The story of how Dutch pensions funds are reacting to the new pensions legislation took a new twist when the €1bn De Eendragt pension fund, the fund for the paper and packaging industry, announced that it was converting to an insurance company.
There were two main reasons for the move. One was the need to conform to the new pensions law. De Eendragt manages the pension schemes of 16 companies as separate entities in different ‘compartments’. The new law will prohibit this.
The other was to ensure that the pension fund had a long term future. De Eendragt was a mature pension scheme, with 70% of its 10,000 members either deferred pensioners or pensioners. Converting to an insurance company would enable it to compete for schemes with more active membership.
The conversion follows the arrival of Philip Menco, as managing director and chief investment officer at De Eendragt in mid 2004. Menco has an impressive pedigree within the pension industry, which includes a period as head of strategic research at ABP.
A change in its legal structure was the only option for De Eendragt, Menco says. “De Eendragt was a very unusual pension fund. It was a corporate pension fund operating on behalf of 16 companies. The companies originally belonged to a large Dutch paper company, Van Gelder Papier. When this went bankrupt in 1981, the companies continued independently or were sold separately, mainly to foreign companies. Moreover, they were not able to pay for the large pool of non-active members that lost their jobs after the bankruptcy.
“As a result the companies did not constitute a single fiscal or financial entity. They all had their own set of rules, or pensions deals, within the pension fund.”
This created problems in terms of pensions regulation, he says. “Under normal circumstance, if the coverage rate in one of the member companies’ funds falls too low, the member companies are obliged to pay into this fund to guarantee its members the same level of indexation as the other funds.” Understandably, he says, the companies were unwilling to subsidise their competitors in this way.
On the other hand, the fund operated with a degree of solidarity, he says.
“The investment policy was totally shared and the pension premium was based on one set of rules depending on coverage rate. The higher the coverage rate the lower the premium, with a contributions holiday possible at over 150%.”
The fund therefore was something of an ugly duckling. In one respect, it did not conform to the model of an industry-wide pension scheme, while in others it did.
The supervisory authorities faced a choice in the early 1980s. They could either turn a blind eye, or they could close down De Eendragt, leaving the former employees of Van Gelder Papier without a pension scheme. They were forced to turn a blind eye and allow the fund to continue.

However, the new pension law, which comes into force on 1 January 2007 explicitly prohibits such a fund, says Menco. “The text of the law says that a historical tie is never a reason to continue this type of pension fund.”
The pensions regulator, the Dutch central bank (DNB), warned De Eendragt that once the law passed through parliament, the fund would have to change its method of operation. In particular, it would have to end the system of member companies operating in separate compartments.
Menco and his colleagues canvassed the opinions of the member companies. All wished to stay with De Eendragt. The question then was what structure would ensure that the pension scheme could continue, and even grow.
“We did our research and came to the conclusion that out of six alternatives a life insurance company would be the best solution,” he says. “The insurance option has an added advantage, because it made it possible to acquire new pension funds, to reinsure new pension funds.
“Since we had some 70% non-actives, the long term continuity of the pension fund was in danger. Over the next 20 or 30 years, the active part would shrink, leading to a pension fund with 90% or 95% non active members.
“So we were looking for a new, active membership to join the pension funds and to bring it to a more balanced situation of 50% active and 50% non-active. That is not possible as a pension foundation, or at least as a corporate pension fund, but it is possible as an insurance company.”
De Eendragt has already added two new companies to its membership. One is part of Clondalkin, an Irish paper company. The other is PaperlinX, an Australian company that acquired the wholesale activities of the Dutch paper and packaging company Burhmann in 2003. As a result of the acquisition the 900 people working for the division had to leave the Buhrmann pension fund and either look for another pension fund or start one themselves.
“After discussions with several existing insurance companies and they came in contact with De Eendragt, and immediately understood that De Eendragt offered them large benefits compared to the commercial insurance companies,” says Menco
Although De Eendragt had not, at that stage, converted to a life insurance company, the DNB allowed the new companies to join in advance of authorisation, and they became members on 1 January 2006.
The companies have provided a transfusion of new blood for De Eendragt, says Menco. “PaperlinX is a large addition, and together the two companies add some 35% to our active portfolio. So that was a very important acquisition.”
The aim is to grow to about €3bn assets under management, and to increase the number of actives to 50% of the total, says Menco. But there are constraints that will limit the rate of growth.
“The bottleneck is equity. We are owned by the foundation that was previously the pension fund. That has now been converted into a holding company of the shares of the life insurance company, and it is not possible to issue new shares or expand the equity portion.
“So we are somewhat limited by the regulations and by the fact that we will try to maintain a high solvency ratio. We probably need five to 10 years to achieve the €3bn.”
De Eendragt will look for new business outside the paper and packaging business, says Menco “We would prefer to be less dependent on this sector. A lot of people are leaving companies in the paper sector due to restructuring, automation and cost saving. So in terms of people it’s clearly a declining business.
“And if the paper industry encounters serious problems we also run the risk of losing a lot of actives over a short period.”
Could De Eendragt point the way for Dutch industry-wide pension funds to reinvigorate themselves? Menco is doubtful. Few pension funds could match the depth and breadth of service De Eendragt provides, he says: “What we offer is full service, a total package, with our own administration and our own investment process.”
De Eendragt’s unusual modus operandi also gives it an advantage when looking for new business, he suggests. “Our administration is already equipped to handle more than one company because historically we have serviced a group of companies.
“Most pension funds don’t have these sort of services, so they won’t be able to compete for new business with the regular life insurance companies. If they have to build all these services and tools from scratch, it would be a very time and money consuming business.”
The odds are, he suggests, that De Eendragt’s bold move into the insurance sector will be unlikely to be repeated by other pension funds in the near future.