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ANGELIEN KEMNA LIKES TO KEEP THINGS SIMPLE. OR AT least as simple as she can, considering it’s her job to oversee €300 billion ($376 billion) in pension assets. In November 2009, after becoming CIO at APG Asset Management, which runs the biggest Dutch pension fund, Kemna wanted to bring her scattered executive team together on a single floor, but she faced a shortage of offices. Her solution? She gave her corner office on the 15th floor of APG’s Amsterdam headquarters to a colleague and moved into a conference room. Kemna works at one end of the long, blond wooden conference table and keeps her personal effects in cabinets at the back of the room. If her staff needs the space for a meeting, the CIO decamps to the nearest empty office and gets on with her work.

With her no-nonsense style, Kemna has been simplifying much more than office arrangements at APG and its predominant fund, Stichting Pensioenfonds ABP, the €261 billion plan for Dutch civil servants and teachers that’s the second-largest pension fund in the world. In the 15 or so years before Kemna’s arrival, her predecessors had transformed the outfit from a stodgy manager of Dutch bonds and real estate into one of Europe’s most diversified, cutting-edge investors. CIOs Jean Frijns and later Roderick Munsters took advantage of a liberalization of Dutch pension rules and embraced the so-called Yale model, investing heavily in everything from international stocks and bonds to hedge funds and private equity. Today, APG has nearly 30 percent of its funds in alternative investments, including such exotica as Amsterdam-based hedge fund seeder IMQubator and a €1.5 billion opportunity fund that holds music rights, catastrophe bonds and pharmaceuticals royalties.

For a long time, that formula worked wonders. ABP has generated an average annual return of 7 percent since 1993. But the global financial crisis hammered the fund’s portfolio. ABP lost 20 percent in 2008. That was relatively mild compared with the 38 percent plunge suffered by the California Public Employees’ Retirement System, the largest U.S. pension fund, and the 27.6 percent drop in Harvard University’s famed endowment. Still, the setback slashed ABP’s portfolio by a hefty €44 billion, to €173 billion.

Compounding the impact of those losses, a change in Dutch regulations aimed at shoring up pension solvency required funds to adopt a much lower interest rate to discount their future liabilities. The combined effect was dramatic. ABP went from being one of the best-funded major pension funds in the world, with assets worth 140 percent of liabilities at the end of 2007, to being an underfunded plan with a coverage ratio of just 89.6 percent 12 months later. The Dutch central bank, which regulates pension funds, ordered a five-year recovery plan that forced ABP to cut retirees’ cost-of-living increases and increase employees’ contributions. Even so, ABP remains underfunded and is likely to have to impose new benefit cuts next April.

The dramatic decline in what has long been considered Europe’s leading pension fund, and pension system, has caused an uproar in the Netherlands and triggered widespread calls for pension managers to rein in risk. “You have a public that’s angry,” says Scott Evans, a member of ABP’s external investment committee, who earlier this year stepped down as president of asset management at TIAA-CREF in New York. “When the market moves suddenly in the Netherlands, it has a much more immediate impact on pension premiums and benefits than we experience in the United States. This is healthy for the long-term viability of the system but difficult for current participants.”

Pension regulators, trustees and pensioners were demanding change from the moment Kemna arrived at APG. “It required a drastic shift of policy, a harsh shift,” she tells Institutional Investor.

With a Ph.D. in quantitative economics and two decades of experience in senior roles at Dutch mutual fund manager Robeco and at ING Group, Kemna was no stranger to complex portfolio management strategies. Her challenge was to strike a balance between maintaining a diverse portfolio suitable for ABP’s long-term liabilities and responding to the clamor for scaling back investment risk. In her first week on the job, the new CIO began to draw up a plan to root out any securities, strategies and investment managers that were taking on too much risk for the amount of return they were generating and causing too much volatility. To get her staff to rally round these changes, Kemna coined a theme for the new regime: “Controlled simplicity” would become the order of the day.

Over the next two years, Kemna and her team would take a line-by-line inventory of the way APG was investing across its 14 different asset classes, ranging from emerging-markets equities to hedge funds. They kept all of those classes — and even added a new one, alternative inflation — but made sweeping changes to simplify operations and reduce risk. In alternatives, for instance, where APG manages €80 billion, Kemna ditched an in-house global tactical asset allocation team because it traded so many exotic derivatives, which she believed exposed APG’s funds unnecessarily to potential market turbulence. For similar reasons, she also fired two external managers in the group’s €3.4 billion GTAA portfolio. With the same risk-reducing strategy in mind, she and her team weeded through APG’s €79 billion developed-markets equity portfolio, removing external managers of so-called 130-30 strategies, a kind of hedge-fund-lite product that seeks to generate higher returns with a mix of long and short positions. “We said good-bye to external managers who couldn’t deliver simple strategies or align with our interests,” Kemna explains.

Digging deeper, the CIO and her team adopted a new, “smart beta” approach and scrubbed every single portfolio, except for alternatives, to eliminate benchmark flaws. In APG’s €40.5 billion core Treasuries portfolio, for instance, managers ditched government bonds from heavily indebted euro zone countries. “If you add a strategy that adds too much complexity and operational risk, then you’re not doing the right thing for your client,” says Kemna.

It took more than a new approach to change course at APG; it took new people who shared Kemna’s vision of a lower-risk fiduciary manager. In her first six months on the job, the CIO would replace four of her five fellow executive board members, leaving only Paul Spijkers, who heads APG’s New York office and its alternatives portfolio. “Whenever you want to change a culture, you need to change a few key positions, and it starts at the top,” says Kemna.

The transformation has been dramatic, says Ronald Wuijster, former head of strategic portfolio management, whom Kemna made chief client officer and an executive board member. “Since Angelien we’re less into innovation and more into making it as simple as possible,” he says. “Risk management is our primary job.” 

Complicating Kemna’s task is APG’s relatively new status as a fiduciary manager. A 2007 Dutch pension law, aimed at strengthening pensions following losses from the dot-com bust at the start of the decade, effectively forced pension funds to turn over their asset management to independent firms. About 18 months before Kemna arrived, ABP’s board voted to spin out its money management and administration functions into a newly created firm, APG. The change has added a new layer of bureaucracy, as ABP created a bestuursbureau, or secretariat, to help the pension trustees oversee APG’s work. The new arrangement also demands greater accountability of APG, forcing Kemna and her team to explain and justify their strategy to ABP trustees. But with new demands come new opportunities: APG has used its independence to win the management business of five other pension schemes and merge with Cordares, the €35 billion manager of the Netherlands’ building and construction sector pension fund.

Kemna’s challenges notwithstanding, many pension managers would love to be in her position. The Dutch pension system has earned a reputation as arguably the best in the world because of its comprehensiveness and robust funding. Participation is compulsory for most Dutch workers, with more than 90 percent of the labor force enrolled in a pension plan. In a world where most pension contributions are in the single digits, Dutch employees squirrel away an almost unheard-of 20 percent or more of their annual salaries, with employers kicking in 70 percent and employees the remainder. A strong sense of intergenerational risk-sharing helps ensure balance during times of economic stress, when retirees may forgo cost-of-living increases while participants and employers boost their contributions. Last, it helps to have pension assets managed in large pools that ensure economies of scale, leaving pensioners with more euros in their pockets.

“The notion of mutual support across society is deeper than in the U.S.,” notes Leo de Bever, CEO and CIO of Alberta Investment Management Corp. in Edmonton, Canada. De Bever serves on ABP’s external investment committee. “Given that everyone in the Netherlands has some pension, there is more support for making it sustainable.”

And how. Dutch pension fund assets amount to 134 percent of the country’s gross domestic product as of 2008, more than those of any other member of the Organization for Economic Cooperation and Development, according to OECD figures. By contrast, Australia’s pension assets stood at 91 percent of GDP and the U.S. was at 72.6 percent. “If you count that in, we’re part of the richest country in the world,” says Guus Warringa, APG Asset Management’s chief legal counsel. The Netherlands’ pension system ranks first among 16 countries because of its strong adequacy, sustainability and integrity, according to the Melbourne Mercer Global Pension Index, a joint study conducted last year by the Australian Center for Financial Studies and consulting firm Mercer. The U.S. holds tenth place.

Yet even the stalwart Dutch have found it difficult to cope with two financial crises in one decade. The first blow came from the dot-com bust and resulting drop in equity markets, which caused the average pension fund to suffer losses of about 8 percent in 2002. Two years later trustees of all Dutch plans decided to end early-retirement benefits after the government withdrew its share of funding for those benefits. The changes were a rude shock for Dutch workers and retirees. In October 2004 hundreds of thousands of people thronged central Amsterdam’s Museumplein, surrounded by the priceless collections of van Goghs, Rembrandts and Vermeers that represent the Netherlands’ rich cultural patrimony, to protest the threat to their standard of living.

The public pressure prompted lengthy debate, and in 2007 Parliament passed a new pensions act in a bid to shore up the system’s solvency and strengthen the transparency and accountability of pension management. The act set a minimum asset-to-liability ratio of 105 percent and mandated corrective action for any plan falling below that threshold. The law also changed the rate for discounting future liabilities from a fixed 4 percent to a rate calculated monthly by the central bank based on interbank swap rates. Dutch officials reasoned that it was more prudent to use a market rate, which should better reflect what funds could expect to earn. But when interest rates plunged following the 2008 financial crisis, pension trustees saw their funding ratios plunge in tandem. Almost overnight ABP went from being generously overfunded to seriously stretched, prompting the central bank to order a five-year recovery plan.

Although there have been no major public demonstrations of late, the Dutch media are filled with debate over how pensions should be structured in an era when low interest rates and longer life spans threaten pension plan solvency. The long-revered concept of solidarity has begun to fray as young people fret that the money won’t be there for them and as their elders see their pension checks trimmed. One union blasted pension funds as “casinos” that were gambling with workers’ money. “It was a disaster,” explains Gerard Riemen, director of the Dutch Pensioenfederatie, an umbrella organization for 400 pension funds. Riemen helped write the 2007 legislation as an official at the Ministry of Social Affairs and Employment. “It was a real wake-up call,” he says. “We have to think about revising the whole pension contract.”

At ABP funding pressure persists even though the fund achieved positive returns of 20 percent in 2009, 13.5 percent in 2010 and 3.3 percent in last year’s difficult market conditions. The discount rate, calculated by the central bank, stood at about 2.6 percent last month, making it difficult for ABP to reach the 105 percent coverage bogie. At the end of April, the funding ratio stood at 94 percent. Barring a dramatic improvement, pensioners are facing a likely 0.5 percent reduction in their monthly checks starting next year.

It’s that prospect that’s keeping the heat on Kemna. “Close to one third of our country depends on whether we’re doing a good job,” she says. “The professional challenge is immense.”

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