AMSTERDAM - The Netherlands' e600 billion ($650 billion) pensions industry is widely considered the benchmark for pension provision in Europe, but its star may be waning.
Some of the country's largest and most respected plans - such as the €135.5 billion Stichting Pensioenfond ABP, Heerlen, and the e11.7 billion Bedrijfstakpensioenfonds Metalektro (PME), Schiphol - are insufficiently funded by government standards and have had to implement recovery plans approved by the pension regulator.
To cope with the pressure of losses, more pension funds are in the process of abandoning balanced mandates, boosting their allocations to fixed income, diversifying their fixed-income holdings to include such vehicles as high-yield bonds, and hiring managers to actively manage the allocations.
Industry experts say large and small pension plans are under considerable pressure from:
* stricter funding and reserve requirements introduced late last year;
* a second year of negative investment returns; and
* poor performance by balanced managers.
Brink of changing
"Pension funds are on the brink of changing. We have not seen so many benchmark and manager changes yet, but after the investment results of 2002 are presented to the (plans') boards, we would expect to see some changes," said Robert Rijlaarsdam, general manager of The WM Co., Amsterdam.
Industry experts expect local pension plans to begin increasing their fixed-income allocations this year to improve their funding positions.
Most recent figures from WM show typical fixed-income allocations at 44% of total assets as of Dec. 30, 2001. That exposure is estimated to have increased to around 50% as of Dec. 30, 2002, although exact figures are not yet available.
Consultants say a number of plans are reluctant to abandon the equity markets despite poor returns. But they expect plan executives to begin diversifying their fixed-income portfolios and rummage in the high-yield bond markets for improved yields.
Over the next few months, PME will invest 10% of plan assets in non-investment-grade credits and emerging markets bonds to improve returns, according to Managing Director Roland Van Den Brink.
In September, the Dutch pension regulator Pensioen & Verzekeringskamer (PVK), Apeldoorn, introduced new solvency and funding rules (Pensions & Investments, Oct. 14, 2002).
The new rules require local pension plans to move to 105% funding by the end of this year and within the next two to eight years to build up reserves capable of absorbing a 40% fall in equity portfolios relative to the highest price of the past four years. The PVK has also put a cap of 3% on pension plans' equity risk premium assumptions.
Funded ratio declines
ABP, the plan for Dutch civil servants, announced last month it had a funded ratio of 103% as of Dec. 31, 2002, considerably below the 122% ratio as of Dec. 31, 2001 (see related story on page 12). PME has a funding level of 101%. Both plans submitted recovery plans to the PVK.
Local sources say it is a considerable embarrassment for the Dutch government to have its own employees' pension plan in funding difficulties.
The Dutch pension market is unhappy with the new reserve requirements. In mid-January, the Dutch Foundation for Corporate Pension Funds and the Association of Industrywide Pension Plans, both of The Hague, commissioned Ortec Consultants, Rotterdam, to assess the potential impact of the new rules.
Ortec found that the new reserve requirements could erode corporate profits by 16% because Dutch companies are required to increase premiums to their pension plans to meet the new requirements.
But this is not a good climate for raising pension premiums, said Angelien Kemna, CEO for Europe at ING Investment Management, The Hague.
She believes a shift from final-salary benefits to average-salary benefit payouts may go some way toward solving local pension plan funding difficulties.
"The solution for European pension plans lies in taking small steps. But we know that outcome will be a pension system that is less generous than it used to be," she added.
Average contributions paid into Dutch pension plans have climbed sharply over the last three years - to 18% in 2002 from 11.6% in 2000, according to recent research by WM. Average funding levels have fallen sharply, to around 105% from 151% in 2000, WM's Mr. Rijlaarsdam said.
Increased contributions
Nine out of 10 Dutch pension plans increased their contributions in 2002, according to research by an actuary who declined to be identified. And one in four pension plans has adjusted the investment policy to cope with lower returns and higher funding requirements.
Consultants and plan sponsors are concerned that the new reserve requirements will also push pension plans to overweight fixed income, a strategy some say will make it expensive for pension plans to meet their obligations over the long term.
Consultants say pension plans are increasingly abandoning their balanced mandates and appointing specialist money managers. Dominant local balanced managers such as ABN AMRO, The Hague; Robeco, Rotterdam; ING, The Hague; and Fortis Investment Management, Utrecht, have struggled to maintain performance over the last few years, said Mr. Rijlaarsdam of WM.
According to WM estimates, Dutch pension plans posted average investment returns of -9.3% for 2002. Returns for 2001 were -2.8%.
Active over balanced
Small and midsized pension plans are cutting up their balanced mandates and looking to manage fixed income actively in order to wring better returns out of their existing asset mixes, said Marc Van Heel, business development director for the Netherlands and Belgium at PIMCO Europe Ltd., Rotterdam.
Balanced managers have traditionally focused on equities to generate alpha, while bonds have been passively managed. But since the recent slump in equities, few balanced managers have been able to make the transition to effectively managing their fixed-income portfolios to generate returns. As a result, pension plans have started breaking up their balanced mandates and handing out global and eurozone fixed-income portfolios to specialist managers.
The lion's share of PIMCO's €2.7 billion in assets under management for clients in the Benelux region comes from Dutch clients, said Mr. Van Heel.
The firm has been increasingly winning mandates for global and eurozone fixed income. This compares to the late 1990s, when PIMCO was mainly appointed to manage highly specialized mandates such as emerging market debt by internally managed Dutch pension plans that lack the resources to run these asset classes themselves, he said.
