Fiduciary management continues to be popular. Clients are exercising tighter control than ever and the emphasis lies on the strengthening of expertise, risk management and liability-driven investing, writes Mariska van der Westen
At a glance
• Classic all-in fiduciary mandates are giving way to modular solutions with sub-mandates.
• Providers’ organisational culture and risk management play a key role, according to a Pensioen Pro survey.
• Access to specialist expertise is thought to outweigh the extra cost over pure passive strategies.
After a quiet period, in which pension funds concentrated on changing legislation and the new financial assessment framework (FTK), the asset management market has regained momentum. The number of fiduciary mandates is also increasing. Part of this relates to churn, but there is also new business. This is confirmed in the ninth annual fiduciary management study of our sister publication Pensioen Pro: the use of fiduciary solutions has increased by seven percentage points and there is nearly as large an increase in the pipeline.
What is striking is that the classic model of the complete solution is giving way to modular structures in which several sub mandates are combined. A notable example of this is the fiduciary mandate granted by the closed ING Pension Fund. The fund, which manages €29bn, engaged two fiduciary managers – AXA Investment Managers and BlackRock – to manage the bulk of the assets. Each will manage half of the matching portfolio. At €20bn, this is one of the largest mandates ever granted in the Netherlands.
Both asset managers receive the same instructions, but can fulfil them as they see fit. They do not consult each other. “By dividing our matching portfolio into two equal mandates, both parties are comparable,” says Wim van Iersel, investment director at the ING Pension Fund. “Combining the best ideas of both managers helps us to design an even more robust investment policy in the present low-interest environment. It keeps all the parties on their toes.”
“Combining the best ideas of both managers helps us to design an even more robust investment policy”
Wim van Iersel
The ING mandate is typical of trends in the Dutch market. It relates expressly to a matching portfolio, symptomatic of the importance of liability-driven investing (LDI). Moreover, risk management plays a central role. The pension fund keeps control of the reins by working with sub mandates instead of a single fiduciary.
“The ING Pension Fund is concerned with risk and aims to achieve a certain level of interest and inflation coverage,” according to van Iersel. “To this end, the pension fund maintains control over the process and coordinates actions between AXA and BlackRock. In addition, both managers are intensively monitored,” he adds.
“Outsourcing is driven by the wish to cope better with the increasing complexity and the associated hazards of managing interest and inflation risk,” according to Monique Donders, head of institutional client business for BlackRock Nederland. She says the expertise and experience of BlackRock in the field of risk management have played a decisive role in the appointment of this particular asset manager.
“Outsourcing is driven by the wish to cope better with the increasing complexity and the associated hazards of managing interest and inflation risk”
“We have made an offer taking into account three matters that are of great importance to the pension fund,” says Hanneke Veringa, head of the AXA client group in the Netherlands. “The pension fund must be in control, cope with complexity and be cost-efficient.” According to Veringa the pension fund is “in control” because it continues to manage strategic risks such as interest rates and inflation. “The complexity is reduced by making the maximum use of fixed income and inflation-linked bonds, and limiting the use of derivatives. That is a new concept. It is precisely through the use of derivatives that the majority of funds cover interest and inflation risks.”
TheING Pension Fund states that the costs of asset management will work out higher due to the outsourcing arrangement. “But, this is compensated by a further improvement and expansion of knowledge, expertise and continuity,” according to van Iersel.
“We also want to work less with a one-stop shop, partly because of our own professionalisation”
Costs remain important, but the clients of fiduciary managers set those in perspective. According to the Pensioen Pro study, organisational culture and risk management play a large role in the assessment of a fiduciary manager as these occupy the first and second place as criteria in determining the choice of a fiduciary.
Access to wider expertise is expected from a fiduciary manager. For some pension funds, the advantages of this outweigh the higher costs of, for example, passive management.
An example of this is the NIBC Pension Fund appointing NN Investment Partners (NNIP) as fiduciary asset manager with effect from January 2016. The fund of the NIBC bank, based in The Hague, has assets of around €300m, which was previously invested in a passive mandate.
NNIP will provide the fund with strategic advice, liability driven investments, operational balance sheet management and management reporting. The fund says it has found a “sparring partner” who can assist management in investment strategy and implementation.
As funds professionalise, the greater the need for freedom of choice becomes – for example, in relation to the selection of external managers – reflected in recent mandates.
“The pension fund must be in control, cope with complexity and be cost-efficient”
The Particuliere Beveiliging (Private Security) Pension Fund transferred its fiduciary management last year from PGGM to BMO Global Asset Management. According to its chairman Hans Kestens, an important criterion was that the pension fund has greater possibilities with BMO to select external asset managers besides their own investment funds.
“With PGGM, the link between the two disciplines, fiduciary advice and implementation of asset management is much stronger. You can depart from it, but you nevertheless commit yourself to their philosophy. A different kind of service, such as we want, is then not logical, although you can see that it is going that way with PGGM.” Kestens emphasises that the fund was not dissatisfied with PGGM.
The fund has grown rapidly, says Kestens, through returns, growth in the industry and the acquisition of other funds, such as that of the security firm G4S . Assets increased from €482m at the end of 2009, the year that PGGM started as fiduciary manager, to €1.1bn now. “With a larger volume, we also want to work less with a one-stop shop, partly because of our own professionalisation.”
PGGM says the fund left because the services it offers no longer sufficiently matched requirements. It did, however, emphasise that external managers can be chosen by funds who have their fiduciary management carried out by PGGM.
Leading role of interest rate risk
Pension funds are focused on the possibility that their coverage ratio will prove to be too low, since it is determined by the market interest rate, which has been low for a long time. Hedging and investment strategies to mitigate this risk, brought together in a matching portfolio, play a leading role in the policy. The management of the matching portfolio is entrusted to a fiduciary manager for risk management and LDI.
The Gasunie Pension Fund, for example, has placed its matching portfolio with Cardano, an experienced fiduciary manager. Cardano manages a portfolio of €300m in government and inflation-linked bonds, supplemented with interest-rate derivatives with which the fund covers the interest rate risk of bonds. Government and inflation-linked bonds were previously managed by Lombard Odier Investment Managers, and the derivatives by the fund itself. These have now been combined in a single mandate. The fund selected Cardano because of “its outstanding expertise in the area of risk management and the integral employment of bonds and derivatives”.
This article first appeared in Pensioen Pro
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