Dutch funds gird for fight to fend off alternative investment curbs

THE HAGUE, Netherlands — Dutch pension funds are fighting proposed government restrictions on their alternative investment allocations, proposals that will be discussed at an April 7 parliamentary hearing.

The funds — including the €150 billion ($182.7 billion) Stichting Pensioenfonds ABP, Heerlen, and the €53 billion Pensioenfonds PGGM, Zeist — are against the government's proposed 20% cap on pension funds' combined real estate, private equity and venture capital investments.

Pension funds and industry groups see the restriction as an affront to the country's prudent man rule and a step backward from the European Commission's pension fund directive.

Mark Rutte, state secretary for social affairs and employment, called for the restrictions in January, saying he was concerned that pension funds could be taking on too much risk and that alternatives allocations higher than 20% of assets make the funds entrepreneurs rather than investors.

Parliament will discuss the arguments against the restrictions at its April 7 hearing. The government may vote on this issue in the next few months, although there is no formal timetable, according to Sabine Jimkes, a spokeswoman for the Ministry of Social Affairs in the Dutch Parliament. The proposals would be included in a new pension law that is to be implemented by September 2005.

The Hague-based Vereniging van Bedrijfstakpensioenfondsen, or VB — the Dutch Association of Industrywide Pension Funds, which represents group pension plans covering more than 75% of Dutch participants — does not believe the government has the right to set a limit on assets, said Peter Borgdorff, director. The restrictions are aimed at investments managed by pension funds' alternatives asset management subsidiaries, not those managed by pension funds internally, he explained. The VB's position is that asset management is a core function of pension funds, along with collecting money from employers and distributing it to pensioners, he said, and therefore the government's proposals violate the EC directive forbidding quantitative restrictions on investment.

The government's intention is to protect participants, but the outcome will be that pension funds' returns on their investments would be lowered, and pensions will become more expensive, he said.

The European Commission cannot comment on any piece of draft national legislation, said Jonathan Todd, an EC spokesman.

The proposed restrictions have a more immediate impact on larger pension funds, as the smaller ones would not have the capital to invest substantially in alternative investments, Mr. Borgdorff said.

VB officials contend that pension funds are well-diversified and therefore do not require any restrictions. They agree that the industry regulator should only be able to examine asset allocations after they have been set, not before, said Mr. Borgdorff.

The government wants 100% security and that is impossible for pension funds, he added.

ABP officials are conducting their own lobbying efforts. Real estate and alternative investments are necessary for the fund's risk-return profile, alpha and diversification, said Rene Maatman, chief counsel for ABP Investments. These investments are critical in keeping the defined benefit system affordable because of the extra return they generate, which holds down the premiums, he added. ABP had 19% of total assets allocated to alternative investments at the end of 2003.

The April 7 meeting will be the first time ABP officials are lobbying Parliament, although it has had discussions with the Staatsen committee — the government commission advocating the restrictions — and with the Ministry of Social Affairs. ABP officials argue the government's desire for restrictions do not comply with the European Union pension directive, Mr. Maatman said, and he thinks ABP has a strong case, although he said it's too early to speculate on the final outcome.

Alfred Kool, spokesman for PGGM, said the restrictions would have a negative effect on returns. The pension fund is heavily invested in alternatives: roughly 13% of total assets are allocated to real estate; 4% to commodities; and 6% to 7% to private equity, Mr. Kool said. PGGM officials, who have communicated with government officials about the proposals, are confident that a reasonable compromise will be reached, he said.

Officials at the €14 billion, Amsterdam-based Bedrijfstakpensioenfonds voor de Metalelektro, the pension fund for metal workers, has also been active in the fight. They joined with the Stichting van de Arbeid, the Joint Industrial Labor Council, to advise the government on the Staatsen commission recommendation, said Bram van Els, spokesman for the metal workers' fund, who said he believes the changes they've suggested to the government will be followed. Their argument: that pension funds' real estate and alternatives investments should not be regulated if they are its core business, said Mr. van Els. PME has 10% of total assets in real estate and 5% in alternative investments.

Also supporting the VB's lobbying efforts is Theo Jeurissen, director of asset management for the €20.3 billion Pensioenfonds voor Metaal en Techniek, the Hague. Mr. Jeurissen said the government should take into account that some pension funds' core investments are alternatives. The fund has 10% to 12% of total assets allocated to alternative investments.

Dutch corporate pension funds also oppose the restrictions. The Hague-based Stichting Voor Ondernemingspensioenfondsen, or OPF, which represents corporate pension funds, is lobbying against the provisions, said Jeroen Steenvoorden, director.

Returns will suffer if companies aren't allowed to be entrepreneurial in real estate investments, said Mr. Steenvoorden. OPF is concerning itself with restrictions on real estate, but also is worried about funds retaining the freedom to invest as they choose, without having to ask permission from the government.

Mr. Steenvoorden said Parliament is listening to OPF's concerns, although he couldn't speculate on what will ultimately be decided.