Dutch pension provision is losing touch with its history of trust, aided and abetted by the DNB, writes Brendan Maton
Life used to be a lot simpler for Dutch pension funds. There was a time when relationships with external providers were based on trust. Lengthy legal contracts, notably investment management agreements (IMAs) were not in existence for even some of the largest retirement schemes. Some align this ethos with the Rhenish economic model (1).
Take PME, for instance, the €30bn scheme for over 600,000 current and former industrial metalworkers and engineers. In the late 1990s, PME was contracted with Achmea Global Investors to run billions of euros in assets. AGI had considerable discretion within regions and was responsible for all investment including management of the cash flows. Nevertheless, the legal agreement to secure these services ran to just a few pages. Roland van den Brink, managing director of PME at that time, reckons that if the legal niceties were removed, the real matter of the deal was less than a page in length.
"Achmea Global Investors was liable for up to €100,000, and only in the case of fraud or a real mess," he recalls. "In terms of content, the contract was minimal. The essence was that Achmea would do its best."
Toine van der Stee, CEO of fiduciary manager, BlueSkyGroup agrees. "I worked for Robeco 20 years ago. Contracts with clients could be four pages long. The manager's promise was that it would do its best and the client had recourse to give it a kick if not."
That simplicity might appear to remain unbroken if one glances just at header agreements. Van der Stee reckons that these contracts with Dutch clients have changed little in the intervening periods. But the simple life has been eradicated by underlying service level agreements with 300 quality criteria to meet and IMAs over which parties have to tussle on disclaimers.
Neither fraud nor any real mess by an external asset manager has brought about the extra paperwork. Van den Brink instead points the finger at the trend of fiduciary services per se and greater interest by the regulators of Dutch pension schemes in the competence of their boards and primarily the levels of their solvency. Van der Stee adds that pension scheme beneficiaries also apply the magnifying glass more and more often.
It is a moot point whether greater use of legal advisers and longer contracts better protect the interests of beneficiaries. The current dispute in London's High Court between the transport workers' pension fund (Vervoer), managing around €12bn for just under 600,000 current and former transport sector workers, and Goldman Sachs Asset Management International, is evidence that written agreements of duties don't always ensure mutual contentment. But it is a fair counterpoint that lengthy contracts might aid the settlement of any dispute where a brief agreement leaves both sides much more dependent on other, auxiliary documents, including the minutes of pension board meetings.
It is worth dwelling on why Dutch pension schemes would ever happily trust billions of euros to external providers without recourse to a detailed legal contract in the event of a dispute.
"Amsterdam is not the same as London or New York, where everyone is used to deals being tied up by lawyers," says van den Brink. "In continental Europe there is a tradition that not just what is written but what you say is also binding."
If this sounds naïve in twenty-first century finance, another deep European tradition needs to be introduced alongside verbal trust: co-operation in the form of cross-holdings. Much criticism from Anglophone investors has been made of businesses in Europe (and elsewhere) mutually bolstering each other's capital base. But cross-holdings can cement a relationship as well as a lengthy contract. PME had a substantial stake in Achmea Global Investors back in the 1990s. It was part of the deal when AGI was established. What need for legal agreement on services when the pension fund would jeopardise tens of millions of its own euros should the contract with AGI be cancelled?
This kind of relationship is pertinent when examining fiduciary management, the investment issue of the day in the Netherlands. Fiduciary management has been adopted by almost all the biggest industry-wide and corporate pension schemes in the country - from the government and healthworkers' schemes, which together account for more than half all Dutch occupational retirement assets, to the schemes of international corporations such as Ahold and Philips. Heineken and Unilever are notable exceptions to a trend that has seen pension schemes become owner-clients or de facto owner-clients of commercial asset management businesses (Shell has established an arms' length asset manager in Rijswijk but it only serves clients affiliated to or sponsored by the oil giant).
The conundrum of such home-grown Dutch fiduciary services - wherein the provider is born from the scheme's internal management - is how far the pension fund is obliged to accept the fruits of its own provider's labours. There may be no binding legal contract but there is a commercial rationale for preserving the relationship. Poor results from the asset manager would hardly entice a new buyer. No one wants to buy a firm lacking both a strong recent track record and a satisfied major client.
(Flip the situation round to the perspective of an unsatisfactory purely commercial manager: the client has the right to cancel the fiduciary mandate at any point but it will incur penalties for so doing, especially in the first year of the agreement.)
In the case of Blue Sky Group, Van der Stee plays down the owner-client paradox. The organisation he runs is jointly owned by the three pension schemes of the KLM airline but he sees no relationship or commercial bind blocking a sale. "They have €15bn in assets; Blue Sky Group is worth €10-15m. It's a minor investment for them; the value is rather irrelevant."
There is a historical precedent for his view. In the 1990s, Philips established the Philips Pensions Competence Center in Eindhoven. It was a prototype fiduciary manager with some third-party business. But by 2005 the project was abandoned, broken into investment and administration services and sold. Philips' own PPCC was a project with good intentions but without the kind of deep capital commitment that tends to ensure longevity.
But the owner-customer conundrum is more profound for larger home-grown fiduciary managers - APG, PGGM and Mn Services (now rebranded MN). The Netherlands has a long tradition in financial services that does not want to lose all management (and associated income) of its citizens' retirement savings to entities based in London, New York or Singapore. Certainly, in the case of APG and PGGM, the commercial future of these entities would be a matter of national importance. The Netherlands wants to be a decent EU member state and open up its country to fair market competition but, on the other hand, it values those Dutch organisations with global standing.
And so, a sale today of PGGM is a legal possibility. PFZW does not own its former investment department and current fiduciary manager. A spokeswoman for PFZW told IPE that PGGM is legally autonomous and has to pitch every three years for the business of the healthworkers' fund. But the fund accounts for about 97% of PGGM's assets under management and the provider discusses the renegotiation of its contract with the major client in advance of retendering. Why the favoured status? "PGGM has a lot of knowledge about the people we serve," said the PFZW spokeswoman.
Are such idiosyncrasies reflected in the legal contracts for these fiduciary managers as distinct from their purely commercial rivals? The former can certainly obtain lower indemnity insurance because their businesses are simpler and the risks fewer. Having said this, lawyers reckon it is difficult for an asset manager of any hue or origin to get cover for gross negligence above €100m these days (contrast, nevertheless with Achmea Global Investors 15 years ago).
"Another common metric in the case of culpable mismanagement or maladministration is to forego a year's fees," says Bernard Spoor, a partner at law firm, De Brauw Blackstone Westbroek.
He notes wryly that any manager offering to forego two years' fees probably won't be retaining the business. Nevertheless, the sacrifice of income, even temporarily, does have its place in the complex world of fiduciary management. One of the attractions for the transport workers' fund in appointing Robeco last September was its facility to make good financial shortfalls due to human error before deciding cause and liability at a later date. The facility was not a gimmick introduced to woo lorry drivers on the board of the €11bn fund; other clients of Robeco's fiduciary management already have the service.
Other providers are more circumspect in discussing such instant rebates or bridging finance. Allianz Global Investors would deal with any mistake "in an agreed and respectful manner", says Piet Molenaar, head of fiduciary management for the Benelux and Nordic region. He then adds quickly that Allianz Global Investors has not yet made or witnessed a mistake in this field.
On the owner-client conundrum, Molenaar makes the point that the big home-grown managers offer their own funds which, even if they access a host of external providers, also contain a fair amount of in-house management. He believes this goes against the current ethos, which is that the fiduciary should be an adviser or manager of managers.
"It is much harder than in the past to use your own funds or carry out investment management," says René Maatman, another partner at De Brauw Blackstone Westbroek. Yet, in spite of much vocal agreement on this point, the reality is that most fiduciary managers leave the door open to use of their funds. Perhaps it is the back door rather than the front door - even though industry guidelines, the DUFAS Principles, are neutral on the issue - but the commercial incentive ultimately is too strong.
There are exceptions such as Blue Sky Group, which has no asset management to offer. Van der Stee says his organisation derives most of its income from hourly fees for advising. Most asset management fiduciaries don't like this remuneration structure and even consultancy firms like Towers Watson are moving to project fees.
Dutch pension provision is losing touch with its past due to the proliferation of Anglo-Saxon legal contracts based on mistrust. No organisation has been more instrumental in this change than the Dutch Central Bank. In pushing pension boards to be more competent but without forcing them to be entirely professional, it has left just enough room for doubt. Into this gap of uncertainty have crept those ever-lengthening service-level agreements.
At the same time, by forcing pension funds to separate retirement provision from investment services five years ago, the Dutch Central Bank has left the very largest pension schemes with home-grown fiduciary managers in what commercial rivals see as cosy relationships. ‘Cosy' because these accords do not seem dependent on lengthy legal contracts but long-standing relationships. Again, it is the regulations of 2008 which permit such accusations and now leave a conundrum of national economic importance: does the Netherlands want new global investment champions, founded on a wide and secure domestic clientele; or a truly open domestic market for pension asset management? Because the awkward truth is that the two are not complementary.
1. See Michel Albert, Capitalisme contre capitalisme