €100m in new loans in 2013, the amount fell to €55.5m last year, while the overall loan portfolio shrank in size from close to €1.8bn to €1.5bn, a 17.6% drop.Ilmarinen also continued to reduce its exposure to domestic equity, with Finnish shares only accounting for 30.2% of all listed shares, a 3.4 percentage point drop.Its exposure to Japanese and emerging market stocks also reduced.However, its holdings in Chinese equity increased markedly compared with 2013, exceeding 5% of the overall equity portfolio, while exposure to European equities increased, approaching 40% of equity holdings.The rebalancing saw equities fall from being the best-returning overall asset class, gaining 10.9% last year compared with 20.9% in 2013.The return nevertheless compared favourably with the 4.9% growth of its property portfolio and the 6.8% gains from absolute return funds, which account for 40% of Ilmarinen’s €1.3bn portfolio of ‘other’ investments. The holdings, which also include commodities, returned 17.7%.Ritakallio, who was announced as president and chief executive last year, said the provider’s diversified investment strategy had “proven to be extremely successful”.Ilmarinen previously announced that FIM Group chief executive Mikko Mursula would succeed Ritakallio as CIO.Read about how Ilmarinen is using its absolute return portfolio to replicate hedge fund strategies in-house Ilmarinen boosted its exposure to China and reduced holdings in emerging markets and Japan last year, returning close to 7% over the course 2014.The increased exposure to China follows AP2’s intention to double the size of its equity mandate, after its existing portfolio returned 59% last year. The €34.2bn Finnish pensions mutual also said an increase in pensioners, stemming from baby-boomers working lives’ coming to an end, had seen it become cashflow negative.It reported a shortfall of €180m, despite contributions of €4.4bn last year.
As of last week, the rate dropped even further to 1%.“Since the introduction of QE, the cost of pensions has risen by 10%, or 1% of the salary on average,” Van Ek said.He warned that, in the coming decades, fixed income returns could structurally fall short of the interest rates that had been factored into liabilities.Mark van de Velde, senior client consultant at Aon Hewitt, noted that the initial effect of the interest-rate drop would be limited to approximately 2% for pension funds that apply a cushioned contribution for a 10-year period.He calculated an effect of 6-7% if contributions are cushioned and drawn from assumptions for returns.However, Van de Velde stressed that the predictions were based on the current UFR of 4.2% that must be used to discount liabilities.“If the Cabinet were to reduce the UFR as expected before 1 July, contributions must increase by an additional 5%,” he said.Towers Watson, meanwhile, underlined the contradiction that the new financial assessment framework (nFTK) dictates that pension funds must establish their premium policy before 1 July, but that the actual contribution must be drawn from market rates during the fourth quarter.Wichert Hoekert, senior consultant for retirement solutions, said: “This could lead to undesired effects if interest rates change after the social partners have agreed on a policy.”He suggested it would be more “practical” if the interest level at the moment of the policy decision could also be the criterion for the new contribution.Commenting on the developments, Jobert Koomans, executive board member of the €4bn pension fund for care insurers (SBZ), said its premium needed to be increased by 2 percentage points to 26% of the pensionable salary to achieve target accrual.The €43bn metal scheme PME, which fixed its contribution at 24.1% for the next five years, said it would draw on an equalisation fund to stabilise premiums.However, PME’s spokeswoman said the drop in interest rates had increased the chances that this financial reserve may turn out to be insufficient.The Pensions Federation said it was “very worried” about the low interest rates and that it feared “disastrous consequences” for pensions.In its opinion, Jetta Klijnsma, state secretary for Social Affairs, has underestimated the problem.However, a spokeswoman for the state secretary told IPE Klijnsma recognised the consequences of continually low interest rates, and that she was willing to discuss the issue with Dutch companies and unions.She added that the state secretary was also exploring options for easing investment restrictions for pension funds, as the Federation had called for earlier. Consultancies have warned that interest rates have fallen so far this year that Dutch pension funds may be forced to increase contributions or cut costs on pension arrangements.Dennis van Ek, an actuary at Mercer, estimated that pension funds would need to increase their premiums for 2016 by at least 10% to achieve their targets.As a consequence, defined benefit (DB) plans and collective defined contribution (DC) schemes that base their contributions on the market rate plus the ultimate forward rate (UFR) could see annual pensions accrual – usually 1.875% – fall by 0.2 percentage points, he said.Mercer noted that the 30-year swap rate had fallen from 1.5% to 1.2% at the time when the European Central Bank (ECB) launched its quantitative easing (QE) programme.
Talking to IPE in the wake of Chinese market volatility that saw the Shanghai Composite Index lose a quarter of its value and led to losses across global markets, Viherkenttä admitted that China was now the number one issue, supplanting a rate hike by the Fed.“It seems that the Fed [rate] increase was a bigger topic a some time ago, but now things are getting pretty nasty in China and in emerging markets, the potential US rate hikes starts to look like, maybe not a marginal matter, but still something of less relevance.”He also said that VER had sold its holdings in Chinese A shares before he took over as managing director as there were “symptoms of overheating”, but still retained exposure to H shares traded in Hong Kong.Asked where the fund would seek to grow exposure, Viherkenttä pointed towards alternatives, which currently account for 10.6% of its portfolio, a 2 percentage point increase over June 2014.“What we are doing all the time is taking an even closer look at alternatives,” he said. “But of course almost everyone is doing it these days, because both the stock market and the bond market are in such a difficult situation.“It’s not a free lunch just to go out there are reap high returns.”VER’s alternatives portfolio currently consists of indirect and direct private equity holdings , indirect real estate, and hedge finds.Its unlisted holdings performed the best in the first half of the year, returning 6.1%, followed by a 3.6% return from hedge funds.The fund’s fixed income holdings, which account for 49.5% of assets, returned 0.5% over the first six months of the year, down compared to both full-year results and the first six months of 2014. Finland’s Valtion Eläkerahasto (VER) is to place greater emphasis on alternatives despite “exceptionally vibrant” stock market growth helping it return 5.5% so far this year.The €18.3bn fund used to pre-finance the Finnish state pension said its equity holdings returned 13.3% over the first six months of the year, ahead of returns from alternatives or fixed income.Managing director Timo Viherkenttä, who was announced as successor to Timo Löyttyniemi in April, warned the “exceptionally vibrant” equity market is losing steam, but holdings in Europe and Japan had continued to perform.“It is advisable to prepare for continued fluctuations in the investment markets in the latter half of the year as well,” he said, citing uncertainty surrounding Chinese economic growth and a rate increase by the US Federal Reserve, expected later this year.
ERAFP, the €23.5bn French additional pension scheme for civil servants, is calling for tenders for up to some €5bn in euro-zone and European listed equity management in connection with mandates that are expiring next May.The pension fund is looking to award seven mandates; the mandates’ size is for between €250m and €1bn except for one, which is a small cap mandate for some €140m.Six of the seven mandates are for a “fundamental, non-benchmarked, SRI management” approach – four being in relation to euro-zone equities and the other two for European equities.All mandates require compliance with the scheme’s socially responsible investment (SRI) guidelines and will run for six years. ERAFP also has a €500m-€1bn mandate to award for the smart beta index-based management of a portfolio of euro-zone mid and large cap equities, and is using the Scientific Beta Eurozone Max Sharpe Ratio ERAFP SRI Carbon Efficient index, which was developed by the EDHEC Risk Institute’s ERI Scientific Beta.The new mandates being put out to tender effectively cover the entirety of ERAFP’s European and euro-zone equity portfolio, IPE understands, with some changes taking place.An ERAFP spokesperson told IPE that the pension scheme is shifting from benchmark to non-benchmark management in relation to six of the seven mandates.One of the mandates for the “fundamental, non-benchmarked, SRI management” of some €250m-€1bn in euro-zone mid and large cap equities now includes an equity risk management component.Further, according to the spokesperson, the mandate corresponding to the passive management against the SRI smart beta index includes a decarbonisation methodology. Amundi currently has this mandate, with the French asset manager having worked with ERAFP in 2014 to develop a methodology to decarbonise what was then a €750m equity portfolio under an indexed management mandate.Edram, Rothschild et Cie Gestion, and Tobam are the asset managers that currently have mandates for active, non-benchmarked SRI management of euro-zone mid and large caps.BNP Paribas Asset Management and AXA Investment Managers have active benchmarked SRI management mandates with ERAFP, with BNP Paribas also managing a passive mandate on a small cap SRI smart beta index.
The Dutch Federation of University Medical Centers confirmed that all eight Dutch academic hospitals supported Aartsen’s call.Aartsen acknowledged that tobacco companies can produce yields for investors.“But every year, 20,000 people die unnecessarily because of smoking,” he added. “The fact these deaths are happening is more important than the return on investment in tobacco.”Aartsen argued that it was a matter of social and governance responsibility for ABP to exclude tobacco.Other funds had already excluded tobacco investments, he added, including healthcare pension fund PFZW and sector pension funds for GPs and for medical specialists.ABP currently invests €1.5bn in tobacco-related assets, a spokesperson for the fund said. She pointed out that tobacco was legal in the Netherlands and regulated by the Dutch government.The pension fund said it screened tobacco companies for issues involving child labour or unethical marketing practices. It also said it was in dialogue with several stakeholder organisations.In addition, ABP was working on an “inclusion policy”, the spokesperson said. The next few years will see companies consciously chosen for the portfolio based on the criteria of return, risk, cost, sustainability, and accountability.University medical centres are currently employer members of ABP, although there have been attempts to transfer this sector to PFZW, which caters for regular hospital staff.A study by the Dutch Heart Foundation and the Association of Investors in Sustainable Development in March showed that more than two-thirds of pension funds didn’t have a policy in place for tobacco investments, compared to 10% of insurers.It suggested the difference was attributable to the fact that many insurers also sell healthcare policies and have adjusted their investment policies accordingly.The metalworkers pension scheme PME has excluded from its portfolio any companies that get more than 75% of their revenues from tobacco sales.The €22bn multi-sector pension fund PGB is working on a similar policy, following a survey suggesting that just 17% of its participants supported tobacco investments.PFZW ceased investing in cigarette manufacturers in 2013. Employees of the Netherlands’ university medical centres (UMC) have called for their pension fund, ABP, to stop investing in the tobacco industry.Jos Aartsen, chairman of the academic hospital UMC Groningen, spoke out during a conference entitled ‘Aiming for a smoke free health care sector’, organised by the Royal Dutch Medical Association earlier this week.Aartsen complained that employees of academic hospitals as participants in ABP were effectively obliged to invest in the tobacco industry.“I stand here on behalf of 70,000 employees of the eight UMCs. We are ashamed of these investments,” said Aartsen, quoted on the UMC Groningen website. “Investing in tobacco is not what we want.”
The largest union, FNV, has made freezing the retirement age at 66 conditional to its support for reform of the Netherlands’ pensions system.Until now, Wouter Koolmees, minister for social affairs, has refused to accommodate demands for a limited increase to the retirement age.According to FD’s report, the CPB expected that, at an AOW age of 70, the percentage of 69-year old men with a labour disability would not be higher than at present – 17% of 64-year olds are currently in such a position.However, the CPB also said that, without any health progress, more workers would drop out before they reached 70. In that case, the percentage of of 69-year olds with a labour disability could rise to roughly 26%, it said. Increasing the Netherlands’ retirement age for the state pension (AOW) is unlikely to lead to a significant rise in the number of workers with a disability, the country’s Bureau for Economic Policy Analysis (CPB) has suggested.Citing a recent study, financial daily newspaper FD said that the CPB expected a “limited” increase of disability support claimants in the wake of a retirement age increase “as people not only live longer, but also stay healthier for longer”.The CPB findings removed an important argument from parties opposing the increase of the AOW age to 67 and three months in 2022, with a further rise planned if life expectancy increases – as has already been decided by the Dutch government.Both employers and trade unions have opposed the gradual increase of the official retirement age, arguing that many workers – in particular those in physically hard jobs – can’t keep working for that long and so would boost the number of benefits claimants.
He also challenges the government’s view that the switch to DC does not call into question the legality of mandatory participation in a pension fund.About 80% of Dutch pension savers participate in a mandatory pension fund, which has to be a Dutch legal entity, van Meerten noted. In 1999, the European Court of Justice ruled that compulsory membership of industry-wide pension schemes was not contrary to European law.The third point van Meerten raises about the Dutch pensions reform plans is EU consumer protection, which he says “reached a new, high level of individual protection in recent years”.Current pension fund governance systems seem “outdated” with regard to expectations of a high degree of individual protection, he writes.“This is built on the assumption that pension funds execute DB only. Yet these governance structures are, strangely enough, not part of the reform.” The full opinion piece can be read here. For more on pensions in the Netherlands, see the full country report in the September magazine. The Dutch government’s planned pension reform could be deemed incompatible with European law in a number of respects, according to Dutch lawyer Hans van Meerten.“The plans of the government are really neither comforting nor convincing,” he writes in the September issue of IPE magazine.He raises three points in connection with the planned switch to a “collective yet individual” defined contribution (DC) system: conversion of existing pension rights vis-à-vis European property rights, compulsory participation in pension funds; and consumer protection.With regard to the first point, Van Meerten argues that the EU Charter of Fundamental Rights could be invoked directly against a pension fund in connection with the conversion of existing pension rights, while the government is being advised that this is possible under the European Convention on Human Rights.