NETHERLANDS – Dutch pension funds may be forced to adopt increasingly passive investment strategies or conversely take undue investment risks if the five-year period of performance testing for the Z-score is not extended.

VB Dutch Association of Industry-wide Pension Funds director, Frans Prins, has warned that if a fund has two bad performance years against the Z-score standard than it is almost obliged to go passive to ensure that it does not dip below mark when the first performance test is made next year.

In a speech at the Eurofunds conference in Rome today, Prins reiterated his belief that the five year judgement period was too short: “A short term threat is that it would oblige funds to invest conservatively or go passive. Also the opposite could happen; pension funds can take more risks after some bad years.”

In an attack on the circumstances that could drive Dutch industry funds towards greater indexation, he commented: “ Even a monkey can do the business. Just program the computer to follow the index. The result is a Z-score of zero. Maybe even a little plus because the fund will have less costs than the norm of 0.15%.
“ It is not yet a trend that all pension funds follow the index but we must prevent this from happening.”

Prins also voiced fears that pension funds could take more risk than the benchmark, but pointed out that this was unlikely: ” This is more like the game ‘double or quits’. I don’t expect this to happen. Asset managers and pension fund manager are not known for their gambling spirit.”

And he added that the pension funds themselves also had to take stock of the situation, or lose their employer members: “Free market action and individual freedom of choice have developed into significant criteria against which the systems need to be tested.
“ Poorly performing pension funds can no longer be assured of a stable group of participants.”




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