Whose hands are on the tiller?
Wth the regulatory framework becoming more complicated, pension funds in the Netherlands seem keener than ever to outsource many of the technical aspects of running their money. Some are turning to external providers. With a fiduciary management mandate, a fund can often shift the intricacies of compliance – not to mention the whole area of investment -- onto a specialist provider.
Goldman Sachs Asset Management has started offering fiduciary management services to its pension fund clients. Through the service, GSAM helps the client with asset allocation, benchmarking, risk budgeting, selection of external managers and monitoring managers.
In January, Dutch pension fund Campina appointed GSAM to manage a E350m fiduciary management mandate, covering European equity, Pacific equity and global fixed income strategies. As manager, GSAM said it would be responsible for overseeing a better risk/return profit for the overall portfolio. As well as this, it would provide general advice on risk budgeting, benchmarking and managing active risk.
This was the third such mandate won by GSAM in the Netherlands, bringing the total of assets under management by the fiduciary management services arm to around E1.7bn. GSAM said the appointment confirmed the growth of interest in fiduciary management in the Netherlands, “…a trend we are seeing develop further across Europe,” said Ruud Hendriks, head of institutional business development Continental Europe, Middle East and Africa (excluding Germany and Austria).
There are other providers of fiduciary management operating in the Netherlands as well as GSAM. International firms such as State Street and Frank Russell, and also Mn Services and SfB.
“There are also some small boutiques offering the concept of fiduciary management,” says Eddy Bannet, consultant at Hewitt/Heijnis & Koelman. “There is quite some distinction, however, between several providers. Some of them offer the full range of services inclusive pension administration, financial administration etc.
“We also notice that the term ‘fiduciary’ can and is explained in a wide range. There are even some parties that would call it financial management or balance management,” says Bannet.
The demand for fiduciary management services in the Netherlands can be explained by the growing demands made by the regulator, he says, and the increasing complexity of the investment solutions deemed suitable for pension funds. As well as this, many investment managers – particularly domestic ones – have disappointed pension funds with the results they have achieved.
Mn Services provides fiduciary investment management services to several pension funds and other institutional investors.
“We can best be described as a fiduciary manager and we apply this quality to our entire range of individual products and services,” says Bernard van de Ven, director sales and marketing at Mn Services.
Asset-liability management can be a part of this. Mn Services takes on the asset side of the equation while using a specialist ALM consultant to conduct the in-depth study of the liability side for a particular client. Van den Ven says Mn Services combines the best of two worlds – its internal knowledge in tandem with the best external consultants.
He sees significant signs of growth in the fiduciary management business in the Netherlands. “That is the way to go forward,” he says.
“These days it is becoming increasingly difficult for pension funds to have all the expertise in-house,” he says. Some pension funds have for example the capability to implement euro equities and euro fixed income investments, but for the other asset categories they need to find external managers.
Selecting and appointing external managers requires thorough research. Combined with increased regulations, IFRS, more stringent reporting requirements and pension governance this makes pension funds reconsider doing their investment management in-house.
“We therefore discern a trend towards outsourcing the entire investment management activities,” says van den Ven.
“The smaller to medium-sized pension funds initiate an increasing number of searches in the market. Most of them are looking for a service provider who can coordinate all aspects of investment management,” he says. In the last six months alone, Mn Services has won three mandates for fiduciary management. And overall in the Netherlands, the company believes it has won the majority of all fiduciary mandates tendered.
It reckons has a considerable competitive advantage in this market, domestically at least. “We are one of the few fiduciary managers around. Furthermore pension funds can also outsource their pension administration to Mn Services and we also offer management support.”
While providers of fiduciary management such as GSAM are also winning mandates, Van de Ven says Mn Services has the edge. “For them it’s one of their products, for us it is our natural way of thinking.”
Demand for complete fiduciary services has come from pension plans in the Netherlands partly because the regulatory environment has become more complicated and difficult to comply with, and also because the liabilities borne by the plans have become more significant, says Erik van Dijk, chief investment officer of Compendeon in Apeldoorn.
The firm started about a year ago and was based on a collaboration of skills from the consultancy and asset management sides. It now has more than E400m under management in fiduciary mandates across different products.
Because of this, pension plans now need solutions which incorporate good asset allocation – both strategic and tactical, van Dijk says. Compendeon provides fiduciary management for small and medium-sized pension plans, he says, with asset allocation as an add-on. “Everything is combined in a tailor-made solution, because we want to link it to the liability profile,” he says.
At the moment, many of the other management and investment options open to pension plans in Compendeon’s target clientele are inadequate, he claims. Funds of this size might choose an insured investment solution, but the disadvantage here is that the asset manager looking after their investments is unlikely to be a party that is top in their field, says van Dijk.
On the other hand, he says, if the plan goes for a solution that is not insured, and it does not have enough staff resources in-house, then it will often simply float between local providers. “Which probably ends up in balanced mandates… and we all know this has to be paid for in the end,” he says.
“We are able to get a deal for the smaller and medium-sized pension funds which they wouldn’t normally be able to access because of their size,” he says. The investment model is based on a big database of around 5,000 providers, and the firm selects three providers for each asset class, using those that show they can deliver good performance for low fixed-fee rates.
Bannet warns that board members at pension funds need to be aware that appointing a fiduciary manager does not exempt them from responsibility.
He says: “We also notice that some of the board members have the idea that a fiduciary solution would discharge them from being responsible for certain investment decisions. From our view this will not be the case and therefore it is important how the delegation of the mandate has been put in writing.”
But even if the board retains responsibility, life does become easier. With a fiduciary management mandate in place, there is less direct involvement with complex issues, mainly in the area of investments.
However, while board members at pension funds may find themselves freed up, there is a price to pay along with the charges levied by the provider. The disadvantages of fiduciary mandates are a loss of flexibility, higher costs, potential loss of transparency, and the risk of achieving no more than average performance, says Bannet.
“For some board of trustee members fiduciary mandates may seem the ideal solution for many problems, of which most have to do with setting the investment policy and outsourcing this.”
But funds must not ignore the pension fund management/governance angle of all of this. There are the potential drawbacks to consider, and also, the supervisor - DNB, formerly PVK - has set specific rules for outsourcing of pension fund activities.
“Outsourcing does not only require a well structured selection process but also adequate and frequent monitoring,” says Bannet. “The board of trustees remains responsible, also if a fiduciary mandate is outsourced.”
Before entering into the decision to outsource fiduciary management, boards of trustees ought to ask themselves what it is that they find important, which issues they aim to address and which options may offer which solutions.
“Fiduciary is just one of the possibilities that a pension fund board has to solve the issues that exist, others are: continue as it is and replace current providers, fund of fund/manager of manager solutions, re-insurance of the pension plan,” he says.
However, having considered everything, it may well be that external fiduciary management is the most appropriate solution for some of the pension funds. “A next stage would then be to find the most appropriate fiduciary manager and find a way to monitor its activities afterwards,” he says.