Streamlined structure and clear-cut principles pay off
Bedrijfstakpensioenfonds Metalektro (PME), the €18bn pension fund for the Dutch mechanical and engineering industries, says its success is down to its streamlined and efficient structure and clear-cut principles that govern the way it works.
To begin with, PME has a strong executive board that determines basic policy. This is supported by a small but efficient administrative office which overseas the policy's implementation and looks after the general interests of the fund.
In addition to arranging meetings, handling all communication and setting the agenda for the board, this office, with a staff of just 12 serving a scheme with 300,000 members and pensioners representing 1,300 companies, agrees performance targets and assumes responsibility for achieving them using the best and most cost-effective organisations around the world.
This approach has two objectives: to achieve optimum returns from investments with minimum risk while ensuring both members and the sponsors are satisfied.
Pension fund administration and asset management are outsourced. There are clearly established principles and performance targets. But that's just the hors d'oeuvre.
PME considers itself a leader and it is proud to say it is one of the first funds to be prepared for the Netherlands' soon-to-be-implemented liability matching regulations, the Financial Assessment Framework (FTK). "The scheme is already operating with a strategy geared towards lower interest rates and as such has already hedged half of its interest rate risk," PME says. "The results are already evident. In the past 12 months, falling interest rates have had a substantial impact on the funding ratio when measured on market rates to be employed under the FTK, but PME has succeeded in minimising the effect by hedging the interest rate risk."
With the FTK looming, many Dutch pension funds have been wondering how to translate pension fund obligations into investable indices. PME has solved this problem by using the Lehman Bellwether swap indices. The fund says it has deliberately steered clear of fashionable investments like hedge funds and private equity and says its investment policy is based on innovation with a long-term view. Essentially, PME says this means it can get the best qualities and therefore results form its asset managers.
PME claims it has consistently achieved one of the highest rates of return with minimum risk for a pension scheme in the Netherlands. It says this is largely thanks to diversification. A good example of this is its fixed income portfolio where only one third is allocated to high yield bonds while the range of products in the rest of the portfolio has meant it has not had any negative results for the past 15 months despite recent troubles with high yield bonds.
Corporate governance and socially responsible investment are also important to PME. The scheme believes companies that look after their staff and the environment in a sustainable manner have a better chance of survival in the long term. It interprets this as shareholder activism. PME says it uses its power as a shareholder to uphold its values by voting at shareholders' meetings to support resolutions that comply with its own criteria of what constitutes good corporate governance and sustainability. The scheme also actively lobbies companies in an attempt to persuade them to adopt what it considers to be more responsible policies. These proactive approaches and PME's voting record are reported in detail every quarter on the scheme's website.
It also promotes member participation. It has a special committee, the Members' Council Platform, which it claims is the most active forum of its kind in the Netherlands. The council receives extensive support from the pension fund, including training, budgeting, meeting facilities and the assistance of office staff. The council is able to voice its own opinions in a bulletin that is published independently of PME.
PME's policy on contribution levels, benchmarks and investment mix is equally transparent. For several years its board has made full use of a decision-making framework that allows both companies and scheme members to predict their own level of premium and benchmark in the coming year with a considerable degree of accuracy, scheme says.
PME also claims to have a first-rate management information system providing 24-hour monitoring on a global basis which can be accessed via the internet.
Highlights and achievements
Industry-wide schemes representing large numbers of firms and members need to be streamlined and efficient. PME's tight executive structure shows it not only understands this basic principle but uses it to great effect to ensure the different firms making up the scheme are satisfied and treated fairly.
But innovation brings rewards and its proactive approach to the concept of liability matching and the Netherlands' recent legislation requiring pension schemes to value their liabilities from year to year is worthy of mention. While most schemes are still debating the best way forward to ensure they comply with the new regulations, the fact PME already has half its interest rate risk hedged shows it was ready to embrace the challenge, irrespective of how controversial some consider the regulation to be.
But the embrace of the fixed income portfolio is wide-ranging, with one third allocated to the high yield end of the spectrum.