NETHERLANDS - The €23bn metal scheme PME has lost its legal appeal against the instruction of supervisor De Nederlandsche Bank (DNB) to de-risk its investment policy.

The DNB has justly interfered to protect the pensions of PME's 700,000 participants, the Rotterdam court ruled.

At the end of 2009, the DNB ordered PME to submit a plan for control of its investment risks and outsourcing risks, after it found 14 legal violations.

During an investigation at PME and MN Services - PME's asset manager and fiduciary manager since 2007 - the DNB discovered that an adequate management framework was absent, and that PME's balance was in a "worrying state".

It concluded that PME failed to adhere to the prudent person rule for an investment policy based on security, quality, liquidity and returns, as described in the Pension Act.

The court disagreed with PME's argument that the DNB should have assessed its overall policy, rather than its individual investments.

In the opinion of the DNB, PME's balance contained a large number of complex and high-risk investments, such as bank loans, hedge funds, global tactical asset allocation (GTAA) and "special products", such as investments in forestry.

This hampered liquidity and caused a concentration risk, according to the supervisor, which also noted that most of the investments were not in regulated markets, and that PME did not use derivatives for risk reduction, according to the court ruling.

The court also agreed with the DNB that neither PME nor its asset manager MN Services had reliable valuation methods for complex investments, as the scheme had argued.

For several of its investments, PME solely relied on valuations of directly involved parties and was therefore unable to make interim risk assessments, the court concluded.

In addition, the DNB suggested that PME's management costs were too high, referring to an amount of €450m PME and the €38bn metal scheme PMT had paid to asset manager MN Services in 2008.

The court quoted the DNB as saying: "This amount strongly deviates from the basic fee of €12m and could largely not be accounted for by MN Services, which also operated with a very liberal mandate."

During the climax of the credit crisis, PME had to divest more than €1.7bn of equity to cover risks within its portfolio.

Meanwhile, the metal scheme has replaced its chief investment officer Roland van den Brink with John van Markwijk.

It has scaled down its board to one layer and downsized the board while appointing expert members. It has also abolished its separate committees for pensions and asset management.

Last year, Ronald van Vliet, chairman for 14 years, was succeeded by Franswillem Briët.

PME's board has not yet taken a decision about an appeal, but such a step is unlikely, according to spokesman Alfred Kool.

"Although PME is disappointed about the ruling, it does provide clarity," he said.

According to Kool, PME's actual management costs in 2008 were approximately €100m, excluding at least €60m of net transaction costs, which pension funds do not usually register.

"In 2008, PME has already decided to start monitoring net transaction costs, which will be indicated in the annual report for 2011 for the first time," Kool said.

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