‘Perseverance is crucial’
Nina Röhrbein assesses this year's cross-border fiduciary management deal between APG in the Netherlands and Italy's PensPlan
Cross-border alliances may be a good idea in theory, but putting them into practice often founders on legal, fiscal or operational obstacles.
Early this year, Dutch pension administrator and asset management company APG Group - which merged with fiduciary manager Cordares last year - began its partnership with €1.6bn PensPlan, a foundation promoting and providing asset management services to pension funds in Italy's Trentino-South Tyrol region.
The deal, which initially involves APG/Cordares managing €100m in assets for the Italian provider, is beneficial to both parties, according to international pensions expert Peter Kraneveld, who advised.
"They both have their own goals, which are perfectly compatible," he says. "PensPlan's main goal is to catch the best investment practices. The partnership means better diversification for PensPlan because it will have access to more asset categories. Due to access to sophisticated risk management procedures, it will also end up with better risk management and investment procedures. In addition, there are scale advantages on both the cost and the benefit side. APG/Cordares' main goal is to gain experience with international fiduciary management. As such co-operation is still quite new."
"We approached Cordares because we wanted to become European-minded," says Michael Atzwanger, managing director at PensPlan. "We have to do the best we can for the population we represent, which as of today is having independent asset management and a possibility to pool assets."
"The reason for us going to Italy was because of the institutional changes that have been taking place in the country, namely the reform of the trattamento di fine rapporto (TFR) and its attempt to create better funded second pillar pensions," adds Alwin Oerlemans, deputy director institutional clients at APG Group.
The partnership also saw units of the Dutch FGR (Fonds voor Gemene Rekening) introduced as a legal instrument in Italy.
According to Atzwanger, the Italian asset management industry has been losing assets to other countries, particularly Luxembourg, which provides the majority of the custodian and servicing business, as well as 98% of mutual funds to Italian retail investors.
"Our first idea was to create a pooling structure in Luxembourg to serve our pension funds," he says. "But as the opportunity to work together with Cordares came up we stopped the Luxembourg idea for a while. We introduced the Dutch FGR as the principal pooling vehicle to be used for our pension funds and Italian clients because, in contrast to Luxembourg, it seemed to us that the Dutch pooling environment was more pension-fund related, giving us the possibility to co-invest with APG/Cordares. We will, however, still use some Luxembourg vehicles to pool other assets, which are not co-invested with APG/Cordares and are managed in-house."
FGRs are "competitive and tax-transparent", according to Oerlemans, while Atzwanger calls them "95% tax-efficient".
"To build the co-operation between APG/Cordares and PensPlan the former needed to have a strong, innovative partner in place," says Atzwanger. "Being home to strong pension funds such as ABP is a competitive advantage for the Netherlands, just like the independent asset and fiduciary management it performs. The challenge was to create Italian financial, tax, legal and operational know-how to be able to import Dutch asset management expertise into Italy."
"But everywhere in Europe there is a different understanding of fiduciary management," stresses Atzwanger. "Because Italy has a DC environment we are not interested in fiduciary management in the Dutch sense. Asset liability management, for instance, has yet to attract much interest in Italy because we are still in the pay-in phase, which will last another 10-15 years. We are only interested in the part which relates to asset management, in other words the way of structuring the pay-in phase so that it creates the most benefits for the population. Providing diversified, independent and flexible management for Italian assets is what is important for the country's pension funds and the institutional investor market."
While the pooling that resulted from the deal has increased the diversification of PensPlan's portfolio by a factor of three, it has come at a cost. However, this did not rise in proportion to the diversification, Atzwanger stresses.
To allow Italian pension funds and institutional investors to invest in the Dutch fund of fund, PensPlan had to set up a strong risk management department based in Italy in order to satisfy compliance and reporting duties prescribed by Italian law.
It had to hire a custodian bank as information provider that collects portfolio information from the APG/Cordares pools. Among the other professionals involved in setting up the APG/Cordares-PensPlan deal were lawyers, including tax lawyers, auditors, the back office, the risk office software provider and asset management professionals on both sides to provide an operational solution suitable for Italian pension funds and investors.
PensPlan shared the cost for creating the co-operation with APG/Cordares. But since the investment timing in the fund of fund was excellent, such costs are already forgotten, according to Atzwanger. "We are fully convinced that this is the best available solution for our population today despite the costs and initial set-up problems," he says.
"If you want to bring in foreign strategies the risk always has to be controlled in the place where you are located, as no supervisor will allow you to move the risk control outside your borders," he adds. "Local or in-house risk management is key to making supervisors comfortable."
"Having a good risk infrastructure on both sides, not just on one side, is crucial," adds Oerlemans. "It allows both of us to exchange information on the portfolios and manage the risks involved, which is very important for managing our objectives. It is, in fact, similar to the Dutch situation where pension funds, even if they use external providers for pension fund execution, remain responsible for the funds."
"The only way to introduce new asset classes - such as APG's music rights - is to have the risk under control," emphasises Atzwanger. "In this cooperation, we can profit from the expertise the Dutch have, while they can learn how foreign supervisors think and what risks have to be measured for them."
Kraneveld believes this kind of deal can technically be done everywhere although the requirements are high and not all quantifiable. He thinks that because even within the same country pension fund cultures can be completely different there needs to be a pool of goodwill on both sides so that in the case of misunderstandings the parties can work out a solution. Perseverance and patience are other crucial elements, as it takes an enormous amount of planning, according to Kraneveld. An independent middleman who can interpret what each party is saying is also important.
"This partnership will work because of PensPlan's 5% long-term track record and APG/Cordares' 9% long-term track record," he adds. "It means that in this deal, PensPlan gets access to a better expected return with a similar or unchanged risk profile due to such factors as improved economics of scale."
In the end it is all about globalisation, according to Atzwanger. He believes that pension funds fundamentally all have the same problems and could benefit from working together regardless of the size of their assets under management. "We have an alignment of interest with APG/Cordares because we try to remain independent as a fund but at the same time cooperate on pooling operations," he says. "Our idea is that we are trying to set up a cross-border family office for European pension funds."
And he has seen interest rise in this area.
"We have already been contacted by other pension funds in Austria and Germany regarding this," says Atzwanger. "The crisis has led to strategy reviews by institutional investors and pushes them towards independent asset management."