“The financial sector will have to make an important contribution to the financing and acceleration of the sustainable transition”. That’s what Finance Minister Kaag of the Netherlands wrote, prior to the debate with the House of Representatives on February 22, 2022, about her policy priorities for the coming cabinet period. The debate includes a discussion on whether and to what extent government and industry can work together on important and substantial investments in the future of the Netherlands. There are certainly opportunities, for example by investing pension money in Dutch infrastructure, says Ronald Wuijster. But there is work to be done. We haven’t looked at this enough yet in the Netherlands.”
“At the beginning of the calendar year, I always catch up with the chairmen of the internationally largest asset managers who, like APG, invest for the long term - such as pension funds and sovereign wealth funds. During one of those meetings, with the Canadian CDPQ, something came up again that has been occupying us as a Dutch pension administrator for some time. This fund invests nearly 20 percent of the assets it manages in local infrastructure in the province of Quebec. Why don’t Dutch pension funds do that? Our government gives incentives from one side and puts up blockades from the other side to prevent it. What exactly is going on? And what is actually driving pension funds in their investment policy?
As Dutch investors, we have little interest in a so-called 'home market bias' on the basis of the convictions we adopted at an early age. Our country is a relatively small and has an open economy, and we strongly believe in diversification. With an open mind and looking outwards, we look for the best investments worldwide.
But doesn’t investing pension assets in the Netherlands serve a social purpose, one that also serves the interests of pension participants? After all, we invest to ensure that our pension members will have a good retirement. The answer to that question is that it just depends. The national economy benefits less from investing in Dutch government bonds and large multinationals. And it is precisely these categories that often weigh heavily in pension portfolios. If you want to make a difference and really stand at the roots of economic growth in your own country, two investment classes in particular come into consideration: venture capital and infrastructure. Now, investing in young entrepreneurship can certainly be attractive, but it is also a fact that the Dutch venture capital market is pretty small. That size is not in proportion to the amount of capital that we have to deploy as pension asset managers. You can therefore not put a lot of pension money to work in the Dutch venture capital market.
With respect to the country’s infrastructure, however, it is a very different matter. After all, large scale investments are needed there. Moreover, the characteristics of this investment category fit in very well with the objectives of a long-term investor of pension money: a relatively stable, inflation-adjusted return and a large contribution to sustainability - like, for example, investments in the energy transition.
And there is something else too. Early this year it was announced that the National Growth Fund will no longer include infrastructure investments among its objectives. At the same time, the need for infrastructure financing in all kinds of areas is substantial - such as the electricity grid, fiber optics for the internet and the energy transition. So, there is a lot of potential room for investment by other investors, such as pension funds. Isn’t one plus one two in that case, and why isn’t the government creating a lot more opportunities?
Two reasons are often given for this. First, the government can historically borrow cheaply; as low as a few percent and, in recent years, even pretty much for free. The return for pension investors, on the other hand, has been between 7-8% over both the past five years and the past 100 years. That, of course, creates a distinctly different expectation of return. And the choice is quickly made, but this does leave opportunities unused. Various studies show that the combination of public and private money leads to better business cases, because they are developed from a broader stakeholder perspective. Since modern monetary theory has come into vogue and numerous government support programs were put in place before the pandemic, there sometimes seems to be a view that governments can borrow almost infinitely with impunity. But according to the Netherlands Bureau for Economic Policy Analysis, besides potential inflationary concerns, this also leads to a ‘mortgage debt’ for future generations. Rabobank economists have nuanced that view. They rightly pointed out that this mortgage debt depends on the return on investments that are made with the borrowed money for future generations. Investments are sensible but require a good business case and for that good business case the involvement of private money is an important incentive, if not a prerequisite.
The second reason why the government offers scant opportunities to invest pension money in our national infrastructure: as a country we do not want our crucial infrastructure to fall out of government hands. Former finance minister Wopke Hoekstra made this clear in response to parliamentary questions. One could argue against this by saying that pension funds are well-known domestic parties. But in order to offer all investors a level playing field, it is not desirable to distinguish between different pots of investment money.
All things considered, it is tempting to conclude that the needs of the government and those of investors of pension money are simply incompatible. Yet my conviction is that we in the Netherlands have collectively not yet looked at this closely enough. Abroad, it is not unusual to distinguish between economic and legal ownership of the infrastructure and there are various possibilities for structuring this carefully. In short, there must be more to this. For some years now, ABP and APG have therefore taken the initiative to talk to government agencies and other pension administrators about ways of paving the way for more pension money to be invested in Dutch infrastructure.
Of course, CDPQ’s 20 percent in Quebec should not be a guide in this regard. But even with 5 percent of the total pension assets, we are talking about approximately 100 billion euros that would eventually become available for investment in Dutch infrastructure. Talks continue, and hopefully there will be some results soon.”
Ronald Wuijster, member of the Executive Board, responsible for Asset Management