Co-operation is the way forward
For Joep Schouten, the chairman of Cordares, the new alliance is an opportunity to put more goods in the shop window: “Together we want to create a large shop, and offer clients all products we both can provide.”
The alliance will also enable Cordares and Mn Services to broaden the client base geographically, he says.
“We are aiming at the company funds’ market, initially within the Netherlands, but both of us have international ambitions. We are already looking for new markets abroad ,” says Schouten.
“I would really like our sector to expand cross border. If we don’t, I’m afraid that we will be overshadowed by countries like Luxembourg, Ireland, and even Belgium as being close to EU capital Brussels,” he says.
“Moreover, the Anglo-Saxon banks are increasingly developing themselves into fiduciary managers and asset managers. So far, they have been working with external actuarial and administrative companies, and haven’t been providing pensions. But that could change over time.”
Schouten says the Netherlands has an excellent reputation for this sort of work. “The Dutch sector has vision, power and a formidable track record. With combined assets of €1,000bn with pension funds and insurers, the average retirement provision for workers in
Holland is amongst the highest in the world.
“In addition, the international financial community has as much faith in Dutch asset management as in that of the Swiss and the Germans. So, if few countries can match the Dutch ability to deal with assets, we just can’t ignore our competitive advantage. Our combined expertise in managing and paying pensions could become an important export product of the Netherlands.”
At least one of Cordares’ current projects has an international dimension. It is currently developing an open collective defined contribution scheme for the new Alternative for Labour Union, the AVV, an organisation aimed mainly at freelancers and workers with temporary contracts. “It’s an innovative scheme,” Schouten says. “So far, mandatory pension schemes have been based on a contract between employers and workers. A voluntary scheme for the self-employed however is uncharted territory.
“The challenge for us is to create a scheme that will be recognised as a pension fund by the Minister of Social Affairs. It is a good way to connect with the DC schemes that are currently being introduced in many European countries.”
As part of its strategic growth plan, Cordares is deploying its IT department for the collection of drainage rates for the district water boards, or ‘waterschappen’. “We are good at designing automated systems for complex administrative processes, so we should make the most of it,” says Schouten.” We could even do the administration of social services, or companies’ administration of social security contributions.
“Our philosophy is to penetrate foreign markets where the legislation is being changed. We want to offer products which the national players probably can’t offer, and introduce better services,” he says.
“At the moment we are focusing on Italy, which is facing a reform of its pensions legislation. Since the state pension claims too much of the national funds, we think there is room for a second pillar. We could provide for regional schemes, industry-wide pension funds, company funds or individual applications.”
Cordares has much to offer in Italy, Schouten suggests. “We could assist with asset liability management at defined benefit constructions. We could offer fiduciary management, and returns based on an agreed risk profile. Moreover, we are excellent administrators. But in order to build-up the necessary trust, we want to start by offering consultancy services first.”
As a way of getting business moving, Cordares recently held a conference for the relevant Italian players.
Despite both companies’ international ambitions, there are no concrete plans for operating together within the wider EU, Schouten says. “Mn is more likely to become active within the UK, since it has shown enthusiasm for this market,” he says.
Cordares and Mn Services seem to be destined for each other.
Although the two companies abandoned initial plans for a merger two years ago, soon they started cooperating at IT level. And earlier this year, they decided to join forces at asset management, administration, pension fund board support and legal and actuarial support. The cooperation covers all Cordares’ and Mn’s main activities for company pension funds.
“Clients will basically be served by the department with the most expertise for the job within our two organisations,” says Schouten. “The only exception might be a large and specific project, which best could be carried out by one
No new commissions have resulted from the cooperation yet, he says. “But pension funds have shown a noticeable interest in the option of shopping in two stores.”
Cordares and Mn Services will work as a single unit in the future, Schouten says. “Two years ago the time wasn’t yet ripe for a merger, and it might still be too early. We mustn’t force a merger, everybody must feel happy about it, including our clients. But ultimately joining forces will be absolutely necessary, because of the increasing complexity of the sector, the economics of scale and the growing role of Europe. “I will do everything within my power to create such a pensions champion.”
For the time being, the two providers will have a ‘living-apart-together’ relationship. The are currently considering the practical aspects of the cooperation. “We
are comparing our mutual insurance and ‘levensloop’, or life course, products, for example,” Schouten says.
He sees the cooperation with Mn Services as part of an evolving pension fund management landscape. “The ideal situation for the Netherlands would be two or three large players in administration and asset management, which not only serve the domestic market, but are also active on the international market,” he says.
“I’m talking about competing, efficiently operating players with assets of at least €50bn. They could be even at the top at global level.”
At the beginning of the year, Cordares demonstrated its commitment to scaling-up by its merger with ASW, the €3.8bn manager of the pension fund for the building societies.
However, in Schouten’s opinion, speed is crucial. “The consolidation must happen within the next five years, otherwise we might loose the race. If we want to take the lead of the pack, we need to work hard for it. We are now ready for taking on the international banks and insurers. We have had the opportunity to orientate on all the new pensions legislation, and we have already absorbed the changes. We can now offer four extensive automated systems for pensions administration.”
Schouten expects that the differences between banks and insurers and providers like Cordares and Mn will narrow. This development, together with increased transparency, will encourage competition, he predicts. “And a benchmark will be beneficial for quality and professionalism within the pensions sector. The CEM classification is a good base.”
Consolidation of the 700 pension funds in the Netherlands is not necessary, he believes. “They can remain independent and stay in control, but we can carry out to work for them. We have already evolved into a financial services provider.”
Schouten looks forward to a pan-European pension system. “It should actually be one pension fund. A single scheme will make it much easier for both workers and employers to avoid administrative and bureaucratic problems, if they want to operate abroad.”
“I know that EU commissioner Charlie McCreevy is not enthusiastic about this idea, because the necessary fiscal harmonisation within the member countries is complicated. But within the current EU, with its free movement of goods, services and financial assets, pensions should also be allowed to cross borders easily.”
In Schouten’s opinion, a pan-European pension fund should also be mandatory for workers, as it applies to most of the Dutch employees. “This is one of the good things of the Dutch system”.
For Ruud Hagendijk, chairman and CEO of Mn Services, the alliance with Cordares is the logical outcome of an unsuccessful attempt to merge with Cordares at the end of 2003.
“Since the merger didn’t happen, we have kept in discussion with each other and co-operated where we could. We already have a shared IT service centre which is low-cost and high quality
“We are both acting on the same market, so we said the most sensible thing to do was to join forces and co-operate.”
The fast changing pensions scene has made co-operation between the two essential, says Hagendijk. “Five years ago, nothing was happening. Today, things are changing very quickly. We have a new Pensions Law. The supervisory authorities are getting closer
to the market. Customers are becoming more critical and more demanding.”
The driver for this change is demographics, he says. “Every country in Europe is facing an ageing problem where the number in the workforce will be much smaller than the number of retired people in the future.
“Governments are having to find solutions one way or another, and the Dutch government is no exception. The government does not want to have a lot of collective obligations in the future. So that’s one of the drivers for the government to change laws.”
All this is putting pressure on the smaller pension funds, he says. “The smaller pension funds don’t have the knowledge or the capacity to deal with these changes. So they have to do something.”
Sponsors, too, are under pressure. “Companies don’t want to be involved with pensions problems because they want to focus on their core business,” he says. “Yet these problems have to be resolved,
so there’s a much greater desire today that they be solved by external parties.”
Hagendijk says organisations like Mn Services and Cordares can help solve the main problems confronting Dutch and UK pension funds - principally, underfunding and balance sheet problems. “There are already a couple of solutions for that, but we are looking for the right solution, mostly on the cash side. It’s not an easy thing to do.”
Many companies are re-structuring the relationship between themselves and their pension funds, he says, in an attempt to remove the risks of their pension fund from their balance sheets. “What you are seeing in the UK and the Netherlands are situations where the sponsoring company wants to set the pension fund at arm’s length, or maybe make it autonomous. We are looking for financial solutions for that kind of situation.”
Hagendijk says the rationale for the alliance with Cordares was partly defensive. “We are both active in the same market so by joining forces we can gain more power in the market. Consolidation is taking place all around us, so why not in this industry?”
He also believes that new entity will be greater than the sum of its parts. “An alliance between two traditional parties can create something new - the best of both worlds. We believe that this should be a tactic for third parties.”
Bernard van de Ven, commercial director at Mn Services, says the aim of the alliance is to capitalise on the strength of both organisations:
“Our approach in the Netherlands, for Mn Services as well as for Cordares, is the sector pension fund approach - that is, big volumes, high efficiency and high operational excellence, things that needs lots of complexity in the business and in the administration of course.”
Van de Ven says consolidation of services with Cordares is the only way that Mn Services can ensure that it can remain a serious player in the outsourcing market.
“The Dutch complementary pension fund market is, of course, large in terms of assets. But the outsourcing market is worth €750m. Today there are around 20 companies operating in this market, and we think this market will be too small for 20 companies in the future.
“So if you can combine efforts you can gain a better position in the market.”
Van de Ven says the new alliance has some ambitious targets. “Because we think this market will consolidate we are aiming at a 10% share in the next three to five years. That means €50m to €60m in assets and around 60-70 pension funds.
“That’s a very high aim because most of the companies that are in the market now currently collect about five pension funds a year. We have to collect 15 to 20 if we are to make this business work. Of course we can’t say we will reach that target but we are certainly going for it.”
Targeted clients will be the smaller corporate pension funds in the Netherlands, he says.
“The smaller pension funds face the question - can they or can they not survive? Many of them are already choosing either to end their pension fund and move to an insurer, or join one of the mandatory sector pension funds. We think we need another approach to this particular sector of the pension fund industry.
“We are now seeking solutions for the problems of small company pension funds which need more flexibility, less complexity - different kinds of solutions for different kinds of schemes. For this purpose, the Cordares and Mn Services names will eventually be replaced by a new label,” says Van de Ven. “We need to have a separate brand. A separate brand and a name and a separate organisation is necessary because Cordares and Mn Services are currently both linked to big sector pension funds.
“This means there could be issues about priority. A small pension fund that joins an outsourcing organisation, which is also dealing with a very large pension fund is going to ask the question, if there are problems who gets priority?
“The amount of money a small pension fund would pay is so low that they would never get the priority of the largest clients. So that is one reason why we want a separate label for a separate organisation.”
The new name will have new buying power, he says. “The new operation with Cordares will enable us to buy the best things available in the market for the client. The concept we are working on is a market driven operation where we will buy in services like administration and asset management.
“We have a multi-manager approach so we are not only buying services from our own house but around the world. We can put all these things together for funds and achieve economies of scale and better use of resources.
“We can also offer smaller pension funds access to asset categories they cannot afford to access directly such as tactical overlay or hedge funds.”
The new alliance can offer pension funds a full spectrum of services, he says. “We can give them just unbundled services, or we can give them more a total management approach, some kind of fiduciary management arrangement that takes in pensions administration and asset management as well.”
The broad strategy of the Mn Services/Cordares alliance is to focus initially on Dutch pension schemes and then expand outwards into countries like the UK, Belgium and Germany, Van de Ven says.
“Our main market is still Dutch companies. They will prefer to do business with Dutch third parties because they have the necessary knowledge and experience of the Dutch situation.
“We are talking to clients and consultants in the UK to see where the opportunities are. We are also looking at Belgium where we have just finished the first phase of a study of the market.”
Germany is also an important prospect. “The German market is much larger than that of other countries, so we must be able to offer something there. However are approach there is to take slow, steady steps into the market, dealing with the consultants in the first instance.”