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NETHERLANDS – “The Dutch pensions industry had come from being a virtually unknown pension power 10 years ago, to being the global pension revolution leader today,” said Keith Ambachtsheer, academic and strategic adviser to pension plans.

Ambachtsheer, who runs KPA Advisory Services in Toronto, said he was now flying parties of Dutch pensions experts to North America to meet practitioners there to explain the Dutch model.

There were a number of reasons for the growth Ambachtsheer identified. “Dutch pension funds are separate entities by law. The largest ones, led by ABP, have become increasingly arms-length single purpose agencies in action,” he said.

“Maintaining a global leadership requires that this contribution be continued to be valued and fostered.”

He told a farewell symposium in Amsterdam held in honour of Jean Frijns, CIO of ABP Investments, who is leaving the fund: “You are now leading the world in the reengineering of shared risk pension contracts.” These contracts can be regarded standards of fairness, transparency and sustainability, and are based on modern finance principles.

“Led by ABP, Dutch funds are now leading the global hunt for new, innovative investment opportunities, playing an active role in raising global corporate governance standards, in such diverse areas as real estate infrastructure, environmental investing and absolute return strategies.” The Dutch funds are now smart money, he commented

Funds are actively engaged in a vigorous debate on the meaning of governance relating to pension funds. “I do not think there is a consensus yet here as to what exactly good governance in a pensions context means. But at least the right issues are being addressed and debated.”

Ambachtsheer went on to say the new Dutch model represents a major step forward in the actualisation in the pensions field on a global basis. “You are so far ahead of the North Americans in this area that I am actively organising workshops and flying in Dutch expertise. I did one such workshop in Toronto some weeks ago.”

The new model he regarded as neither DB nor DC in traditional sense. “It is a shared risk arrangement whereby they adjust benefits, contributions and investment policy over time to changed circumstances. In the hands of good management this can be a beautiful thing.”

One of the reasons for the emergence of the Dutch leadership is leadership, said Ambachtsheer. He paid tribute to Frijns: “Good revolutions need leaders, otherwise they fizzle out or turn into chaos. In this context one person comes to mind, a truly integrative thinker not afraid to speak his mind, leading by example and patient enough to build a strong organisation of talented individuals.”

Looking at how the investment world had changed in the 18 years, Frijns had been with ABP, Alan Brown, formerly group CIO at State Street Global Advisors, who joins Schroders in London next month.

The current emphasis on liabilities at the centre of pension funds concerns, he said, is highlighting the “large and completely unrewarded tracking error between conventional fixed income market benchmarks and the liabilities of typical pension funds”.

“As a result, I feel a more structured, more swap-based and more derivative-based
fixed income portfolios which will bring investors much more closely to a fund’s actual liabilities.” This should release currently wasted risk budgets to a more profitable purposes.

The industry must learn from the past 10 years, that the static practices it has been following spend too much time concentrating on the small risks and “leave us very flat-footed when the large risks come to the fore”.

“We can move away from the unrealistic assumptions that are at the heart of asset liability modelling today. We can adopt more dynamic policies that truly reflect the goals of pension funds and put the liabilities we are trying to meet at the very centre of our investment processes.”

The skill-based return efforts should be separated from the asset allocation to improve the chances of success. “We can stop wasting precious risk budgets in our fixed income portfolios. Today’s markets provide the tools we need to create structured fixed income solutions much more closely related to our liabilities.”

Brown added: “If we did all these things we would finally move away from Modern Portfolio Theory to truly modern portfolio management.”

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