It is a new dawn over Eindhoven for the investment team for the Philips Pension Fund. This autumn it joined the thundering herd of Merrill Lynch Investment Managers (MLIM), one of the largest asset managers in the world with $478bn (e396bn)under management.
The deal, completed in September, is a boon to the London-based manager too, which beforehand ran just e7bn directly for Dutch pension funds. With approximately e13bn from the Philips Pension Fund alone plus an extra e2bn or so from third party
business, MLIM storms into the top 10 occupational pension asset managers in the Netherlands. It has a special relationship that rival foreigners, BGI and Goldman Sachs Asset Management lack. This relationship is not for life but seven years, contractually. MLIM nevertheless hopes that it will be a platform on which to build new business.
Neither side comes to the party with an untainted history. Four years ago MLIM had to endure an embarrassing court case brought by the Unilever pension fund in the UK over alleged volatility of performance by Mercury Asset Management, which MLIM had acquired in 1999. That suit was
settled out of court. MLIM had to enure a couple of subsequent claims from other UK funds.
Separately, some key staff left but MLIM has since regained ground and restored itself to the vanguard of institutional investing.
If MLIM is once again a mighty bull, it would be hard to cast the business it is buying as the beautiful Europa.
In the Greek myth, Jupiter transforms himself into a white bull to kneel before the princess then carry her away across the Mediterranean sea from Tyre to Crete.
In truth, the Philips fund has been rather avidly scanning the horizon for a suitor rather than just picking flowers. More an unsettled wife than a maiden, it needed a partner with greater international experience than the local boy, Schootse Poort.
The irony is that Philips the sponsor created this relationship between pension fund and pensions servicer. In the 1980s, the business strategy of selling or spinning-off non-core operations began to take hold across the industrialised world. In the 1990s Philips was playing this game but paradoxically decided it would be right to maintain continuity of benefits for ex-employees. For paternalistic reasons, Eindhoven chose to keep management of
pensions in-house. By 1996, however, it was decided that even
pensions management was itself a specialism and so it ought to receive the same treatment as other non-core operations. Schootse Poort was established and the influential Dick Snijders went over from being head of the pension fund to managing director of the new venture.
The spin-off, did not however, take on a fully independent life. It was not a free commercial enterprise at any point in the way Eindhoven gave new life to its IT specialists as Origin. Rather Philips the sponsor took on ownership of a pensions service provider. So in fact the pension fund became the free party.
One reason for an electronics company maintaining a pensions servicer may have been enduring paternalism. Another may have the sense that Schootse Poort needed to have some recognisable earning power before true commercial independence. It certainly started life with a formidable
10-year track record, courtesy of a value style that had flourished ever since the 1987 crash.
Schootse Poort won third-party business but its investment performance palled. The exorbitant path of technology stocks in the late 1990s punished value investors. A highly-publicised investment scandal meant Snijders himself had to take control as interim head of investments before Lars Dijkstra’s appointment as chief investment officer. Even then, the fund underperformed in global equities during a bear market.
Schootse Poort prided itself on pensions management; it was not merely an investment manager. But on the administration side, one ex-employee described the operation as “a mess”. He claimed there was no IT spend to make administration scaleable, which put a strain on a handful of staff dealing with both operations and client servicing.
Schootse Poort closed to new business last year and was rebranded - with no apparent sense of irony - Philips Pensions Competence Center.
The official reason for the change from Eindhoven was that there was limited amount of time to service clients and it had become clear that the main client was the Philips fund itself.
Not long after, a search was implemented to find third-party service providers of its own, thus ending an electronics manufacturer’s diversification into pensions management.
Philips said that issues of performance did not cause the sale.
Putnam Lovell NBS Securities was financial adviser and search organiser. It is understood to have brought the board of trustees three shortlisted contenders for investment management. The first pitch was on the subject of investment process. The cost of the deal was negotiated afterwards.
MLIM of course won the bid but what kind of portfolio has it assumed? In under two and a half years, the allocation to debt by the Philips fund has grown from 38% to 60%. Philips has also been employing fixed income swaps to better match its liabilities. These changes fit well with MLIM’s position as a leading purveyor of liability-driven solutions.
Global equities, however, will be managed from London and MLIM’s other offices around the world. No one is understood to have been made redundant in Eindhoven, and just a couple of employees moved from the Netherlands to MLIM in London. Dijkstra himself left at the start of the year and has since resurfaced as chief investment officer at
Kempen Capital Management in Amsterdam.
Arnout Korteweg, head of business development for Hewitt in the Netherlands, says he believes that keeping administration in Eindhoven and offering future career paths for the employees there was one of the biggest factors in Hewitt winning its pitch. Also conducted by Putnam Lovell but distinct from asset management, the administration brief sees Hewitt service 150,000 members of the Philips Pension Fund and more than 50,000 from third-party clients, notably Atos Origin and Thales.
Hewitt takes just three third-party clients, far fewer than Merrill Lynch. But Korteweg is content: the deal raises its lives in the Netherlands 400% from 50,000 to 250,000, making a grand total across Europe of 1.4m.
“I would like us to add two new clients a year in this country,” says Korteweg, “but they do not all have to big. A fund of 5,000 would be very welcome.”
The impact of this duo of deals on the Dutch market is uncertain. A crude summary might be to say that the American invasion now has its bridgehead. But that would naively infer that Dutch funds have hitherto jealously awarded their business to fellow countrymen.
Bram van Els, spokesman for the e17.5bn PME fund, the industrywide arrangement for 650,000 current and former metal workers, rubbishes that idea. He reckons more players in the business will be a good thing. “The market will get more transparent, more professional and more used to competition.” PME’s in-house team of seven monitors the external administrator and investment managers unsentimentally. “We always look for the best provider at the best price. PVF Achmea is the administrator and they know we push them for a good deal,” notes van Els. He added that investment managers are relatively easy to change but it is hard to swap an administrator and inform members of changes in communication more than once every three or four years.
PME may see advantages but the demise of Schootse Poort seems more pertinent to those commercial players: Mn Services, Blue Sky and most recently Cordares, which came to life in a similar way. All have one major pension fund client {counting the KLM schemes as one for Blue Sky}. Like Schootse Poort, they have succeeded in acquiring other, smaller clients.
But have they critical mass?
Toine van der Stee, managing director of Blue Sky, said more Dutch funds will want to outsource their services because of growing complexities, thereby leaving the trustees free to do their job. “We are not in competition with MLIM. Our unique selling point is the combination of all the disciplines necessary to manage a pension fund.”
Pieter Kiveron, managing director for corporate affairs at Mn Services, said the Philips deal proves that even the biggest Dutch pension funds are considering third-party administration and investment management. He expected more to follow Philips’ route. For Mn Services, the new accounting standards make client servicing more individualistic because each scheme’s liabilities are unique. Moreover, Kiveron noted that Dutch funds favour doing business in their own language, a point taken up by Paul Gerla, director at Kempen Capital Management. “To a global asset manager, even if you have e500m you are just another account to them. Lots of the medium and smaller-sized companies we speak to like to do business with Dutch partners.”
Kempen Capital Management has just poached two senior staff from Mn Services for its new Fiduciary Management operation, which will offer guidance on investments including asset allocation to pension funds.
Hank Rademeker and Jan Berthus Molenkamp will effectively start from scratch, which seems to fly in the face of the move by Philips to established, international providers. But then in the Netherlands it is tempting to mislabel any move by a big fund as a trend. Roughly three-quarters of the occupational market is housed in just 10 funds. Philips is one of the ten. Kempen would be far more interested in the other quarter, where local mores are more significant. For Philips, one of its preferences was for international providers because it has so many employees and pension plans outside of the Netherlands.
Then again, Shell, another of the top 10, is in the process of concentrating asset management of all its pension plans worldwide, including a major fund in the UK, back in the Netherlands. Proof yet again that in this market, moves should not be confused with trends.
It seems reasonable to conclude that not every all-service provider will survive in its current format. Although they like to distinguish themselves from the Netherlands’ larger insurers, the competence centres start to resemble them. No bad thing in itself; just a likely scenario for acquisition, as Aegon has achieved with TKP. Then there is the paradox of pension funds being both owners and major clients in an enterprise. Van der Stee accepts that the conflict is always there. The question is whether KLM, or BPMT, or the builders’ fund would ever find themselves in a situation where the relationship was detrimental to beneficiaries’ best interests. As one ex-employee at Schootse Poort noted, “once we were set up as independent, Philips found everyone knocking on its door saying ‘We can do it better’.” This year, Philips answered the call.