Once stable, predictable and well-funded, the pension sector in The Netherlands is nowadays a dynamic, less predictable and long-term under-funded system. These are turbulent times for the largest institutional investors in The Netherlands: an ongoing merger wave, low interest-rate environment, search for yield, digital transformations, critical public opinion around ESG and cost transparency are just a few examples of frequently returning agenda points during board meetings. To facilitate discussion around important themes, Nyenrode Alumni Finance Circle, an Alumni Association of the Nyenrode Business School, frequently organises the Nyenrode Institutional Investors Day – a knowledge sharing and networking opportunity for the professionals in the Institutional Asset Management Industry within The Netherlands. The event on 29 November 2018, organised together with partner JP Morgan Asset Management, has taken place at the InterContinental Amstel Hotel Amsterdam and was visited by more than one hundred students, alumni and asset management professionals. Chris Limbach, Managing Director of Investments at PGGM, facilitated discussion with panel members and the audience regarding the impact of the changing demographics on the portfolios of pension funds and the opportunities/threats that digitalisation creates for the pension fund sector.
The event was opened by the Chairwoman of the Finance Circle, Katherine Kucherenko, who shed light on the creation of the event series: “Nyenrode Institutional Investors Day was born from the will to contribute to the stronger and healthier institutional asset management sector in The Netherlands.” Kucherenko emphasised the importance of having a strong and solidary pension system as being the pillar of the economic freedom to which every human being has a right: “Rich country is not where all poor people have pensions, but where because of their pensions people are not poor”.
Changing demographics such as the aging of the population pose a serious challenge to the Dutch pension funds, which find themselves underfunded and are struggling to create a new model that works for all parties involved. Peter Borgdorff, Director of the Pension Fund Zorg en Welzijn (PFZW) and Executive Lecturer at Nyenrode, started the first panel by giving a brief overview of the discussions held around the Pension Agreement, de ‘Pensioenenakkord’, by the stakeholders: the Cabinet, Employer- and Employee unions in the Netherlands. “There is still no agreement and the participant is the only loser” – stated Borgdorff; not without disappointment and frustration. “There is simply no trust between parties”, Borgdorff further stated. The participants of the pension schemes have lost their trust in their system, and this was the consensus between the panel members. In 2020, the pension funds will be required to lower the pension benefit due to a deficit within the system, primarily caused by low child birth, lower migration rates and other macro-economic developments. "People live longer and this is an ‘issue'” continued Borgdorff, though with humour albeit with the necessary seriousness. Funding ratios have been lowered due to the higher life expectation in The Netherlands: the estimation in 2010 was -8%. Jan Latten, Professor of Social Demographics at the University of Amsterdam and prominent demographer in the Netherlands, is at the centre of all discussions around demographics impacting industries: “Higher life expectancy is not the only issue. Female emancipation during this century turned out to be another ‘fund ratio killer’" – the old pension system was taken by storm by women that have entered the labour market in the past decades, who, in addition, live on average 7 years longer than men. The pension system was not ready for this. Furthermore, flexibility in the labour market is causing issues as well. Self-employed professionals, a sizable portion of the Dutch labour market, has not made any pension arrangements and is not contributing to the system. On top of this, many of those freelancers are women, who – due to uncertainty - decide to postpone having children, if at all, whilst reinforcing the aging problem.
FLTR: Jan Latten (UvA), Rob Heerkens (PGB), Peter Borgdorff (PFZW), Alwin Oerlemans (APG AM)
On top of the discussed macro-economic developments that equally impact all industry players, the pension funds are dealing with sector specific challenges that create another level of complexity. Borgdorff stated: “The challenges our pension funds are dealing with are caused by a number of fundamental issues in the health care sector. One of those is a structural shortage of health-care professionals; there are 60.000 vacancies that cannot be filled.” Furthermore, the employees, who provide care to ill people are often ill as well. Sickness absence numbers are staggering – “Health care is in the Netherlands the sickest sector”.
The Changing preference of participants is another force affecting the portfolios of pension funds that was discussed. Performance has always been the main focus. Though the importance of the performance for the boards of pension funds has not changed, the values of the participants are shifting. “How can pension funds stay relevant?” – asked Rob Heerkens, board member of the Pension Fund Grafische Bedrijven (PGB), left other panel members and the audience with a puzzled expression. For one moment, the panel members looked concerned that the focus on performance might become their downfall: pension funds are driven by return, and participants are (increasingly) driven by values. Heerkens stated: “For our participants, both performance and wellbeing are very important. In the past, performance was the most important factor, nowadays ESG factors are very important as well, but not at the cost of performance”. It is increasingly the case at PFZW, where 18% of the participants stated they would tolerate a lower performance in order to create a better world. This shift in focus influences infrastructure of the pension funds, confirmed Alwin Oerlemans, Chief Strategy Officer at APG, ABP’s Asset Manager. “Pension funds need to invest in infrastructure to be able to invest in good causes’.
Pension funds are very familiar with the impact of such factors as low interest rates on their funding ratios and portfolios, but the next steps remain unclear. 2020 is approaching rapidly, but there is still not a consensus between the social parties. Borgdorff is concerned that the process will be similar to ‘boiling a frog’: it will jump out if it is suddenly put in hot water, but if the cold water is boiled slowly – it will be cooked to death. Borgdorff “We need to reach an agreement on how to deal with pensions in the future”. Heerkens agrees: “Social parties decide, we execute. We, as a society, should first decide on whether we want to change the system and how. Our pension fund is ready to change”. PGB’s payout ratio is now 3,3, but the pension fund is able adopt any other system if necessary, including DC.
The first panel discussion was concluded with a mutual agreement that it is not a matter of getting the numbers right, rather, it is a matter of getting the trust back into the system. PFZW once received a letter from an 86-year old woman, who felt disappointed with the pension fund because she did not receive her total contribution amount back. “I personally delved into the numbers to look at what happened and it turned out that we paid this participant 6 times her total contribution, which I confirmed that to her in writing”, shared Borgdorff. Transparency and communication are key, but it seems to be easier said than done: “Participants just do not read our letters” – argued all, which appears to differ per social class.
The second part of the event tackled another challenge the asset management sector is dealing with – digital transformation; data was a thread running through the panel discussion. “Aegon is becoming an IT company, technology is our asset”, started Erik Hietkamp, Director IT of a Dutch insurer that making significant steps in AI and deep learning. Aegon is now focussing on two processes defined as ‘Insight’ and ‘Engagement’. Hietkamp: “The key questions are what does the client want to know and how are we going to answer them - automation of knowledge and automatic responses are both driving our innovation at the moment”. Also at APG Asset Management innovation is important. Alwin Oerlemans, Chief Strategy Officer at the largest asset manager in the Netherlands, shared how central data is to all processes such as sustainable investing, on which APG spends much time and resources. Another example is APG’s start-up Kandoor.nl, a platform which helps to answer a wide range of financial questions. Both organisations, however, recognise the need to deal with the downside of the growing amounts of data and the associated costs to protect it. “Cybersecurity is an issue. In the past, everyone was focused upon money, nowadays everyone is interested in data.” This notion was confirmed by Vincent Juvyns, Global Market Strategist at JP Morgan: “We spend 11 billion dollars on technology every year, 600 millions of which is spend on cyber security only.” JP Morgan is said to have become a technology company as well. Juvyns: “At our company, everyone needs to understand IT, even if there is an extensive coaching required.” The asset manager has recently opened a cutting-edge data lab in London. “If you would like to pursue a career in the financial sector – you should learn to program in Python” – was Juvyns’s advice to the younger participants in the audience.
FLTR: Vincent Juvyns (JP Morgan), Erik Hietkamp (Aegon), Eleonore Witteveen (DNB), Alwin Oerlemans (APG AM), Chris Limbach (PGGM)
Asset managers agreed that, due to technology and data they possess more control than in the past. “However, we get more and more questions from the regulator”, complained Hietkamp. This statement triggered a response from his panel member, Eleonore Witteveen, a Senior Expert Operational- and IT-Risk Management at De Nederlandsche Bank (DNB), the Dutch regulator. “DNB is continuously looking at what our role should be in this space: A police? A knowledge institute? A sparring partner?” - concluded Witteveen her plea. Digitalisation is defined as one of the three main focus areas of the Dutch regulator.
“How are the business models in the asset management industry going to look in 5 years?” - was Limbach’s concluding question to the panel members and the audience. The answers were not all equally optimistic; the opportunities are great, but concerns cannot be marginalised. The point of agreement was the shortening of the distance between the asset managers and the participants of pension and insurance schemes. The bet is on technology to help to fulfil participants’ financial goals and communication needs. In this process, technological innovation should not suffer from underinvesting.
After networking drinks, the evening was concluded with a private dinner, organised for all panel members and the board of the Nyenrode Finance Circle. The British Ambassador to the Netherlands, The Honourable Peter Wilson CMG, joined the dinner as the guest of honour to share an update on Brexit. During the roundtable, participants discussed with Ambassador Wilson and Simon Banham, Head of Investment and the Department for International Trade Netherlands, challenges their organisations are dealing with in light of the Brexit situation and steps they are taking to lead their respective organisations into the new Europe.
The Honourable Peter Wilson CMG with the Nyenrode Finance Circle board members Katherine Kucherenko, Peter van Ees, Vera Tolkach, Omar Abdellaoui