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How Vervoer handed over the fiduciary reins

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Pensioenfonds Vervoer made headlines last year when it awarded a fiduciary management mandate to Goldman Sachs. Walter Brand, Vervoer CEO, tells David White what happened next.

In the largest deal of its kind among Dutch pension funds, Pensioenfonds Vervoer, the Dutch industry-wide pension fund for private transport workers, last year appointed Goldman Sachs Asset Management as fiduciary manager of its €6.4bn assets.

Until then, no Dutch pension fund had outsourced the entire management of its investment strategy and sceptics suggested that Vervoer and Goldman Sachs had perhaps bitten off more than they could chew.

Yet more than a year later Walter Brand, the chief executive officer of Pensioenfonds Vervoer says that, after some teething troubles, the arrangement is working well.

"At the start, different developments in the structure of our organisation caused some difficulties," he says. One of these was the construction of a Fonds voor Gemene Rekening (FGR) or Funds for Joint Account (FJA) for tax reasons for both the pension and pre-pension funds. Another was the change of custodian bank.

"We had to move from the previous asset manager to Goldman Sachs. We also had to move from the pension funds into the FGR, so there was also a kind of transition within the transition," Brand explains. "Normally it's wiser to change your investment firm and afterwards make these kind of organisational changes.

"So the one thing I would say to any other pension funds who are contemplating such a move is if you want to do the same things don't do them all at the time because that's asking for trouble. It's like fighting on two fronts.

"But we didn't have any choice at that time. We couldn't have done it in any other way. The main point is that we've solved it."

Keeping in constant dialogue with Goldman Sachs helped smooth any bumps in the road, Brand says. "We have talked a lot with each other and I think that we are now at the stage where we have established a good relationship. We have created a constructive co-operation or partnership."

Maintaining a personal relationship with the fiduciary manager is important, he says. "We try to maintain a personal relationship with Goldmans, because from time to time our board will want to know how well the arrangement is working. They don't only want to see the figures, although those are important. They want to know that we have chosen the right party and that the relationship will last."

Brand is impressed with the way problems have been dealt with, in particular the issue of lines of communication. "A few months ago we had some problems of communication between ourselves, our back-office, our custodian and Goldman Sachs," he recalls. "It's very difficult if we first talk to Goldman and then to our custodian, and the custodian talks to our back-office and the back-office phones Goldman. It just doesn't work."

The problem was resolved by a two-day round-table discussion in London involving all the parties, he says. "By sitting down with all parties at a meeting we were ab le to work out better arrangements for procedures in future. We have established a number of communication lines along which all parties have to move.

"That kind of cooperation is good, and I was glad that a firm like
Goldman Sachs could acknowledge that there were some points which they could do better as well as some points that we could do better. It was not simply a matter of take it or leave it."

Implementation is now almost complete, Brand says. "There are some outstanding little items. For instance, there is a certain amount of money which is still with the former asset manager because we can't get it out quickly. These kind of transitions always take a lot of time.

"But I think we have reached the point where the new structure is 99% in place and the normal work flow can take its course. If we need to make any major changes in strategy or asset allocation that will be part of the normal discussions we would expect to have."

As part of the groundwork for the fiduciary management arrangement, Vervoer pension fund created a "bestuursbureau" or pension competence centre based at Schiphol airport. This provides an additional layer of management between the board of the pension fund and the external investment managers.

The bureau is composed of a team of five, including Pensioenfonds Vervoer chief investment officer Patrick Groenendijk and Brand himself. It provides the pension fund board with specific advice not only on investments but also the pension scheme itself.

"We wanted a situation where the board didn't have to concern itself with every single investment," Brand explains. "We wanted the board to make strategic decisions, setting out the main features of asset allocation in relation to our liabilities."

Brand says the creation of the bureau has made the overall management of the pension fund simpler. "The function of the bureau is to co-ordinate activities. It is also a channel of communication, a way of getting information from one side from the other. One of the main tasks of the CIO, together with our advisory board on all investments, is to translate the highly complex issues of investment today to the board of trustees."

Some Dutch pension funds that have set up fiduciary management arrangements more recently have retained control of the management of part of their investment portfolios. However, Brand feels that the Pensioenfonds Vervoer fund was right to hand over all rather than part of the management of its assets to Goldman Sachs.

"Otherwise you end up with, as we say in Holland, neither fish nor flesh. You have to make a firm choice otherwise you find yourself with a fairly complicated construction where you have a fiduciary manager for 50% or 70% of your investments, and you then have to establish an organisation for yourselves to manage the rest of them. In my view, this combination doesn't work.

"This is particularly true if you are not a very large pension fund. To manage your investments you have to have a lot of in-house expertise and a lot of information. You can't do it if you have a team of only two or three people. Maybe 30 or 40 years ago it was possible. Now I don't think it is."

Fiduciary management is labour-intensive, and there have been suggestions that fiduciary management mandates will take up more time than asset managers can afford. Brand says he has no doubts on this score.

"At the beginning there is pressure on time because you have to make organisational changes, but in the future, when we have a settled structure, there will be less time needed for fiduciary management than when we started.

"Of course there is a lot of work on the investment side to do, but Goldman Sachs manages the investment managers for us and their role is very specific. Hiring managers and firing managers is their normal, everyday work. So in that respect there won't be a change."

Brand feels that other Dutch pension funds are likely to follow Pensioenfonds Vervoer's example. "At the moment fiduciary management is a fashionable trend and a lot of pension funds are looking at this structure. This is because boards of trustees have more than enough on their hands with increasingly complex regulation."

He points out that Dutch labour unions, whose members sit on the boards of pension funds, are also likely to become torch-bearers for fiduciary management. "There are people from the labour unions who are members of five or six boards of pension funds. So if they learn about this structure from one pension fund, they are likely to raise the subject with other pension funds too," he says.

An increasing number of investment managers, both international and European, are likely to offer fiduciary management services to meet this demand, he believes. "There are plenty of investment firms who would like to have a piece of the fiduciary management cake."

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