ABB continues to set the trends
Switzerland is not famous for its radical thinking and anyone who challenges the status quo is going to stand out. So, when trailblazing ABB Vorsorge opened its doors to third party pension fund business at the beginning of the year, any hopes that it would go unnoticed were nothing short of naive.
The Sfr4bn (E2.5bn) pension fund - the largest of Swiss-Swedish multinational group ABB’s scheme’s worldwide - has traditionally been viewed as a trend setter in the Swiss market and this is a label the fund is very proud to wear. Its set of principles on which it operates range from the basic to the visionary, but each of them is carved in stone. What ABB Vorsorge brings to the table is something that many asset managers in Europe still haven’t quite figured out - a fixed identity.
ABB’s decision to set up Vorsorge to offer third party pension fund management services has proved a popular one. In the space of three months it has already secured the same number of clients - multinational pension fund clients to be precise. That a Swiss pension fund-cum-third party provider should have had such a successful market debut is not surprising if its clients view the alternatives on offer with the same degree of distaste as does the man they have put in charge of their investments.
Christoph Schenk who heads up ABB Vorsorge in Baden is evidently unimpressed by the prevailing investment culture in his home market, which he characterises as having “a mentality of do-or-die”.
“When you look at the Swiss market, it is more than just dull,” he complains. “It is dominated by banks and insurance companies and what you can get are so-called collective foundations. It’s boring. You give them the money, you get the plan and then you get perhaps 4% even when the markets do 12% or 15%.”
Schenk’s opinion on the lack of value available in the market is mirrored in Vorsorge’s investment strategy. ABB does not maintain its reputation of being the strongest indexer in Switzerland for no reason - the fund is almost 90% indexed. Schenk is unswerving in his criticism of active management in the current economic climate and defends the fund’s commitment to passive investment to the hilt. “Normally, active management destroys value,” he says simply. “You get higher index volatility, higher fees and you don’t get the outperformance.”
Vorsorge is constructed as an umbrella-type vehicle, set up as an investment foundation split into nine different asset classes and divided between 12 different asset managers. It manages a total of Sfr5bn, which is dominated by the assets of its largest client and its majority shareholder, ABB Switzerland. Currently the scheme’s assets break down to Sfr1.9bn in Swiss bonds, Sfr300m in global bonds, Sfr860m in Swiss real estate (partly run in-house), Sfr849m in Swiss equities, Sfr916m in global equities, Sfr158m emerging markets, Sfr200m in global and North American private equity, Sfr66m in Swiss money market funds (run in-house) and Sfr9m in Swiss mortgages.
ABB prides itself on picking the best talent and has essentially positioned itself as a manager of managers. It is under no illusions that it can run the money itself. “We are not good at managing money,” admits Schenk, “But what we are good at is finding the best managers.”
ABB Vorsorge knows where its talents lie and for this reason is not planning to incorporate ALM and performance measurement into the package - it is leaving that to the experts, though ABB will gladly help with the selection process. “We are not Frank Russell,” he says simply. “You have to concentrate on your core competence.” He admits that if Vorsorge put its mind to it, it could probably deliver both these services, but his reasoning for not doing so is simple. “We can’t do everything.” And that is the mistake he believes many asset managers make. “You cannot be good at everything, it is not possible.”
What it can do is offer other pension funds full access to its asset managers, custodian, administrators, accountants and consultants and pool clients assets alongside their own and manage the entire scheme on their behalf including paying out the pensions themselves. While ABB is offering the full service, Schenk suspects some plans will only utilise Vorsorge for specific functions, be it recordkeeping, accounting or for individual investment mandates. But this misses the whole point he feels. “You can get that anywhere in the market,” he says. “But to have it on a turn-key basis, dealt by one hand - this is new. To have an independent foundation which you control as a company, not which is controlled by the bank or the insurance company - that is the point.”
The economies of scale argument has been the selling point of the likes of General Motors and Philips into setting up third party operations to meet the ‘lack of resources’ problem faced by many small to mid sized schemes - offering their know how to give smaller funds those levels of manager diversification previously out of reach, while at the same time driving down the fees charged by the asset managers employed to run their own fund.
Economies of scale of course is more than just a selling point for ABB - if you are positioning yourself as an indexer then it is pretty essential.
“Reduced costs - that’s the idea,” says Schenk. “They should have the same benefits from a pension fund that ABB has - transparency, reduced costs and the performance in the end, that’s the idea.”
Transparency is the second key factor to bear in mind when considering ABB Vorsorge as a pension fund manager. The scheme believes in total transparency between itself and the managers it hires, but also between itself and ABB’s employees. ABB discloses all financial information to its members on the basis that this is their fundamental right. “Our members have to know everything, they are allowed to know everything.” It also keeps ABB proactive as an organisation. Most funds are too reactive, Schenk believes. Communication is key.
“They just pile up the reserves to an unknown amount, the employees don’t know how much reserves are held, how the distribution works, why they only get 4% and not 4.5%. Here we have a clear mechanism set up. In the end if you entrust us with the assets, members on their own can calculate returns, how much would go into the reserve, how much you would get and so on.”
He continues: “You have a right to know what is going on and you have to demand the best performance.”
These open lines of communication must be adhered to by the asset managers employed to run the pensions money as well, naturally, and ABB isn’t one to compromise should they get ideas of their own. “If they don’t want to be co-operative and disclose all the information that we want, then they’re out,” says Schenk.
But interestingly, this philosophy is not only reserved for its service providers - it also applies to the clients. For those pension funds that are not willing to give full transparency to their employees and expect ABB to just “pile up the reserves” and pay out the bare minimums on their behalf, says Schenk, their business is simply not welcome. “We would say to the client, ‘no we won’t do that’.”
While the Swiss investment foundation as a structure cannot be exported abroad, the overall philosophy can and ABB is well aware that more opportunities exist outside of Switzerland and it is equally aware that in the countries where an ABB pension fund exists, so can an ABB Vorsorge equivalent.
“Whether we would have an investment foundation as a shell, a mutual fund which is Luxembourg-based or whatever structure, it doesn’t matter -we have the people in place who can do the administration,” says Schenk. “So if there is a need for it on a global basis, we could do it, we could set up a structure and then pool those assets with the existing product.”
There is no definite plan as yet to put this idea into action as the Swiss team have sufficient business to keep them going for the time being. “We have lots of ambitions,” he says. “First, we want to have our foot in the market and then we will look abroad.”
ABB Vorsorge’s core ambition, however, takes innovation onto another level. ABB has a dream and it is contribution-free pensions. This future target is the reason in fact that Vorsorge exists and as with its approach to indexing and transparency goes to show, this isn’t something to be taken lightly. ABB have every intention of fulfilling this promise. “If we made enough money, we could contribute so much to the pension fund that they don’t need to collect contributions,” he explains. “You as an employee of ABB wouldnot have to pay a single Swiss franc contribution to the pension fund.”
The logic behind it is simple, he explains, a gradual lowering of contributions would apply to both sides, to the employer and employee, lessening personnel costs along the way, increasing the company’s competitive edge.