ABP open season
Would you set up an ABP now if you were creating a public sector pension regime from scratch for the Netherlands? The simplicity of a single scheme and the economies of scale in investment and administration all call for it. The fact that the scheme covers employees in 14 levels of government, education and the military, together with knotty social politics, speak against.
ABP’s size (€351bn) also makes it something of a supertanker, unable to act nimbly in capital markets or to achieve a meaningful level of diversification in certain asset classes.
That size, and a 2.8m-strong membership, grants ABP a prominent place in Dutch public life. It also sets it up as an Aunt Sally for everyone from divestment lobby groups to disgruntled members writing to newspapers and journalists like Martin Pikaart, whose October 2015 book ‘Wanbeleid, Algemeen Burgerlijk’ presents a critical analysis of ABP’s investment policy over the years.
Even the regulator, De Nederlandsche Bank, has criticised the return assumptions in ABP’s recovery plan, announced last November. At 7%, the long-term assumed return on equities was at the upper bound of that permitted.
The negotiations around the reduction of ABP’s 2016 contribution from 19.6% to 17.8% late last year illustrate why the the stakes are so high. The reduction was intended to allow a public sector pay increase, but the subsequent partial reversal of the cut by 1% in mid-January cost government entities €245m. While that cut might not have been right for ABP in the long run, it did make some poltical sense.
A government report, completed last summer but only sent to Parliament early this year, sets out three ways to overcome the unwieldy nature of ABP: it could be split into three overarching schemes for education, central government, and regional and local government, or into 14 separate schemes, one each for the sector of government. A third option would be sub-sections within a unified ABP. The report received short shrift from most political parties.
Having one monolithic ABP means the scheme will probably always be something of a political football, which proponents of fund mergers in the UK local government sector and other places should note carefully.
There seems to be little motivation to reform ABP wholesale, at least ahead of the development of a new Dutch occupational pension system design, with individual accounts and a high level of risk sharing. The problem is that these reforms have themselves been long in the making and there is no guarantee that they will be successful. Meanwhile, it’s open season on ABP.