Amid all the talk of fiduciary management in Dutch pensions, Stichting Bedrijfspensioenfonds voor de Agarische-en-Voedselvoorzieningshandel (AVH), the fund for agricultural wholesalers, remains doggedly independent.
Based in The Hague, this industrywide arrangement has assets of almost €400m for 20,000 members, just over a quarter of which are already retired.
The staff of sixteen work with external partners but essentially carry out administration, including dealing with 837 employers, inhouse.
"We try to do everything ourselves," says Erik Martens, the managing director. As well as general management, Martens is one of three staff looking at assets, alongside Eric Mateman, head of investments and mandates and Rob van Bergen, head of the back office.
None of the money, however, is actually managed internally and Martens is pragmatic that for certain asset classes such as real estate, AVH is too small to command its own segregated portfolio.
After a disappointing period of active management with a Dutch growth-style asset manager - demonstrated by a negative z-score five years ago - the fund realised a profound new policy in 2005 of core passive management with satellite active diversifiers. BGI looks after more than 70% of the fund tracking fixed income indices; SSgA has more than 12% in enhanced passive managed equities. The satellites include 5% in real estate and 10% in commodities, hedge fund, active currency and private equity.
Martens says that AVH started preparing for the new financial assessment framework back in 2004, when it began on the switch from mostly active to mostly passive. The forces acting on the fund and its reactions will not be unfamiliar to pension scheme managers across the country. The fund's coverage ratio had slipped under 100% in 2002. Contributions had to rise accordingly, with 30% in 2003 and 30% in 2004. From 2005 contributions stabilised. The board also agreed last year to switch from a flat rate pension scheme to career average benefits.
The board of AVH itself comprises six union representatives and six employer representatives. The role of chair alternates every year between these groups. Martens emphasises that career average has not been a means of saving money, because it was an improvement of the pension entitlements. So there has had to be a lot of communication to make this point to the employers. "We have explained that it was necessary to change and the majority understood this decision. The sponsoring companies see it because pension contributions are a large amount on their profit & loss statements," he adds. "But we aim to keep them all happy," says Martens.
As part of the switch to career average, early retirement arrangements for those in the potatoes, vegetable, fruit and cheese wholesale sector were stopped, on account of fiscal law. With that new-found extra budget it was possible to up the average annual salary accrual of 1.75%, to 1.9% for these workers. Other sectors, such as egg producers, never had an early retirement arrangement and hence are stuck on a lower accrual rate. The average expected annual pension for a member in today's prices would be €12,160 gross and dependents' benefits are also restricted to death-in-service.
As a nationwide replacement for early retirement schemes, neither Martens nor Mateman views the progress of levensloop at this moment as successful. Levensloop has been the government's brainchild to slow early retirement and transform the working life to more flexible patterns where individuals could take years off in their thirties and forties to pursue a career change or concentrate on parenting. In return, they would be less likely to burn-out or reach boredom before the age of 65.
AVH participates in a levensloopcoalition with the railways fund, the public transport fund and several others including Volker Wessels and PNO Media. But both men remain doubtful of its draw for individuals.
"The regulator, the Dutch Central Bank, has introduced severe solvency requirements for schemes," says Mateman. But that spells greater contributions, as witnessed among AVH's contributing employers. "As a result, people don't have the money to put into Levensloop." On the other hand, on more conventional savings, spaarloon, there is no premium tax and you can see the money more readily. "Levensloop has not received a warm welcome in the Netherlands. Perhaps it needs to be made more attractive," he concludes.
While benefits have been altered and contributions greatly increased for the fund itself, investments have also been refined since the switch to core/satellite. After much deliberation over the opportunity cost of locking into structured synthetic bonds, AVH took the plunge late in 2005 and has now the policy of phased reduction of the mismatch between liabilities and investments by 50%. The duration gap was seven years and will be reduced in time to three and a half, according to Martens. The instruments used to achieve this were long-dated swaps, LDI-pools and swaptions, although the latter are now preferred as its solvency is healthy - currently 109%. The coverage ratio is nowadays about 118%.
The cautious thinking of the board on the issue is conveyed by Martens: "We know that the yield on long-dated, secure bonds is going to grow. The question is ‘when?' and ‘how?'" Like many a pension fund, AVH wondered whether it should wait for the rise or simply treat the problem as structural and lower the duration mismatch.
The fund does not have a mature profile but the solvency requirements still might have squeezed it uncomfortably to repair deficits. Hence the work started two years ago, although Martens retains mixed feelings on a risk system so weighted towards interest rates. "There are two opinions. The first says for instance when the coverage ratio is very low that you have to take your medicine and reduce the risks. However with the result that you have locked-in your coverage ratio. The second says that you must wait because the coverage ratio has to increase to a comfortable level."
With 70% of the fund in fixed income, it is evident that AVH was never going to take the very long-term view of Yale University or similar endowments when it comes to risk-taking and volatility.
The Central Bank's new framework would not permit such a policy, especially given the fund's coverage ratio was clearly out of the red only in 2004. But that has not stopped AVH introducing contemporary sophistication to its investments. For example, it started with ‘plain vanilla' exposure to a commodities index but probably will switch to a more active product combined with a structured element that ensures lower volatility but high returns. Martens expects that because since 2006 the new combination has worked better than being merely tracking the Dow Jones-AIG Commodities Index.
This year AVH has bought into Euro Choice IIIa private equity fund, including an Eastern Europe fund of fund. This private equity fund is run by Lombard Odier Darier Hentsch. Martens admits it is too early to say how this choice is faring.
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