Pension funds and their providers seldom find themselves at the top of political and societal agendas. But in the Netherlands, they are firmly in the spotlight right now.
With the upcoming Dutch general elections in March and increased responsibilities set to land at providers' doors, firms such as APG Group are working hard to prepare for changes at the heart of their retirement system.
“Pensions has been brought forward as one of the most important items” in the upcoming election, said Eduard van Gelderen, chief investment officer at APG Group NV. “We are following politicians carefully to find out their way of thinking.”
Under the current system, participation is almost always mandatory when an employer offers a plan. These plans are often one-size-fits-all, and there is little flexibility when it comes to contributions and choice.
Much of the conversation at a political and societal level regards major changes to the existing collective plans, moving instead toward an individualized system.
“There is public anger about the (rigidity of the current) system: some changes will be made, but the big question is to what extent will it affect us? It is also possible where we get rid of collective schemes in a big-bang scenario ... divide the pie and give it to the individuals” to manage retirement savings themselves, said Mr. van Gelderen.
He said work is being done on methodologies of how this would work, for example by the Netherlands' Social Economic Council. That big-bang move would not be difficult to make, and “would solve a lot of things: the politicians get rid of a nasty problem; we won't have any solvency issues anymore; and corporates and other pension funds won't have to bother about liabilities because it (would all be) in the hands of the individuals.”
"Changes and more choice'
While APG executives do not think this big-bang scenario will happen, “there will be changes and more choice, so we need to be able to inform and support individuals in the funds in a much better way.” And those changes present a challenge for the €444 billion ($481.8 billion) APG. “For asset management specifically we might have to create new investment products on top of what we already do in the collective scheme. But that is a bit of a challenge because I don't want to compete in the market with the commercial asset managers ... on just equity or bond products; that doesn't make any sense for us,” said Mr. van Gelderen.
Any move toward individual plans is something APG executives are able to get ahead of because of advances in big data and technology. APG runs assets for a number of institutional clients, including the €381 billion Stichting Pensioenfonds ABP, Heerlen, Netherlands, one of the largest pension funds in the world, catering to government and education employees. In the corridors of APG's office in Amsterdam are large photographs of employee representatives, including a nurse from a teaching hospital and a water worker. They were put up a few years ago when Angelien Kemna, chief finance and risk officer, was chief investment officer.
They were put there for good reason: so everyone knows for whom they are working. Executives might be managing around €400 billion of assets, but Ms. Kemna would say those numbers are abstract. So in order to emphasize the people behind the numbers, and that APG is there “for the benefit of everyone in our funds, we have those photos.”
Given current discussions, the reminder is particularly important. “If we really move from collective to individual schemes we have to have a much better grip on who (participants) actually are, what is important to them, how they make decisions. That is where the new technology comes in, because we do have a lot of information about their behaviors, and we have data, and we can start to profile them. It is something we have never done.”
The abundance of information that comes with developments in data is something executives will need to approach with care. Mr. van Gelderen said traditionally there were three types of data: economic data from governmental bodies, company information and market data. “Now with big data, so much more is becoming available and we have to find a way that we are not going to choke on this data, but (rather) transform it” for managing assets.
There is a misconception that artificial intelligence and big data is “only for quants: it is definitely for the more traditional processes, as they get much more data available to them as well,” he said.
A returns gap
While operational changes might be stretching executives, meeting the return needs of APG's institutional clients remains Mr. van Gelderen's biggest challenge.
“For two years in a row I have been telling clients we have had a great run for a very long time; but looking forward don't expect us to generate again over 7%. Looking at the markets, and being totally agnostic about everything and just taking information from the markets, on a na´ve portfolio of 50% bonds and 50% equities you are probably going to generate 2.5%. But we know that for ABP we need 4.5%.”
Bringing more investment in-house has been a focus for APG executives in recent years, as they have moved to improve returns. But when it comes to more specialized allocations, such as those that are the “hype” at one point and not necessarily long term, Mr. van Gelderen is not keen to build internal teams. “Distressed debt is a good example. I'm never going to do that in-house, because you need to hire special people like lawyers. The opportunity is now, and in two years' time it may not be. If that happens then we can stop the external mandate.”
Executives at the firm have made no secret of their ambitions to increase holdings in illiquid and real assets. But “also in the public markets we are trying to find ways to squeeze higher returns. One of the ways of doing that is through new opportunities,” he said.
China is one opportunity. APG signed a letter of intent with Guangzhou-based E Fund Management to explore a long-term strategic alliance. “We really want to be ready when that market opens,” said Mr. van Gelderen. “China is such a huge market, the idea is we should do it ourselves. However, I don't think we have the knowledge base currently to do it in-house.”
“To get there, we are working with E Fund, and then in a few years time for sure we will have an internal team working on Chinese equities. It is moving very quickly; I'm worried that we are already late,” said Mr. van Gelderen.
APG already has a presence in Asia, monitoring developments from Hong Kong. The office has about 30 employees, with executives also working on real estate, infrastructure and equities investments. Mr. van Gelderen said the office has always been small, “but we decided two years ago it was crazy to have this cap on the number of employees there, so that office is for sure going to grow.”
Executives are considering the role the Hong Kong office and its other non-European office, in New York, can play in the firm's future.
New York houses the firm's expertise in investment in innovation, fixed-income and alternatives. Hedge fund manager New Holland Capital, which invests exclusively for APG, is based in New York's Chrysler Building. “At e20 billion that is a significant portfolio, and it means our fee structure is very competitive,” Mr. van Gelderen said. The firm identifies opportunities and then selects a manager to execute trades. “I really regret calling it a hedge fund, as it is really truly a different strategy.” Market beta is very low for these investments, and the alpha NHC adds “doesn't correlate with market betas. That is key for keeping the strategy in place,” he said.
This article originally appeared in the November 28, 2016 print issue as, "APG chief prepares to pivot with change in Netherlands".