Spotlight onPME

PME, the industry-wide pension fund for the Dutch mechanical and electro-
technical engineering sector, manages the pensions for more than half a million people. Francesca Fabrizi meets Bram van Els, spokesman for the fund, to discuss the challenges the fund faces in this turbulent and evermore scrutinized marketplace

The Dutch mechanical and electrotechnical engineering industries are made up of more than 1,250 medium and large companies, from shipbuilding yards to chip machine manufacturers.

The PME(1) pension fund provides and manages the pensions of all those involved in these companies, to include approximately 1,250 employers; 150,000 employees; 150,000 pensioners; and 343,000 former members.

The fund manages approximately €20.5 billion and over the past ten years has achieved an average annual return of 9.4 per cent, which ranks it among the best performing pension funds in the Dutch marketplace(2).

But even with a fund this size and a strong track record, success is never a given and last year’s turbulence meant the fund didn’t perform as well as some of its peers3. Bram van Els, spokesman for the fund, explains: “Last year we weren’t the best performing pension fund in the Dutch market and this had to do with our interest rate hedging, but in the long term we are doing very well and this can be attributed to our keen investment policy and diverse asset mix (we diversify between both asset classes and between regions); our strong investment manager selection process; and last but not least the special projects we have undertaken.”

For example, PME has been investing in illiquid long term investments such as timber and life settlements for some time now. It was also one of the first funds in Holland to invest in commodities, on the basis that such alternatives give good though volatile returns and moreover because they have low correlation to traditional asset classes.

PME has also done relatively well in the equities space, amongst others because of its regional allocations in emerging markets; while in fixed income they were early adopters of high yield bonds.

But, stresses van Els, this tendency to diversify into more esoteric areas of investment does not mean PME is keen to take on too much risk: “We may be adventurous in picking our asset classes but this does not mean we are adventurous in taking risks – we are a mature fund and we have as many pensioner members as active members, so we cannot take on too much risk. Indeed in picking our alternative asset classes we succeed in minimising risk because these asset classes have low correlation and also because we hedge our interest rate risk which leaves us a lot of risk budget to use for alternative asset classes.”

Van Els has been with the PME for four years now and has seen both the fund and marketplace around him change dramatically. In its early years, PME’s asset management was carried out by Achmea Global Investors but before long the board decided to take a more independent approach and set up an office from which most of the asset management was done, with only mortgages and property remaining with Achmea. “We were also developing policy and manager selection in-house at that time so we started looking for the best managers to do the best job at the best price worldwide, That resulted in about 40 mandates worldwide, so we actually went from using just a few asset managers to about 40 in just a few years! Then in 2003 we really started investing in alternatives – commodities in that year – and after that came the others.”

In July 2007, PME announced it was appointing Mn Services as its fiduciary asset manager. At the time, the parties also entered into discussions on the appointment of Mn Services as PME’s pension administrator.

Van Els continues: “Our complete investment team went to Mn Services in July 2007 when the firm was appointed as our fiduciary manager. We also want to move the pension fund administration to Mn Services, and we are now looking for the best way to do this. And while this is going to be a very long and complicated process – in fact I don’t think it has ever even been done in Holland with a fund this size – it will simplify things for our participants and for employers in the sector.

The other pension fund for the Dutch metalworking sector – Pensioenfonds Metaal en Techniek (PMT) – is already administered by Mn Services and we think it would be good if both funds were managed by the same service provider, there being a lot of traffic between the two.”

But while the fund’s management structure may have changed considerably in recent years, one constant remains – its commitment to member service. “On the member service side we are doing some important projects mainly in relation to our online offerings”, says van Els. “We are developing very sophisticated online systems for both employers and employees to do all they ever wanted to do online and that includes their financial planning.

“The key here is to keep things as personal as possible, which includes offering individualised online information as well as continuing with our face to face meetings with the members – but also to keep things simple. Members don’t need to understand the technicalities of the pension fund but what it means for them.

“For example, every pension fund in Holland and probably worldwide wants to increase pension fund awareness among its members and I think it is a difficult task as pensions are boring and are far into the future; so you need to create pension fund awareness not on a general level but at the right moment – for example, if people change job, if they marry, if their partner dies, if they have children or they make a big career move – these are the times they should be pension aware and this is a real challenge.”

The other significant challenge on the member side is meeting their expectations in particular on the hot topic of Socially Responsible Investment (SRI).

“SRI was already a big issue in Holland, then the Zembla TV programme was aired last year when it was revealed that many
of the big pension funds were investing in companies that produced cluster bombs and the like, and the issue was really thrown into the public eye.”

PME had already been doing work in this area since 2001/2 with its first SRI mandates and the introduction of its SRI policy. “Then, at the end of 2006 we came to the conclusion that this policy needed to be updated and we presented a new sharper exclusion programme (which effectively excluded 19 companies which were producing controversial weapons) two months after Zembla was aired.”

At this time the pension fund board also made a decision to develop a PME specific engagement policy and a PME specific voting policy. “Next to that we already decided last year that we were going to engage in our timber investments to make them more sustainable; and we started investigations into how we could make our property investment more sustainable.”

In the coming weeks the board plans to announce the details of this new PME specific policy on engagement and voting which will include a set of leading principles against which all investments will be checked.

“These principles will be inspired by international/UN treaties on human rights, child labour, freedom of organisation and some environ-ment issues, and if a company doesn’t comply with these principles they will either be excluded or we will start engage-ment with them. For example if a company builds landmines it will be immediately excluded; but if
a company is producing products which are not controversial but the process is not compliant with our principles then we will start engagement with them. This will continue for three years and if after three years there is no change we will exclude them.”

There is no doubt the SRI issue will remain at the top of the agenda for Dutch pension funds in the coming years and, says van Els, it will also present huge challenges for asset managers in this space as standards are now very high in the Netherlands. “So if the big asset managers want to serve the Dutch market they will have to come up with the right solutions if they want to compete with the likes of PGGM and Mn Services – these companies owned by social partners understand what pension funds need especially in the ethical sense; and it has become more and more relevant for pension fund boards to include these issues.”

On a more general note, van Els believes the new FTK will continue to have an impact on the marketplace: “There are a number of developments in the Dutch market which are important for us as a pension fund such as the FTK – this has been in place for over a year now and it has been a rough year on the stock markets with sharp movements of interest rates, which has had a tremendous impact on funding ratios and so I don’t think the FTK debate is
over yet.

“Consolidation is also a big issue – just look at look at ABP and Cordares. ABP is now independent as a pension fund from its asset manager and service provider. PGGM also split as a pension fund and service provider. And with the new FTK taking its toll and the new pension law it will become harder and harder for the smaller pension funds to go it
alone so will see more and more consolidation in the coming years.”

(1) Bedrijfstakpensioenfonds voor de Metalektro (PME)
(2) The average of all Dutch pension funds (not including ABP and PGGM) in the same period of time was 8.3
per cent.
(3) In 2007 PME made a return of 5.5% and has a funding ratio of 135%