Preparing pension communication under the new Dutch pensions system

Mr. Van Eechoud is executive trustee and board member of IBM Pension Fund Netherlands. He discussed how the board of trustees prepares its policy on pension communication under the new Dutch pension fund system.

Under the coming system the pension amount a member receives, is no longer guaranteed but fluctuates as a function of the investment results the pension funds books.The plan member must be informed on the risks which may result in a lower monthly pension income and loss of purchasing power. An assumption is that a plan member prefers nominal security over the risk to lose money. The plan member underestimates the risk of the loss of purchasing power. Inflation carves out the pension payments if communication is in nominal terms as opposed to real terms.

The loss of purchasing power is taken into account with the investment policy, assuming a 2% annual inflation rate.  Another assumption is that a pensioner spends on average 20% less  compared to his spending pattern during his working life.

Aasumptions are important. The steer the risk profile. The board is considering communication methods to explain its assumptions tot he plan members effictively.

Are your IT systems suitable for the future?

Today information technology (IT) is deemed necessary to protect pension funds scheme’s participants. Pension funds are fast becoming digital organisations. This requires IT knowledge from pension funds trustees.

IT is viewed as of the essence to the pension administration business of a pension fund but the investment management activities are IT driven as well. And under the new Dutch pensions system, the digital administration of pension rights  and the investment returns are almost intertwined.

Which IT systems does a pension fund require? To assess the systems that are suitable for a pension fund, IT must be viewed as a means to reach the goals a board sets. Both pension administartion and investment management need tob e taken into account. This is why pension funds include IT in their organizational strategy.  Only then can they assess the IT risks and optimise their processes.

Policy on pension rights administration and investments under the new pensions sytem in the Netherlands

BNP Paribas Securities Services is a custodian. It serves Dutch pension funds and helps pension funds migrating tot he new pensions system, particularly as regards the new digital connection between pension rights administration and investment management reporting.

As an international custodian BNP Paribas Securities Services has got extensive experience optimising IT processes. Pension funds may reach out to participate in a working group set up by BNP Paribas Securities Services.

Panel discussion: setting policy on the energy transition

The topic of the energy transition remains an actual topic in 2022. Pension funds such as ABP, PME, Hospitality and Pharmacists decided to exit their investments which are connected to fossil fuels.

The panel discussion addressed topics such as:

• Considerations when decision making;
• Tension between the prudent person principle and the obligation pension funds as members of their branche organisation have to comply to international agreements on climate change made by the Dutch government;
• Reporting requirements;
• Ethics.

Conclusion:

When considering to make an exit out of fossil fuel investments, predominantly the C02 emissions connected with fossil fuels are a deciding factor. However, trustees seem hardly aware of important other considerations such as the conomics of energy, supply chain risks or international security risks - which may cause future problems managing non-financial risks;

In addition to legal and regulatory requirements pension funds that manage their public affairs need to follow private initatives such as the  Glasgow Financial Alliance for Net Zero lead by Mark Carney, the Beyond Oil and Gas Alliance by Michael Bloomberg and the Central Banks and Supervisors Network for Greening the Financial System;  

Ethical dilemma's are discussed, such as: should pension funds be altruïstic and decide to divest out of the energy sector in an effort to do good?

Policy making on impact investing with the Austrian School of Economics

Under the theory of the Austrian School of Economics man is central. Man taking action to improve his situation. On the basis of every man’s subjective preferences, prices are formed. Each investment has got a positive impact and we are understanding better and better how non-financial returns of an investment are measured.

Many economists are of the opinion that society can be engineered. Central banks act if society doesn’t comply with the 2% inflation model. However, monetary policy has got negative side effects such as boom-bust cycles, creating instability, a shift of wealth from the poort o the rich, an and insurmountable burden of financial debt – none of which side effects are deemed sustainable. Perhaps price decrease aren’t so bad. Impact investments may contribute to a more sustainable approach to investing, as opposed to monetary policy with its side effects.

Impact investing - unlisted companies and projects

Impact investing is not charity. Results are measured and reported. Investments are related tot he UN Sustainability Goals.

Mr. Van Dijk addressed how non-listed investments may yield measurable financial and societal returns.

He gave an example. A hospital in Venice was owned by the Roman Catholic Church. Mainteance was too heavy a burden on the available financial means and the Church sold the hospita lto Fraklin Templeton’s Social Infrstructure Fund. Real estate developers had a keen eye on the project, wishing to transform the hospita lto a luxury resort. However, by improving the facility and maitenance, a modern hospital is preserved fort he region , with a fixed lease contract for fincancial return.

Impact investing - listed companies

A pension fund may generate a better return on its total investment portfolio by adding listed impact investments to its stock portfolio.

Listed companies with a positive impact tend to respond well under changing consumer’s demand, technological developments and legal and regulatory requirements. It is more likely that these companies will show better results than “the market”. Impact investing in listed companies is viewed as a “niche” but T. Rowe Price expects that listed impact investing will become mainstream.

Why a joint initiative on impact investing works

Jeroen van Wilgenburg and Stephanie Mooij gave insight into the joint effort made by Aegon Asset Management, ABN AMRO Bank and ABN AMRO Investment Solutions to create an impact proposition. Each party tot he cooperation brings in knowledge and experience to contribute to the UN Sustainability Goals by investing in a selection of companies that generate positive impact.

The selected companies are considered fundamentally by a dedicated portfolio team measuring financial results. The selection is proposed to an impact committee, resulting in an impact fund holding 40 – 80 impact investments. In addition, the impact team is in dialogue with companies in an effort to move them into criteria that fit into the impact fund’s objectives. This ongoing dialogue is leading in connection with the qualitative selection of impact companies if other available qualitative data provide insufficient insight.