Dutch pension funds should follow the example of their Canadian counterparts by increasing investments in the real economy, the CIO of the €417bn asset manager APG has suggested.

In a keynote speech at the conference of Pensioen Pro, IPE’s sister publication, Eduard van Gelderen cited a recent McKinsey report showing Canada’s five largest schemes had returned between 9.6% and 12.3% over the past five years.

“By raising the allocation to infrastructure, for example, pension funds can expect a stable and inflation-linked cashflow from long-term contracts,” he said.

Van Gelderen also advocated investments in private equity and direct real estate.

He said pension funds should exploit their power as full asset-owners with long-term interests “and move up in the economic chain by generating returns at the expense of other economic players”.

He added: “By increasing direct investments, pension funds can improve their returns by a couple of percentage points.”

Van Gelderen also noted that Canadian schemes often gained exposure to infrastructure as partners of companies, or even through companies owned by pension funds.

“In a tendering process, we always lose out as a financial investor,” he said.

“Moreover, pension funds over there are willing to commit larger amounts, with investments of €1.5bn not uncommon.”

Again citing the McKinsey report, he said the five largest Canadian schemes’ combined allocation to infrastructure, private equity and direct real estate was 30-40%.

Further, the three asset classes account for up to 13%, 19% and 16% of schemes’ pensions assets, respectively.

Van Gelderen conceded, however, that the situations in Canada and the Netherlands were not entirely comparable, as many Canadian schemes conduct asset management in-house.

“In addition,” he said, “regulation is less dominant, and the Canadian supervisor allows reasonable freedom, as long as total return on investments is at least 4%.”

For Dutch pension funds, a similar approach to investment would require different kinds of expertise and attitudes, APG’s CIO said.

“We would no longer wait for what the markets offered but take the initiative ourselves and actively search for projects and structures in which we could participate,” he said. 

Van Gelderen also argued that following Canadian pension funds’ example in the Netherlands would require a culture change.

“Pension funds over here are apprehensive because of regulatory pressure,” he said.

“It’s hard to imagine a board member approving a €1.5bn investment without thoroughly considering the possible repercussions from the supervisor.”

Van Gelderen said the combined effect of high pension contributions, population ageing and indexation targets had put pressure on investment returns.

A pension fund with an indexation target of 2%, wishing to grant inflation compensation in arrears, would require an annual return of about 6.5%, he estimated.

He also lamented European financial regulation “dominated” by Germany and France, and of “limited benefit” to Dutch pension funds.