A changing world
Written by ING Investment Management
Fiduciary managers need to adapt to a rapidly evolving Dutch pensions landscape
Dutch regulators reacted strongly to the battering the pension industry’s funding ratios received during the financial crisis, setting in motion a series of reviews and reforms that will profoundly alter the pensions landscape in the Netherlands, and see a dramatic reduction in the number of small and medium-sized schemes. This transformation is presenting a challenge to fiduciary managers who need to be able to adapt their pension solutions offerings for a number of potential future outcomes.
“The name of the game is now clearly that you have to be able to service the larger organisations in a credible way across the board if required, as the smaller pension funds are rapidly disappearing and these were the traditional hunting grounds for the fiduciary managers. We repositioned ourselves two to three years ago as these developments didn’t come as a surprise and we knew that any manager has to offer top quality products and a real alpha producing investment engine, otherwise they would disappear themselves,” says Martin Nijkamp, the member of the management committee responsible for Implemented Clients Solutions (ICS) at ING Investment Management (ING IM).
Nijkamp points to the findings of research by the financial markets regulator, the AFM, which concluded smaller schemes were paying too high costs to investment managers - up to 2% of returns in some cases. With government bonds sometimes making up as much as 70% of these pension funds' portfolios and yields so low, the real investment returns can be zero or negative. The Dutch Central Bank has estimated that the growing pressures on smaller retirement providers could result in the number of pension funds in the Netherlands falling to as low as around 100, from the roughly 550 existing today.
“As an honest and open advisor, you have to say to the smaller schemes that they need to talk to an insurer, or a large occupational or sectoral pension fund, because they’re just not economically viable to service properly, particularly with all the additional demands that are now being placed on trustees. That can be a difficult conversation to have with a client, but if the price is unreasonable then the ultimate person suffering is the pension plan member,” he adds.
In common with other markets such as the UK, many retirement plans in the Netherlands are potentially shifting from DB to DC, but the process of adjusting to this transfer of risk from the fund to the individual has been further complicated by calls for a two-tier risk system within this. On one side, those requiring greater security would pay more or receive a lower pension and those willing to take on risk over their lifetime would not.
ING IM is leveraging its long DB experience to provide new DC products such as the “MyPension” platform targeted at the institutional market. The platform is a purely fund-based individualised online reporting and transactions system, similar to a target-date fund, but without the additional cost layer. Although the vast majority of individuals go into a predetermined life cycle solution, it is easy to adjust your personal asset allocation within the system. While ING IM is offering a plain vanilla bank-orientated DC solution through MyPension, it is possible to add insurance riders, such as disability benefits, via group insurer Nationale Nederlanden.
Another twist to the increasingly complicated Dutch pensions mix are proposals to offer inflation-linked pension plans, which is not standard practice as in the UK.
“Inflation-linking is still only an ambition at the moment, but we’ve already gone a long way down the road to prepare for it by having our risk exposure detailed in both real and nominal terms in the short and long-term. So we can make it explicitly clear to clients what their portfolio risks are relative to their real and nominal liabilities. That can be a very interesting discussion as you can decrease risk in the real world, but that might result in higher risks in the current nominal framework forced upon us by the Regulator,” explains Mark den Hollander, head of ICS at ING IM.
Den Hollander adds that a move towards pension portfolios denominated in real terms would also have fundamental implications for asset allocation strategies, particularly as the Dutch government doesn’t issue inflation-linked bonds in the small sovereign debt market in the Netherlands.
He says the big pension funds and fiduciary managers are already looking at more real return-type products and may ramp up their exposure to asset classes that have an inflation component such as infrastructure, real estate and commodities. This in turn has a further impact on portfolios as the relative illiquidity of some of these investments means positions have to be held for much longer periods - perhaps ten to 20 years.
As fiduciary managers adapt to the big changes under way in the Dutch pensions sector, they have also had to redefine their own roles in the market following the financial crisis.
“There was a fundamental difference in the way fiduciary management was perceived in its first incarnation in the Netherlands, which was laid bare by the crisis. This was particularly the case between the Anglo-Saxon managers who saw it as an ethical trust issue and the Dutch institutions who interpreted
it more legalistically in terms of preserving value,” Nijkamp says.
He adds that the Dutch Central Bank’s view is clearly within the former camp: there is no fiduciary management in the legal sense, as it is the trustees who remain responsible for a fund’s investments.
Den Hollander says that the new environment was creating a need for a “modular approach” where institutions, for example, split the roles of the coordinating manager and risk management, or just ask for specific services such as derivative overlay strategies or multi-manager frameworks. ING IM, he continues, was one of the first in the Netherlands to step away from a traditional “asset-only” approach to fiduciary management by adopting a more liability-driven perspective, looking at the right-hand side of the balance sheet and in depth at issues such as inflation and interest rate risks, specifically for affiliated ING insurance companies.
ING IM’s acquisition of Swiss-based specialist multi-manager firm Altis in November 2008, with its bottom-up holdings-based analysis, compared with many consultants’ returns-based focus, has strongly boosted the company’s risk management capabilities, both in the long-term and the crucial short-term - when things can go badly wrong.
“The key aspect of the short-term model”, he explains, “is that you can really pick up the way correlations are trending and when convergence is increasing. During the crisis there was a convergence across asset classes, notably in exotic areas such as credit derivatives. In order to deliver optimal balance sheet management, you need to combine the long-term risk framework with risk management aimed at the short term and not to forget the qualitative economic reasoning behind the investment strategies. That is exactly what we do for
Against this background, the proposal from the Regulator to separate the roles of risk and fiduciary management between different managers appears to be adding an unnecessary layer of complexity and costs, Den Hollander argues.
“I think the Regulator’s position is too black and white. Most solution providers or fiduciary managers are in the optimal position to manage the risks on the investments they make and have great tools to monitor and select investment managers. Those investment managers also have their own risk managers, so I’m just not convinced that we need to add a third layer to the picture. The schemes should make sure they develop enough countervailing power internally to control and monitor the activities of the solutions providers,” he concludes.
Written by ING Investment Management