Netherlands: Joint efforts yield results on cost disclosure
Carlo Svaluto Moreolo outlines how Dutch pension funds have changed the way they gather and present information on investment costs
At a glance
• The Dutch pension sector has developed a cost-disclosure framework.
• Improving data and transparency on costs involves additional focus on organisational costs.
• ‘Cost awareness’ and ‘cost responsiveness’ are key issues for funds.
Pensions have become a such regular and emotionally charged topic of discussion for the Dutch public that it should be no surprise that the sector has turned its attention to costs. The adoption of a cost-disclosure framework that allows pension funds to control costs is the result of a joint effort by funds and regulators.
Regulators have had a key role in the process by gathering and publishing information and making recommendations.
In 2011, the Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, AFM) published a report showing that a cost reduction of 0.25% would result in a 7.5% increase in collective pension assets over a period of 40 years. The report is seen as a turning point in the debate about costs in the country.
Later studies by the AFM and De Nederlandsche Bank (DNB) – the Dutch central bank and pension fund regulator – offered further insight into the cost profiles of pension funds and proposed solutions to the problem.
In 2012, the AFM proposed Total Cost of Ownership (TCO) as a measure to help pension funds make sense of their complicated cost structures. The AFM defines TCO as “a cost criterion that makes the amount of all the costs of the investment services clear for the consumer”. TCO is different from an all-in price, as the latter only reflects the direct costs, according to the authority.
In 2014, the AFM went further, recommending that pension funds publish a breakdown of all costs in their annual reports, asking for improved transparency on gross and net returns as well as estimates of transaction costs.
In 2015, the DNB and the AMF found that the average asset management costs, excluding transaction costs, was 55bps in a sample of 242 pension funds.
The regulators also suggested that there is room for improvement in how Dutch pension funds report costs. Yet the industry has come a long way since 2011. All funds report asset management costs and the vast majority offers more detail on implicit and explicit investment costs as well as estimates of transaction costs.
Some of the country’s largest pension funds are leading the introduction of the framework. Among these pioneers is Pensioenfonds Zorg en Welzijn (PFZW), the pension scheme for the health industry. PFZW is the second-largest scheme in the Netherlands in terms of assets under management, which stood at about €180bn as of October last year. The scheme has put cost control at the forefront of its agenda. Its asset management arm, PGGM, is responsible for implementing the scheme’s cost strategy.
“As part of the protocol, layered fee structures like fund-of-funds were abandoned. PGGM instead focuses on disintermediation and insourcing in private markets and on investing more through joint ventures, co-investments and direct deals”
Frits Meerdink, manager of fund management at the PGGM, says: “PGGM considers it a fiduciary duty to contribute to cost awareness and cost transparency, and to further enhance and institutionalise this.”
Meerdink emphasises the importance of “cost awareness”, which represents a step further from a “narrow” focus on absolute or relative level of costs. Fixating on costs as a percentage of assets may distract from the ultimate objective, which is a sustainable and valuable pension outcome for members.
For Meerdink, cost awareness is a pre-condition to what he calls “cost responsiveness and control”. This is an approach that includes adequate monitoring of existing investments, managers and service providers.
The approach enables PGGM to make the necessary adjustments to existing mandates, policies and practices. “Full transparency of fees and cost levels is both a condition and a tool for effectively negotiating them down,” adds Meerdink.
He recounts how over the past five years PGGM has taken several steps to improve policies and processes with regard to cost transparency and control.
PGGM introduced a fee protocol that sets the standards for fee levels that it deems justifiable and outlines acceptable fee arrangements. “High costs can only be justified by high returns, thereby placing value-added centre stage. Performance fee arrangements are scrutinised and evaluated,” adds Meerdink.
“When hiring new managers and setting up new deals, fair remuneration policies are a key item in due diligence. Furthermore our guideline for remunerations of portfolio companies directs our voting in shareholders meetings. Remuneration must be aligned with sustainability goals.”
As part of the protocol, layered fee structures like fund-of-funds were abandoned. PGGM instead focuses on disintermediation and insourcing in private markets and on investing more through joint ventures, co-investments and direct deals.
Meerdink continues: “Cost reduction for clients also meant a rigorous assessment of our own cost levels, resulting in a programme to cut our own costs.”
The firm launched a database of costs to aid cost analysis and reporting to clients.
“Total cost reporting has become part of the standard service to clients. To aggregate the appropriate data, all actors in the value chain have been asked to report total costs. We do not accept costs to stay ‘hidden’; managers must complete fee templates showing all costs,” Meerdink concludes.