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For almost ten years, insurers and pension funds have been squabbling over territory. In preparation for the EU directive on institutions for occupational retirement provision, much was made of adequate solvency levels. Insurers would dearly have loved the directive to enforce similar levels of solvency on pension funds as they were obliged to provide. The European Federation for Retirement Provision, the pan-European lobby group for pension funds, countered such ideas. It said that corporations stood behind pension funds, which gave them a unique form of security.
As things stand, the EFRP won but its victory seems increasingly Pyrrhic. National regulators are tightening the requirements on solvency of pension funds, independently of Brussels. Meanwhile, the directive does require high levels of funding of cross-border schemes. Surprisingly, this definition may catch single-country plans with just a few expatriates working in another member state. Suddenly, scheme sponsors are fearing that they must find even greater levels of funding.
The squabbling has been nowhere more evident than the Netherlands, where the reach of the most populous pension funds has repeatedly upset insurers. Past sources of contention have been the sales of non-life insurance products such as car cover and mortgages. The current clash regards levensloop, a new opportunity for individuals to fund early retirement and sabbaticals from work. Levensloop is new legislation in the Netherlands: a sage policy by the government to increase individual liberty but also responsibility. The Dutch association for insurers, Verbond van Verzekeraars, estimates that take-up of Levensloop will eventually reach 1.9m. That would be almost one-third of the working Dutch population. The VvV further presumes that the option is more likely to interest average to higher income earners. Taking thus an average salary at e40,000 (average disposable income for all under-65s was e20,000 in 2004 according to the Central Bureau of Statistics), Levensloop could eventually produce annual flows of €9bn. That is a considerable sum; approximately 40% of the value of premiums net of reinsurance to occupational pension funds for the last recorded year, 2004.
Moreover, the insurers’ association estimates that only about 25% of Dutch occupational assets are in the hands of its members. The rest lies with self-administered schemes and the power of these largest schemes to publicise products to a captive membership may threaten the flow of levensloop money out into the open market.
Even though it will take a number of years for the market to grow to its full potential, the insurance association wants to ensure fairness from the start. It has initiated legal proceedings against ABP and PGGM, the two largest occupational pension funds, regarding their practices on levensloop. This follows a note from the Dutch central bank and new pensions regulator, DNB, to the same two funds on the same theme. Both have insurance subsidiaries, Loyalis and Careon respectively. The DNB is concerned that Loyalis and Careon enjoy a privileged position whereby the civil servants who comprise ABP’s membership and the healthworkers who comprise PGGM’s membership are directed via internal publicity towards the related insurers, in contravention of the European Union’s freedom of goods and services and more particularly, the national veto on industry-wide schemes offering third-party products.
ABP, the larger of the two schemes, has already made a statement that if subsidiary companies are allowed to offer levensloop products, it is logical that a pension fund is allowed to inform its members which company it is. The legal judgment of this view should be known later this year, and fines may be in order for the pension funds. The fact that insurers have sought clarification from the courts proves only keen they are to establish a level playing field once and for all.
In the meantime, insurers are confident that they can win more business in the extant occupational sector. Arie Perfors, pensions director for Aegon Netherlands, expects consolidation, with up to 70% of pension funds disappearing over the next five years as a result. and newer industries like Information Technology, which is the process of establishing a pension fund, to look for novel solutions.
“The main trend is for smaller pension funds to outsource because of growing risks such as longevity and the solvency requirements,” says Perfors.
Lex Solleveld, sales solutions for corporate clients, points out that Aegon can minimise risks as much as possible using cashflow matching techniques as well as a wide array of assets. Aegon’s Strategic Allocation Fund 75/25, for example, uses a composite benchmark including hedge funds, private equity, commodities and asset-backed securities.
On size alone, it is difficult to distinguish between the largest insurers and the newly-converted pension fund providers. Aegon, for example, has responsibility for the retirement savings of more than 300,000 people, and assets of €20.6bn at the end of 2004. Single and regular premiums together amounted to €1.6bn in 2004.
In comparison, Cordares, the fusion of the builders’ retirement scheme and the housing association scheme, now has over €22bn in assets although more than one million members. Evidently the Aegon group worldwide has greater assets and resources. But on the other hand, Cordares has already entered into some administrative sharing arrangements with another newly-commercialised operation, Mn Services.
Perhaps it is not these fellow leviathans that the leading insurers expect to disappear. There is consolidation in the insurance sector, with Achmea and Interpolis set to formalise their union. But the insurers will still have to compete with whoever remains and Solleveld indicates one advantage in the process of cashflow matching.
He says that it is harder for an asset manager or investment bank to match one client’s liabilities than for Aegon, with a huge range of clients to find solutions between them, internally. In other words, insurers can make use of the variety in their clients’ liability profiles.
An opponent might note that the swaps market is quite deep regardless, and certainly to extend duration and inflation-rate sensitivity, it is probably more important to have contacts with “inflation sellers” such as utilities and property developers rather than a variety of clients with different kinds of liabilities.
But with Perfors’ stated target schemes with €100m-200m in assets, Aegon is unlikely to face competition from investment banks direct. They rarely go for such a size. There will, however, be competition from native asset managers such as ABN-Amro Asset Management and possibly rivals from further afield such as Standard Life Investments with similar liability-targeting funds.

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