A safe harbour
Nina Röhrbein spoke with Cees Blokzijl, director of pensions at Vopak Pension Fund, about the interaction between the fund and its fiduciary manager
The largest European port, that of Rotterdam in the Netherlands, distinguishes itself from its counterparts not just through its sheer size but also by what travels through it.
The harbour functions as a global transit point for the transport of petrochemical industry goods and other cargo, which is why the name of bulk liquids storage facility provider Royal Vopak is closely connected with it.
Headquartered in Rotterdam and listed on the Amsterdam Stock Exchange, Vopak operates in 31 countries worldwide, employing an international workforce of more than 5,900 people.
The company offers its Dutch employees and their dependants a hybrid pension scheme with defined benefit (DB) up to a salary of €51,152 and defined contribution (DC) for the part of the salary that exceeds this amount.
At present, contributions are paid into the DC part for around 900 of the 1,357 active participants.
The hybrid scheme was set up in 1998 at a time when involving participants in their pension scheme was highly valued. The DC part ensures this involvement, while at the same time temporarily - until retirement - limiting the exposure for the employer.
In accordance with a financial agreement between the pension fund and the company, the employer contributes a total premium, which can amount to a maximum of 30% of the total salary, depending on the financial position of the pension fund. For new participants, an employee contribution was implemented some years ago. This means that these employees now contribute 5% of their pensionable salary.
At present, overall contributions equal 30% of the total salary, of which 1-2% is paid in by the employees and the remainder by the employer.
At retirement, the DC account is used to buy an annuity with the pension fund, so that any investment and longevity risks move from the participants back to the pension fund.
Overall, the pension scheme has been set up to be as flexible as legally possible. There is flexibility, for example, with the retirement date - a ‘high-low' construction - in other words, a higher pension during the early years of retirement followed by a lower pension during the later years, and exchanging survivor pension for old age pension.
"Our overall strategy is to ensure our pension promises, taking account of the interests of all our stakeholders and to regularly increase these pension promises as far as possible in order to keep them inflation-proofed," says Cees Blokzijl, director of pensions at Vopak.
"This objective has recently been confirmed by our trustees. It is why the pension fund was set up and what we will probably be judged on in the long term."
And its future as an independent pension fund in a consolidating environment seems safe for now.
Because Vopak's competitive landscape is fragmented, the pension fund has few opportunities to consolidate with other pension funds to start with.
"At the end of 2011, the trustees had a strategic meeting and came to the conclusion that they would keep the pension fund as long as possible going forward," says Blokzijl.
"The employer confirmed its interest in the upkeep of the pension fund with an additional, voluntary €50m contribution in December, despite the pension fund having sufficient recovery capabilities."
Vopak Pension Fund manages all its assets externally via a fiduciary management agreement with BlackRock. It only uses the Vopak pension department to co-ordinate its outsourced activities and control the pension administration and trustee support.
The trustees make all the decisions in the pension fund but ensure there is countervailing power with BlackRock through an investment committee. Besides Blokzijl, the scheme's investment committee consists of three external investment advisers.
"Important processes are shared between the board of trustees, the board of participants and the employer," says Blokzijl. "Members of the board of participants also attend trustee meetings. One major challenge ahead of us is finding full-time employees or pensioners who are willing to become trustees and able to meet the new trustee requirements. This could drive us towards external expert trustees in the future."
Prior to the appointment of a fiduciary manager at the end of 2004, one section of the pension fund's DB part was insured with Dutch insurer Nationale Nederlanden, while the other part was insured through an investment portfolio with outsourced mandates.
Today, the only investments that are managed in-house are two illiquid private loans that are due to expire in the near future.
As part of the manager-selection process, BlackRock shortlists a number of managers for the portfolio in question. These managers are analysed and a recommendation is made for the most suitable manager. The analysis and recommendation are then shared with the investment committee of the pension fund. If the committee supports the manager recommendation it is passed to the trustees for confirmation of the selection.
But before the trustees confirm the choice, an external asset consultant seeks an opinion on the manager.
The pension fund's assets are currently divided across 14 portfolios. But the €713m DB and €77m DC portfolios are invested separately.
The DB part's asset allocation is currently based on a strategy comprising 30% equities and 70% fixed income.
"The large part invested in fixed income derives from the fact that our pension fund is relatively mature with regard to its members," says Blokzijl. "Over 70% of our liabilities relate to former participants and pensioners."
But the defensive asset allocation is also a result of the pension fund's underfunded position in recent years.
In 2008, the fixed income/equity split was still 60/40 in favour of fixed income. But as pressure on its financial position grew in the wake of the financial crisis, the pension fund reduced its equity allocation to 30%, although it has room to manoeuvre it back to 40%.
"From the beginning, a large credit portfolio was part of our investments," says Blokzijl. "But over the years we have made changes to the long bond portfolio. We have only maintained our exposure to AAA-rated countries and divested from Portugal, Italy, Ireland, Greece and Spain. The resulting capital was partly moved to emerging market bonds."
The majority of the pension fund's fixed income portfolio, around 35%, is now allocated to corporate bonds. Long government bonds make up 24%, while 7% is invested in emerging market bonds. The remainder of the fixed income portfolio consists of private loans and cash.
Approximately 10% of the overall portfolio is allocated to European equities. US equities and Asia-Pacific including Japan make up 7% and 4% respectively. After increasing substantially over the past two years, emerging market equities now total 7%.
In addition to fixed income and equities, the pension fund holds a real estate allocation of 3%.
The overwhelming majority of Vopak Pension Fund's investments are active. Only parts of the long bond portfolio and the exposure to Asia-Pacific including Japan have been filled with passive mandates.
In its search for higher returns and more diversification, Vopak Pension Fund also began to invest in high yield and private equity in 2012.
"Because we have a highly liquid portfolio we can look to illiquid portfolios such as private equity," says Blokzijl. "High yield, on the other hand, has merely been an extension of our fixed income portfolio. Again we are just taking a little more risk in the expectation of higher returns."
The pension fund is unlikely to increase its high yield exposure in the near future. However, the current 1% allocation to private equity is just the start, as Vopak Pension Fund eyes a 3% target for the asset class over the coming years.
At the end of 2011, the pension fund's funding ratio stood at 106%. This had increased to around 110% at the end of April, easing the pressure from the regulator.
The fund mainly makes use of asset liability management (ALM) studies to validate its strategic asset allocation. It undertakes limited ALM studies on an annual basis and extended ones every three years. The next extended one is due in 2013-14.
"ALM studies help us get a feeling for the possible future of the pension fund, given the strategic asset allocation and guidelines in place," says Blokzijl. "In addition, stress scenarios have given us an idea of the possible range of outcomes in the future. ALM studies are also used to compare outcomes between the old and new agreement when negotiating a new financial agreement with the company."
The DC assets are invested via ABN AMRO Pension Services in four investment funds whose characteristics were determined by the board of trustees in collaboration with financial consultancy Ortec, namely two BNP Paribas Asset Managment funds, a BlackRock fund and a Fidelity fund.
The DC portfolio operates a lifecycle approach, which means that until age 45, a member's contributions are invested in the BlackRock and Fidelity equity fund. Then, the fixed income part is gradually increased until age 60 with a move to long-term fixed income funds. After that, the member will have an 80% exposure to fixed income and a 20% allocation to equities.
One of the reasons the pension fund chose BlackRock as its fiduciary manager in 2009 was its risk management capabilities in terms of knowledge, experience, instruments and reporting.
"Over the last three years they have shown that their risk management capabilities are not only good in writing but also in practice," says Blokzijl.
All relevant risk reporting takes place on a monthly basis. Although all essential risk management is fully outsourced, additional risk management is available through the online reporting of the pension fund's custodian, its investment committee and its asset consultant. The co-ordination of the risk management lies with the pension department.
The pension fund's long-term return target for the total portfolio equals the interest rate plus inflation. Over the past 10 years, the annualised return amounted to 3.5%, and to 2.2% over the past five years.