Dutch regulations seen as restrictive, costing pension plans returns

Some of the latest attempts by the Netherlands' pension regulator to prevent Dutch retirement funds from drifting into what it deems a high-risk zone are causing a backlash among plan executives, consultants and fiduciary managers.

“Pension funds have lost a lot of money” due to regulations, said Anton van Nunen, director of strategic pension management at fiduciary manager Syntrus Achmea, Utrecht. “If (the regulations) continue, pension funds can expect low returns in the foreseeable future, prohibiting decent pension levels,” added Mr. van Nunen, a pioneer in fiduciary management in the Netherlands.

De Nederlandsche Bank, the Dutch central bank that regulates work-based pension plans, has been tightening its grip on the nation's retirement funds since the 2008-2009 financial crisis left funding levels in tatters. But some of the latest actions — including a DNB order to reduce the gold exposure at the €300 million ($422.7 million) Stichting Pensioenfonds Vereenigde Glasfabrieken, Tilburg — has led pension fund executives and their advisers to question whether the regulator might have gone too far.

“Pension fund trustees now see the DNB as the ultimate client, not the pension fund beneficiaries,” said one consultant who spoke on the condition that he not be named. “That's fine as long as the interests of the beneficiaries and the regulators are one and the same in the long term, but this is not always the case.”

A board member of another pension fund who asked not to be identified added: “In everything they do, the first thing trustees are now asking themselves is how will the DNB react to that, not whether it is the right thing” for beneficiaries.

A request to speak to DNB pension supervision officials about stricter enforcement measures was declined. However, in an e-mailed response, DNB spokesman Kees Verhagen said, “In all circumstances, the supervisory culture must be characterized by an intrusive, skeptical and proactive approach.”

In an unprecedented court challenge, executives at the Vereenigde Glasfabrieken pension fund disagreed with the DNB order to lower its gold allocation to between 1% and 3%, which is in line with the average Dutch pension fund's 2.7% allocation to commodities. The fund had 13% invested in gold at the end of 2010. A Rotterdam court judge sided with the DNB on Feb. 8, but fund officials are planning to appeal the decision, according to information provided by the fund.

One manager who requested anonymity said the DNB's focus on comparing pension fund portfolios against peers rather than the fund's own unique goals might usher in an investment climate in which “to fail conventionally is better than to succeed unconventionally.”

The DNB has been taking a more confrontational stance against pensions funds to promote “a durable business model and a sound culture, supported by equitable governance,” according to Mr. Verhagen. During the financial crisis, the average Dutch plan's funding ratio fell to 92% in March 2009, compared with 144% at the end of 2007, according to data from the DNB. The average funding ratio has since risen to 107% at year-end 2010.

“The need for timely intervention calls for action,” according to Mr. Verhagen. “The effect of intervention will be carefully monitored. ... If the result is unsatisfactory, the DNB will use specific enforcement instruments. A new intervention department will ensure that this process is seen through.”

Early this year, the DNB launched a supervisory division to intervene in problematic cases and promote better internal risk management practices within pension funds. (The unit has been dubbed “the pensions SWAT team” by some industry sources.) The new division director is Femke de Vries, who was previously the DNB's head of pension fund supervision. She was replaced by Olaf Sleijpen on Jan. 1. Mr. Sleijpen is former head of institutional clients at money manager APG Group who previously worked at the DNB.

Heading in the other direction from the DNB to money manager is Eloy Lindeijer. The financial markets division director at the DNB will join PGGM Investments as the new chief of investment management on Sept. 1, pending DNB approval. Industry sources hailed the appointment as “a smart choice.” Mr. Lindeijer's insider knowledge of the DNB was not seen by sources as the main reason PGGM appointed him; nevertheless, his experience there will help the manager navigate an increasingly complex regulatory environment. PGGM officials did not respond to telephone and e-mail requests to speak about whether Mr. Lindeijer's link to the DNB was a key factor in his appointment.

APG and PGGM manage the two largest pension funds in the Netherlands, respectively, the €237 billion Stichting Pensioenfonds ABP, Heerlen, and the €99.5 billion Pensioenfonds Zorg en Welzijn, Zeist.

“In the aftermath of the financial crisis of 2008, many pension funds came under pressure as funding ratios fell. They couldn't deliver on the pension promises,” said Paul Boerboom, founder and managing director of independent consultant Avida International, Amsterdam. “As a result, the regulator has been increasing regulatory oversight of how pension funds are managing. ... Trustees are under more pressure to get their house in order, which I think is a good thing.”

Several sources point to three major flaws in the current Dutch pension regulations. For one, the emphasis on funding ratio forces pension fund trustees to be more concerned about short-term goals. Also, the use of a swap rate prescribed by the DNB is too conservative and discourages funds from taking risks, which is needed to obtain returns in the long-term. And lastly, the 105% pension funding level benchmark is “arbitrary at best,” Mr. van Nunen of Syntrus Achmea added.

According to other fund executives, the DNB is worsening an already difficult situation by venturing dangerously close to micromanaging pension funds.

One consultant, who spoke on the condition that he not be identified, said officials at executives of the €12 billion Stichting Pensioenfonds ING, The Hague, were told last year that the proportion of the fund managed by in-house money management subsidiary ING Investment Management was too high, which could result in “suboptimal asset management” for members, according to the consultant, who is familiar with the case. The plan's funding ratio was about 111% at the time, above the 105% legally required before it needs to submit a three-year recovery plan. Fund officials were also criticized for moving some strategies to active from passive. Chairman Peter de Bruijne could not be reached by press time for comment.

Separating risk management from asset management is another area of focus for the DNB. Under the Dutch fiduciary management model, risk management and asset management are often left in the same hands, according to the regulator. Separating the functions is encouraged; for example, in 2010, the DNB put pressure on the Amsterdam-based €24 billion Pensioenfonds van de Metalektro, or PME, to revamp its operations after the fund's solvency level dropped as low as 90% at year-end 2008 from about 135% a year earlier. The funding level has since improved to about 96% as of year-end 2010.

PME's investment portfolio still is managed by fiduciary manager Mn Services, but fund officials appointed an internal independent risk manager and director of asset management in an attempt to shift some of the responsibilities handled by Mn, according to sources familiar with the fund. John van Markwijk also was named new chief investment officer PME in October, a role that had essentially been outsourced to Mn after the fund's previous CIO Roland van den Brink moved to Mn in 2007. In addition, PME changed the corporate governance rules to require board members to meet more often.

PME spokeswoman Gerda Smits declined to comment for the story.

Avida's Mr. Boerboom said the “separation of strategic risk management and the management of the underlying portfolio” is happening at other funds, too.

The €4 billion Stichting Pensioenfonds UMV, Groningen, the €2.5 billion Ahold Pensioenfonds, Zaandam, and the €2.2 billion Stichting Pensioenfonds TNO, Rijswijk, all have taken steps to separate risk management from investment management. “This is the next generation in fiduciary management,” Mr. Boerboom added.

But Syntrus Achmea's Mr. van Nunen said while many pension funds have benefited from more emphasis on risk management, “risk management and asset management are two sides of the same coin.”

“The heart of asset management is managing risk; decent risk management is the heart of running a pension fund and returns will follow automatically,” he said. “Separating the two is not possible.”