THE HAGUE - Dutch plan sponsors are expected to put industrywide pension plans under greater scrutiny this year following the publication this month of medium-term performance scores.
This is the first year that employers are allowed to switch pension plans if their existing industrywide plan fails the new performance test. The test is designed to show members of industrywide pension plans how well their plans are performing in relation to their chosen benchmarks and to other industrywide pension plans.
But no plans failed the performance test this year, although one or two may be in danger of missing the target next year.
The e335 million ($291 million) Bedrijfspensioenfond voor de Agrarische en Voedselvoorzieningshandel, s'Gravenhage, is in the "critical zone," according to Joos Nijtmans, head of Financial Affairs at the Association of Industrywide Pension Plans, Rijswijk. The plan scored -1.21 points in its performance test.
The e2.3 billion Bedrijfspensioenfond voor het Schilders Afwerkings and Glaszetbedrijf, Rijswijk, scored the best result, with 2.45.
Heavyweight Dutch pension plans the e147.3 billion ABP, Heerlen, and e49 billion PGGM, Zeist, recorded performance test results of 0.73 and 0.78, respectively.
Employers sponsoring a plan scoring worse than -1.28 points in the performance test have the right to move to another scheme.
Membership in an industrywide plan is compulsory if a company does not provide its own pension plan. Industrywide plans account for around 60% of total Dutch pension assets.
It is expected that plans close to failing the test next year may decide to increase their use of passive management in order to perform in line with their selected benchmarks, said Ronald Nagel, head of institutional services for ABN AMRO Asset Management, Amsterdam.
Alternatively, failing plans might make greater use of specialist asset classes to improve overall investment returns, said Peter Budde, director of institutional clients at Amsterdam-based Kempen Capital Management, which specializes in active small-cap equities.
Since 1998, the Dutch government has required all industrywide pension plans to report their annual performance according to a standard calculation called the Z-score. The Z-score reflects how well each pension plan's specified portfolio for the year has performed against an index with a similar allocation of assets that is chosen by plan executives.
Annual Z-scores then are converted to a rolling five-year performance number called the Performance Test. The current performance test includes only data for the past three years. This was the first year the performance tests were published for all plans.
Erik Martens, newly appointed general manager at the Bedrijfspensionfond voor de Agrarische en Voedselvoorzieningshandel, attributed the plan's relative underperformance to its heavy bias toward growth stocks. He is reviewing the plan's asset strategy said he wants to invest in value stocks to give the plan a better mix of equities. An announcement is likely within the next month.
The plan is entirely externally managed in balanced mandates, but he would not name the money managers. Equities account for 20% of total assets, and the rest of the plan is invested in fixed income. He would not say if the plan would appoint specialist money managers.
Mr. Martens joined the fund April 1, following the retirement of Auke Roeleveld. Mr. Martens previously worked for Dutch insurer Interpolis, where he was responsible for relationships with pension plans.
No standard indexes
Roderick Munsters, executive director at PGGM, said his plan's showing reflected the inflexible nature of the Z-score calculation.
The plan invests a large portion of assets in private equity and real estate, for which there are no standard indexes. In order to calculate the Z-score, which measures how well a pension plan performs in relation to indexes, these investments are benchmarked to returns from fixed income plus one percentage point. But manufacturing an index for an asset class that doesn't have one can result in a mismatch, causing a potential distortion in the Z-score. If private equity and real estate don't perform as well as fixed income, those portfolios may not match the benchmark and the plan as a whole will post a weak Z-score, he said.
In 2001, for example, PGGM recorded an investment return of -23% on its private equity portfolio, while the fixed income index it was benchmarked to was up 7%.
Mr. Munsters echoes local consultants and money managers in criticizing the Z-score concept. He said it is inflexible, as it does not allow pension plan executives to make strategic changes to their selected portfolio strategies during the course of a year.
The test also discourages pension plans from investing in asset classes that may be illiquid and may not have benchmarks. "That's a bit of a silly move," he said but added that using the Z-scores was the law and all industrywide pension plans had to comply.
But he praised the concept of the test. "The basic goal of the Z-score is for pension plans to be transparent and for (plan sponsors) to be able to leave a scheme if the investment returns are poor," he said.
Roland van den Brink, chairman of the board of the e12.5 billion Bedrijfspensioenfonds voor de Metaalindustrie, Amsterdam, and a proponent of the Z-score, said the test made plan executives and sponsors more aware of the risks of active management, which he described as a "zero-sum game."
The Metal Industry fund scored 0.78 points in the performance test.