Dutch pension funds must prepare themselves for ever-increasing longevity, possibly even through the “120-year ceiling”, following improved medical techniques, according to civil service scheme ABP.
Commenting on a number of trends likely to affect the industry in the coming years, ABP said pension funds must look at ways of spreading the effects of longevity evenly across the generations.
The €334bn pension fund also highlighted the growing importance of socially responsible investment and said it was convinced that including ESG factors could help improve investment results.
“Factoring in ESG,” it said, “will lead to improved transparency of investments from both pension funds and companies they invest in, possibly resulting in less complex investments or specific sustainable investments.”
ABP cited a growing need among Dutch workers for clear and tailor-made information, not only from pension funds but also employers, and pointed to an increasing focus on cost reduction – particularly by asset managers – facilitated by increasing transparency.
As a consequence, pension funds are already divesting from high-cost asset classes, such as hedge funds and private equity, ABP said, adding that low-cost pension vehicles were emerging, and that pension arrangements were likely to be simplified and made more uniform.
The Netherlands’ largest pension fund also warned that increasing “individualisation” in society, combined with an ageing population, was putting pressure on the much-touted principles of collectivity and solidarity, and that the call for freedom of choice for pension accrual was getting louder.
However, it argued that a thorough explanation of the material advantages of collectivity and solidarity could help reverse this trend, and that improved management of individuals’ data could help produce tailor-made pension products.
ABP said it expected the government to decrease tax-facilitated pensions accrual further, resulting in participants looking for additional pension saving.
This, in turn, will accelerate the development of defined contribution products, it said.
The civil service scheme, which has 2.8m participants, underlined that pension funds must also prepare for increasing flexibility in the labour market, with more job changes and more self-employed workers.
ABP said population ageing would require an increasingly defensive investment mix, with lower expected returns, and warned that the growing mobility of capital would weaken the benefits of diversification.
Consolidation among Dutch pension funds is to continue apace, particularly among company schemes, while cost-cutting on pension arrangements and the increase in the official retirement age will increase the “uniformity” of pension plans, it said.
“There could be no more than 100 pension funds left in 2020,” it said.