April the first next year sees the Netherlands’ Z scores reach their fifth birthday and members of industry-wide funds have the option of dropping out and seeking investment management and pensions administration elsewhere if their scheme fails to meet the prescribed level. The number of funds that are likely to fail is unknown and difficult to gauge given the recent market volatility.
Joos Nijtmans at the VB, the association of industry-wide pension funds, is confident that most of the funds will meet their Z scores. To date none has failed but, he says, the fall in markets makes it that bit harder to predict. The Z scores have themselves come under fire for forcing industry-wide funds to take a more passive approach to investment and some argue that the formula for calculating them is fundamentally flawed (see box). Frans Prijns, the VB’s managing director, earlier this year said he expected some of the sector wide funds to drop below the minimum level.
Those that do are likely at least to be approached by both sector funds that offer investment management and pensions administration and by insurance companies. One investment manager in the Netherlands says there is no evidence of member companies who have declared themselves desperate to leave the industry-wide funds. But there is, in his words, a terrible information gap in that many of the smaller company members are unaware they are able to opt out if their schemes fail to meet the Z scores.
According to the same manager, the most likely scenario is that insurance companies and industry-wide funds are likely to approach members and bring it to their attention that there is an alternative. And if these members prove receptive, some of those poorly performing sector funds might face a similar prospect to PVF Achmea, part of the Eureko Group, which has seen a number of pension schemes leaving since its privatisation.
“PVF is no longer a sector pension fund so companies are free to go,” says Michel Ho, director of business development at Dresdner RCM in Badhoevedorp. Earlier this year there were reports in the Dutch press quoting the board of PMI, the pension fund for metal workers, as being dissatisfied with the level of service they were receiving from PVF Achmea. These articles sent home an uncomfortable reality.
“This has shocked the industry because they basically made PVF Achmea aware of the fact that it could lose the metal industry, one of the biggest funds in its portfolio,” says Ho. “They can basically do what they want and opt out of the asset management contract whenever they want.”
When PMI’s new managing director Roland van den Brink arrived from MN Services in May, the fund underwent considerable change. “When I arrived I thought there had to be a change is strategy,” he says. Once PVF Achmea, who originally carried out the investment management and administration, was privatised, there was what van den Brink calls a change in interests.
The shift in assets from PVF, due in 2002, is not a significant loss to the Eureko Group as a whole since the NGL17.5bn (e8bn) in assets is heading to Foreign & Colonial in London. PMI is also looking for index managers and a new custodian to replace PVF. Van den Brink says that the change in strategy has nothing to do with Z scores. Nevertheless, there are parallels. PMI moved because it was unhappy with the level of service from Achmea and the somewhat limited range of products on offer.
Others have already taken their business elsewhere. Horeca, the e970m caterers’ pension fund has switched part of the pension scheme from PVF to Robeco after disappointing results. Last year the NGL 3.8bn public transport workers fund (SPOV) left PVF to join Spoorweg, the railway workers pension fund who now provides investment management and administration. The transition was less than plain sailing since SPOV was in a pooled fund and its due assets were hard to ascertain. Accountants from Achmea and Spoorweg are trying to reach some agreement and chief investment officer Ton Groeneveld hopes to have the remainder, which he describes as a small fraction, by the end of the year.
Groeneveld says that the public transport fund is their first success since Spoorweg split in 1994. Although he says they are about to take on another pension fund soon, he predicts the Z scores are unlikely to have a very large impact on the industry-wide schemes. Some sector funds are likely to fail and consequently he says there is a certain logic in marketing yourselves to those companies in underperforming funds.
SFB, the NGL35bn investment management arm for the construction workers fund, who has been negotiating with MN Services for some time, has already separated the pension fund from the fund management company, as has MN Services. Although neither are promoting themselves aggressively as independent investment managers, the structure is already there. “It doesn’t necessarily mean that they are going to go into third party business but they could,” says Ho.
According to Loues Laan, head of equities at SFB, their largest client is the builders pension fund although they also provide management for other related pension funds including the roofers an building merchants. Laan is candid about the strategy of SFB “In the future we will try to manage asset for other pension funds outside of the building industry.”
Says Ho: “Most of these sector funds are now turning into commercial asset management companies.” AZL, the mine workers pension is promoting itself as an investment manager while, on a slightly grander scale, ABP and PGGM have the joint venture NIB Capital. ABP is focusing on the local government market where there are large sums that need investing according to strict government guidelines.
Even some of the company pension funds are putting clear water between their investment divisions and pension funds. KLM recently announced its Blue Sky Group that will offer strategic and tactical asset allocation in addition to manager and custodian selection. KLM will initially market itself to those is similar industries to itself but that eventually it will offer services to smaller funds.
Although managers such as SFB and MN services would be perfectly suited to take on other fund’s assets, in practice it may prove a little trickier. “I doubt whether the Z score will encourage the different companies under the sector fund to leave because there’s more than just the investment performance,” says Ho. Performance is only one element of the equation, all the other duties-custody and administration- are more difficult to replace and typically companies in the sector funds have five or 10 employees making it relatively impractical for them to launch their own schemes.
And van den Brink is resolute about the attributes of the Z score system. He says that in practice it will be very difficult for companies to drop out. In addition, few will be able to because the bar has been set so low that failing to meet the requisite –1.28 will be some achievement. Instead, he says, the Z score system is something to
be celebrated. “The Dutch have established an open, competitive market for mandatory pension funds,” he says.
Despite this, come publication of the Z scores in April next year, many industry-wide funds and their investment management departments will no doubt be keeping a eye on their contemporaries’ performance.

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