Zembla, a current affairs TV programme in the Netherlands, lit a firestorm in the pensions industry last month after it argued that Dutch pension funds have underperformed consistently over the past two decades, missing out on more than €145bn in unrealised returns. The programme claimed that funds had generally invested too much in risky assets and that trustees lacked the necessary expertise to look after Dutch workers’ pension savings. It even went so far as to accuse the industry of “bad management”.

The programme caused such a furore that Christian Democrat MP Pieter Omtzigt called for a hearing and debate on the matter in parliament. Little surprise, the knives were out almost immediately for Bureau Bosch - the consultant that Zembla commissioned to analyse pension funds’ returns from 1989 to 2010. A string of industry heavyweights queued up to take shots at Frits Bosch’s assumptions, calculations, methodology, conclusions, you name it.

While Zembla’s rather withering assessment of the last 20 years will have made few friends in the industry, the fervency of the backlash was notable. Perhaps the piquancy of some reactions had to do with the fact that Zembla is no stranger to Dutch pension funds.

Back in 2007, Zembla claimed that a number of Dutch pension funds had invested in US companies that used child labour or produced cluster bombs and landmines. The TV programme said ABP had invested in seven companies with ties to the production of cluster bombs.

At the time, VB, the association of industry-wide pension funds, tried to explain that most pension funds had formulated a policy for social responsible investing, but that there were thousands of companies involved worldwide and that it was extremely difficult to screen for evidence of involvement in the manufacture or sales of controversial weapons.

But then in April 2007, after receiving more than 1,500 emails in the wake of the Zembla ‘expose’, the VB drafted a social responsible investments manual to help pension funds inject more transparency into their investments. The entire episode, which many in the industry considered a stitch-up, left a bad taste in a lot of mouths.

Bosch’s case
According to the Bosch report, from the 1990s onwards, pension funds have allocated ever more to equities, resulting in more risk-taking. Because of this, the two crashes of 2002 and 2008 had a devastating impact. The financial problems of today would be far less severe, Bosch argues, had pension funds stuck with the less risky investment strategies that had been favoured in the past.

On average, Dutch schemes now allocate 61% to equities, he says. During the 2001-03 dotcom crisis, Dutch schemes, as a result, lost some €50bn and their funding ratios dropped from 200% in 1989 to 124% in 2002. The credit crunch of 2008 caused the schemes to lose another €112bn, and the average coverage ratio dropped to just 95%.

Zembla claimed that the pension fund industry has wrongly insisted that risky investments are required to keep pensions affordable. The more risk-averse asset mix of 1989 - which on average consisted of 10% property, 75% fixed income and just 15% equities - would have fared much better, the Bosch report argues, adding €36bn to today’s total pension assets and bringing today’s coverage ratios up to 115%.
Pension schemes not only allocated too much to risky assets - in addition, their investments underperformed the benchmark to the tune of more than €145bn, according to Zembla. Bureau Bosch found that over the period in question Dutch pension funds underperformed the MSCI Europe index. The consultancy said: “This underperformance cost nearly €80bn, which amounts to €145bn today if one takes interest and investment returns into account.”

The rebuttals
Of course, ABP and PFZW, the two largest Dutch pension funds, dismissed the claims out of hand.

Hans ten Brinke, spokesman for the €237bn civil service scheme ABP, said: “Our yearly return of 7.1% on average since 1993 is much higher than returns on government bonds would have been and is, in part, thanks to our equity investments. Bureau Bosch should not have applied the MSCI Europe index as equity benchmark, as pension funds are investing worldwide.”

Bram van Els, spokesman for the €100bn healthcare scheme PFZW, said: “We are wondering whether the calculations of Bosch and Zembla are correct, and whether they have drawn the right conclusions.”

PFZW’s calculations show a return of 8.4% on average during the past 20 years, he said. “This is much higher than the S&P 500 and 10-year Dutch government bonds of 6.9% and 5.3% on average during the same period,” he added.

The Pension Federation - the umbrella organisation of the three pension fund organisations - also strongly criticised the Bosch report. It said: “Industry-wide schemes, representing some 75% of all participants, have outperformed the z-score benchmark. And the idea that equities outperform fixed income in the long term is widely acknowledged.”

Some of the harshest criticism came from Ortec and Cardano, who argued that Bosch’s calculations were off by as much as €650bn due to “grave miscalculations”. Guus Boender of Ortec and Theo Kocken of Cardano both said the figures were “poppycock”.
Boender said: “Bosch’s calculation of the contribution shortfall is based on the assumption that cost-covering contributions grow in tandem with liabilities and also cover inflation compensation. That is not, in fact, the case.”

He pointed out that when liabilities increase due to the underlying discount rate or market valuation, the increase is paid out of investment returns, not out of contributions.
Inflation compensation is funded out of investment results as well.

Cardano’s Kocken said Bosch made an initial and very basic mistake, which was then compounded by others. “According to Bosch, contributions increase in lockstep with liabilities,” he said. “But the discount rate is already accounted for in the liabilities. He then adds the realised returns. By doing so, the interest is counted twice: both in the returns - interest plus risk premium - and in the contributions. Over longer periods, this makes a huge difference and leads to exponentially incorrect results.”

Bosch’s response
For his part, Frits Bosch said he never meant to say pension funds should not invest in equities.

“Perhaps the Zembla programme was a bit un-nuanced in that regard,” he said. “In the past, strategic allocations to equities were too high, but this is a tactical game - there are times, such as the present, when fixed income might be riskier than equities. In the short term, it may well be better to invest more in equities.”

The parliamentary hearing on the entire brouhaha is set for April. Stay tuned.