Investing in self-regulation for pension funds

Date: 10/12/1998

By Renée Cordes

JOS van Niekerk, managing director of a 3.6-billion-ecu pension fund, is becoming impatient.

Like an increasing number of fund managers in the EU, the head of the Progress pension fund, owned by the Dutch giant Unilever, is anxious to see the creation of a single pensions market. He argues that this is becoming more necessary than ever as Europe's ageing population increasingly relies on private schemes to provide for their retirement.

But Niekerk cautions that Union-wide legislation should only supplement industry agreements and national laws, and not replace them. First and foremost, he insists, the industry should regulate itself, with the state stepping in only when absolutely necessary.

“It is very important that money is being invested in the right way,” says Niekerk. “But if one goes too far in regulating, then one gets a pension product which becomes far too expensive, where maybe investment funds are being too conservative and where flexibility is hampered.”

In an ideal world, Niekerk emphasises, pension funds should neither be obliged to invest in government bonds nor restricted from investing in equities, as is currently the case in many European countries.

In the Netherlands, where there are no such constraints, the approach seems to have worked. According to a recent study, Dutch pension funds achieved about 10&percent; average real returns between 1993 and 1997. Niekerk describes this as “rather satisfactory”, given that about 40&percent; of fund investment goes into equities, which tend to be riskier than government bonds.

“Regulation should not go too far and should be designed to address the major risks only,” Niekerk told pension managers in Brussels earlier this month. “Regulation does not add value where individual responsibility is eroded.”

Dutch pension funds hold about 20&percent; of the country's equity market. About 1,000 private pension funds with investments of some 325 billion ecu operate in the Netherlands, with the participation of more than 90&percent; of the working population.

Niekerk argues that industry self-regulation has played a crucial part in encouraging funds to invest. Those in the Netherlands, for example, have reached a voluntary agreement which allows workers to keep their pension benefits when they move from one employer to another. Niekerk believes strongly that such a system is necessary at the European level.

Currently, many EU countries prefer pensions and life insurance policies to be taken out with domestically registered institutions. Tax breaks for nationals on their policy contributions or benefits are often not extended to those who move to another country and change employers.

That is not the case in the Netherlands, where workers keep their 4&percent; discount rate on pension schemes when they move from one employer to another.

At the same time, says Niekerk, the absence of restrictions on Dutch fund managers has not resulted in “unduly risky” investment strategies because of the industry's vigilance in policing itself.

Dutch law calls for pension fund or other money to be invested “in a sound manner” and limits the extent to which corporate pension funds can invest in their respective sponsor companies.

However, the industry has also agreed on a voluntary compliance code on investment and recently formed a foundation to produce studies and provide guidance on issues such as solvency and asset management.

Some major funds have also started publishing their investment results. Niekerk argues that this will encourage them to compare their rates of return with those of their peers and to look for improvements where possible.

At the EU level, Niekerk would also like to see modest supervision of pension funds. He applauds the recent pledge by Internal Market Commissioner Mario Monti to unveil a proposal early next year which would allow private pension funds to invest freely anywhere in the Union and use the services of any approved asset manager or custodian in the EU.

The Commissioner has also promised moves to allow workers to keep pension benefits when they move to another member state. He told a recent conference that a preliminary meeting on the issue this summer had demonstrated a “real willingness” among governments in the Union to dismantle such obstacles to labour mobility.

That is music to Niekerk's ears. “I am very glad that Monti is now heading for new steps. I would be delighted indeed if these steps could be taken very quickly,” he says.