PGGM: No ordinary fiduciary manager

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When PGGM was spun off from the industry-wide healthcare scheme PFZW in January of 2008, a new giant fiduciary manager seemed to enter the Dutch market. But although PGGM offers ‘integrated asset management’, the organisation has shunned the fiduciary management label. PGGM Asset Management CEO, Else Bos, explains why to Mariska van der Westen

Now that PGGM and the industry-wide healthcare scheme have parted ways the pension fund manager has expanded its range quite a bit, but empathically stays true to its roots. “Our home turf is still the healthcare industry,” explains Else Bos, CEO of PGGM Asset Management. “Our core product is still to provide full service integrated benefit administration, asset management and trustee support services, just as we did previously, before the spin-off. The only difference is that we now provide these services to more than one pension scheme within the industry. In addition, we also offer integrated asset management solutions to pension schemes outside the healthcare sector.”

PGGM serves the health and welfare industry in the broadest sense of the word, including healthcare, wellness and lifestyle-related industries and the arts. Besides PFZW, the €78.5bn healthcare scheme, PGGM now has a second full service customer for which the manager provides both benefit administration and asset management: the tiny €20m professional pension fund for independent artists, Aena.

In addition, PGGM has garnered its first mandates outside the healthcare industry. Earlier this year the €2.2bn architects scheme and the €300m industry-wide scheme for private security firms entrusted their asset management to PGGM. The manager is also presently in exclusive talks with the pension scheme for Dutch preachers.

“It’s not like we are in a hurry to try and win dozens of clients. We’ll be perfectly happy to serve ten schemes a few years from now,” Bos says. “When making such a huge turnabout in ones business model, it’s important to strike a balance between ‘full steam ahead’ and ‘don’t bite off more than you can chew’. So we are aiming for controlled growth.”

No fiduciary management
Even though PGGM provides one-stop shop asset management, the manager does not label itself a fiduciary manager. “Not everyone is in agreement as to what ‘fiduciary management’ means, which makes it hard to compare providers. That is the reason why we shun the label,” says Bos. “We prefer to say we provide integrated asset management services.”

PGGM offers these services either as part of a one-stop shop solution including benefit administration and trustee support, or as a stand-alone service to non-healthcare pension schemes.

“What we do is actually much the same as we used to do when we were still part of a self-administering pension scheme, except now we translate this to a process that can be utilised for multiple pension schemes,” explains Bos.

Coming from a situation of servicing a single large client, isn’t it difficult to ‘translate’ this to servicing multiple, often much smaller pension schemes? “The key is to ensure that operational processes can be replicated. That way, we can achieve a level of efficiency in implementation where the size of the scheme no longer makes much of a difference,” Bos replies.

Designing a scheme’s unique investment policy is a highly personalised and labour-intensive endeavour, but as long as pension fund assets can subsequently be pooled, the actual investment process can be streamlined to achieve a high level of efficiency, she explains.

“Starting from a scheme’s tolerance for risk, our first step is to translate the asset liability management study to an investment plan. This first step is highly customer-specific and we invest a great deal of attention and effort into understanding the scheme’s ambitions and communicating with the board of trustees. But once the investment plan has been drawn up, we pool the assets of our various pension fund clients as much as possible. To this end we have launched nearly twenty PGGM investment funds. If necessary the funds can be complemented by segregated mandates, but with an eye towards efficiency we try to limit these as much as possible.”

Despite this approach, size does matter. “That is why we do impose a lower limit on non-healthcare schemes that are asset management clients only.” This limit does not apply to schemes within the healthcare and welfare sector: PGGM’s objective is to provide a service platform for all schemes within the industry, regardless of size.

And eventually also regardless of location: in the future, PGGM will not necessarily limit its services to Dutch schemes, says Bos. “As I’ve mentioned we aim for controlled growth and that also applies to international activities. So first and foremost, we want to provide excellent services to the schemes in our home country.” But the so-called ‘social partners’ - employers and employee representatives that sit on pension schemes’ board of trustees - are well aware that cross-border labour mobility in the healthcare industry is on the rise, “so this is something we’re considering from the pension fund manager perspective as well.”

Providing insight
PGGM’s close ties with trustees and social partners in the healthcare sector determine the way the organisation has responded to the crisis. “Because we used to be fully integrated into a pension scheme in the recent past, we have first-hand experience of what a scheme needs to make informed decisions,” Bos explains. “We believe that our main task is to provide insight. Our role is to provide schemes with all the clear and accessible information they need to understand the risks and make decisions.”

The decisions that pension schemes are presently facing will have far-reaching consequences. “Pension professionals have long been aware of tail risks and of the fact that our pensions system offers no ‘de facto’ guarantees in the case of a major crisis. But the rest of the world is only just beginning to catch on. Decisions regarding risk management that are made today will to a great extent determine the shape of pension arrangements - and the corresponding asset management - to come.”

This can go one of two ways: “Either one accepts that risks and uncertainties are a necessary part of the system because they afford the opportunity to realise a good pension outcome. In that case we continue along the same conceptual lines and there is no need to make substantial changes in terms of asset management. After all, as long as the long-term view continues to be our guiding principle, it makes no sense to change the basic investment strategy,” says Bos. “But it may well be that risks are no longer deemed acceptable and pension arrangements are in fact expected to offer more security - regardless of whether one opts for nominal or real, inflation-linked guarantees. Choices like that do have consequences for the way assets are invested.”

Improving from a position of strength
The first challenge pension schemes face, therefore, is to manage their plan participants’ risk perception and risk tolerance. “On one hand, this is a matter of communication - how are you going to communicate to your participants that the scheme involves risks, and how are you going to communicate the purpose of those risks?” says Bos. “On the other hand the scheme needs to determine how to deal with the risks involved. Should the pension arrangement be more explicit about the risks, or should there be a guaranteed ‘bottom’? Once these issues have been decided, the next step is to determine how to follow through in terms of the fund’s investments.”

The second challenge concerns the ‘real’ versus ‘nominal’ dilemma. “This is a crucial issue, particularly since the situation at present is extremely complicated because the supervisory regime has a nominal focus whereas our ambitions are ‘real’.”

The issue has substantial implications for the way pension assets are invested. “If a scheme’s objectives are real, meaning that the board of trustees would like to have the
possibility to compensate benefits for inflation, the best way to go would be to invest in real assets - such as infrastructure, stocks, and real interest rate swaps. However, if a scheme chooses to offer nominal guarantees in their pension arrangement, investments should be geared differently and for instance include nominal interest related assets. In that case we will point out to the scheme that this does have a negative impact on participants’ purchasing power in the event of rising inflation. It is not up to me as a manager to have an opinion on the decision a scheme makes, but it is definitely up to me to provide insight in the implications of these decisions.”

In addition, Bos sees a third challenge for the pension industry. “In response to the crisis there are quite a few critics claiming that our pension system is no good and is in need of an overhaul. But we have a basically sound system, particularly when compared to other countries. So I would like to implore people to improve from a position of strength rather than destroying what is essentially a wonderful pension system.”

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