Fund with know-how
The way corporate pension funds are managed will change with changes in the corporations that sponsor them.
Few organisations demonstrate this better than DSM Pensions Services (DPS), the in-house organisation that manages the Dutch pension funds of the Dutch firm DSM, the former Dutch state mines.
The company was once part of the Netherlands’s defunct coal mining industry. As the coal industry dwindled in importance, DSM shrewdly diversified into other areas to become a multi-speciality chemical company.
This has meant changes in pension fund provision. When DSM was purely a mining company, its employees were members of the industry-wide mineworkers pension fund. (This is now run by AZL, with no links to DSM) As the company diversified into chemicals, however, it became necessary to set up a pension fund for chemical workers. The Pensioensfonds DSM Chemie (PDC) was set up in 1972, originally for employees in the Limburg area and now for most DSM employees in the Netherlands.
DSM has also changed geographically. Over the past 25 years, its profile has changed from a national to an international company. It now operates at more than 200 locations around the world, with some 25,000 employees, 70% of whom are located outside the Netherlands.
Most of DSM’s pension assets, however, are still located in the Netherlands which has €4.8bn in assets and 45,000 participants in pensions schemes. The remaining €1bn are located elsewhere, mainly in Switzerland, the UK and the US.
The evolving profile of DSM has led to significant changes in the way it runs its pension assets. The most significant is the creation of DPS in 2003. DPS has broadly two roles – an executive role and a consultative role. Two years ago it took over the executive role from PVM, the in-house insurer that DSM set up in 1979 to handle DSM employees’ pension insurance contracts. PVM is now being liquidated.
The purpose of the switch from PVM to DPS is to provide better protection for pension fund assets. Wil Beckers, managing director of DPS, explains: “There was some discussion about what would happen if DSM were taken over. Would it be possible for the shareholders to get access to the assets of PVM?
“The conclusion was that it was unlikely but not 100% guaranteed. So the decision was taken to dismantle PVM and go back to the normal pension fund structure.”
In its executive role, DPS handles asset management and pension fund administration for
three pension funds in the Netherlands – two belonging to DSM and one belonging to a former DSM company.
The largest DSM scheme, PDC – with assets of €3.8bn – is the scheme for eight DSM employers in the Netherlands. The smaller DSM fund, the Pensioenfonds Gist-Brocades (PGB), with assets of €792m, was acquired when DSM took over the antibiotics business Gist-Brocades in 1998.
The fund that became PGB was created in 1887 by the socially oriented entrepreneur Jaques van Marken, and is the oldest company pension fund in the Netherlands – one of the reasons why DSM did not merge it with the PDC.
The third, non-DSM scheme, the Pensioenfonds SABIC Euro-Petrochemicals (SPF) is the result of SABIC’s acquisition of DSM’s petrochemicals business in 2002. In this case, SABIC decided that DPS should continue to manage its pension fund, says Beckers. “They decided to carry on more or less the same pension scheme that they already had in place. So today the pension fund is still 99% identical to the PDC scheme.”
DPS is now in the first year of a three-year contract to manage the SABIC scheme. This is an unusual arrangement for DPS and is unlikely to be repeated in the future for other pension funds, says Beckers. “Our mission is not to be active on the commercial market and we are not actively looking for other business outside DSM.”
The funds are managed with an active management style with a focus on value, says Ewout Gillissen, investment manager at DPS. “We don’t follow hype and we were not overweight in equities in 1998 and 1999. So due to the sometimes contrarian view we have for both funds, especially PDC, their coverage ratios are pretty high.” PDC, which has a coverage ratio of 137%, is currently 40% invested in equities and 40% in fixed income investments. It also has 5% invested in absolute return strategies, 10% in inflation-linked bonds, and 5% in real estate.
“We can take quick decisions about investing in new instruments if we like them. PDC has been invested in emerging market bonds and equities, and in inflation-linked bonds, for some time,” says Gillissen.
PDC has outperformed its benchmark since 2001. Last year it returned 10.9% against a benchmark 9.1%.
DPS outsources less than 20% of the management of the assets to external managers. Outsourcing is mainly for specialist asset classes such as emerging market bonds and Japanese equities.
DPS is currently carrying out new ALM studies for both PDC and PGB to take account the impact of the FTK regulations, says Gillissen. “ We are trying to incorporate the influence of the financial framework assessment. In our new strategy for 2006 we will certainly change if we need to. But we’re not in a hurry and we are advising the pension funds not to hurry.”
Advice is a crucial part of DPS’s activities, and the second role of DPS – the consultative – is to act as a pension knowledge centre for DSM and DSM employers worldwide and act as a pension advisory organisation for DSM pension funds worldwide.
The aim is to provide advice on pensions policy, asset management and governance. Recently it advised on the creation of three new pension funds in Switzerland when 2,000 employees were transferred from Roche to DSM last December.
The main focus is on pension fund governance, says Beckers. “If something happens to a pension fund, it’s not the pension fund that gets into the newspapers it’s the company.”
To provide guidance to DSM employers, DPS has produced a best practice document for asset management covering four areas: governance; investment policy; the procedure for selecting and monitoring external manners; and reporting and performance measurement.
The document is not a diktat from DSM, Beckers emphasises. “It’s not about head office giving the right answer. It’s about giving the board of trustees the right tools.
DPS has also devised a set of minimum requirements for pension schemes worldwide. “What we try to do is set up minimum requirements so that if someone in the DSM organisation wants to change pension scheme or introduce a new one, they have to satisfy that requirement,” says Beckers.
The consultative role of DPS is likely to grow in importance, he says. This will not mean an enlargement of DPS itself, which is a relatively lean organisation of 50 people.
“We cannot create an organisation where everyone knows everything about pension schemes around the world. So we are also working to build a network of consultants and people with international know-how.” This will be critical he says, since know-how – knowledge about pensions and pensions governance – is DPS’s greatest asset.