Some 30% of Dutch pension funds have not managed to safeguard even a nominal pension for their members since 2007, according to new research performed by a former fund manager at Aegon Asset Management.
Anton Kramer, the manager of an emerging market equity multi-manager fund at Aegon AM until leaving the firm last year, analysed the returns of pension funds on their investments and liabilities from 2007 up until the third quarter of 2022.
Kramer published his findings on the new website www.overrendement.nl, which he founded together with IT entrepreneur Marcel Nijp.
Return on investment minus return on liabilities is defined by Kramer as excess return (overrendement in Dutch). Kramer also accounted for the investment risk taken by pension funds (see box), calculating an information ratio for 125 pension funds. If the information ratio is zero, the return portfolio has kept up with liabilities, resulting in a nominal pension without any indexation.
The information ratio explained
The excess return of a pension fund is its net return on investments minus returns on liabilities.
“However, looking just at excess return is too narrow a focus. A fund that takes a lot of risks, is more likely to make high returns too,” noted overrendement.nl’s Anton Kramer.
“But that doesn’t necessarily mean that it is a better investor than a fund with lower returns.”
Therefore, Kramer has introduced the information ratio, which he calculates as excess return divided by tracking error, defining the latter as the standard deviation of returns of pension funds.
The higher the tracking error, the riskier a fund’s investment strategy is deemed. To get to his conclusions, Kramer manually entered all relevant data from pension funds’ annual reports (until 2022) into a database.
For 2022, he used data published by pension regulator DNB.
PMT
Metals industry scheme PMT is the only one of the largest five Dutch pension funds with a negative information ratio over the research period (2007-2022).
Bpf Bouw performs best, scoring an annualised excess return of 1.8% at relatively low risk. This results in an information ratio of 0.16 and the eighth spot overall.
ABP, which has the same asset manager as Bpf Bouw (APG), also scores a relatively high excess return (+1.4%) but has a higher tracking error (see table below).
| Position | Fund | Investments | Liabilities | Excess return | Tracking error | Information ratio |
|---|---|---|---|---|---|---|
| 29 | ABP | 5.1% | 3.7% | 1.4% | 15.2% | 0.09 |
| 72 | Zorg en Welzijn | 4.7% | 4.4% | 0.3% | 14.6% | 0.02 |
| 105 | Metaal en Techniek | 4.0% | 4.4% | -0.4% | 13.4% | -0.03 |
| 8 | Bouwnijverheid | 5.8% | 3.9% | 1.8% | 11.6% | 0.16 |
| 75 | Metalektro, bedrijfstakpensioenfonds | 4.2% | 4.0% | 0.2% | 12.2% | 0.02 |
Annualised returns between 2007 and Q3 2022. Returns on liabilities equal return on risk-free assets.
The company pension funds of Avebe, TDV, Chemours and ABN Amro scored best in Kramer’s research.
According to Kramer, the €358m Avebe fund scored well because it had reinsured its liabilities for a part of the research period.
“As a result, the fund emerged relatively unscathed from the poor investment year of 2008 and benefited from rising markets when it started to increase its investments again. ABN Amro, for its part, is known for its focus on balance sheet management, looking at both liabilities and returns. The fund has had a high interest rate hedge for many years,” Kramer said.
| Position | Fund | Investments | Liabilities | Excess return | Tracking error | Information ratio |
|---|---|---|---|---|---|---|
| 1 | AVEBE | 4.5% | 3.0% | 1.4% | 4.4% | 0.32 |
| 2 | Kring Chemours (Achmea) | 5.3% | 3.4% | 1.8% | 8.7% | 0.21 |
| 3 | TDV | 5.3% | 2.9% | 2.4% | 12.1% | 0.20 |
| 4 | ABN AMRO Bank | 5.6% | 3.9% | 1.6% | 8.5% | 0.19 |
| 5 | Loodsen | 5.7% | 3.7% | 1.9% | 10.0% | 0.18 |
Annualised returns between 2007 and Q3 2022. Returns on liabilities equal return on risk-free assets.
The four worst scoring funds are all relatively small sector schemes. The funds Medewerkers Apotheken (PMA, the fund for employees of pharmacies, not to be confused with SPOA, the fund for pharmacists) and Kappers, the fund for hairdressers, have the most negative information ratios of all.
These funds not only were hit hard by the financial crisis of 2008, but also have a relatively young membership. As a result, their liabilities increased by more than average because of falling interest rates.
“Some of the funds also badly timed their increases and cuts of their interest rate hedges,” Kramer noted. As a result, funds like PMA and Levensmiddelen hardly benefited from the rate increase of 2021 and 2022.
| Position | Fund | Investments | Liabilities | Excess return | Tracking error | Information ratio |
|---|---|---|---|---|---|---|
| 121 | Kring ANWB (De Nationale) | 2.9% | 4.2% | -1.3% | 11.9% | -0.11 |
| 122 | Banden- en Wielenbranche | 3.8% | 5.1% | -1.2% | 11.3% | -0.11 |
| 123 | Levensmiddelenbedrijf | 4.5% | 5.8% | -1.3% | 11.3% | -0.11 |
| 124 | Kappersbedrijf | 4.4% | 6.4% | -1.9% | 15.8% | -0.12 |
| 125 | Medewerkers Apotheken | 2.2% | 5.1% | -2.8% | 15.9% | -0.17 |
Annualised returns between 2007 and Q3 2022. Returns on liabilities equal return on risk-free assets.
2022
According to Kramer’s analysis, 70% of pension funds score an information ratio of more than zero, meaning their investment returns outpace the returns on their liabilities. This is a clear majority, but Kramer is concerned about the 30% of funds with a negative information ratio over a 15-year period.
“On the basis of the past 15 years, the conclusion is that most pension funds do not make significant excess returns. It is being said that everyone will get a better pension in the new system, but on the basis of the excess returns realised by pension funds over the past years I find that a risky thing to assume,” he said.
Kramer’s results would have been even much more alarming, had he published his findings a year earlier. The interest rate increases of 2022 led to a dramatic increase in the share of pension funds that were able to exceed the returns on their liabilities.
By the end of 2021, only 20% of funds had a positive information ratio. Nine months later, this had risen to 70%.
This article appeared originally in Pensioen Pro, IPE’s Dutch sister publication.
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