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Staying calm in adversity

Figures released in April by the Association of Industry-wide Pension Funds (VB) and the Company Pension Fund Organisation (OPF) showed that the average return for Dutch pension funds during 2001 was –2.8%, after average returns of 10% a year during the past decade. In just over a year, the average of pension fund reserves as a percentage of liabilities dropped from around 140% to 120%, resulting in serious concerns about the future health of the industry.
It might seem that for those pension funds with reserves problems reconsidering their approach to equities could be the only way forward, but the truth is that Dutch institutional investors’ exposure to stocks has not been reduced. On the contrary, figures released by the VB/OPF suggest that equity exposure among pension funds increased to 44% of total assets in 2001 from the 41% registered at the end of the previous year.
Even after 11 September, there were no significant moves away from equities in institutional portfolios, showing that – despite losses in assets – Dutch investors are sticking to their long-term strategies.
According to the latest Bureau Bosch fund manager survey, Dutch funds lost a combined €79bn since the beginning of 2001. The report says that poor market conditions have wiped €47bn off the value of Dutch funds during the first half of this year, compounding last year’s loss of €32bn.
A good example of this situation is ABP, Europe’s largest pension fund, which started 2001 with €150bn in assets and lost €3bn during the following three months. Like many other Dutch pension funds, ABP is reviewing its financial strategy and increased contribution rates at the beginning of this year. The fund has also designed a risk budgeting system that identifies investment that can generate extra returns without additional risk.
PGGM, the second largest fund, also had disappointing investment returns of –6% during last year, and blamed its €2.8bn investments in private equity, which dropped 24.8% during 2001 and underperformed the benchmark by almost 15 points.
According to official figures published by the WM Company, other large funds suffered major losses. The €9.9bn Spoorweg fund for railway workers fell 6.1%, Philips’ €14.7bn scheme fell 5.7%, Rabobank’s €4.5bn fund fell 5.5% and Shell’s €12.2bn scheme by 4.9%.
However, the reaction to these negative investment returns has shown, once again, the professionalism of the Dutch market. Instead of panicking, investors are following the example of big names like ABP and focusing on risk budgeting, trying to find solutions that can maintain the quality and integrity of the industry. As a consequence of this, issues relating to cost and accountability are acquiring greater significance. “The boards want to change the way pension funds operate on both the investment and the administrative side,” a VB spokesman told IPE this summer. “They are planning to set up small offices with only one goal: to manage the managers. If you don’t manage the managers you can end up paying too high fees and obtaining disappointing results.”
Despite this environment of poor performance not all the news was bad for pension funds. In April, the results of the first performance test of the Z-score system introduced in 1998 were published. The good news was that all compulsory industry-wide pension funds in the Netherlands ‘passed’ the exam. Under this system pension fund boards have to specify a standard portfolio prior to each new investment year, taking into account the risk they are able and willing to take. Once this is done the board has to choose an index reflecting a similar allocation of assets and at the end of each year the results of the standard portfolio and the specific benchmark are compared. The results published in April were taken over a 3.7-year rolling period and showed how most funds improved the performance of the standard portfolio.
However, the whole functioning of the Z-score system has been highly debated in the market, and some have questioned its rational validity as a performance measurement tool. The VB has made public its concerns about the fact the system could promote passive management among pension funds in a negative Z-score zone, and the duration of the testing period which they consider to be too short.
In the same way as performance has been under review, contributions to the system have also been debated in the market. In July the new Dutch government announced its intention to cut tax exemption levels for contributions to occupational schemes, a move that will force workers either to retire earlier or to pay more for an equivalent final salary pension.

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