PGGM Turns Heat Up on Remuneration Practices

087_RuulkeBagijn Ruulke Bagijn, CIO for private markets, PGGM (Art by Chris Buzelli)Dutch pension manager PGGM has issued a direct challenge to fund managers and company executives to end excessive bonus payments and better align their interests with those of their investors.

While state pensions in the US are demanding action from regulators over high fees, PGGM—which runs €186.6 billion ($203.3 billion) for Dutch pension funds—has set out its vision for a “better world scenario” and declared its intention to enforce better standards itself.

A detailed report, available on the group’s website, sets out new remuneration standards that PGGM expects fund managers and company boards—both publicly and privately held—to adhere to in future.

Ruulke Bagijn, CIO for private markets at PGGM, said higher fees were only acceptable “if the pension fund fully benefits” from the returns achieved.

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“Asset managers must be transparent regarding their pay and remuneration structures,” Bagijn said. “Performance fees should only apply in the event of above-average performance that is agreed in advance, [and] only basic remuneration should be paid for the costs and pay of the management of the asset manager.”

“It is a journey that requires stamina, in which we will focus on undesirable practices and denounce these to the financial services providers and publicly as well,” Bagijn added. “We will also search for cooperation with like-minded people in the pensions world to act collectively against unacceptable practices.”

“It is a journey that requires stamina, in which we will focus on undesirable practices and denounce these to the financial services providers and publicly as well.” —Ruulke Bagijn, PGGMIn the report, PGGM said current practices in areas such as private equity “do not support our desired practice of paying remuneration for creating long-term absolute returns and sustainable value”.

“We believe that such practices are aligned only with management’s interests and contribute to excessive and complicated remuneration systems that are not at all linked to long-term value creation and/or the interests of a broader stakeholder group,” PGGM said

The pension manager argued that bonuses should only be awarded when managers or executives have achieved performance “which meets or exceeds challenging levels”. At the moment, PGGM argued, many companies see bonuses as additional fixed salaries with low performance benchmarks.

PGGM admitted that achieving these demanding new standards “will take an extended period of time” but promised to be pragmatic in its approach to dealing with companies in different jurisdictions where payment cultures vary from those in the Netherlands and Europe.

Bagijn added that PGGM would continue to grow its internal team to reduce its reliance on third-party providers.

As investor attention focuses more intently on when the US Federal Reserve will raise interest rates, researchers at Standard & Poor’s (S&P) have warned not to expect a sudden boost for active equity managers.

Rising rates could be expected to exaggerate the difference between companies with high leverage and those with low leverage, as funding debt becomes more expensive, a report from the ratings agency claimed.

“In periods during which rates have increased, there’s no tendency for dispersion to do the same.” —Fei Mei Chan and Craig Lazzara, S&PBut authors Fei Mei Chan, associate director, and Craig Lazzara, managing director, warned that historical evidence has shown little correlation between rising interest rates and an increase in dispersion between the best and worst performing stocks in the S&P 500.

“In periods during which rates have increased, there’s no tendency for dispersion to do the same,” the authors wrote. “Admittedly, rate increases since 1990 have not been nearly as extreme as those of the late 1970s and early 1980s, but the periods of rate increases did not result in higher dispersion as we had conjectured.”

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Instead, the opposite was true: Periods in which interest rates rose sharpest coincided with periods of particularly low price dispersion in the S&P 500.

“It may well be that dispersion will increase in late 2015 and 2016; if it does, we would expect more opportunity for active managers to add (or subtract) value relative to their index benchmarks,” Chan and Lazzara said. “But the data give us no reason to assume that rising rates will drive dispersion higher.”

Turning their research to factor-based indexes, Chan and Lazzara found no distinct connections between interest rate rises and the performance of benchmarks such as low volatility or momentum indexes.

The only notable exception was when the researchers paired the S&P SmallCap 600 with the S&P 500. “As rates increase, the margin of outperformance of the small-cap index grows steadily,” the authors explained.

This pattern was “less convincing” when the researchers compared the S&P 500 with the S&P MidCap 400, however.

“So while the evidence may be intriguing, we’re unable to conclude that smaller companies tend to outperform more when rates are rising,” they wrote.

Chan and Lazzara’s full report, “What Rising Rates Will Not Do”, is available on S&P’s website.