The Dutch government has passed law stipulating that the country's huge industry wide schemes be re-quired to undergo mandatory performance measurement tests. Should a scheme's results over five years fall below a stipulated level, employers will be free to arrange their scheme elsewhere. This follows criticisms made by the Labour Foundation, Stichting van de Arbeid (STAR) in 1995 that these schemes' investment performance, administration costs and quality of service was below the performance of others.
Following this, a working party in-cluding pension organisation representatives was set up and produced a report last November which recommended that the actual yield of a fund would be compared with the projected yield under a 'norm' portfolio over a five-year period.
The 'norm' portfolio would be de-termined by the fund each year in advance along with an explanation as to why this would lead to stable and low contributions for employer and employees". Where a fund's returns remained significantly below this norm yield for a five-year period, an employer could apply for an exemption from mandatory membership. The system has become operational from January 1 this year (see page 31), using funds' actual holdings as the yardstick.
In future years, funds will provide data on allocation and benchmarks to a special panel, which will review the performance, taking into account its costs, to see if the fund has under performed.
Eric Martins of the Industry-Wide Pensions Funds Association in The Hague welcomes the new law. "It will sharpen industry pension funds in their investment performance. It will also give an employer who is not satisfied about the performance the ability to go else where."
However, one Dutch investment manager has doubts as to how significant it will be in improving performance, rather he sees it leading to more defensive portfolios. "If your fund's performance is compared not against a universe of like investors, but against your own model portfolio, it is very un-likely that your relative performance will be really different from the model portfolio, especially over a period of five years." He fears that a more defensive investment policy will result in significant underperformance. "Employers will never get their dispensation to leave these schemes. So it is very un-likely that industry-wide schemes will fall apart as a result of this legislation.
A manager of an industry-wide scheme expressing his concerns, asks what action an underperfoming scheme manager is going to take after say two years' poor performance. There would be a move to ensure the benchmarks would be achievable and so leading to increased indexed management," he says.
p Figures just released by the Verzekeringskammer, which supervises pension funds, show that in 1996 industry-wide schemes return-ed 10.9% on their investments, while company pension funds had returns of 15.4%. Fennell Betson"