Beyond the call of duty
Judge’s comment: “A very innovative way to overcome unaffordable DB schemes in the Netherlands, combining a solid pension scheme before and after retirement”
The €1.4bn Nedlloyd Pension Fund’s origins go back to 1971 when it was created to manage the pensions of employees of the Royal Nedlloyd group. This has since expanded to include part of the Maersk group, following its takeover of Royal P&O Nedlloyd in 2005.
Until 2014 the pension scheme was a Collective Defined Contribution (CDC) plan, which mimics a defined benefit scheme by offering a pension based on salary and the number of years of accrual. Contributions are set at a fixed rate and the collective nature of the scheme is designed to offer some risk protection for the sponsor. If it turns out that the contributions were not enough, the members’ accrued benefits will be lower than originally envisaged.
However, this was set to change this year when Maersk Line Netherlands, now the sponsor, asked Nedlloyd Pension Fund to design and implement a new defined contribution arrangement for its employees. The aim is to solve the problem that the level of pensions income the CDC plan offers is ever decreasing as a result of the fixed contributions, low interest rates and increasing life expectancy.
The scheme established a working group comprising the sponsoring employer, trade unions and other member representatives to begin drafting the new plan. The first proposal was a DC account scheme with an insurer providing individual pension pots and an accrual arrangement that no longer automatically converted the savings into pensions benefits and income. But the Nedlloyd scheme itself took part in the search as a candidate and this presented Maersk the ideal opportunity to compare the Nedlloyd fund with other schemes and pensions providers.
The Nedlloyd scheme thus teamed up with Robeco to benefit from the asset manager’s history in DC scheme investments and management to develop an innovative solution to present to the working group. This was subsequently adopted and implemented.
In the Nedlloyd scheme’ solution a member accrues capital in an individual pot with Robeco. The default life-cycle mix is based on a specific model it devised and adapted covering different periods of a member’s working life and the risk they can take, with higher returns expected from investments in riskier assets, such as equities, during optimal accrual phases. This is based on the strategic asset allocation of the Nedlloyd pension fund, with a minimum funding ratio calling for a 40% allocation to riskier asset classes during the main accrual phases, which matches the allocation of the scheme’s CDC plan and offers a higher rate of return than a traditional insurance company DC arrangement.
An important and innovative feature of the Nedlloyd scheme’s solution is that a member may convert their pensions savings from the individual account into the Nedlloyd scheme itself, removing the market-rate annuity risk associated with DC members’ converting their savings into an actual pension payment plan and any investment risk the member takes on thereafter individually. The Nedlloyd fund’s concept means the risks posed by investment, inflation, longevity and interest rates are shared. As the fund is able to invest in higher-risk assets, the returns are greater and the members may convert their savings at a higher rate than a regular market annuity thanks to a form of conditional indexation.
The new DC model is also designed to offer a degree of flexibility governing how and when the members may access their pension capital as they could convert part of their individual pot into pensions benefit before they retire to remove more risk.
Founded in 1971 but current DC plan in 2015
Hybrid corporate pension fund
- active: 686
- retirees: 7,664
- deferred: 2,818
Market value: €1.36bn
Performance as a percentage:
- one year: 21.8
- three years: 10.1
- five years: 8.6
- Innovative new DC plan offering high returning life-cycle accrual
- Option to convert DC savings into former collective DB-type fund
- Collective annuity spreads risk and enables higher returns during retirement
- SPF Beheer
- Stichting Rabobank Pensioenfonds