A Pension Fund Bares Its Teeth
The largest pension fund in the Netherlands used to be content as a silent shareholder. But that was then. Unhappy with losses and the management structure at Baan Co., the Dutch software maker, Algemeen Burgerlijk Pensioenfonds helped force founders Paul and Jan Baan off the supervisory board last year. This month, ABP expects sugar processor CSM to let stockholders vote for the first time. Now it plans to step up pressure for greater shareholder control at such Dutch blue chips as bank ABN Amro, supermarket giant Ahold, and KLM Royal Dutch Airlines. Says Chief Legal Officer Rene Maatman: "The owners' voice should be heard."
ABP's new assertiveness reflects an urgent need to boost returns in a liberalized pension market. And what's beginning in Holland could spread across Europe. Until it was privatized three years ago, ABP grew fat on the mandatory contributions of 2.5 million members, including every Dutch teacher, cop, firefighter, and civil servant. Its $140 billion in managed funds rank it second worldwide after CALPers, the civil service fund in California. But from 2001, employed members can pay into any Dutch fund they want. Private insurers are ready to pounce. "We will definitely go after ABP's business," says Jacob Van Eeghen, director of ING Investment Management.
No wonder ABP wants a bigger say in corporate governance. It may still shun the aggressive style of U.S. funds, but it has fast become familiar with the notion of boosting returns. Holland's government-run system insures only about 30% of all employees' gross salaries--leaving room for some 1,000 private funds through which employees top up benefits. While ABP is by far the largest of these, it hasn't fully shed its legacy as a government fiefdom with a captive market.
Back then, ABP's share investments were limited by law. In 1995, the year before privatization, the fund had only 11% of its portfolio in equities. Returns in the 1995-98 period averaged 9.6%, compared with an industry average of 10.3%. "We've had to rethink our investment strategy and become more sophisticated," admits Jean Frijns, ABP's chief investment officer.
Frijns isn't wasting a moment. Equities now account for a third of investments, and Frijns intends to boost that to the limit--currently set by the government at 50%. Now that the euro has eliminated currency risk, he is buying more stock in Europe's top 500 companies, as well as the government bonds of other euro-zone countries. European companies now account for about two-thirds of ABP equity holdings and the U.S. the rest. "We have learned a lot from how the pension sector is managed in the U.S.," says Frijns.
RISK CONTROL. More aggressive investment strategies, of course, bring bigger risks. That's why the Dutch government is keeping the cap on equity investment for now. The need to control that risk is another reason local pension-fund managers want louder voices inside the companies they hold. ABP began attending annual meetings last year. It joined 14 other big funds to create the Hague-based Foundation of Corporate Governance, which researches Dutch companies. The funds are pushing local companies to abolish extensive takeover defenses, such as nonvoting shares.
ABP's example could prove attractive elsewhere in Europe, where most pay-as-you-go state retirement schemes face crises. Graying populations mean more pensioners and fewer workers making contributions. So the systems can no longer afford their own generosity: French workers, for example, receive nearly 70% of gross salaries as pensions. This year, Italy is to begin letting banks, insurance companies, and other institutions set up private pension funds. Not surprisingly, reforms similar to Holland's have been debated in France, Germany, and elsewhere in recent years.
European pension funds won't get as tough as their U.S. counterparts anytime soon. Even ABP has its limits. In the Baans' case, it let the brothers stay on the management board. "We solve our problems by discussion," says legal officer Maatman. "Getting rid of CEOs does not fit within the Dutch harmony model." Compared to their passive past, however, Dutch pension funds are waking up.