The Profile: Bernard Walschots, CIO, Rabobank Pension Fund

With over €14 billion in assets, and the responsibility for providing the retirement income for one of The Netherlands’ largest employers under his direct control, Bernard Walschots, chief investment officer of Dutch Rabobank’s pension fund could be forgiven for having something of an ego.

Add to that implementation of a series of hedges almost five years ago that protected the fund’s coverage ratio and left the Rabobank with one of the country’s best funded schemes after the financial crisis and ‘smug’ would also be allowed to be counted as a characteristic.

In reality, nothing could be further from the truth.

Walschots, who joined Rabobank in 1988 as an economist after a brief stint as advisor at the Ministry of Finance and sits on The Netherlands’ Pensions Federation Investment Committee composed of the largest institutional investment chiefs, is one of the most unassuming characters in pensions.

I meet him in the large, bright, cavernous atrium of the Dutch bank’s headquarters in the medieval city of Utrecht, some 30 minutes south east of Amsterdam by train.  The tall, glistening, one-year-old towers vie for skyline domination with that of the city’s cathedral, built more than 600 years earlier.

The thermometer is showing just below freezing but the typically friendly Dutch welcome is warm.

Walschots invites me to take a cappuccino in the communal coffee bar in the open area – it’s the only place in the building that serves good coffee, apparently – and we wait in line behind other bank employees.

The design of the new HQ reflects the Rabobank image, Walschots tells me: The largest agricultural bank in Europe, aware of its environmental responsibility and totally transparent.

As we wander over to one of the earth-coloured sofas – all natural fabrics – by a large bank of pristine white lockers where staff can stow their belongings, Walschots says: “The bank is heading towards paperless working, driven by the flex-desk set up of the working area, where none of the staff have their own desk.”

In the huge entrance hall of Rabobank headquarters, you find working desks, a staff restaurant, meeting rooms and a coffee counter.  

“Some people just stay down there, have meetings, do their work, respond to emails, have their meals and go home again,” he says.

And the pension scheme? Well, up to a point.

“At the pension fund we are not quite paperless – but we are working on it,” Walschots says. “Also, we are not in one of the new parts of the building where it is all open plan – some of our meetings cannot be overheard.”

However, it was being close to the bank that helped the pension scheme keep its funding ratio well above the regulatory limit when other schemes were sinking below triple figures.

In 2006, the trustees were looking at the incoming FTK [Dutch solvency rules for pension schemes] and decided to protect the coverage ratio of the fund.

“At that time, liability hedging had come into vogue, but the risk department at the bank suggested protecting the coverage ratio – which amounted to the liabilities and the surplus,” Walschots says.

“In the last quarter of 2007, when the fund enjoyed a 160% coverage ratio, we bought a portfolio of derivatives that would protect the coverage ratio for the next five years so that it would not fall to below the required level.”

The fund bought a series of swaptions, equity put options and equity-linked swaptions. This protection was not cheap.

Walschots said initially the gross fee quote for the hedge had been €600m, against an asset pool of €10bn.

“This was a bit much and therefore we decided to sell some upside for the coverage ratio. Thereby we managed to scale the net premium for the protection back to €260m over five years, this broke down to just over €50m a year. 

“At the time, there was some criticism of what we were doing.  Some said we were throwing away money.”

“That criticism became less vocal a year later, though,” he says with the slightest of wry smiles.

That is as smug as it gets.

This strategic hedge has helped the fund to stay afloat during the credit crisis. The fund’s coverage ratio stood at approximately 116% at the end of 2011, a clear 11 percentage points above the minimal required coverage ratio of 105%.

Walschots still faces a challenge though – the Eurozone crisis has heaped on problems that no one could have foreseen five years ago.

“We have already rolled the larger part of the hedge over, but no hedge can protect against a crisis of this longevity,” Walschots says.

He maintains that despite the current Eurozone debt crisis, the idea of a single currency was not flawed.

“The idea of the euro was brilliant – it was just executed wrongly. The European authorities did not pay attention to the gross mistakes of governance in Southern Europe – they should have been tackled sooner.”

The currency crisis, along with that of the banking sector that preceded it, has made Walschots’ already tough job even harder.

“In the past couple of years things have changed in the market place – it is very difficult to get reasonable returns without taking unreasonable risks,” he said.

“Triple A rated government bonds, for example are yielding so little that they are negative on a real return basis and earnings also are very low.

“It is very difficult to earn enough to pay out benefits and index these as well, and with rock-bottom interest rates driving up the costs of pensions.”

The innovative hedge should ensure Rabobank scheme members – for the moment at least – receive the pensions they were promised and maintaining this coverage ratio is the most important task for 2012, Walschots says.

Just after an hour after our interview had begun, he looks apologetically at his watch and has to rush to a meeting.

After ensuring I have appointments with enough of the right people on my trip to the Netherlands he bids me goodbye at the 60 foot glass front doors and I head back to the subzero winter weather.

He then turns back into the vast open-plan atrium and blends back into the hubbub of people whose comfortable retirement he is working to ensure through some very clever engineering, a good amount of quiet confidence and not a single ounce of smugness.