With 2.8 million members from the educational and public sector, ABP is the Netherlands' biggest pension fund. At the end of March 2011 the scheme had an invested capital of €239 billion and although its 2010 results were not as strong as in 2009, the scheme seems to be moving forward. Pension Funds Insider recently asked ABP's vice president, Xander den Uyl (pictured), how he views the fund's future.
Pension Funds Insider (PFI): You called 2010 'a year of contrasts'. The scheme made a return of 13.5%, did not link pension payments to inflation rates but did increase the premiums. Can you elaborate on this?
Xander den Uyl (XDU): In April we increased our premium by 0.5%. This was due to two reasons. One was that we increased our overhead charges, there seemed to be a marginal difference in them. However, we will be lowering our costs this year so we can probably lower the overhead as well again. The other reason was that we increased the premiums due to longevity expectations. In the past years we have seen quite a rise in life expectancy. Part of the difference we took last year, which also lead to higher a higher premium, and this year we increased it by another 0.5%, just for that reason.
PFI: With regards to the hard economic crisis, and what you have been through in the last couple of years, how do you see the future?
XDU: We haven't returned to normal yet. This has to do with increased life expectancy as well, our liabilities have risen with nearly 8%. Secondly, we received a real blow in 2008-2009. We have made a full recovery but it really lowered our average return over the past couple of years. In 2008 it was -20%, in 2009 +20% and in 2010 +13.5%, take the average and you'll see that is not such a great return. Due to the current developments in the world, the market conditions, we fear that the coming years will also not bring really high returns which means we are not completely freed from our worries. Indeed, we do not have any imminent problems but there will be new problems out there for us.
PFI: Aside from rising life expectancy, what other problems do you foresee?
XDU: That would be the developments in the world economy. You can see that governments have reacted brilliantly during the crisis, both in the US and Europe, by making sure that they took away most of the pressures, but this forces them to make major cuts themselves and that of course has a delayed negative reaction to the economy.
Then there are the commodities, we are looking at a limitation of commodities – these are all global problems that will affect pension scheme investments.
A third point of precaution would be the indexation of the pensions by ABP. We haven't been able to index the pensions in line with inflation and the short-term future perspective does not look fantastic. That for us is a problem as well as it is our ambition to increase pensions in line with inflation.
PFI: Has this affected your image?
XDU: Our strength is the trust people have in us. This unfortunately has diminished a bit as a result of the crisis but you have to imagine that for our members ABP is still "their ABP". This implicates a bond of trust. The fund is a symbol of continuity and security but these key words have suffered some blows because we haven't been able to index the pensions.
PFI: The Netherlands is currently working hard to reach an agreement over the new Pensions Act. What is your view on the new proposals?
XDU: The fact that a deal was struck between the social partners is good news as it isn't easy but now we see that agreeing on the details of the new reforms are even harder, it has been over a year [the details were to be clear before February of this year, but up to today no agreement has been reached]. There are two problems that need to be dealt with. One is increased life expectancy - on that point they all agree.
The second problem is the volatility of the financial markets. The Dutch pension system is mature, that means that we have relatively high liabilities with high assets, that is fine but it makes us vulnerable to the developments of the financial markets. The question that this raises is 'how far should we go with shifting liabilities to the members?'
We do not want DC in the Netherlands, we want to keep hold of DB, but we cannot ask employers when times are tough if they are willing to pour some extra money in the fund. The relation between what we have and what we need has changed over the years and that means we need to discuss how we are going to deal with that instability. However, I am confident we will work it out, and then it will be a welcome development.
PFI: There was a debate recently about the misinformation and lack of transparency regarding costs, especially when it comes to third party costs. What is ABP's view on the matter and how have you organised your own costs?
XDU: In our annual accounts and during the presentation of our annual report, we have included extensive coverage of our costs, both direct and indirect. We especially mentioned the costs of the asset manager and the pension provider. We pay roughly €90 per member per year and now we have made agreements with the pension provider that these costs will be brought down.
As far as the costs of our asset manager go, we aim for international benchmarks. We can see our costs have gone down slightly, from 42bps to 40bps.
PFI: ABP provides pensions for the public sector, this means the member base consists of a large variety of demographics. How does ABP communicate with these differences or do you have a uniform policy with regards to member communication?
XDU: Our communications are uniform but at the same time, through the wide scope of tools that we use, we manage to inform different members in different ways. We communicate mostly via paper-based means but increasingly use the internet as well. For some years now we have something called 'My ABP', a calculation programme which helps you to get a clear overview of your personal situation, this has proved to be very popular. We also have an online interactive question database which also works well and we've got call centres people can use.
The problem however with pensions is that people actually are happy not knowing, it is very far away from their daily reality. We try, on a structural basis, to get our members more involved with different instruments. For example: this year we brought out a new magazine, with an overview of 2010, and distributed it to all our members. In the magazine, board members, employers and members entered an informative discussion on the most important issues of 2010. This was meant to show the subject is not as abstract as it seems and ABP is not an anonymous organisation. We are real people who carry the responsibility of looking after your pension for you.
PFI: Is there a way for members to communicate back to ABP as well?
XDU: There are three ways in which we organise that. Firstly we conduct a lot of research amongst our members in which they are able to express their opinions and we benchmark our performance. Our historical record shows that we pay a lot of attention to our members and really listen to what they want. At the same time we also have a more organised way of listening to our members and this is through the participation council in which there are members represented. So you can say there is two-way communication going on through communicating with individuals - but it is also institutionalised.
PFI: How important is transparency to ABP and what do you do to ensure maximum transparency?
XDU: We publish everything in our annual accounts and online. We try to be as transparent as possible. The only thing we need to be a bit careful with of course is information which could have an impact on the market.
PFI: Do you invest mostly in local or further from home markets (such as emerging markets)?
XDU: We invest more than we should in Dutch investments, that is a historical development. ABP is involved indirectly in many housing agreements which we used to own. The Netherlands should technically be only 3% of our universe but we are in it for 10%.
ABP wouldn't mind investing closer to home but then we would like to see index-linked bonds in return, they give us a good protection against inflation and this is an important objective for us. We really regret the fact that the Dutch government will not issue them.
PFI: What social role do you think pension funds can play when talking about responsible investments?
XDU: For quite a few years now we have invested according to strict ESG principles (environmental, social and governance) which are very close to the UN global principles of responsible investments. We are looking to adhere to international standards and we are convinced that responsible investing works best when you integrate it in your normal investment process. That is why we have looked at the ideal formula to do this. We need to look at the possibilities. In some areas it is easier to do then in others, for example with illiquid assets it is much easier than with equities.
PFI: What do you see as the scheme's biggest challenge in the upcoming years?
XDU: There are two challenges really. One is winning back the trust which some members lost in us and in the pension system in general. Parallel to that we need to look at how we can go back to our normal indexation. These are challenges that we are facing and we need to look at them with an eye on the long-term. In 11 years time ABP will be celebrating its 100th birthday [it was founded in 1922] and the question "where do you want to be in 11 years?" is no doubt a question that we like to answer very soon.
First published 01.06.2011
azeevalkink@wilmington.co.uk
