What can the UK learn from the Dutch approach to fiduciary management? (and vice versa!)
Many of our UK readers may not know this, but the Dutch have invented many things we take for granted today – the microscope, the eye test, wi-fi and even orange carrots*, to name but a few.
It’s also appropriate, given what I’m about to discuss, that the Dutch also invented the stock market. The first stock exchange emerged in the Netherlands in the 17th century as a way for everyone to invest in the trading adventures of the Dutch East India Company.
Historically Holland has been a hotbed of innovation. And its contribution to the financial world continues today with the creation of fiduciary management around twenty years ago. Strictly speaking you could say that fiduciary management began in the UK in 2003, but the big difference is that only a tiny minority of schemes were using it. In the Netherlands it started with big schemes and was adopted much more quickly.
The Netherlands leading the way
That’s twenty years of road-testing that the UK can learn from and adapt in a way that suits us best. The Netherlands has led the way in developing and refining fiduciary management. But (and most importantly) it operates under a different set of rules than the UK.
So, I thought it would be useful to look at the two systems to understand what we can learn from each other.
Since fiduciary management is largely applied to pension funds – although it’s also used by insurers, foundations, family offices and so on, particularly in the Netherlands – it’s important to understand that there are different priorities for each country. The majority of Dutch pension schemes are still open and so their priorities and investment strategies are different. Another big difference is the scheme size, the Dutch market has been much more successful consolidating driven by finding efficiencies whereas the UK is only just looking at this approach.
Dutch benefits are not guaranteed
And another major difference is that Dutch benefits are not guaranteed. Increases are discretionary, and pensions can be reduced this is a big difference that and very much drives investment approaches. The Netherlands is also further ahead than the UK in cost transparency and incorporating ESG given their Regulator is much more involved in investments generally.
Much of the focus of UK pension schemes over the last ten years has been on liability management given that the majority of our schemes are now closed. However, that is rapidly changing and Dutch schemes are increasingly focusing on liability management especially in this very low interest rate environment and this is a good example of where (for once!) our UK expertise can help our Dutch brethren.
The Dutch pension system is widely admired and regularly tops the charts of the world’s most effective pension schemes. They’ve been very successful at navigating the economic landscape and adapting as circumstances change.
So, what are the main differences between how fiduciary management works in the Netherlands and the UK?
The major difference is from a regulatory standpoint. In Holland a fiduciary manager cannot replace the mandated investment consultant; a pension scheme can only delegate the implementation. Whereas in the UK, generally when people think about fiduciary management, they generally expect to delegate the strategy setting too.
What we at Kempen bring to the market is an understanding of both systems and an ability to tailor a governance solution that truly fits any individual trustee board. As part of the decision making process when appointing a fiduciary manager, a trustee needs to decide how much they want to delegate not just to whom. One size does not fit all. That’s where we can help.
Whilst in the Dutch system only the implementation of the asset allocation can be delegated. The beauty is that in the UK there are lots of different options. We could mimic the Dutch system – our client could keep their consultant and we could just do the implementation.
Alternatively, the trustees could fully delegate where we both provide the strategic advice and follow through with the implementation.
Or, alternatively, Kempen can do something halfway between. This means we might create a governance structure that allows more participation for the trustees where we agree that they can for example have a veto on choosing underlying managers or can keep existing managers.
Fiduciary management is principally about taking over the heavy lifting of implementing, maintaining and evolving an investment strategy through the lifecycle of a pension scheme. The fiduciary manager chooses the underlying managers. They continually monitor them and disinvest in a timely and efficient manner if circumstances changes both for the scheme and/or the manager.
It’s all about having an experienced and knowledgeable team that knows the asset class.
CMA's final order
In the UK, the Competition and Markets Authority (CMA) final order relating to investment consultancy and fiduciary management has seen a flurry of activity not least because of the new rules on tendering.
Trustees have some tough choices to make as different fiduciary managers have very different delegation models and as part of the tendering process they need to fully explore what works best for them. What gives Kempen an advantage is the experience we’ve gained from working in the Dutch system and applying those lessons to the UK market.
Our experience in both environments is already paying dividends. For example we have one UK client that has adopted a very much ‘Dutch-style’ set up while the majority fully delegate and then we recently gained another client that is more somewhere in between – they do not have a separate strategist but they still want to be heavily involved in all decision making/manager selection.
Finding the balance
Pension fund trustees have a tricky balance to find between handing over control to experts while having a strong oversight on performance. Either way they’re still ultimately responsible. What we can offer in the UK can be a lot more fluid and just what the trustee board is comfortable with especially given the very different levels of trustee investment knowledge.
While the Dutch system has its strengths – and some weaknesses, we can cherry pick the best of both to tailor a solution that suits our clients’ needs.
It’s not a question of one system being better than the other. It’s about taking the best of both and applying them in a way that suits each individual client.
This article has been published in Kempen Insight- May 2020
Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.