Risk now the magic word
Erik van Ballegooijen resigned as the director of the pension fund of TNO technical research institute in Delft, Netherlands, at the beginning of this year
What was your first full-time job – and do you remember what you were paid at the time?
My first job was as a researcher in the Signal Processing Group at the Physics and Electronics Laboratory (TNO-FEL) of the Netherlands Organisation of Applied Scientific Research (TNO) in The Hague. I started in 1979 and was paid approximately €1,500 a month.
What was the best piece of advice that anyone gave you career-wise and did you take it?
The former head of the TNO personal department advised me to switch from being head of the TNO-FEL Underwater Acoustics Group to become the first director of the TNO Pension Fund, where I started on November 1, 1997.
How did a nice person like you become involved in a pensions career?
I believe there were two major reasons for asking me to become director of the TNO Pension Fund. First, during my eight years as member of the
central labour liaison committee, four as its chairman, I undertook the organisation’s first negotiations on labour conditions, including pension matters.
Second, I oversaw the successful merger of TNO-FEL’s two research groups - the Underwater Group and the Signal Processing Group - into the new Underwater Acoustics Group, of which I was then appointed head. The move into pensions represented a career change. Although the pension fund was formally independent of the sponsor, in reality this was not necessarily the case. So my challenge was to implement this separation. In addition, I had to make the fund more professional.
What was the most satisfying achievement during your career – and why?
In fact, there were three most satisfying moments. The first was during my Underwater Acoustics time when we, a small research group of about 25 people, set up a collaboration with Nice-based Thomson Sintra (now Thales), a large sonar company employing thousands. This proved to be an example of successful co-operation in European defence projects.
The second was the bringing together of a number of pension funds, including the TNO Pension Fund, in a new building – the so-called Pensioengroep Zuid Hoorn (PZH) – to facilitate closer collaboration in the areas of investment policy, facilities management and IT. It is
my firm belief that this is the way
for smaller pension funds to survive in an increasingly complex pension world.
The third was the strong recovery of the TNO Pension Fund’s funding ratio from about 90% in 2003 to around 126% by the end of 2005. Basically, the investment strategies were not changed from those developed before 2003 and this, in my opinion, validated the investment policies and showed that other factors contributed to the exceptionally low funding ratio in 2003.
If I had to choose just one moment it would probably be the last because this discussion touched me the most.
What was the worst moment in your career – and why?
The worst moment was when the funding ratio dropped far below 100%. There were three main reasons for this. For many years the contribution of the pension fund was far below the cost contribution. In addition, in a move that proved very costly to TNO’s defined benefit system, the trustees granted a so-called 13th month to both active employees and pensioners. And the investment results were very poor due to market conditions.
During that period the trustees held me, as chairman of the investment committee, and my team more or less responsible for this, thereby solely emphasising the poor results on the investments. This was my most difficult time at the pension fund.
How would you sell a career in pensions to a prospective newcomer to the industry?
Although being a pension fund director may not appear exciting, it certainly has been in recent years. First, there is a strong pressure to deliver returns on investments. The days when a pension fund could afford to just invest in traditional assets like bonds and equities are history.
The major challenge lies in developing a highly diversified portfolio with a risk-return profile that matches the risk appetite of the pension fund and its sponsor. Risk has become the magic word, while the regulator’s increasing demands complicate life. Then the new financial framework (nFTK), to be introduced on 1 January 2007, necessitates a review of investment strategies. All these challenges create a fascinating job that requires lots of innovative thinking.
What would you do differently?
Do you have any unfilled ambitions?
In principle, no. However, I had hoped that a closer co-operation between the various pension funds in the PZH building would have been realised more rapidly. I underestimated the pension funds’ attachment to their independence and the extent to which trustees believe that interaction with other pension funds will affect their independence.
Are you retiring or are you recycling yourself into some new role?
In Holland, we say: “I am not going to sit behind the geraniums”. After more than eight years in this environment I hope to assist other pension funds or asset managers by sharing my experience with them on a part-time basis.
Your words of wisdom for those in the pensions industry?
I hope that the regulator, DNB, will pay even closer attention to the quality of trustees and the decision-making process. For example, whether trustee decisions meet the requirement that they be well-balanced between the interests of a pension fund’s various stakeholders – active labour, the sponsor, pensioners and sleepers.
Under the new reserve requirements a pension fund’s decision to lower its risk profile by selling part of the equity exposure and putting it into a less risky asset class is rewarded by DNB with a lower mandatory amount of reserves. However, if the same risk reduction is realised by using derivates, this will not lead to lower reserve requirements. It would be more realistic to treat both strategies equally. The obligation to build up an unwanted large exposure in low-yielding, long-term bonds would thereby diminish and leave more money for alpha-generating strategies.
Finally, I must emphasise that if the goals set out in 1997 have been largely realised and I leave the pension fund in a healthy state, it is mainly thanks to the devotion of all those who have worked for it over that period.