There are not many pension plans in the Netherlands that represent workers across such an eclectic diversity of private/government entities ranging from the qualitative labelling of fruit and vegetables through to the technicians in vehicle crash-test dummy laboratories. This is because the TNO organisation is founded by law in The Netherlands.
The e1.4bn (including pre-pension scheme) TNO pension fund in Rijswijk, the 15th largest in Holland, is something of a rare animal.
Erik van Ballegooijen, director at StichtingPensioenfonds TNO, calls the pension fund TNO one of the ‘bigger smaller funds’ in the Netherlands, and explains that while the largest organisation under the TNO pension fund umbrella is the TNO research organisation itself, with about 5,300 active employees, the remainder of the fund’s members hail from a number of smaller companies with the same labour conditions as TNO, albeit independent in their work activities. “One of the biggest, for example, is a company called Marin in the centre of the Netherlands, which has about 200 employees. We carry out the pension regulation for them so they pay separate premiums to us. On top of that we have seven other companies. Most of them were created because parts of TNO were privatised, for example First Technology Safety Systems Europe BV, a small company of about 10 people that deals solely in crash-test dummy testing.” The great idiosyncrasy of TNO, however, is that it is neither truly public nor private in make-up. It is a not-for-profit organisation. As Van Ballegooijen notes: “TNO is the only com- pany in the Netherlands which is founded by a law that ex-plicitly states that there will be a TNO company working in the general interest of the country.”
One important area, for example, is that TNO carries out all the defence research in the Netherlands. The law was adapted in 1985 so that it could also operate as a contractor in the private sector – hence its public/private hybrid nature today.
Around 35% of what TNO does now is directly funded by the Dutch government and 65% is open market. This has been about the mix for the last few years, with one part of TNO effectively allowed to make a profit, which is not the case with the work carried out for the government.
Managing the money for such a pension fund is no mean feat in these times with decreasing funding levels and the markets as they are. The pension fund TNO is no exception.
Van Ballegooijen explains that at the moment the board of trustees of the pension fund is in consultation with the board of directors of TNO about the measures (for example a sponsor cash injection, increasing premium levels, leaving indexation of pensions etc) that can be taken to improve its funding level in the light of demands by the Dutch pensions regulator. “It’s a process we are in along with many pension funds in the Netherlands that are in a similar position.” He adds that the fund is carefully considering its funding position at present, not only in terms of increasing income levels and/or decreasing liabilities but also looking after the investment strategy.
“It’s not easy for the pension fund TNO to realise these kind of measures given TNO’s complex market position. These kinds of measures are easier to realise within bigger private companies.” However, Van Ballegooijen says the fund takes the view that this is a short-term problem, which should not be solved by irreversible measures.
“Such measures are only to be taken after a fundamental discussion of the costs of pensions. I expect that such a discussion will take place in the coming years. I consider a period of two to three years as short and we hope that the measures under discussion will solve our present problems, but we will not change the present pension scheme on the basis of these short-term problems. On the other hand increasing pension costs are a big issue!
“Nonetheless, I don’t think it’s reasonable to reduce the pension payment in order that we have an easier time with our liabilities. That’s not fair to the people who hope to have a certain pension when they retire.”
Although he is not too optimistic about the economy and the present economic circumstances, Van Ballegooijen says he is not too pessimistic either about the near future.
“I believe that the negative sentiment about the stock market is determined by more than just economic factors. I hope and am convinced that when these factors Vanish things will become more positive in the next two or three years. What I do know is that we can’t expect the high performances of three or four years ago.”
Van Ballegooijen believes that despite market shocks such as the Ahold affair – which hit Dutch pension funds hard – the present state of stocks is low but with good p/e ratios: “I think in time the uncertainty will change.
“It’s my firm belief that in two or three years it will be a little better, although at the moment if you look at the Amsterdam stock exchange it’s almost at the same level as eight years ago, which is crazy.”
In terms of the change in assets, the director of the pension fund says he is conscious that any strategy switch won’t deliver better returns straight away. Instead, the policy is directed towards realising more stable income with less volatility than at present. “We’re learning all the time at the moment, but my priority is not to have the highest performance, rather a return that is more stable over the years to avoid the problems we face now.”
The first thing the TNO chief is clear about is that the fund will stay in stocks. The second thing is that the fund will not increase its bond exposure significantly. “I really believe that interest rates will go up in the next year, so I cannot see any reason to go into bonds.”
He notes that the strategic asset allocation is based on the historical development of the fund as well as its ALM studies, the latest of which was carried out three years ago by Dutch ALM specialists Ortec.
The present asset allocation pans out at about 40% stocks (including private equity), about 52% in bonds and a real estate exposure of around 8%.
On the alternatives side, Van Ballegooijen points out that the pension fund TNO already has a sizeable stake in private equity – some 12% of total
assets are committed to PE, of which about 4% is invested.
“We have one external member of the investment committee who is an expert in private equity. We are allowed to have 10% committed over total assets in private equity, but the reason why it is 12% at the moment is because our total assets have come down. The committed capital was e140m where we expect that the maximum that will be really invested is 60 70% of the committed capital. We thought it was reasonable to have around e100m really invested in the future in private equity.” In total the fund selected eight PE-managers, one of which is a fund of funds (Harbourvest). The other exposures are direct investments through managers: AIG, Gilde, Pantheon Ventures, Carlyle, AsiaVest with investments in Asia, a mezzanine fund with ING in London, and Coller Capital for secondaries. He adds that the scheme is now also looking at hedge fund exposure and searching for providers via a third-party, FundPartners, in the Netherlands.
Overall, Van Ballegooijen says the aim of the new investment strategy is to have part of the portfolio that is low risk and part of the portfolio that
is more risky. The fund, he says, no longer employs balanced mandates because it doesn’t believe they will deliver any extra performance.
To this end, TNO last year appointed Vanguard to run some straight passive mandates (e60m) and earlier this year hired State Street Global Advisors (SSGA) for an enhanced index strategy with an initial deposit of e25m (now risen to e35m). Both passive allocations are likely to rise over time. “These portions we consider to be the low risk elements and when the restructuring is complete at the end of this year we should have around 50% of our equity portfolio run on a passive basis – 25% on a purely passive basis with Vanguard and 25% through the enhanced product of SSGA.”
The next step, according to Van Ballegooijen, is to look at more stable products such as inflation-linked bonds in a bid to get some kind of interest rate protection. In the meantime though, the fund has begun slowly increasing its real estate exposure, recently appointing third-party pension fund manager, Mn services, to run an e30m portfolio. The fund already employs Kempen Capital Management to run a real estate portfolio e70m.
On the bond side, TNO runs money through Rogge Partners in the UK, Fortis (the largest chunk of its bond exposure) and AZL. On top of that, the scheme allocates to a special credit fund run by ABN AMRO, although Van Ballegooijen stresses that exposure is not allowed to go lower than BBB rated bonds.
For stocks, the fund currently has mandates with Montag & Caldwell, a US-based large cap growth manager - an affiliate of ABN AMRO, ING, AZL (value oriented), Schroders (small caps) and Edinburgh-based Walter Scott (European equities). The fund tends to leave asset managers to decide whether they take a certain view on sectors etc, although Van Ballegooijen believes this decision will become increasingly important in the future against country allocation.
“What we are really seeking if we are looking for new asset managers is diversification on style and uncorrelated risk between assets,” he notes.
On top of the asset allocation, the pension fund employs Pareto Partners to carry out currency overlay hedging on its exposure. “50-100% of the portfolio is hedged and we believe it is extremely important to do this. In fact it was our biggest generator of income last year! It could also have been the other way of course, but Pareto has performed very well.”
Additionally the fund runs a securities lending book as part of its master custodian relationship with Kas Bank.
In terms of reviewing this strategy, Van Ballegooijen says it is more or less ‘continuous’ at the moment. “Our longer view is that we might consider
changing SAA once every four years, because we have decided with the board that we will do an ALM study once every four years. The outcome of this could mean that we will make more changes in the future.
“Overall though, this is a process which started last year and hopefully it will have ended by the end of this year.”
In another significant aspect of how the TNO fund runs its money, the fund was one of six Dutch schemes that built and moved into the same office building near The Hague, with the aim of collaborating on administration and IT systems and eventually looking at the possibilities for shared investment management and custody.
According to Van Ballegooijen the process has yet to reach maturity.
“It is a slow process that you cannot force or stimulate to reach some goal within a certain time frame. It is more a natural process.”
Despite the fact that one of the collaborating pension funds, HBG, recently reinsured its liabilities following a significant amount of M&A activity within the mother company HBG, Van Ballegooijen says the other funds were quite successful in co-op ing the internal investment manager. At present there are also a number of bilateral and trilateral agreements between the funds, but Van Ballegooijen says it is still very difficult to realise full collaboration. “This is not strange if you realise that all the funds are independent and each fund has it’s own history, own relation with their
sponsor (for company pension funds), own liabilities etc. If we can collaborate on certain topics we will do it, but a large issue here is
timing. For instance our board of trustees is extremely positive about collaboration, but they are also convinced that there are objectives that you have to meet in the interest of your own fund and you cannot wait until other pension funds have the same objectives. This is true for each fund. “This is a major reason that more time is required to develop a collaboration on specific topics.
“But I’m absolutely positive about the collaboration. We are here in one building, we are regular speaking to each other and in a couple of years
this form of collaboration will be effective I’m sure.”