Anton Kramer: Explaining is not the same as assessing
This column was originally written in Dutch. This is an English translation.
By Anton Kramer, Co-Founder of OverRendement
The ink had barely dried on Minister Vijlbrief’s (Social Affairs and Employment) letter to the House of Representatives regarding pension funds’ investment returns when the next publication appeared: the OECD’s provisional pension figures.
Both documents provide insight into how pension funds invest and into the factors that influence returns. But one question remains unanswered: given the risks taken, were the returns achieved good enough?
The Minister rightly emphasises that a pension fund cannot look solely at the return on assets. The liabilities side of the balance sheet is also important. Interest rate and inflation risk play a major role. For example, rising interest rates can reduce the value of bonds, but at the same time cause the value of future pension liabilities to fall even more sharply. Differences in asset allocation, interest rate hedging and risk appetite are also relevant.
But explaining is not the same as assessing. When the Minister discusses the performance of the five largest pension funds, that assessment remains strikingly superficial. He notes that returns are ‘generally positive’ and that the average return is around 4 per cent. Is this good or bad?
Also striking: according to the Minister, BpfBouw achieved a cumulative return of 31 per cent over the period 2014–2025. This is demonstrably incorrect: for the first five years, an incorrect line from the annual report has been copied over. The actual return, at 82 per cent, is considerably higher. The return figures have been handled rather casually. And this reflects a failure to properly assess the figures. Whether 31 per cent or 82 per cent, apparently either is sufficient, as long as it is positive.
The relevant question is: what return was achieved, given the risk taken, the returns on financial markets, and the obligations the fund had to fulfil?
Preliminary figures from the OECD show that, in 2025, the nominal return on Dutch pension funds will be the only negative one among 57 countries. Naturally, there are explanations for this. Currency effects play a role. Differences in asset allocation and interest rate hedging are also relevant. The OECD itself highlights the effect of the high level of interest rate hedging by Dutch funds in the run-up to the transition to the new pension system.
But here too, the following applies: this explains the difference, but does not assess it. The Minister argues that a pension fund’s performance must always be measured against a benchmark that takes differences between pension funds into account as far as possible. In this way, the benchmark becomes the portfolio and differences are explained, but not assessed. The composition of these benchmarks can also change from time to time, meaning that the effects of timing and changes in risk appetite are not made transparent. Is a 4 per cent return over the past twelve years good? Funds with significant indexation shortfalls perform just as well relative to their benchmark as funds that have met their indexation targets. Whilst the Minister specifically emphasises that it makes sense to look at the trend in indexation, the benchmark does not take this into account.
The minister’s letter is on the agenda for the meeting on 10 September. Anyone who obliges millions of members to have billions of euros managed by pension funds must not only be able to explain what has happened; they must also be prepared to critically assess whether things could have been done better, given the knowledge available at the time.
