On the right track
The pension fund of the Dutch rail system, Spoorwegpensioenfonds (SPF) is the oldest and now one of the largest pension funds in the Netherlands, with some 77,000 members and assets of €10bn.
The non-compulsory, industry-wide fund, which celebrates its 160th anniversary this year, was one of the first funds in the Netherlands to hive off the management of its pension into a stand-alone management company, SPF Beheer.
Today SPF Beheer, based in Utrecht, manages the SPF fund and the Dutch public transport workers’ pensions fund, Stichting Pensioenfonds Openbaar Vervoer (SPOV) with assets of €2.5bn assets and 27,000 members. SPF Beheer acquired the SPOV business in open competition with other pension management companies in 1999. Besides these two large clients, SPF Beheer manages seven other transport related clients.
SPF Beheer also provides specialist services such as private equity expertise to a pension fund whose parent companies’ activities are unrelated to transport.
John van Markwijk, the chief investment officer of SPF Beheer, says the company’s experience of running one of the 10 largest pension funds in the Netherlands provides the know-how that could be useful to other pension funds. “We are constantly in the front line of knowledge, and with our experience and size we are in a position to help other pension funds. We offer that knowledge as a special product of our company to other pension management companies.”
SPF Beheer is involved in the full spectrum of pensions activity – pensions administration and asset management as well as broader policy issues. Two years ago, for example, it was part of a working group of 25 of the world’s leading asset managers which produced a consultation paper aimed at improving standards in Europe’s credit market. SPF Beheer expects its investment team to take a holistic view of their job, Van Markwijk says.
“When I hire people I choose people who have a broad view of working for a pension fund rather than looking only at what they do and ignoring everything else. They have to consider what their contribution is to the total product of SPF Beheer and the clients. That’s the culture.”
Investment style for both the SPF and SPOV pension funds is characterised as “solid and active”. Investment policy reflects the different characteristics of the two funds.
Marcel Andringa, head of investment strategy at SPF Beheer, explains: “The most important differences are that SPF invests a larger percentage in equities than SPOV and SPF invests in private equity and at the moment SPOV does not.”
Last year, the strategic asset mix for SPF was 46% in equities, 5% in private equity and 36% in fixed income. The mix for SPOV was 36% in equities and 54% in fixed income securities. Both the funds have exposure in real estate.
One reason for the different asset allocations, he says, is that the coverage ratio of SPF is higher than that of SPOV. SPF has a coverage ratio of 165 to 170%, well above its peers, while SPOV’s ratio is around 133% (at a 4% discount rate). “That allows us to take a little bit more risk in the SPF portfolio,” he adds.
“The other reason is that the average age of the members of SPOV is older than that of SPF, so more is invested in fixed income,” he says.
“The coverage ratio at SPF offers the possibility to really think on long-term investing and you can choose from categories and investments policies that are long-term. At the moment we are considering this with the board both on the strategic and tactical side.”
There are also differences in allocations to real estate. “Throughout its history SPF has had a real estate portfolio of about 12 to 13%. We are now creating a real estate portfolio for SPOV of 10%.”
Most of the asset classes are managed in-house. Some 70% of the equity portfolio is managed internally and 95% of the fixed income portfolio.
External management is limited to specialised asset classes such as emerging market and high-yield debt. SPF Beheer’s aim is to manage assets in-house as much as it can.
The aim is also to keep costs down and knowledge up, says Van Markwijk. “It is what clients demand. We have external mandates for emerging market debt and clients said ‘that’s a lot of basis points for that – is this really necessary?’.”
Hiring external managers does not necessarily lead to higher performance, he says. “There is no guarantee of success with external managers. All you can be certain of is the number of basis points you have to pay them each year.”
The objective is to outperform the internal benchmark. SPF’s return last year was 9.1% against a benchmark of 8.7%, while SPOV returned 7.6% against a benchmark of 7.8%. Yet SPF Beheer looks beyond the benchmark, Van Markwijk says. “We have the duty to outperform the benchmark, but it is not enough to look only at the tactical, relative performance. We also have to consider the absolute return and the long-term perspective.”
“I can play the game of overweighting and underweighting securities in the benchmark, but I have to ask whether it is always in the interest of the pension fund to invest tactically this way.”
SPF Beheer divides its equity investments into a tactical and strategic portfolio, says van Markwijk. “We now have tactical equity portfolios with a short horizon of less than three years and we have to report the results from quarter to quarter to the board. And we have to outperform, no doubt about that.
“But we have also constructed a longer-term strategic equity portfolio that enables us to make some larger stakes in some companies that are under-valued.”
SPF has a strategic allocation of 10% to real estate, which last year accounted for 11.2% of the portfolio. Most of this, 80%, is invested in the Netherlands and 95% of this is direct investment. Global investment in real estate is managed through property funds, with 40% invested in the US and 60% in Europe including the UK. SPOV’s exposure to real estate has been increased progressively from 0.8% in 2001 to 4% last year.
Hedge funds have so far not figured in the portfolio, and are unlikely to do so in the future, says van Markwijk. “We have looked at them because we have a duty to look at all opportunities. But we think that most hedge funds are black boxes – there’s not enough regulation, bad governance and we don’t believe the results we see in the indices.”
Diversification does not mean putting as many asset classes into a portfolio as possible, he adds. “I could put a lot of asset categories into an ALM study such as Dutch art of the 19th century. It will diversify but I ask myself whether it is really useful for our pension funds.
“Fortunately the board gives us the freedom not to follow our peer group too closely. So when everyone else is investing in hedge funds, we don’t have to, just because everyone else does.”
The investment policy of SPF and SPOV is not focused exclusively on return. The boards have drawn up and begun to implement a more stringent policy of socially responsible investment (SRI) in its European portfolio.
In the portfolio SPF underweights investment in securities of companies which are failing in their SRI, and overweights investment in companies with a good SRI record. If companies fail to improve, SPF may be told to sell their securities. The impact of the re-weightings is closely monitored, van Markwijk says. “The board will ask us to show them in our quarterly report what the effects are on the performance of underweighting poor scoring companies and overweighting better scoring companies. They want to know what their principles are costing in daily practice.”
SPF Beheer is also active in corporate governance. It votes at every annual meeting of a company in which its funds are shareholders, through a web-based proxy voting platform. It also speaks out at shareholders meetings when it believes this is necessary. “We give our point of view and I think companies listen to what we say,” van Markwijk says.
The general approach, he says, is to be actively engaged but to adopt a relatively low profile. “We are not at the barricades. We prefer to do things more in the background.”
Yet one issue has brought SPF Beheer close to the barricades – the introduction of the new financial assessment framework, Financiel Toetsingskader (FTK), which from January 2007 will change the way pension funds calculate their liabilities.
The key changes are the marked to market value of liabilities and a new solvency test. Assets must be high enough (105%) to cover the liabilities in a one-year horizon with a probability set at 97.5%.
Andringa says the new FTK will have a significant impact on pension funds’ investment strategy. “Having to change policies to improve the coverage ration will impact the whole quality of pension fund schemes together with high pension contributions.
“One of the greatest risks of new FTK, especially in the solvency test, is that the horizon becomes too short. A pension fund normally has a long horizon and this doesn’t mix with the solvency test. The result will be sub-optimal investment strategies.”
To meet the new solvency requirements, pension funds will have to increase premiums. Higher pension contributions will impact the Dutch economy, says Andringa. “One of the reasons why consumer spending in the Netherlands is not very healthy is that most people’s net salary is lower and one of the reasons for this is the higher pension premiums they have to pay.”
One of the casualties of the new regime is the indexation of pensions, says van Markwijk. “No-one can afford to pay guaranteed indexation, it’s not sensible. Politicians may demand guarantees but the price is too high.”
Like other Dutch pension fund managers, SPF Beheer is reviewing the increasing number of liability-matching products on the market, says van Markwijk. “We are looking seriously at the use of swaps and swaptions. These are good instruments, although they have a price.
“But we are not in a hurry to match our liabilities. Everyone says that interest rates are too low. We say they can go lower. Up to a certain percentage we have taken that into account.”
SPF Beheer values its independence, and believes that others do recognise this. “We have a good image. When we ask people how they perceive SPF Beheer, they tell us people who know what they’re talking about, not a glossy company,” says van Markwijk.
“We don’t want to become a factory. We want to be specialist retailer rather than a supermarket. We want to pay a lot of attention to a limited amount of clients. And we want to be independent. That’s important.”