Bert Leffers & Anton Kramer: Pension returns. Who is responsible?
This column was originally written in Dutch. This is an English translation.
In the 1980s and 1990s, interest rates were significantly higher than the actuarial interest rate, which made it easy for pension funds to grant indexations. The pension fund board met every quarter and saw that things were going well. According to former minister Gerrit Zalm, this board had to consist of at least four people so that they could play cards.
By Bert Leffers, independent investment consultant and Anton Kramer, Director of OverRendement
Since then, financial markets have evolved and investment portfolios have become more complex. More and more risks were identified that then had to be managed. Supervision and regulation took off in a big way. Despite or because of all the measures, indexation arrears accumulated. Extra staff were hired to keep the portfolio on track. The fiduciary manager was brought in to take the pressure off the board. ABP outsourced the entire implementation to APG, and other large industry pension funds followed suit.
This meant that the days of four meetings a year were gone for good. The board is expected to be 'in control', which is quickly interpreted as an obligation to be aware of what is going on in the investment portfolio. The fiduciary also has to be assessed. And so an administrative office was added. ABP's total salary bill is now around €10 million. But the total costs for managing the assets averaged €3 billion over the past five years.
For such an amount, you would expect a good return. Analysis shows that the five largest industry pension funds achieved a return of around 4% over the past 10 years. That is not a high percentage. A simple allocation of 60% equities and 40% bonds performed better over this period. Who is responsible?
The logical answer seems to be: the owner of the assets. Many people will say that the pension participants are the owners. However, this is not legally the case. The pension fund board acts as the responsible party. This creates a principal-agent relationship between pension participants (the principal or owner) and the pension fund (the agent), whereby the question arises as to whether the fund is acting in the interests of the participants.
Earlier this year, the directors of the five largest industry pension funds called on politicians not to give pension participants the right to vote on the transfer of assets through a referendum. These directors would prefer to sideline their principals. So they will take full responsibility for the poor returns of recent years, right? However, no pension fund director has ever resigned due to disappointing returns. They place the responsibility with the administrative office and/or the fiduciary manager. Changes are indeed sometimes seen here, but the link with returns is weak. Only at the next management levels of portfolio managers or external managers do dismissals occur in the event of negative performance.
This skewed responsibility has its price in the labor market. Part-time pension fund managers regularly receive the lowest remuneration, while (private) equity managers earn millions. It is easy to guess where the brightest people go to work.
Who can really be held responsible for the strategic asset allocation that determines pension returns? Pension fund managers are failing to deliver. The accountability body is powerless. DNB has interpreted its role as supervisor as monitoring the correct implementation of rules, procedures, risk management, and ESG policy.
In the dynamics of the principal-agent relationship and the complexity of investment portfolios, responsibility for returns has disappeared in a tangle of management layers. It is time for pension funds to return to a simple structure with clear responsibilities. This means that experts in their own fields make the decisions and take responsibility. Then pension fund administrators could once again play cards with peace of mind.