“It seems impossible to address all concerns”
What is the focus of the paper?
The paper contains a reflection on the performance test for industry pension funds. This legally required annual test indicates whether the investment performance of an industry pension fund has been sufficient (as compared to a self-declared benchmark portfolio). If an industry pension fund ‘fails’ the test, the mandatory participation can possibly be revoked, and employers may leave the fund. The paper discusses the underlying rationale of the test, its design, several concerns and possible alternatives and improvements.
What are the key findings?
The interviews held, with mulitiple involved parties, indicate that the mandatory participation in industry pension funds calls for sufficient attention for checks and balance on the performance of the fund in general. There are several concerns regarding the current performance test. For example, the test only evaluates the quality and implementation of the investment policy, not the policy itself. Funds also determine their own benchmark portfolio, without external assessment of its quality. There are also concerns regarding the calibration of costs and volatility, the lack of suitable benchmarks for certain asset classes and overlays, and the use of bespoke (ESG) benchmarks. In addition, there is little transparency about the testing process, as the results are not centrally recorded. The paper discusses three proposed alternative proposals for revising the performance test.
What are the implications?
According to the author, the main recommendation is to first answer the following questions before considering concrete alternative implementations of the performance:
- Which aspects of the performance of an industry pension fund should be tested?
- How can these aspects best be tested (for example, quantitatively or qualitatively)?
- Through which mechanism can these aspects best be tested (for example, through internal governance, the supervisor(s) and/or a legal test)?