The Netherlands: Who will take up the challenge?
It is widely hoped that the introduction of the multi-OPF will offer smaller corporate funds a means to survive in a complex investment environment. Mariska van der Westen asks who will partake?
After four years of hard-nosed negotiations and intense lobbying, both houses of the Dutch parliament have approved the so-called multi-OPF law allowing corporate schemes to merge their boards without merging the actual funds. It is hoped the law will offer smaller corporate funds a means to survive in an increasingly complex environment by joining forces. The law, which took effect on 10 June, is a major victory for the Dutch association of corporate pension funds, also known as OPF. Already, the first corporate schemes have begun ‘dating' via a pension fund matchmaking service.
Corporate schemes in The Netherlands face an ever-expanding set of rules and regulations concerning their governing structure, an increasingly complex and volatile investment environment and a dire shortage of human resources to fill key positions. Close collaboration on the trustee board level with like-minded schemes - either funded by the same sponsor company, or in a multi-employer setting - would yield economies of scale and help tackle these challenges.
As recently as this August, researchers of Dutch pensions supervisor DNB reported that pension funds can significantly improve their efficiency through consolidation, and warned that smaller funds' cost inefficiencies "are not explained by higher service quality or cut-to-size pensions".
The director of the OPF, Frans Prins, told IPN: "Over the past 10 years the number of corporate funds has declined by a third and various parties regularly question small and medium-size pension funds' right to exist."
The developments of the past years prompted the OPF in September of 2006 to ask its member schemes how they viewed their future, says Prins. "The response to this survey was not as bleak as we had expected, but our members did clearly indicate that they needed the possibility to join forces."
To tackle the many challenges facing corporate schemes, ‘selling out' by joining an industry-wide scheme or opting for a buy-out or similar insured solution is often not deemed an attractive alternative, as this would mean giving up independence and individuality. "Corporate funds often prefer to retain their typical, very own character" adds Prins. "This is why they have asked us to come up with an option for collaboration that would yield benefits of scale but would still draw on their own people to man the board of trustees."
At first it seemed that existing plans for a cross-border pension vehicle - the General Pensions Institution, or API - might do the trick. Prins comments: "Early in 2008, after discussions with pensions minister Donner and Parliament, it became clear that the introduction of the API was going to take a long time. We couldn't afford to wait for that, because many of our member schemes were in dire straits."
At present, 110-150 corporate pension funds - out of roughly 500 in The Netherlands - are facing urgent challenges, Prins continues: "Moreover, the situation is constantly evolving. When we started work on the multi-OPF four years ago, it was thought that this new entity would primarily benefit small pension funds. Now even larger and quite solid schemes are buckling under the pressure of governance requirements and beginning to consider whether they shouldn't opt for a multi-scheme solution."
That is why OPF decided to forge ahead and take the initiative. OPF secretary Mila Hoekstra wrote a draft of the envisioned Multi-OPF Law in the summer of 2008. "Then things started to move fast," she comments. "The draft was published in October. Soon after, we gained support from DNB. In November, Minister Donner accepted it as one of two options, and passed it on to the Labour Foundation, STAR - a consultative body in which both empoyers and employees are represented - which unanimously endorsed it. That is quite unusual, because everybody involved, both the pension fund associations and the Union of Insurers, agreed to give a green light."
This unanimous consent wasn't reached without effort. To gain the support of insurers, the draft had to include a provision requiring that pension funds must have been operational for a minimum of five years to be eligible to join a multi-OPF. Insurance companies wanted to make sure that companies that had previously contracted out their pension provision to an insurer would not be able to cancel their insurance contract and opt for a multi-OPF instead. "We did not object to this requirement. We weren't aiming to overturn existing agreements regarding the division of responsibilities between pension funds and insurers," Mila Hoekstra explains.
"Industry-wide schemes, for their part, also were a bit hesitant on this score," adds Prins. "But we have been able to reassure them and ensure that the multi-OPF does not pose a threat to non-compulsory industry-wide schemes."
The OPF kept its eye firmly on the ball, Hoekstra adds: "We wanted to be pragmatic, because we didn't want to waste time reaching our objective, to make the multi-OPF possible."
Interest in the new legal entity is considerable. Last autumn, between 80-90 schemes attended two briefing seminars to learn more about the multi-OPF. "At this point, pension schemes sponsored by the same holding are particularly interested although there is also some interest from pension funds within the same industry," says Prins. "But the necessary sense of kinship might also exist between schemes active in the same region, or of similar size."
The pension fund association has launched a dating service to help corporate schemes find their match. So far, some twenty schemes have joined the OPF matchmaking service and are in the process of getting to know each other.
In addition, the OPF has published a practical guide addressing the issues involved with launching or joining a multi-OPF. "We wanted to provide an overview of the various steps that need to be taken with regard to legal issues, governance, reporting requirements and the like, and offer an overview of the actual decision making process," says Hoekstra.
A practical guide will come in handy, as corporate funds considering a multi-OPF wade into uncharted territory. The first pioneers have already started up proceedings to launch a multi-OPF vehicle: the two corporate schemes of SCA - SCA Hygiene Products Nederland pension fund and pension fund ‘The Anchor' - have signed a letter of intent to merge into a multi-OPF. The two schemes are hoping for the merger to take effect by 1 January 2011.
"We're hoping to get the new multi-OPF structure going by the start of the new book year 2011," said Mathijs van Gool, director-secretary of the two schemes. "We really need the time between then and now, as this is terra incognita. We have to make a few inventions and work out the details of the merger. There's plenty of homework still to be done."
For one thing, the two schemes have not quite worked out which type of merger would be best from a practical standpoint. "We'd rather not opt for a liquidation scenario. We'd prefer to have a single legal successor to the two funds, so as to minimise the legal hassle involved," Van Gool continued. In addition, the name of the new multi-OPF has not yet been determined. "We are considering whether we should include the term ‘multi-OPF' in the name to indicate that is the legal framework under which we operate," said Van Gool.
The funds' trustees also view the multi-OPF route as an opportunity to pool governance resources: "We expect pension fund governance to become even more complex in the future, with even higher demands of pension funds' expertise and organisation. That's why we are deliberately choosing to organise our governance in a multi-OPF so that we are ready to face the challenges of the future. We believe that is crucial," he added.