DSM Pension Services
Ewout Gillissen, senior investment manager
The stock market success of speciality chemicals company DSM, the former petrochemical giant, is being mirrored by the financial success of its pension funds.
After the divestment of the petrochemical segment to Saudi Arabia’s SABIC, the in-house pension management supplier DSM Pensions Services (DPS) has taken on its first - and probably only - external client.
DPS’s senior investment manager Ewout Gillissen explains that core activities are focused on providing assistance, management services and consultancy to internal clients. These include Pensioenfonds DSM Chemie, Pensioenfonds Gist Brocades and newcomer SABIC Euro-Petrochemicals.
But he does not expect to target third parties in the next few years. With a combined investment portfolio of more than €5bn, the schemes are large enough on their own.
DPS currently outsources labour intensive mandates such as emerging markets and high yield.
DPS is becoming a more international player itself, Gillissen indicated – advising and consulting to the international pension funds, related to new acquisitions and investments.
The funds are managed in an active management style with a focus on value, Gillissen stated. “DPS has not succumbed to market hype. We have been more conservative about equity investments than others, but the results have proven that we were right.”
“The main change we have made in the last few years is to invest in inflation-linked bonds,” he said. The impact of the foreign pension funds is still minor as they ‘only’ account for some €500-600m. However, there are internal discussions about streamlining processes worldwide.
DSM has become aware of the increased risks these funds could become due to the other investment strategies, IFRS and accounting rules.
With healthy coverage ratios in the 145% range, the various funds are not feeling the immediate pressure that others may be feeling from the DNB and FTK.
At the same time, the duration of the Chemie and Gist Brocades schemes are currently around 12 years while the SABIC Euro-Petrochemicals fund, being very young, has a higher duration. Most of the pensioners of DSM Petrochemicals have been merged into the PDC fund.
Gillissen says the FTK and DNB have been a catalyst for the whole sector to focus attention. The funds are in the enviable position of being almost best in class.
A new ALM study is currently underway - taking the FTK issues into account - although a dramatic change in investment strategy will not be seen. Gillissen expects more attention for additional return/yield providing investments but this will not lead to an investment in hedge funds.
Although he expects a lower return environment in the coming years, Gillissen is sure the fund “will not feel the pressure of the FTK or supervisor on our neck”. Outsourcing is also not an issue, with 80% of activities still managed in-house.
Gillissen certainly expects increased dynamism in the pension sector, but DSM will be a rock that these waves will break on.

Metaal & Techniek
Bert van de Belt, senior investment manager
Metaal & Techniek, the pension fund for the metalworking and mechanical engineering sector (BPMT), has reaped ample rewards from its current investment strategy, according to fund director Bert van de Belt.
“At present, the fund has a coverage ratio of 115%, which is very acceptable given current market fundamentals and recent developments in the financial markets,” he says. “In absolute terms, the fund has performed as expected.”
Most of the fund’s activities and strategy are already based on the new Financial Assessment Framework (nFTK) regulations, although there was still some work to do, he adds.
“The delay of the implementation of the nFTK to January 2007 from the beginning of 2006 gives us and the rest of the pensions sector additional leeway to address still unresolved issues,” van de Belt notes. “Indeed. we regard it as a gift we can all use to our benefit.”
BPMT is still at the internal discussion stage on the rest of the raft of regulations and rules tabled by the supervisory DNB, he says.
Looking to the future, van de Belt sees several looming threats and changes, depending on how the market develops: “Even though the nFTK presents us with a strict set of regulations, it will also bring some positive developments,” he says. “The whole sector has been forced to examine its performance, the role of indexation and even the relative position of premiums. The need to cover liabilities with a cost-effective premium has finally become a main theme of discussions. And this has resulted in an increased need for an effective communications structure.”
Further, the impact of nFTK and the strict interpretation of indexation, together with the replacement of the early retirement (VUT) and pre-pension schemes by the life-course (levensloop) programme, changes to the former WIA unemployment benefit arrangements and the healthcare system, have resulted in a need to enhance the effectiveness of pension funds’ communications with pension fund members, he notes.
Van de Belt acknowledges that many members and pensioners still have no real idea about the ongoing changes and their impact on pensions. “Members have a right to be informed,” he says.
Van de Belt is critical of the government’s practice of putting a cocktail of regulations on the table, which forces pension funds to both implement them and simultaneously explain them to their members. BPMT accepts the role of implementing decisions of the social partners, but would like more involvement by the social partners, he adds.
But the fund has chosen not to be involved in any of the levensloop arrangements, he says. “We have chosen a different approach to that adopted by ABP and PGGM,” he says. “We will keep solely to our core activities, and we will leave the additional work to pension adviser and manager Mn Services.”
However, it has become very hands-on with alternative investments. “Alternative investments – mostly hedge funds, commodities and private equity – have become a key feature of our current and future investment strategy,” Van de Belt says. “Currently, alternatives make up 10% of our portfolio, and in absolute terms, we have the same alternatives investment volume as ABP and PGGM. The asset class will remain of interest in future.”
BPMT has not been as affected as others by the issue of the ageing of its membership base. “Most of our sponsors and subscribers are working for middle-sized or small companies and so ageing issues have not been as acute as in other sectors,” van de Belt says. “There is an ongoing rejuvenation process at work, the taking on of younger people in the sector. At present, our membership base is still relatively young.”

Nedlloyd Pension Fund
Ton Zimmerman, director
Ton Zimmerman, director of the Nedlloyd Pension Fund, reckons the fund’s coverage ratio and financial situation have performed very well in the last few quarters.
The coverage ratio - based on the 4% interest rate - was 137% at the end of last year. And it had risen to 145% as of the end of June 2005. Even under the new mark-to-market rules, the ratio was still above 135%.
Zimmerman sees the growing impact of ageing as the key challenge the scheme faces – due to its relatively small active membership.
As at the end of last year the fund had just 765 active members, 3,691 deferreds and 8,925 pensioners.
However, parent company P&O Nedlloyd, has now been taken over by Danish marine giant Maersk. The move is expected to have a positive development.
The Dutch part of Maersk will bring a new set of active employees to the fund, which will bring new financial backing.
Zimmerman rejects fears that P&O Nedlloyd members will leave the fund. He says P&O Nedlloyd and the works council have expressed their satisfaction with the current standard and implementation of the pension arrangements.
Both have publicly stated that they would like to continue the current relationship.
Despite this there are some external issues on the horizon – namely the new and still fluctuating legal and financial environment.
Zimmerman said that the FTK will present both threats and opportunities to the fund. A positive factor was that schemes’ current liabilities needed to be accounted for on a fair value basis.
This will not only make the total interest-rate risk clear but it will also provide the tools to counter these threats and to manage the whole new system.
Conversely, the main threat posed by the FTK is its requirement for a one-year recovery period – a very short term for most pension funds.
This measure would and could constrain funds in that they will now have to comply with the short-term financial demands of the FTK. And the long-term aims such as indexation will be under increased pressure.
The overriding threat though is interest-rate risk. “Another main impact of the FTK on the fund will be that we have to reassess our current investment policy,” Zimmerman says. “This has been implemented in the last few months, which has resulted in a new set of measures to counter possible interest-rate risks.”
Under the new arrangement - in place from March 1 2006 - around 50% of the €490m of liabilities, will be covered with an increased duration bond portfolio.
“Next to this, we will start with an asset liability study this year to assess the effects of the new policy on a long-term basis and to find out which other counter measures can be taken to decrease interest risks,” Zimmerman says.
In total, the long-term ambition of indexation is still the main basis of the fund’s strategy. The fund’s allocation at present is 20% real estate and 2.5% hedge funds and private equity.
As a relatively small corporate pension scheme, Nedlloyd has no intention to merge or cooperate with another pension fund in the near future, Zimmerman stated.
He’s very confident that the current 11-member board is more than capable of dealing with the pension arrangements.
He sees the future is interesting and full of changes. As he says: “Pension sector dull? No way. There’s never a dull moment.”

Rob Kragten, fund director
Having posted an 8.5% yield on investments at end-2004, PFKVWS, the corporate pension fund of Dutch construction enterprise Koninklijke Volker Wessels Stevin NV is on track to meet the requirements of its recovery plan. The plan foresees the raising of the coverage ratio to 120% by 2009.
Fund director Rob Kragten confirms the annual report’s suggestion of an end-2004 coverage ratio of 111.4% and adds that the overall coverage ratio had increased to around 116% by mid-2005, based on a 4% interest rate. “I am not sure how far this will be reflected on a fair-value basis due to the low interest rates,” he adds.
The need for an overall recovery plan was forced upon the sector by the regulatory DNB, says Kragten. The fund’s plan was supported by the injection in 2004 of an additional €12.6m its main sponsor, Koninklijke Volker Wessels Stevin and €1.3m from Volker Wessels Netwerk Bouw and this year they agreed to contribute a further €8.3m, of which €1m will come from Volker Wessels Netwerk Bouw.
In addition, the fund has implemented a cost-effective contribution rate, one that totally covers payments to pensioners.
“The fund has been working on a strategy to increase overall duration of the investment portfolio to support the change in financial reporting as required by DNB regulations and new accountancy rules,” Kragten says. “This way be will be able to counter the total impact of fair value and liability constraints.” The fund has maintained its stated policy of indexing payments, but new regulations specify that indexation will occur within a coverage ratio of 105-140%, and from now it will be discretionary. Throughout 2004 it gave its pensioners total indexation while for 2005 it opted to give a 1% indexation, implemented in July.
The fund has around 4,400 subscribers, 3,300 deferreds and 2,000 pensioners. Its investment portfolio totalled around €696m at end-2004, of which €383m was in bonds and €251m in equities and €52m in real estate.
Looking to the future, Kragten says that he does not see any major risks on the horizon. “Liabilities have not increased dramatically due to relatively low indexation and an average increase of total pensions,” he says. “We have kept in place an agreement that there could be a refund if the coverage ratio reached levels above 160%.”
However, there are some factors that give rise to caution, including the implementation of new legislation on early retirement, pre-pension and life course saving, the introduction of new accountancy standards and regulations, and the new Financial Assessment Framework (nFTK). This has led to a substantial increase of the administrative workload, Kragten says.
“The nFTK has forced us and all other funds to make substantial changes to their regulations,” he says. “It is on of the issues we are reviewing in our ALM study, which should be completed in the coming months. But one of the initial decisions has been to increase our overall duration. There are two main issues under discussion, yields on investments and risk management. Investment yields are of the utmost importance but will increasingly need to be integrated within the new risk assessments. We are also considering a possible change of investment strategy but which direction we will take is still open. Alternative investments are a possibility to counter the impact of liabilities and we are not excluding any real investment opportunity or sector.”
The last ALM study has resulted in an asset allocation of 55% bonds and 45% equity and real estate. Some 75% of the US dollar risk is covered, he adds.
“The main issue in the coming years will be new regulations, Dutch laws, governance directives and accountancy standards,” Kragten says. “The pension sector could fall victim to the immense workload and the speed of the new proposals.”
This will result in increasing outsourcing, but the fund will continue to keep all except investments in their own hands, he says. Co-operation with other funds does exist, but will not be formalised.

Stork Pensioenfonds
Gerard Rutten, Director
Stork Pensioenfonds, one of the Netherlands’ oldest pension funds, made a remarkable recovery last year.
In 2002 it had a reserve shortage, posting a coverage ratio of 104%, below the required level of 105%. But at end-2004 the total coverage was up 4% on the year at 112% and, according to director Gerard Rutten, it is on course to reach 126% in 2010.
For 2004 it posted an overall yield of 8.5% on investments, pension liabilities increased to €1.9bn and it added €76m to reserves. The fund also had a positive cash flow and increased its overall subscriptions by 5% to 24.68%. There was no indexation for 2004, but in the wake of the fund’s financial performance, its board decided to give an indexation of 0.39%.
And the recovery is continuing. Although the fund does not release intermediate or quarterly figures or indications of the coverage ratio, Rutten indicates that the fund’s performance this year is in line with that of 2004.
The improvement has been
calculated on the basis of a 4% interest rate, the fund is discussing when to switch to a fair value
On the advice of its audit committee, the board is reassessing the fund’s investment strategy. To date this has included a reorganisation of its US real estate portfolio.
In addition, it has instigated a new ALM study to take into account the nFTK and accountancy rule changes. But it has already ruled out expanding its alternative investments allocation. Currently, alternatives make up some 5% of its portfolio.
There have also been challenges, including the unexpected
departure of its previous director Luc Gastel. But Rutten, who took over in February, is optimistic about the future, although he concedes that there are still some threats on the horizon. “The major risks comes from the low interest rate environment, low inflation payments and the possibly of increasingly strong inflation,” he says. “An upturn in inflation could definitely happen soon, based on high commodity prices and possible labour shortages.”
The pension fund has retained the possibility for members to take early retirement, although for its members aged less than 55 at the end of last year this option will end at the beginning of next year under recent legislation.
Rutten says that the fund is still happy to be independent. “Mergers or other options are currently not at all on the table,” he says.