Dutch Pensions Push to Punish Poorly Performing Managers with Lower Fees

Led by PFZW, Dutch pensions are considering renegotiating contracts, allowing them to discipline underperforming managers.

(April 16, 2014) — The Dutch care and welfare sector pension fund PFZW has said it wants to build punishments into contracts with its asset managers which would see their fee levels fall if they underperform.

Speaking to Dutch newspaper Financieele Dagblad (FD), director Peter Borgdorff said it was wrong that fee levels could rise if managers outperformed, but that nothing happened when they produced poor returns.

“The culture is that if all goes well this is the merit of the asset, and that if it is bad, this is due to the market,” he said.

“Asset managers now get a bonus if they do well, but they are not disadvantaged as they perform worse than the market. That’s not right.”

Borgdorff said he wanted to write into new contracts with the fund’s asset managers rules that would dictate managers’ fee levels would be lowered to their basic compensation if they underperformed over a sustained period.

The movement has won support from the Netherlands’ largest pension fund ABP. Furthermore, it was prepared to align itself with PFZW. Speaking to FD, Erik van Houwelingen, an ABP board member, said: “If we want to change something, like pension sector, we need to join forces.”

ABP already has a system in place where if a fund manager has underperformed over a number of years, the bad years must be compensated for before the pension fund awards a bonus for the better ones.

PME, the metalworkers pension fund, also praised the idea, although it stopped short of pledging allegiance to PFZW’s cause.

A spokesman said the initiative was “interesting and commendable”, adding that it “fits well into the overall effort to control costs”.

Somewhat unsurprisingly, asset managers are rather cooler on PFZW’s suggestion. “Based on the available information, it is currently difficult to provide a substantive response,” a spokesman for Robeco told the newspaper. FD was also unable to get a response from BlackRock or ING.

The proposal comes at a time when the Dutch regulator, the De Nederlandsche Bank (DNB), has put more pressure on pension funds to control their costs.

In January, the DNB reported that Dutch pension funds spent €4.5 billion on investment management fees in 2012 on aggregate, equating to 0.53% of their total investments. The report also found a large variation between funds, with some reporting their costs equated to as little as 0.05%; others reported their investment fees amounted to more than 1% of their total portfolio.

Related Content: 401(k) Plans’ Pervasive Problem of Excess Fees and Aon Hewitt: Fiduciary Fees Must Be More Transparent