Dick Kamp: The new steering role of pension fund directors
This column was originally written in Dutch. This is an English translation.
By Dick Kamp, Director of Pensions, Investment & Risk at Milliman Pensions
The Future Pensions Act (Wtp) brings fundamental changes to the work of pension fund administrators. The new pension contract has been worked out in detail, which means that much of the former freedom of decision-making has disappeared. However, this does not mean that the role of the administrator is becoming less important. On the contrary: the focus is shifting to four crucial areas that together determine whether a pension fund really remains “in control”.
1) Strategic recalibration with social partners
Every three to five years, a strategic discussion takes place between pension fund administrators and social partners to review the pension scheme and agreements made (goals and ambitions). This discussion revolves around finding the right balance between contributions, risk and ambition. This is a delicate balancing act.
The risk profile is based on risk preference surveys among participants, supplemented by scientific insights and knowledge about the participant population. The pension ambition is shaped by ALM calculations, in which contributions and risk are carefully weighed for each age group.
The administrator translates these principles into a concrete investment policy, taking into account ESG policy, investment cases, and further optimisation studies. Various investment risks – from market to currency risks – are carefully managed.
2) Quarterly monitoring and adjustment
At least every quarter, it must be assessed whether the reality still matches the principles applied. This involves external developments in various areas:
- Economic developments
- Politics and legislation & regulations
- Social trends
- Financial markets
- Technological developments
- Pension sector developments
A complete overview of all explicit and implicit assumptions underlying the agreements with social partners is crucial in this regard. This includes the composition of participant categories, contributions, salaries, pension levels, risk premiums, inflation, costs and biometric risks. In the event of deviations, the board determines whether and how adjustments need to be made to keep the pension scheme on track.
3) Optimising ethical and controlled business operations
The third responsibility concerns the continuous optimisation of ethical and controlled business operations. This includes:
- Governance: strengthening administrative processes, the BOB model and the management culture.
- Investment domain: refining the investment portfolio by selecting more suitable financial instruments and asset managers.
- Biometric risk domain: developing a deeper understanding of risks and translating this into improved control.
- Pension administration: streamlining administrative processes and improving data quality.
- Pension communication: increasing participant engagement.
Implementing changing legislation and regulations and best practices also falls under this responsibility: a task that requires constant attention.
4) Innovation as a structural part of governance
Where optimisation improves existing processes, innovation brings real renewal. This goes beyond minor adjustments and involves fundamental renewal in areas such as:
- Developing more modern value propositions for participants and employers.
- Designing pension schemes that are better aligned with modern HR needs.
- Integrating advanced technology into pension solutions.
- Exploring new forms of collaboration.
The results of innovation can form input for both the review meeting with social partners and for ongoing optimisations.
Conclusion: staying in control
The Wtp contract fixes the distribution of returns, costs and risks, but gives the director even more control over strategy, monitoring, optimisation and innovation. In order to remain in control, action is now required on three fronts:
Action plan for pension fund directors
1) Develop a monitoring dashboard: an effective monitoring dashboard with carefully selected KPIs is essential. This system must identify deviations from the starting points in a timely manner and enable the board to take proactive corrective action where necessary.
2) Establish a strategic calendar: the pension fund's strategic calendar must be revised to reflect the new responsibilities. This calendar determines which topics deserve attention at what time and how the administrative cycle can be optimally organised, whether or not in relation to stakeholders.
3) Build a partner ecosystem: A well-thought-out partner ecosystem – from actuarial advisers to investment advisers and IT providers – can support both optimisation and innovation. It is important to determine what expertise is available in-house, what needs to be hired in and with which parties strategic partnerships are desirable.
Pension fund directors who start taking these three steps today will lay a solid foundation for an agile and future-proof pension fund. This will enable them to remain demonstrably in control even after the transfer. Not only because it is necessary, but above all because it benefits the participants.
This is the forty-third column in a series on risk management. The series aims to encourage readers to consider risk management as an integral part of running a pension fund.