Scheme consolidation: Lessons from the Netherlands

Last week, the UK government published consultations aimed at creating what it calls “megafunds” in the Local Government Pension Scheme and private sector defined contribution (DC) schemes.

As the industry digests what this means, for some guidance it can perhaps look across the North Sea to the Netherlands.

A similar desire to address fragmentation has led to a drastic fall in the number pension schemes operating in the country, from 833 in 2005 to just 169 this year, according to regulator De Nederlandsche Bank (DNB).

A European leader

This year’s Mercer CFA Institute Global Pension Index ranked the Dutch system as the best in the world.

Mercer’s report credited the Netherlands for providing “very good benefits, supported by a strong asset base and very sound regulation”.

The country is currently undergoing a significant overhaul of its pensions system, however. The Future Pensions Act, which came into effect in July 2023, will see schemes move from a predominantly defined benefit approach with conditional indexation towards a more traditional DC approach, retaining some elements of collective risk sharing.

Consolidation has been a notable feature of the Dutch pensions landscape. Kees Swinkels, country business leader for wealth at Mercer, tells Pensions Expert that the consolidation trend, which has been pushed by regulation and a desire for greater expertise, is accelerating due to the Future Pensions Act, Swinkels says.

“Key benefits of this consolidation include increased efficiency, enhanced investment opportunities, better risk diversification, improved governance, and greater member benefits,” he says.

“However, challenges such as cultural resistance, integration issues, and communication gaps persist.” 

Did the Netherlands actively pursue consolidation?

The Netherlands is not alone in witnessing the steady consolidation of its pensions landscape. There are 36 master trusts in the UK, according to Aviva, which is less than half the number that were operational in 2017.

Last week, chancellor Rachel Reeves announced plans to create “megafunds” with at least £25bn in assets under management to improve governance, achieve economies of scale and invest in illiquid assets such as infrastructure and private equity, particularly in the UK.

While the Pensions Regulator in the UK has been explicitly calling for “fewer, larger schemes” for some time, in the Netherlands this was never an explicit aim – rather, a natural result of DNB raising the bar for pension scheme governance.

Rabobank senior pensions analyst Bas van Zanden is not convinced the Netherlands actively sought a consolidation agenda. “I don’t think the Netherlands pursued consolidation,” he says. “I think it is a general trend within the financial industry.”

“The majority of the consolidation in the Dutch pension sector is also predominantly focused on corporate pension funds and much less on industry-wide pension funds,” he continues.

Van Zanden sees consolidation as a way of reducing the impact of schemes on corporate balance sheets, as well as reducing costs and creating access to more assets, thereby allowing for more diversification in portfolios. Some assets, such as private equity, are less accessible for small schemes, he says.

“Consolidating should not be a goal in itself and at a certain point it has reached its maximum potential”, he adds.

Scale not always cheaper

The scale afforded by consolidation is not always cheaper, in the eyes of one expert. “The costs of pension funds are not lower than index funds [in the Netherlands],” says Hans van Meerten, professor of European pensions law at Utrecht University.

“We pay a lot of money to private equity,” he continues. “It’s strange because these funds are huge, but still the costs are pretty high, so scale as such doesn’t mean they are cheaper.”

Alfred Slager, professor of institutional investments at Vrije Universiteit Amsterdam, notes that many high-cost active strategies have been discontinued by funds, which has driven down costs. The largest funds, he observes, have slightly higher costs as consolidation has provided the scale to invest in private equity or infrastructure.

“Chances are that costs won’t drop further due to consolidation but remain at the current level,” he says.

Dutch reforms aimed at facilitating more illiquid investment will partly explain this, while the largest funds are moving towards their own bespoke equity benchmarks and strategies, which will increase costs.

“The biggest cost increase recently has been on the administration side though,” he says. “There, consolidation will continue, but on the administrator level.”

“After the pension reforms, administering pension rights and payouts will be far more standardised, which then should lead to lower costs,” he adds. “All in all, the total cost base is likely to stay where it is now.”

Dutch pension funds are required to report costs annually to DNB, which publishes the data. Asset management costs reported this year range from 6 basis points to 119 basis points, according to DNB.

The biggest players

One benefit that large Dutch schemes have is that they are long-running industry-wide arrangements set up through an agreement between multiple employers and relevant unions.

ABP – which caters for government workers and education sector staff – is the largest pension fund in the Netherlands with €529bn (£442bn) in assets under management as of 31 October 2024. Its dedicated asset manager, APG, is one of the largest private equity investors in the world with €46bn allocated to the asset class.

Healthcare scheme PFZW is the country’s second largest pension provider with over €254bn in assets. It also has a dedicated asset manager, PGGM, which invests €23bn in global private equity.

APG and PGGM invest €27bn and €14bn respectively in infrastructure globally.

PME and PMT, which both serve the Dutch metal industries, have almost €130bn in assets between them, while the building industry scheme bpfBOUW oversees €68.5bn.

Additional reporting by Nick Reeve