THE HAGUE, The Netherlands -- New Dutch performance standards for industrywide pension funds likely will lead to greater risk controls and more structured investment approaches, including increased indexation.
Under new rules adopted April 24, Holland's industrywide pension funds will have to meet customized benchmarks, or run the risk of participating employers shifting to another pension fund.
Experts believe industrywide funds will alter their investment strategy to minimize risk away from the new normalized benchmarks. Industrywide schemes consistently have underperformed Dutch corporate funds, largely because the multiemployer funds have lower equity allocations and less tolerance for volatility in returns. While a corporation can boost contributions following a bad year, industrywide funds cannot unilaterally raise payments by employers.
The change also comes at a time of consolidation within the industry. Last year, mutual fund provider Robeco Group, Rotterdam, acquired Groningen-based Beon, while Zeist-based Achmea recently merged with PVF Nederland NV, Amsterdam.
The standards are the first of their kind in the world, and are designed to open the industrywide funds to greater competition.
Holland's 80 industrywide funds had 438 billion guilders ($220 billion) in assets as of Dec. 31, 1996, the latest available data.
Participation in industrywide schemes is mandatory in Holland. Until now, employers were wedded to their plans unless they were big enough to maintain their own. The new rules are expected to introduce greater levels of professionalism in investment and management of the industrywide funds.
A REAL BOTTOM LINE
From here on in, an industrywide scheme "has to be run as a real business, with a real bottom line," said Roland van den Brink, manager, policy and information, Stichting Bedrifjspensioenfonds voor de Metaalnijverheid, Rijswijk, the $14 billion pension fund for Metalworking Pipe, Mechanical and Automotive Trades.
Mr. van den Brink, who served on a panel that designed the rules, said the standards reflect the importance of pension assets to the Dutch economy. Dutch pension assets equal 140% of gross domestic product as opposed to 85% in the United States, he explained. Maximizing investment performance will enhance the global competitiveness of Dutch employers, he said. He believes the standards will influence Dutch corporate funds and could be adopted across Europe or globally.
Several key issues affecting Dutch funds have not been decided. It's unknown whether an employer who leaves a poorly performing fund can transfer assets to cover previously accrued liabilities for active workers, or whether those assets will remain in the original fund. (Assets and liabilities for current retirees would remain with the original fund.) Under previous rules, the employer would be stuck with the fund. Under the new rules, it could switch to another fund -- not necessarily one covering its industry.
It also has not been determined which regulatory body will oversee implementation. Any oversight body will have to decide if employers could leave a plan and to evaluate whether pension funds have picked appropriate benchmarks.
Rein van Dam, director of the pensions department at the Apeldoorn-based Verzekeringskamer, which regulates pension funds and insurance companies, said his agency monitors the solvency of pension funds but does not want to be involved in deciding whether employers can leave their existing pension funds. He prefers that responsibility be handed to a separate panel.
Following the report of an industry task force in November, the Ministry of Social Affairs published the new rules April 24.
PASSING THE TEST
The rules require each fund to develop its own policy benchmark, based on an asset/liability study. If a fund fails to perform within a prescribed range of its customized benchmark over a five-year period -- roughly one percentage point -- employers will be able to switch to other providers. Initially, the test will cover the three-year period starting Jan. 1, 1998, but will be stretched to a five-year period by the end of 2002.
In the first year, a fund's actual holdings at the beginning of the year will be used as a proxy for strategic policy weights. Thereafter, each fund will set policy weights and benchmarks at the start of each year.
The new test moves funds away from a peer group benchmark to a benchmark set against their own liability structure. In addition, the test compares performance, on an after-cost basis, with the policy benchmark, so high management costs will harm performance.
Dutch funds are unlikely to fail the test because they will focus their attention on their policy benchmark, and not as much on the risk of individual asset classes, explained Jane Ambachtsheer, a director of Hall/CEM.
Johan Cras, a director of Frank Russell Co., Amsterdam, said the standards would lead to greater risk controls and a more structured investment approach.
Some observers note some Dutch industrywide pension managers already have been tightening their investment structures, in anticipation of the rules.