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Fiduciary responsibility: A question of legality

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Managers remain puzzled on meaning of legal amendment

Key points

  • Parliament has adopted a legal amendment designed to limit pension funds’ ability to outsource fiduciary asset management
  • The initiator of the amendment claims that fiduciary management would no longer be possible
  • The social affairs minister Wouter Koolmees has denied fiduciary management is set to become unlawful
  • The ultimate responsibility for outsourcing services still lies with a pension fund’s board

Pieter Omtzigt, a Dutch Christian Democrat MP, has caused a stir in the fiduciary management sector by tabling a legal amendment last October forbidding pension funds from outsourcing the design of strategic investment policy as well as monitoring asset management. In a clarification, he emphasised that the change – adopted by both the lower house and the senate – meant that fiduciary management would no longer be possible. 

The industry is struggling to comprehend the meaning of the amendment, but is assuming not much will change in reality.

In a further clarification, the MP argued that fiduciary management should be abolished, as it could hamper the ability of trustees to control their pension funds. According to Omtzigt, trustees are responsible for monitoring their investments in particular as IORP II demands pension funds have a risk officer. If a scheme outsources supervision, the risk officer would lose track of the risks being taken, he contended.

Commenting on the amendment in December, Wouter Koolmees, the minister for social affairs, said that the concept of fiduciary management would not become unlawful. In his opinion, the amendment underlined that a pension fund had the ultimate responsibility for drawing up policy for strategic asset management, monitoring as well as adjusting, even in case of outsourcing. The board cannot contract out this final responsibility to a manager, he said.

Pieter Omtzigt

Pieter Omtzigt

Koolmees explained that a fiduciary manager’s task is to advise pension funds about investment policy, risk management, portfolio construction as well as the selection of operational asset managers. “Subsequently, the pension fund could take up the implementation of investment policy, or outsource the job to an asset manager,” he says. Koolmees added that the fiduciary manager could – at the request of the scheme – also monitor and report on implementation.

The minister says that this role and task-sharing was already common practice and would now be enshrined in law. Pension funds already following the Dutch Fund and Asset Management Association’s (Dufas) Principles of Fiduciary Management of the would not have to change their practices. However, “other schemes will have to improve the supervision on outsourced services”.

The minister emphasised that his view applied to all investments, including derivatives. “This means that a fiduciary manager for swaps can only supply swaps if their market value can be verified independently in a liquid market. Otherwise, there would be a clear conflict of interest between advice and implementation.”

Van Nunen puzzled
Anton van Nunen, credited with developing the fiduciary concept, agrees with the minister’s interpretation. He emphasises that pension funds did not want to avoid their responsibilities, and that fiduciary managers merely wanted to take responsibility for the execution of policy.

Wouter Koolmees

In his opinion, both the drafting and allocation of responsibilities at pension funds is properly regulated. “The board is responsible for all policy decisions and their implementation. This means establishing the strategic investment policy based on a solid asset-liability management study, defining tactical policy, managing balance risks as well as reporting,” he says.

Van Nunen is puzzled as to why Omtzigt wanted to include these conditions in a legal amendment. “As far as I know, not a single fiduciary manager would like to take on these responsibilities.” 

He argues that fiduciary management has strongly improved the management of institutional assets and has particularly benefited smaller players, who would otherwise not have had access to the neccesary expertise. Van Nunen also disputes Omtzigt’s suggestion that fiduciary management was not permitted in the US: “Large asset managers and other institutions carry out large fiduciary mandates over there”.

Twan van Erp, senior manager strategic portfolio advice at Achmea Investment Management, says he sees no reason to change fiduciary arrangements, pre-existing contracts with clients, or to adjust working practice. “Omtzigt seems to be bent on repairing something that isn’t broken. I can hardly spot any difference between what Omtzigt wants and the current practice, which focuses on communicating with clients about who is responsible for which task. It seems that Omtzigt wants to further clarify the tasks and responsibilities between smaller pension funds and large powerful asset managers”.

Manager to assist pension funds

Fiduciary management is a concept developed by Anton van Nunen, a Dutch specialist in asset management services. It took off in the Netherlands during the mid-2000s. According to Van Nunen, approximately three-quarters of Dutch pension funds have embraced various forms of the model.

In his 2007 book Fiduciary Management: Blueprint for Pension Fund Excellence, Van Nunen stated that fiduciary management should assist pension funds in optimising the diversification of their portfolios, tightly monitoring asset managers and reporting back to boards in the required way. Fiduciary managers therefore, needed to be capable, in particular in accounting for, but also in following and anticipating developments on financial markets.

Van Nunen emphasised that pension fund boards need sufficient expertise to assess their fiduciary, and that they must ultimately be in control. It is up to the board to establish a neutral risk budget and to assess whether the fiduciary manager has met the requirements. Decisions on the strategic portfolio, active risk and benchmark specifications should not be delegated by the board either, he argued.

Fiduciary management is a concept developed by Anton van Nunen, a Dutch specialist in asset management services. It took off in the Netherlands during the mid-2000s. According to Van Nunen, approximately three-quarters of Dutch pension funds have embraced various forms of the model.

In his 2007 book Fiduciary Management: Blueprint for Pension Fund Excellence, Van Nunen stated that fiduciary management should assist pension funds in optimising the diversification of their portfolios, tightly monitoring asset managers and reporting back to boards in the required way. Fiduciary managers therefore, needed to be capable, in particular in accounting for, but also in following and anticipating developments on financial markets.

Van Nunen emphasised that pension fund boards need sufficient expertise to assess their fiduciary, and that they must ultimately be in control. It is up to the board to establish a neutral risk budget and to assess whether the fiduciary manager has met the requirements. Decisions on the strategic portfolio, active risk and benchmark specifications should not be delegated by the board either, he argued.

Twan van Erp

The industry responds
Van Erp says Achmea offers clients a combination of fiduciary and asset management, arguing that this could provide added value for balance risk-driven investments, including the liability-matching investments and interest hedge. “It would be more logical indeed to have return-generating investments managed by an external player.”

Wilse Graveland, Kempen’s head of client solutions, says his firm does not consider the amendment an obstacle to the model of fiduciary services. “In recent years, our service has already largely evolved from fiduciary management to fiduciary advice. Our model has been fully organised along the lines of advice, with the pension funds deciding about asset allocation, hiring of managers, portfolio construction and which services they use.” 

Maarten Thomassen, head of investment and ALM at Aon, also says he does not expect any changes in practice. In his opinion, market practice has already evolved beyond the amendment. He notes that many schemes already have investment advisers and experts on their board to provide advice on asset management. “Moreover, we observed that pension funds often hire different [fiduciary] managers for different portfolios.” 

Thomassen says he does not know a single scheme that is wholly dependent on a fiduciary manager. However, he makes clear that he disagrees with Omtzigt’s suggestion that fiduciary management would no longer be possible.

Wilse Graveland

Dufas says it has not been able to get in touch with Omtzigt yet about the exact interpretation of his amendment. “So far, what has driven Omtzigt has remained guesswork to us,” says Iris van de Looij, the director of Dufas. “We have not noticed any problems in practice and do not see the need for legal changes. And neither does the supervisor, DNB.” Van de Looij confirms that the ultimate responsibility for outsourced services remained with a pension fund’s board.

She also calrifies that Dufas is keen to discuss parliamentary questions asked by Omtzigt in February, in which he claimed that pension funds struggled to hold their fiduciary managers liable for mistakes and gross negligence, because of the way providers had shaped their contracts. 

At the time, the MP argued that the “situation was detrimental, as a number of asset managers and investment institutions operating in the Netherlands had been involved in almost all possible kinds of market abuse” (see box). 

Van de Looij concludes: “We felt a bit shaken by the venomous tone towards the fiduciary managers.” 

Omtzigt did not respond to requests for a clarification of the reasons for his reform initiative.

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