The Netherlands: Sky-high success
André de Vos spoke with Toine van der Stee of Blue Sky Group, the manager of the KLM pension funds
Just recently, a retired KLM pilot had a cake delivered to Blue Sky Group, the pension manager for the Royal Dutch Airlines’ schemes. “To mark the fortieth anniversary of my retirement,” read the card attached by the 96-year-old pilot, adding: “And I intend to enjoy my pension for a while yet.”
Blue Sky CEO Toine van der Stee recounts the anecdote with glee, and points out that the story reflects the unusual situation of KLM’s pilots’ scheme. Pilots need to accrue nearly a full year’s pension benefits for each year they work. As they are selected for the job based on superb health, they tend to live longer lives than the average person and they take retirement at 56. Even with all that, the pilots’ scheme boasts a funding rate of a whopping 127%. The two other KLM schemes – for ground crew and cabin crew – also are well above the 105% legal minimum.
However tempting it may be to credit the terrific performance of his company for these healthy funding rates, Van der Stee instead points out that the main reason lies in the special status KLM has historically afforded pension savings. “As the airline business is rife with uncertainties, pensions have always been considered an extremely important employment benefit, with generous contributions of 20-30% – or more, in the case of pilots. KLM has always realised that good pensions cost money. We are reaping the rewards of that approach now.”
Blue Sky Group serves other pension funds besides the KLM schemes, and some of those are faring less well. “Some even have to cut benefits, simply because they are active in a different kind of industry. It isn’t possible to copy the success of the KLM schemes overnight.”
All the same, the KLM schemes’ glowing solvency rates do reflect well on Blue Sky Group, according to Van der Stee. “Our strength as a mid-sized manager is that we deliver top quality at a competitive rate. We are close to our customers. We pride ourselves on flawless benefit administration and good communication with participants. Our investment policy is prudent, aiming first and foremost to avoid big losses. That probably goes to our roots – in the airline business, you can’t afford to take risks. That also means that if you’re looking for spectacular returns, we are not the manager for you.”
Blue Sky Group has outsourced to some 30 external asset managers. The manager is sceptical about actively managed funds and does not believe active management adds much value in the case of mainstream investments such as large caps and government bonds. In the case of smaller asset categories, such as emerging markets, small caps and credits, it does opt for active management. “In those cases we tend to give the fund manager more leeway. After all, if you insist on sticking to the benchmark, you might as well opt for passive management,” says Van der Stee. “But if the extra room to manoeuvre doesn’t result in additional returns, we are quick to renegotiate the fee.”
Total assets under management amount to €17bn, while the KLM schemes – all three rank in or near the top 50 pension funds in The Netherlands – account for €16bn. Blue Sky Group was spun off as an independent entity 13 years ago and is fully owned by the KLM schemes. Besides its owners, the manager serves 10 other pension funds. Some of these contract with the manager for its complete suite of services, including benefit administration, asset management and trustee support, while others contract for just one of the services offered. The number of customers is growing slowly but steadily – a deliberate pace, says Van der Stee. “Although we don’t have a set growth target, like any company we do want to grow. As pension funds on average are increasing in size, so must their managers. Some pension funds require their manager to be three times their own size in terms of assets under management. To survive this consolidation battle, you need to have the scale to meet the ever more demanding qualifications.”
The fact that the KLM schemes are both owner and largest customer is no objection, says Van der Stee. “The largest customers are given the most attention, which is what they demand. That makes sense. Recent customer research shows that our other customers don’t feel disadvantaged. On the contrary, they believe that the important position of the KLM schemes ensures quality, stability and continuity. Each year we have to renegotiate our contract with the KLM funds, so there is no forced sourcing, but then, there is no reason for the KLM schemes to switch to a different manager. They own their own manager for a reason. If they are not happy, instead of having to move their business to a different provider, they can simply kick me out.”
Over time the AUM of the KLM schemes have grown to the point where they now technically have the means to buy their sponsor company, Air France KLM – several times over. “This means the pension funds must be able to stand on their own two feet and have excellent risk management, because there is no wealthy sponsor company to bail them out if things should go wrong.”
Owing to their high funding ratios, the KLM schemes have been able to partially compensate for inflation. And owing to political measures – such as the introduction of the ‘ultimate forward rate’ as a discount rate and the decision to discount using an average interest rate – the schemes have even been forced to pay inflation compensation, as these measures have artificially boosted the solvency rate. This is bad news, Van der Stee believes. It would have been better if pension funds had taken necessary steps to process the blow of the financial crisis right away.
“In November of 2008 I heard the chairman of a large pension fund – I’m not divulging his name – say on the radio that he would ask the government for permission to postpone measures. My first response when I heard this was: ‘now we’re toast’. The pension industry did get the delay it asked for – UFR, an average discount rate – and now look.
Four years have passed and the problems still haven’t been solved. Instead we have jumped from the frying pan into the fire, because now we have involved the politicians.
That is not a good thing. It is a bad idea to try and manage pensions centrally. The trouble really started when we kept changing the discount rate. If you try something like that in the corporate world, you end up in jail, but in the pension industry somehow you can do that and get away with it. My advice would be to pick one discount rate and stick with it.”
According to Van der Stee there is really only one problem: longevity. “That means we simply have to keep working longer to maintain our pensions at the same level. Everybody in the street and in the pub gets that. But now we are coming up with all sorts of short-term fixes for pension funds that in the past have failed to save up enough to meet their pension promises. Those pension funds have tried to defy gravity. They have contributed too little and promised too much. A funding rate of 125% is simply not enough to navigate all the rapids – that’s where we all went wrong.”