In the fastchanging Dutch pensions environment, both pension funds and asset managers are having to rethink their game in order to keep their place in the industry. Keren Holland reports
As the move towards pension fund consolidation in the Netherlands gathers pace, players in the industry are realigning themselves to confirm their place in the everchanging environment.
Hans Benenga, head of Aberdeen's Netherlands office, said many asset managers had moved to fiduciary management, which meant those who had decided not to make the change, such as Aberdeen, were finding themselves competing for multi-manager mandates with their fiduciary manager clients.
He said: "Last year we won a very nice multi-asset mandate of around €150m but we were competing against fiduciary managers, and some of those fiduciary managers were also our clients.
"That's kind of strange that you are competing with your clients for the same mandates. That is something that is new."
Hessel van Beijma, head of pensions at BGI, said he had also noticed it was increasingly competing with fiduciary manager clients for the same business, but the assets still often flowed to BGI either directly or indirectly.
He said: "What has been happening in 2007 is clients are also becoming your competitor. We expect to see that more and more."
Benenga claimed there was still a place for firms that stayed firmly in the asset management space. He said: "It is very good to have competition, we are not afraid of that. "Every year more and more asset managers and investment banks will enter the Dutch market because it is a sophisticated market, a large market and an interesting market.
"I do not see fiduciary management as a big threat because there will always be room for players like Aberdeen.
"We are suppliers to fiduciary managers, we have good products and fiduciary management is not the preferred solution for every pension fund and this will never be the case."
One firm that has added fiduciary management to its offering in the past year is ING, through the acquisition of fiduciary manager AZL, which operates as a subsidiary of the company.
Arthur van der Wal, managing director and head of institutional clients at ING Investment Management, said: "We are the biggest active asset manager in the Netherlands but we have to fight for our market share and provide the best solutions for our clients.
"Institutional clients come to ING with a problem and they are looking for a solution. For some that may be asset management, for some it may be administration, for some it may be insurance.
"We saw a trend towards fiduciary management and that is why we acquired AZL. By doing that we can ensure our whole range of offerings is complete."
Van der Wal described the change in the market as a "blurring of frontiers". He said: "It's a trend that started a couple of years ago but has intensified in the last year. Asset managers are going into fiduciary management and everything in between. Whereas before they had clear roles, now it is mixing up."
He said the change had occurred as pension scheme clients faced increased workloads and costs as a result of the increasing regulations placed upon them.
He said: "Many clients have had to think, 'Can we continue to do things in the way we did them in the past?' That has led to a repositioning and asset managers have been coming up with solutions - the fiduciary model being the best example."
However, as the number of fiduciary managers operating in the Netherlands has exploded, questions about how much space remains for the new players setting up have been raised.
Beijma said he believed the move towards fiduciary management was starting to slow, which would make it increasingly difficult for players in the market.
He said: "My personal belief is that we have seen the majority of deals, although you still see more and more companies who are calling themselves fiduciary managers.
"It is going to be difficult for new fiduciary managers to build a big business."
Bart Heenk, managing director of the Benelux business for fiduciary manager SEI, agreed the space was getting crowded. But he said SEI, which currently has around €2bn under management in the Benelux, expected to grow further in the coming years. When SEI started in the Netherlands in 2004, it was one of a handful of fiduciary managers. Now there are around 30.
Heenk said: "The market for fiduciary management has taken off, which is why we have seen a lot more suppliers coming in.
"I think it is a good thing because it offers clients more choice. The bad news is it means margins have come under pressure somewhat."
Heenk said he believed the number of competitors would fall going forward. He said: "We saw a little bit of consolidation in 2007, but I expect to see more in 2008 and beyond. Even though the market is large, 30 competitors is not sustainable, there isn't enough money for everybody to make money out of this."
However, Christiaan Tromp, head of fiduciary management at Fortis Investments, said many pension funds in the Netherlands were still considering the fiduciary route. He explained that while the first generation of fiduciary managers had focused on asset management, pension funds were now demanding much more.
He said: "At the start they were focusing on the assets, which is important but is not the most important factor from the point of view of a pension fund board.
"Pension boards need to have a good understanding of their pension fund scheme and a good view about their liabilities.
"They also need to know how to tell the story to their stakeholders. That is how we see fiduciary management."
One company that chose the fiduciary management model for its pension fund last year was Atradius, which in December appointed Fortis.
Atradius had always outsourced its investments, administration and insurance because of its size, but decided a fiduciary manager could offer even more. Jack Sung, member of the Dutch pension board of Atradius, said pressure on Dutch pension funds in areas such as administration had increased following the introduction of the new Pensions Act in the Netherlands.
As part of the requirements, pension funds are required to set up more robust governance structures including establishing internal supervision and internal auditing. In addition, the law requires pension funds to provide clear explanations to their participants in a standardised annual statement on the status of their pension reserves and the indexation to inflation policy of pensions, in particular in the case of a conditional indexation scheme.
Sung said the increase of regulatory requirements was one reason to consider fiduciary management. He said: "If you are a big pension fund, you would have more capacity and ability to do everything in-house, from pension administration to the investment of pension assets.
However, if you are a smaller pension fund such as Stichting Pensioenfonds Atradius Nederland, it is more difficult to do all of these pension activities inhouse."
Sung said Atradius' Dutch pension fund had also considered whether it should continue to outsource its investment function to one asset manager. He said: "We now have a fiduciary manager who performs the investment fund selection process for a significant part of our portfolio, enabling the pension fund to benefit from best-in-class products. This is aimed at spreading our manager risk and optimising our investment structure."
With the new requirements, Sung said he expected to see more pen- sion funds moving to a fiduciary management model.
He said: "As the regulatory requirements become more complicated, the decision that small and mid-sized pension funds need to make is whether to (i) stick with the stand-alone model, (ii) find additional help by travelling the pension road together with a fiduciary partner, or (iii) consolidate by, for example, joining an industry-wide pension fund."
For those pension funds that have not chosen the fiduciary management route, consolidation has been another option that has come to the fore. Arnout Korteweg, director at Hewitt in Amsterdam, explained the Netherlands now had a very severe governance structure in place for its pension plans, which was having an impact on smaller schemes.
He said trustees had to be much more professional than they were in the past. "There is a rapid change in terms of the knowledge and expertise within those pension funds and pension funds that can't cope with all those changes, especially the smaller ones, may cease to exist," he said.
"Consolidation of pension funds in the Netherlands is really taking place. The bigger ones are becoming bigger, and the smaller ones are finding alternatives for doing their pension business. "We are seeing much more of a shift by pension funds which are moving over to sector pension funds or to insurance companies. "In the last year, insurance companies have done big business."
Rajish Sagoenie, actuary and executive director of actuarial services at Aon Consulting, explained pension boards were facing increased scrutiny from the regulator and had to take more care when executing their pension plans. He said it was a heavy burden for smaller pension schemes.
"Nowadays there are about 700 pension funds left, a few years ago we had 1100," he said. "I think there will be around another 100 going into liquidation, so we will only be left with about 600. But the quality of those pension funds and the decisions they make will be on a higher level - that is a good thing."
Anton Wouters, head of LDI and fiduciary management at ABN AMRO Asset Management, agreed pension governance was becoming a challenge for the smaller pension funds.
He said: "A lot of smaller pension funds are looking for opportunities for help in the situation they are facing, they can do that in several ways; they can join bigger clubs, outsource investments, or outsource everything. I think the smaller or mid-size funds have to make a choice on that.
"Do they have enough capabilities to do it all themselves, or do they have to outsource some or all of the things they have to do for the regulator?"
Seeking to guarantee long term growth
Pension funds in the Netherlands are increasingly looking for new investment opportunities to provide long term growth.
Karin Roeloffs, head of financial institutions & corporate clients Benelux at ABN AMRO Asset Management, said the financial situation of pension funds had improved over the past years and they had become more familiar with the Financial Assessment Framework (FTK) solvency rules.
Under FTK, pension funds need to be 105% funded and demonstrate a 97.5% probability of remaining above the minimum funded status.
Roeloffs said: "FTK has been in place for some time now and, due to market developments, coverage ratios have improved, which has made it possible for pension funds to look more at the long term situation, so there is more focus on alternative products and new investment opportunities.
"Pension funds are looking more at the amount of risk they are able to take and are more focused on where they want to take their risk. For some parts of the portfolio they are not willing to take any risk, but in others they could add value through hedge funds and private equity and we are seeing that interest increasing."
One example of a pension fund looking at alternative assets is ABP, which has introduced a new asset class called 'innovation' to encourage asset managers to look for new investment opportunities.
Henk Eggens, chief investment officer at AEGON Netherlands, said he had seen a big shift among pension funds. He said: "I think a trend this year will be more pension funds moving away from the traditional mix.
"The big pension funds already did that and now we see that the smaller and the mid-sized pension funds are moving in the same direction. There is a true demand for alpha, they need added value and they believe changing that mix and adding alternative asset classes gives them more alpha and a better risk return profile."
Hans Benenga, head of Aberdeen's Netherlands office, said pension funds were looking at more 'exotic' alternatives such as timber, catastrophe bonds and CO2 emission rights.
He said hedge funds and property continued to be popular, and more clients were now investing in commodities.
Arthur van der Wal, managing director, head of institutional clients at ING Investment Management, said current low returns meant there would be an ongoing search among institutional investors for absolute yield. He said: "In a low return environment you see more demand for guaranteed products. There is more absolute return business and more inflation linked solutions."
While pension funds were keen to ensure the best performance for their members, it was difficult in current market conditions, according to van der Wal.
He said: "For people who are retired, indexation is very important and to get indexation you need returns. "In this current low return environment, it is very difficult for pension funds to get the right results, so they are looking for different ways to get the best returns with considered risks. We will see more creative solutions in order to achieve the indexation."
Theo Kocken, chief executive of Cardano Group, said there had been a trend towards equity protection among pension funds to exclude extreme risks, as well as inflation linked contracts to cushion the strategic inflation risk component in the pension fund.
He said: "Pension funds searched for further diversification and market return in areas such as sustainable energy and infrastructure.
"Hedge funds didn't lose popularity despite the Amaranth and Bear Stearn disasters, but substitutes such as 130/30 funds gained some momentum.
"There is also a growing demand among pension funds to select alpha that seems sustainable in the long term, based on style consistency etc, making manager selection a more quantitative business than before."
Roel Thijssen, head of financial institutions and iShares at Barclays Global Investors (BGI), added there was increasing demand for asset managers who could offer both alpha and beta capabilities.
He claimed this was part of the reason behind the move by some asset managers to fiduciary management. He said: "We are a very good beta manager, we also have a strong track record in alpha, but you need to be very large as an asset manager to be able to offer both.
"I think a lot of asset managers in the Netherlands do not have the skill to offer various different alpha capabilities, as well as beta.
"Also, many of them have had a performance issue over the past few years and I think these asset managers also go the fiduciary route because they need to do something, from a strategic point of view, to protect their business." Globalp
Regulatory issues cloud cross-border pensions
Cross-border opportunities are expected to fuel future growth for pension providers in the Netherlands, but legislative barriers are yet to be overcome.
According to Aegon, demand from multinationals for crossborder pensions is set to grow, with benefits including improved governance and cost efficiencies. Cross-border opportunities are expected to fuel future growth for pension providers in the Netherlands, but legislative barriers are yet to be overcome.
According to Aegon, demand from multinationals for crossborder pensions is set to grow, with benefits including improved governance and cost efficiencies.
Frans W. van der Horst, managing director of AEGON Pension Network, said cross-border pensions were a growing opportunity in the marketplace.
He said as pressures on pension boards increased, so the incentive for companies to create a European or global pension port, bringing together their pension plans in various countries, grew.
Large multinational companies, such as Shell, have been able to do this themselves, but van der Horst said smaller firms were looking to outsource, which was why Aegon had created an over-arching pensions unit, bringing together all of its pension capabilities in both mature and emerging markets.
He said: "Pensions are going to be much more complex, with much higher disclosure requirements and stricter regulations.
"Companies, at a headquarters level, are realising they either have to establish, in each of the countries where they operate, big pensions units which know all about the local regulations, or they are going to have to outsource more in the area of pensions so they can focus on their core business."
Herman Kappelle, executive vice-president AEGON Adfis, said a debate on cross-border pensions was currently happening at government level. He said: "It is very difficult because if you look at the regulations in Holland they are very strict, compared to Belgium for example.
"If the government wants to create a vehicle to make it easier to go cross-border, but it uses the same supervisory rules as for local schemes, then schemes based in the Netherlands have a disadvantage compared to those in Belgium.
"But if it gives cross-border vehicles less strict supervisory rules than the local schemes, the local schemes can use that vehicle for the less strict supervisory rules.
"That is a tricky discussion that is going on at the moment."
Kappelle explained it was an issue that needed to be resolved because Belgium was actively lobbying Dutch pension funds to move to the country, where they could make cost savings as a result of the less stringent regulations.
He said: "For the position of the Netherlands as a leading pension country, this is a very big issue at the moment.
"The government is going to create this new cross-border vehicle, but what rules will be applicable to it are very important."
Arthur van der Wal, managing director, head of institutional clients at ING Investment Management, agreed international companies were increasingly seeking international solutions in their asset management or pension activities.
He said: "In asset management this is very achievable and we have some asset pooling arrangements in place for our clients, so we can pool the assets internationally.
"That is relatively easy but pooling pension liabilities is a real struggle. International companies are seeking more efficiency and scalability.
"Asset management is the easiest way to deal with that and we have solutions in place."
Van der Horst said one of the biggest challenges was that while companies were increasingly moving into an international framework, pension schemes were predominantly locally focused in terms of taxation and regulation.
He said: "Technically, this means there are stumbling blocks to creating international solutions. "But organisationally there are also stumbling blocks. This whole process is very new for the marketplace, so we still come across multinational companies that have no international pension organisation yet, or have just started looking at it. But this will change over time. There is no doubt we're at the start of a new trend."
Arnout Korteweg, director at Hewitt Associates, said big pension schemes in the Netherlands were looking for more solid grounds for growth, and currently they could do this through consolidation or by introducing pan-European solutions. He said there were two vehicles they could create, the first allowing them to provide pension arrangements in other countries, the other to do the administration for other pension funds, locally and abroad.
He said: "We are seeing that happening with the bigger pension funds, which are trying to find legal entities to allow them to service a broader domain.
"The growth in the Dutch market is virtually zero, so for real growth opportunities they have to go abroad.".
Hyperbolic discounting and political temptation: Why Brexit-fuelled AE reversal would be a 'monumental' mistake
The home secretary has suggested AE should be scrapped in the event of a no-deal Brexit. Darren Philp explains why this would be misguided
The trustees of the Kodak Pension Plan No.2 (KPP2) have said it will likely enter the Pension Protection Fund (PPF) in "due course" after reviewing the scheme's investment in Kodak Alaris.
A US company has completed a £285m pensioner bulk annuity for around 1,100 of UK members with Legal & General (L&G).
Former BHS chief Dominic Chappell has been accused of trying to rewrite history as he seeks to overturn a conviction for failing to hand over information to the regulator.