The Dutch central bank wants pension funds to invest in alternatives with eyes wide open.
To that end, De Nederlandsche Bank — which regulates Dutch occupational pension funds — is considering a program, initially involving about 10 pension funds, in which funds complete a self-assessment of their alternatives portfolio, focusing on private equity and hedge funds.
The longer-term plan would then be to roll this out to the rest of the industry — for all pension funds with relevant alternatives portfolio, according to information provided by the DNB.
The regulator's planned pilot program follows a 12-page letter in June 2012 to provide all pension funds with general guidance and to promote the development of good practices for alternatives portfolios — among the first regulatory agencies worldwide to do so with such scale and detail.
The proposal asks pension funds to consider four areas: investment policy; selection and assessment procedures; monitoring; and governance.
“Smaller pension funds are already stretched as it is, and many can't afford to dedicate any more resources to their governance budget in order to invest in alternatives. Some are considering moving out of alternatives altogether in order to avoid differences with the regulator,” said Jelle Beenen, Amsterdam-based head of investment consulting in the Benelux region at Mercer.
“Larger funds will probably increase their governance budget because they want to continue adding alternatives,” Mr. Beenen said. However, even among larger funds, some are “simplifying their investment portfolios” to add transparency, as encouraged by the DNB, he added.
“We expect pension funds to be in control of their (alternatives) portfolio,” according to a statement from the DNB. “They need to be prudent in terms of how they invest at a very high level. We're much more explicit in terms of the level of awareness that pension funds should have with regards to the key risk drivers around the portfolio. ... If they outsource, they still need to exercise control.”
Within the e917 billion ($1.2 trillion) Dutch pensions market, the average allocation to private equity is about 4.5% of total assets, according to Dec. 31 data provided by the DNB. The average allocation to hedge funds is about 2.9%.