Committed to flexibility and customised pensions
Still the largest pension fund in the Netherlands, with over a million active members, 700,000 inactive members and 700,000 pensioners, ABP is the self-administered occupational pension scheme for the Dutch public sector. Aside
from pensions, it offers disability and death benefits for survivors and dependants.
ABP’s long-standing defined benefit structure is about to change as it will become a hybrid DB/DC scheme based on career average earnings from 1 January next year. ABP believes the change will enhance its commitment to flexibility and customised pensions and that career average plans are more robust and easier to finance in the long run. In addition to the main scheme, ABP also offers both sector and individual supplementary plans.
But the change doesn’t alter the scheme’s overall objectives to provide a diversified and customised product range alongside high-quality customer service, to ensure low performance fees but high investment returns
and to make use of external benchmarks to track its objectives in practice and compare them with those of its competitors.
Employing some 2,100 staff, ABP carries out the vast majority of its activities itself, including most of its asset management and consultancy work. Its investment portfolios this year consist of 36% equities, 44% fixed income and 20% alternatives. The real estate portfolios make up half the alternatives, with a combination of private equity, commodities and hedge funds accounting for the bulk of the other half.
The element of the fund’s asset management that is outsourced accounts for 25% of overseas investments and is mainly down to costs and the fact that ABP doesn’t have the knowledge of some small and emerging markets to be able to manage these investments inhouse.
ABP says it only uses external consultants for specific projects. Even the selection and screening of external managers is carried out by a dedicated inhouse team.
One notable exception, however, is the use of external actuaries, accountants and custodians, though asset liability matching (ALM) studies are carried out inhouse.
The fund’s financial position is covered by a cost-effective contribution rate that provides hedging against ABP’s actual pensions liabilities, themselves determined by the fair value of investments and obligations. The financial position is also affected by public sector wage developments and ABP says it covers any shortfall with a ‘solvency surcharge’. Recent developments have seen the contribution premium topped up in this way by 14.4% and ABP admits it may have to take steps to improve its financial position the situation gets any worse.
Contributions to the fund are made by both employer and employee, split 75% and 25% respectively. ABP takes a long-term 35-year perspective when calculating the contribution premium to allow for demographic changes and evolution to be taken fully into account.
The contribution rate is based on the fund’s real interest rate and is designed to cover the costs of the pension scheme. This doesn’t vary according to how well the investments do, as ABP explains surplus assets in the form of profit do not result in discounted contributions.
ABP’s investment strategy is based on a multi-alpha – strategic, tactical and operational model and states its investment policy overall is centred on long-term investments that are not automatically linked to the development of its financial position.
The strategic alpha is designed to allow ABP to obtain additional returns on its alternative investments. The tactic should permit the fund to benefit from the vagaries of the financial markets, whist the operational alpha refers to active and strategic investment decisions concerning geography, sector and individual stocks which are designed to lead to diversified portfolios with low correlation.
ABP’s own investment company, ABP Vermogensbeheer, whose staff levels in its New York and Amsterdam offices have doubled from 200 to 400 in the past five years, takes care of the asset management and its mandate is largely to maintain a high rate of return while keeping both costs and risks low.
ABP’s strategic investment policy is determined by the results of asset liability matching studies that also serve as the foundation for its long-term risk budget. ABP takes a flexible approach to its risk management, allowing the asset managers themselves to determine part of the risk budget. The mismatch risk budget year on year depends largely on the fund’s financial position and the economic outlook. In general, ABP’s risk management is based on a coherent premium and indexation policy that is designed to react to developments in the fund’s cover ratio and financial position.
Highlights and achievements
ABP has achieved considerable success in the past few years in the areas of investment returns, the development of its product range, communication, corporate governance and pensions administration.
The fund’s build-up of internal knowledge coupled with the strengthening of its links with universities and niche players has led to some rich investment returns, while the Z score for its return/risk ratio puts ABP in a favourable position among Dutch pension funds.
Moreover, the expansion of its product range and the new hybrid DB/DC structure ensure it remains abreast of market trends and its continued commitment to transparency, quarterly reporting and its active shareholder policy allow it to anticipate and respond to the individual needs of its members.
ABP claims to be a pioneer in increasing the awareness of both national and international investors with respect to corporate governance in the wake of the Enron and Ahold affairs.
ABP’s quarterly report was the first of its kind in the Netherlands but the idea has since been copied by other Dutch pension funds. It has also established a network of ‘contact counters’ where members can enjoy one-on-one interaction with experienced personnel about the state of their pensions and get information on products.