As the Netherland's biggest pension fund looks to follow PGGM in splitting its administration and asset management from its pension fund, Keren Holland talks to ABP director Olaf Sleijpen
Olaf Sleijpen: What the board of trustees has decided is to basically split ABP into the ABP pension fund and a separate company. So the current organisation, which services the pension fund in terms of pension administration and asset management, will become a separate private company, which is owned completely by the pension fund but at the same time will also have the opportunity to serve other clients. ABP is doing this, and PGGM has done the same. To avoid unfair competition, the company cannot have the same name as the pension fund, so our board of trustees has said the name ABP is linked to the pension fund and the company will get another name - which is something we are still working on. Cordares is the pension executioner mainly of the pension fund for the building and housing industries and, from a strategic point of view, we felt it would be good to start a cooperation with them because we stand for the same strategy. The big advantage is strategic and also in the sense that Cordares already has quite some experience in the market where our experience is limited. You could also think of all kinds of synergy effects that will arise and of course in the end it is beneficial for participants of both sides, so we are pretty sure both organisations are going to gain from this. But we are not talking about a merger between ABP and the pension funds served by Cordares; we are talking about cooperation between the service company that is owned by ABP and that is basically doing asset management, pensions administration, those sorts of things, and the service company that serves Cordares. It is not a merger of pension funds. The ABP pension fund basically remains as it is. One of the reasons this separation was decided upon was because of Dutch and European legislation. In the Netherlands, we have a system whereby if you work for a company, you are automatically insured with the pension fund - you do not have a choice. We believe this is necessary to provide a good collective pension. But you could argue that all these pension funds have an advantage in the sense they have participants for free so to speak, they don't have to be involved in any marketing effort whatsoever. A number of pension funds also have other companies doing other businesses, such as subsidiaries involved in insurance activities. European legislation says this is not possible, a pension fund can own that company, but cannot be involved in activities other than providing pensions. By making this split we are a market party - there is a level playing field now.
Keren Holland: Early last year, ABP outlined its Strategic Investment Plan for 2007-09. What have been the benefits of this shift?
Olaf Sleijpen: There are a number of features of the strategic investment plan and one is (…) a shift from public liquid markets to more private illiquid markets, for instance, asset classes such as private equity and hedge funds. Given the fact we are a pension fund and have a long term investment horizon, this gives us the opportunity to benefit from the socalled "illiquidity premium" that you have in these types of investments and, secondly, it makes you less susceptible to market volatility. In addition, we targeted to increase our investments in Asia and we have introduced a new asset class called "innovation", which covers all types of investment opportunities that eventually meet our aim to provide an indexed pension. We are talking about shifts that are of course relatively contained - we are not talking about a huge sell-off of listed assets. In terms of whether it has paid off, if you look at these private and illiquid assets, these asset classes have performed rather well in 2007. Private equity had a return of almost 30%, while hedge funds gave a return of over 14%.
Keren Holland: How has the financial health of ABP improved as a result of these changes?
Olaf Sleijpen: 2007 was a good year, we were able to give our participants full indexation. That is our aim, not only to give participants a nominal pension but also to index that pension. We were also able to give back the indexation that was cut the previous three years. In relation to our funding ratio, even with the indexation that we paid, we were still looking at an increase of almost 7% compared to the same time last year. 2007 ended with a healthy funding ratio of 140.3%. This is the result of two factors; our assets have grown 3.8% because of our positive investment return last year, and the liabilities have decreased 8.5% because they are marked to market and the long term interest rate has increased compared to where it was the end of last year.
Keren Holland: What rate of return does the fund target annually and how is this calculated?
Olaf Sleijpen: We are a long term investor, so we have to look at the targets we use from the medium to longer term perspective. We base that on our ALM study and the ambition that we want to index our pensions completely. To make that happen we need a return target in the medium term of about 7% and that is also our benchmark, so to speak. The average long term return since 1993 amounts to approximately 8% above our target.
Keren Holland: What are your main concerns from a risk management point of view?
Olaf Sleijpen: The main concern at the moment is inflation. In particular, for a pension fund which has the ambition to give full indexation to participants, high inflation is a big risk and the inflationary prospects are not that good.
Keren Holland: How is the fund investing to protect against inflation?
Olaf Sleijpen: It's looking for strategies that give you a return that has a high correlation with inflation. Infrastructure is a very good example, it is an asset class we introduced in the previous Strategic Investment Plan and it is typically an asset class where you get a return that is linked to inflation. Part of the background to the "innovation" asset class is that there may also be completely new things you cannot cover in the traditional asset classes, but which still have return features that are very positive from the point of view of a pension fund, but which you cannot measure upon usual benchmarks. One of the problems with asset managers is they are appraised against benchmarks and these benchmarks are usually traditional. If you want to do something innovative, which nobody is doing, the incentives for the asset manager to include these investment opportunities in the investment portfolio are not very high. If you have an asset class which gives you that opportunity, it becomes easier for asset managers to look at completely new avenues that until that time nobody was looking at.
Keren Holland: How are ABP's environmental, social and governance (ESG) commitments reflected in the portfolio?
Olaf Sleijpen: Our aim is to eventually screen all our investments against these ESG factors because we firmly believe that investing according to these factors pays off. Of course, we are not talking about a change overnight, so as a first step, we have started to look at two equity portfolios to introduce these ESG factors. To do that, we have also set up a team of seven people who are actually working on this, monitoring our investments, visiting companies etc. We are working with companies like Governance Metrics and Innovest, amongst others, which are doing research in this area and rate companies on, respectively, corporate governance and the environmental and social factors.
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