APG has had a challenging year in 2018. Decreasing stock prices in the fourth quarter led to a negative return for pension funds. And despite all the efforts of those involved, there is still no new pension agreement. That means uncertainty for many pension fund clients and their participants. CEO Gerard van Olphen and fellow Executive board member Ronald Wuijster, responsible for asset management, look back and ahead and explain how APG deals with pension dilemmas, like return versus sustainability and bonuses for investors”.
The lengthy discussion about the pension agreement in Dutch consensus politics, the global political uncertainty, the fall in interest rates and the strong decrease of the stock market in the fourth quarter: 2018 was not an easy year for APG. There was a negative yield. Although bpfBOUW was still able to indexate slightly at the beginning of the year, the cover ratio of client ABP fell below 100%. That means that we’re once again facing the possibility of pension cuts at ABP. Indexation had already been scrapped. Stock markets have now recovered and APG's invested assets are higher than ever at 500 billion euros. These concerns aren't yet behind us, say CEO Gerard van Olphen and Ronald Wuijster, CEO of APG Asset Management and responsible for the asset management of the affiliated pension funds, including ABP, bpfBOUW and SPW.
What gave you sleepless nights in 2018?
Gerard van Olphen: “What I found the most challenging were the external circumstances. We're working hard on pension value: our aim is to create as much value as possible for every euro that participants put into their pension. Over the past year, we've taken a few good steps: we're strategically on track, we've reduced the average administration costs per participant by six percent and we have offered people more insight into their pension. At the same time, the market continues to be plagued by the prospect of cuts due to low interest rates. The lack of a pension agreement also continues to decrease the confidence of participants and public support in general. That doesn't make it easier.”
Ronald Wuijster: For us as investors, the biggest challenge came at the end of last year. In the first nine months of 2018 it seemed that we would be able to achieve a reasonable return, but in the last quarter there was a sudden downturn. We're here to get a return for the participants, so a negative result is the last thing we want. Although we've outperformed the market with our investments, it remains very frustrating. Not least because we would have liked to have kept ABP's cover ratio out of the danger zone.”
Pension assets are higher than ever. So how come there’s no indexation, and there might even be cuts?
Gerard: “Yes, that does give a bit of a mixed feeling , and it’s almost impossible to explain. Since 2008, our assets have doubled, but due to the extremely low interest rates the pension commitments increased even further. As I explain this, I’m well aware that it doesn’t help people put bread on the table, and that comes hard. There's not much that we as APG can do about it. The rules call for high cover ratios in order to meet the pension commitments. That underlines the importance of quickly reaching a pension agreement based not on a pension guarantee, but on a pension ambition. That way, pensions can start to keep pace with the economy, creating more room for indexation, but the downside is that pensions will get cut sooner. ”
Does APG itself have to communicate differently with the members?
Gerard: “The pension sector, and therefore APG, has always given people the feeling that their pensions would turn out well in the end and that they didn’t need to worry too much. That led to the expectation that their pension was guaranteed. Now that there is no indexation and there are even sometimes cuts, people are saying: I’m not getting what I'm entitled to. That's an entirely logical reaction. As a sector, we have simply not clearly communicated the fact that pensions always feature an element of uncertainty and that people need to prepare themselves for their future financial situation.”
People also don’t understand why APG still pays out bonuses in the event of a negative return.
Ronald: “I can well imagine people wondering about that. We invest for the long term, so we assess our performance over the long term too. Over the past decade, we've achieved an average of ten percent return per year for ABP. In 2018, total returns ultimately turned out negative due to the poor stock market, but the unlisted investments did perform well. We outperformed the market there. Besides that we reward people for non-financial performance, such as leadership and teamwork. That means that with bonuses we don't look at that one less good year, but at the long term and at the whole.”
Still, it sounds quite a lot: around 31 million in variable pay and five people who earn one million or more.
Ronald: “31 million euros is a lot of money, but in fact it’s ten percent of our total cost. Around five million of this is paid out in the Netherlands, and the rest abroad. The five people who earn a million or more work in America. To attract top investors there, you sometimes have to accept variable pay. You also have to look at the returns. Because these top investors are able to generate extra returns in the long term, this variable pay will pay itself back many times over.”
Gerard: “To be perfectly clear: my fellow board members and I don't receive any variable pay. This variable pay is only intended for a small group of investors. At APG, we do three-quarters of all investments ourselves. That means that you have to attract the right people. If you invest in the construction of a motorway in Australia, for example, you need people who know the market: boots on the ground. It's not practical to manage a billion-dollar portfolio by phone or Skype from Amsterdam. You can also outsource investments, but that costs a lot more. So we only do that when there's no other way. Besides this, the amount of variable pay will not be visible when you outsource investments, as this is done by the external party. While we want to be transparent about it.”
APG manages Dutch pension funds, so why does it invest mostly abroad and not in its own country?
Ronald: “I understand the question, but the Dutch economy is only 1% of the world economy in size. Global investments offer more opportunities for returns. We also want to benefit from the growth in Asia, for instance. And you don't want to put all your eggs in one basket, but spread the risks as much as possible. However, we are planning to invest more in the Netherlands in the coming years. We're already involved for example in the financing of the Afsluitdijk, energy-efficient housing and wind turbines. There are also other investments in infrastructure, such as a better connection between Schiphol and Amsterdam. In many countries, such projects are financed by pension funds. This could also be an attractive option for us, as long as the returns are good.”
What if APG has to choose between returns or sustainability when making an investment decision?
Ronald: “It is primary our task to achieve a good pension for the members, that is why a good return is needed. But we also want our investments to contribute to a good living environment, because otherwise that good pension won't be of much use to you later on. A good pension, in a sustainable world, emphatically in that order. Besides, in practice, we barely face a dilemma between profitability and sustainability. In fact: the fact that we look not only at the financial figures, but also at sustainability, helps us to make better investment decisions.”
Why is APG still investing in companies like Shell?
Ronald: “You can decide not to invest in this type of company, but then you can't exert any influence as a major shareholder. As an investor, we prefer to remain involved. Shell is working on the transition from fossil fuels to new energy sources, partly because of the pressure we put on the management. Ideally, you could say that using fossil fuels should stop tomorrow, but that's unrealistic: the world can't do without them. We don't take an activist approach, but we do make our voice be heard.”
APG plans to focus more on participants and has appointed a fifth board member with this responsibility. What will the participants notice in concrete terms?
Gerard: “In a new pension system with less guarantees and more freedom of choice, people have to take more responsibility for their own pension. They have to make important choices, despite often not having enough knowledge or desire to delve into it. Once a year, we send participants a virtually incomprehensible pension statement. Seventy percent of the people throw the envelope straight in the bin. That shows that you have to make pensions simpler and more accessible and help people become more pension-conscious. Examples include a digital 'pension check-up' at life moments like marriage, divorce, having children or changing jobs. A quick check: how does that affect your pension? Last year for example we developed the Personal Pension Pot for ABP. This helps 850,000 Dutch people to see how much money there is for them in the pot. In the coming period, we’ll be talking to participants about how we can give them more support.”
There are also 850,000 self-employed people without a pension in the Netherlands. How are we going to deal with that?
Gerard: “That's worrying. If self-employed people don’t build up a pension, this could lead to poverty among the elderly. Most employees work one day a week for their pension. As a result, the Netherlands has 1400 billion euros available for retirement provision. Self-employed people can voluntarily build up a pension, but they don't always do so. If you give people the choice of locking up their money for forty years or spending it today on a new TV, they'll go for the latter. But no two self-employed people are the same. You have the redundant construction worker who becomes a freelancer out of necessity, and then there’s the well-paid IT professional or interim manager. We believe that the government has to take measures to protect the vulnerable self-employed people and the middle group. We’d therefore considered it desirable for there to be a compulsory pension for the self-employed. Because this does not seem politically feasible and there is also insufficient support from self-employed people, you can think of intermediate forms that also address the core of this problem, but that offer more scope for customization. "
Finally: will there ever be a new pension agreement?
Gerard: “In the Netherlands we judge British politicians on how they are dealing with Brexit. The pension negotiators should watch out that they don't start to behave the same way in the pension agreement discussion. Some might be thinking along the lines of: we have until December 31, 2019, so let's negotiate until Christmas, because that will step up the pressure for a result and perhaps a party will start to move. But this leads to great uncertainty for the Dutch pension participants. The parties concerned have to be made aware of the emotions that this evokes in the country. They have a duty to make a decision and finally let people know where they stand.”
Read APG’s Annual Report 2018 here