Background

PFZW is the compulsory industry pension fund for employees in the Dutch Health Care Industry. It is the second largest pension fund in the Netherlands, with 2.4 million participants, targeting indexation of pension payments with wage inflation. Assets under management are $197.2 billion at the end of 2017. Since 2008, there has been a split between PFZW (the pension fund) and PGGM (its Pension Delivery Organization), which advises on and implements the investments, amongst other things. The board of PFZW includes representatives of employers and employees, with an independent chair.

The challenge

After the financial crisis of 2008–2009, PFZW faced a number of questions that essentially said: the world has changed in a significant way, does our investment thinking reflect these changes? For example, the paradigm of “efficient markets” did not help to prevent large losses. The license to operate for Defined Benefit (DB) pension funds was no longer self-evident. Trust in pension funds by society was at a very low ebb. And PFZW felt the need to integrate sustainability in a more profound way. Last, but not least, after becoming separate entities, PFZW began developing its own identity at a certain distance from its service provider PGGM. Being the asset owner, PFZW felt it should formulate and own the principles for investing. PFZW felt that having a strong set of principles would be of great value in getting everybody in the chain moving in the same direction and speaking the same language.

The process

The preparation for the project began in late 2011, and was called the “White Sheet of Paper.” Within the PFZW board, there was broad support for the project. All board members were willing to spend a considerable amount of time on the project, which lasted for 18 months. In particular, six board members, most of them also members of the investment committee and including the chairman, were able and willing to devote one day per week or more. They proved to be the driving force behind the project, both inspiring the PFZW board and directing the PGGM organization.

In order to provoke fresh thinking, the approach was defined as “outside in.” The committed board members took it upon themselves to obtain access to the best investment thinking globally. The process, leading to the new Investment Framework, consisted of a pyramid of questions on three pillars: “how can we invest in a way that (i) fits in with our financial ambitions, (ii) in which sustainability is fully integrated, and (iii) which is intelligible and controllable?”

During the process, PFZW's six involved board members interviewed over 30 industry experts from all over the world, ranging from peers such as Angelien Kemna from APG, to consultants such as Keith Ambachtsheer, and researchers like Antti Ilmanen. Furthermore, a number of contrarian thinkers were invited to appear before the full PFZW board and asked to be very explicit on the questions of “What should PFZW keep doing?” “What should PFZW change?” “What should PFZW stop doing?” from their special topics. This led to a very intense and thought-provoking discussion.

During the process, great care was taken to document all the outcomes. Thus, the results of the interviews were written up, and each of the board sessions led to a document in which the statements of the board were summarized. Each of the three pillars led to a “pillar document” that would form the input for the final document.

The outcome

The outcome of the process is PFZW's Investment Framework 2013–2020. This 12-page document briefly describes the identity and the ambition of PFZW, the changed context in which the fund operates and the 16 resulting convictions and principles that will govern the investments going forward. Here we highlight some aspects of the resulting principles.

• Sustainability. These principles lay the foundation for a deep commitment to sustainability, from two perspectives: (i) the logic that PFZW assumes responsibility for making a tangible contribution to a sustainable world, and (ii) that at the same time a sustainable world is a necessary condition for adequate return generation over a long horizon. In other words, in the long term, PFZW can't afford to see a system that generates sustainability as an externality. The notion of sustainability also includes the health of the financial system. The principles assume that PFZW can have a serious impact, which is also referred to as “the steering power of money.”
• The principles also address principal–agent issues between the fund and its investment managers. The fund asks for long-term relationships and it acknowledges that there's “many a slip twixt cup and lip”—leakage, in the form of agency costs, short termism, and actual costs that has to be addressed in the relationship with the investment managers. Also, a direct link is sought between realization of ambitions and the actual investment management that goes beyond the notion that: “If I beat my benchmark I'm doing a great job as an asset manager.” Needless to say, developing a long-term perspective and integrating other goals than just beating a financial benchmark takes some time to achieve.
• Simplicity and control. Additionally, the principles deal with the question “How can the board have total oversight over both policy and implementation” vs. “How complex does the investment solution have to be in order to realize the ambition.” The clear call is again for parsimoniousness: keeping the solution as simple as possible, and being very clear about the expected value-added either from adding investment categories or from adding complexity.

The Investment Framework was adopted by the board in June 2013. In order to achieve consistency between the framework and the actual investments, a Strategic Investment Plan 2014–2020 was adopted. This plan translates the framework into 11 workstreams and draws a roadmap for the period up to 2020. This plan provides a framework for incorporating the transformational change in a controlled way, and at the same time argues for “learning by doing,” in order to avoid analysis paralysis.

Lessons for Achieving Investment Excellence

• It takes serious time and collective effort to build shared investment principles.
• The board should own its investment principles. If it does not, there will always be friction between board and asset manager.
• An outside-in perspective stimulates fresh thinking and avoids a superficial writing down of the principles behind current practice.
• The principles should drive implementation. In the actual investment solution you should be able to ask the question: is this rooted in and consistent with our principles?