Building funds designed to fit
Across Europe more and more pension funds find they are having to choose investment funds not for themselves, but for their members. No matter how wedded they are to their traditional defined benefit (DB) approach, the pressures are on to offer supplementary plans, usually on a defined contribution (DC) basis.
But just how well equipped are pension trustees and boards to do this? Not particularly well in the view of Dutch group FundPartners (FP), set up to provide guidance to pension funds and other providers of pension products in this increasingly crucial area.
“We have looked at DC developments in the US and the UK and one of our conclusions is that it is not a sufficient solution to offer traditional fund products, thinking that more choice is better,” says Jeroen Tielman chief executive of FP. Such an approach considers DC scheme members almost as investment professionals. “People are not automatically interested in the investment business.”
Or take the case in the Netherlands, where pension funds tend to go to asset managers for funds and advice. “Often they end up allowing the asset managers choose the funds they want to provide to the scheme,” says Tielman, who believes that going along with such ready made-solutions does not produce the best results for participants.
FP was set up in 2000 by Tielman and a group of other professionals from the funds industry in the Netherlands, keen to spread the message about proper product design and choice. “We are in the business of building investment products.”
Its team of specialists is based in the picturesque town of Laren, not far from Zeist, where PGGM, the second biggest of the Dutch industry-wide funds, has its HQ. The significance of this is that the pension fund is not only a founding shareholder, but also a user of FP’s services, when putting together its award winning DC plan Pension Extra Plan for its members.
Tielman describes FP’s role simply as “product architects and engineers”. “For individual pensions products, there is considerable scope for innovation, but also a set of challenges in dealing with individual participants rather than collectively with a group. So a product, such as an investment fund for a DC plan, should not be defined by how the investments are done and how the asset allocation is set up, but more in terms of what the product does for the individual.”
It then becomes a question first of looking at what the end user’s understands: “What are the criteria an individual would apply in buying a pension product, one that they could understand.” This is particularly the case where there is going to be no advisory function involved, which is very costly to provide.
The second aspect is to organise the communication and interaction with scheme participants and all “the back end” aspects of product delivery. “You must make pension products accessible, make it easy for people to understand them, to make adjustments and to manage their pensions assets.”
Pension funds in the Netherlands are now having to look at developing their own product range, he maintains. This is what PGGM did with FP’s help “We were asked to assist in the process they started when developing their additional products. To offer individual products is really something very different for pension funds, which have only provided DB arrangements.”
FP’s contribution was to focus on the aspects particularly related to developing individual pension (DC) products in this process, he says. “In defining the product, PGGM took a sensible first step of developing two products that were in line with their current investment philosophy, a balanced fund in line with the total portfolio of the fund, and a cash related fund. This means that an extensive advisory is not required, which was a wise first step.”
FP’s role was to unbundled the different aspects that were needed and create a platform that PGGM can use to develop further products. “Where we also helped was in areas like project management and process design.”
Now more pension funds are looking to offer their own individual plans. “So they have to decide how these are to be offered, in order to meet the concerns their members will have.” FP can help them understand and interpret those concerns and translate them into product solutions.
The firm is independent of any of any product manufacturer such as an asset manager, custodian, insurer, or fund administration group. Its aim is to bundle the different product elements such as portfolio management and administration, and to bring them together into specific investment product solutions.
FP is looking to spread its activities outside the Netherlands, but very carefully. “The solutions we offer are very scaleable to pension funds elsewhere,” Tielman says. “At present, we intend to be quite surgical as to who we approach – those who are ready to innovate and take the necessary steps.”
An strong signal came with the appointment of Karel Stroobants, former chief of the Brussels-based VKG CPM pension fund, to FP’s advisory board. “He will be guiding us in strategy as far the pension marketplace is concerned. But, in addition to his vision for the European pension industry, he has a very entrepreneurial spirit, which is quite a unique combination in the pension industry.”
It client base is wider than pension funds, though pensions is a primary focus. “We design products also for banks, private banks, insurance companies, independent financial advisers, and those with a retail client base.” Their role is distinct from the investment consultants, especially as more of these are becoming involved in multi-manager arrangements, says Tielman. “We do not have any heritage, pre-existing agendas or conflicts of interests.”