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Misguided belief in outperformance to blame for bonus culture – academic

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Outperformance is almost impossible, and pension funds’ willingness to pay for it is contributing to the current bonus culture, according to Jaap Koelewijn, a professor of corporate finance at Nijenrode Business University.

Speaking at a seminar on fee policy and bonuses at Dutch pension funds, Koelewijn argued that a number of studies show that outperformance is hardly ever achievable.

“Asset managers suggest they can outperform, and clients are willing to believe this,” he said. “It is a kind of magic we are kidding ourselves into.”

However, Koelewijn, who is also an independent adviser on financial supervision, acknowledged that bonuses were not necessarily negative in concept, as long there was a clear relation between the reward and the delivered result.

In practice, he said, many arrangements between pension funds and asset managers regarding bonuses involve performance that cannot assessed, due to lack of expertise.

He said too many pension board members believed that an academic course lasting just a few days was sufficient to challenege hedge fund managers, something he described as a “grave misconception”.

He also criticised the ease with which pension funds outsource work by “simply by throwing it over the fence to an asset manager”.

“Nobody lends their car to somebody without ensuring they have a driving licence,” Koelewijn said. “But we just put our money outside, and are confident everything goes well.”

The professor called for an increase in expertise among pension trustees.

He also claimed the DNB and the AFM, both regulators in the Netherlands, were drawing up rules that were too detailed, failing to take into account the people at which they are aimed.

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