Finance Thesis Internship Report1
The effect of Asset Betas on the Pension Preference within AEX listed Companies
Dylan van Haaften BeFrank PPI N.V.
Internship from 1-11-2012 until 1-7-2013
The author would like to thank Mark Dijkstra and BeFrank for all their input into the development of my thesis. Furthermore it is assumed the thesis has been read before reading this internship report as to clarify any subject matter that is not elaborated upon within the constraints of this thesis internship report.
Index
BeFrank p. 3
Performance p.7
Thesis Internship p.9
Befrank
While writing the thesis titled “The Pension Plan Preference and Risk within AEX listed
Companies” the author interned at a new type of pension institution called BeFrank. The
internship provided the inspiration for the abovementioned thesis, and grounded the study of risk with pension schemes into the Dutch pension market. BeFrank supplied the author with data through private Bloomberg terminals and also specific data on sample firms through, holding firm Delta Lloyd. This internship report is a summary of the collaboration of the author and BeFrank during the internship that lasted from 1-11-2012 to 1-7-2013, in regard to the accompanying thesis.
PPI
On 23-12-2010 the Dutch government passed new legislation allowing the creation of a new pension institution as of the first of January 2011 (AFM 2014). This new pension entity was called the Premium Pension Institution (PPI) and was instituted to second pillar; employment based, pension accrual to take place outside of traditional pension funds. Where a pension fund offers a full set of pension services, ranging from pension accrual, voluntary and obligatory insurances to pension issuance at retirement, a PPI offers only accrual of pension up to retirement. Pension issuance at retirement is done by transferring the pension capital to another party upon retirement, and insurances are purchased at external parties and re-sold to participants within the PPI (AFM 2014). Because the insurances and pension issuance are not born internally, PPI’s may be started by any private party that meets the requirements of the Dutch Central Bank (De Nederlandse Bank, DNB). These requirements are regarding
dependability and reputation of the board of the PPI (art. 3:8 and 3:9 Wet Financieel Toezicht, WFT), integrity (art. 3:10 WFT), reporting (art. 3:267a WFT), investment (3:267b WFT). If one meets these criteria, a PPI permit may be issued by the DNB. Pension accrual can then be undertaken with assistance regarding insurances by an external insurance company or pension fund (Reed Business 2014).
The Dutch Government passed this legislation because in collective employment
agreements (CAO); predominantly sector driven, accrual is capped2 at defined benefit pension
funds. A PPI would allow these companies to continue accrual above this salary cap up to the fiscal accrual limit (Reed Business 2014).
2 Accrual is capped because within these db pension funds because benefits are capped as a percentage of salary.
Upon passing the legislation regarding PPI’s, BeFrank applied for a permit, eventually being licenced as of the 27th of June 2011, becoming the first PPI in the Netherlands. BeFrank was founded as a public limited liability company (N.V.) with Delta Lloyd N.V. and BinckBank N.V. as main shareholders. Delta Lloyd supplies BeFrank with insurances that could be resold to participants through premiums, and BinckBank altered its online trading platform to
accommodate pension accrual, so participants could check accrual online.
Pension Types
Within PPI’s only Defined contribution (DC) pension schemes are offered, these are schemes that have a fixed contribution that may increase nearing retirement, aimed at accruing a pension capital through a mix of investments and bonds. Within pension funds Defined contribution is also offered, this is a pension scheme where one may accrue benefits that are guaranteed the pension fund still receives and invests premiums but these are intended to cover the benefits at retirement. Both pension funds and PPI’s may also offer Collective defined contribution pension schemes, these are based on DC accrual but also offer benefits, these may however freely be shorted by the employer, making them not guaranteed.
BeFrank Mission
Upon the creation of BeFrank several key aspects were composed that BeFrank should meet, these were: Fully online services, complete transparency and low cost.
Through BinckBank’s adapted trading platform, participants can access their pensions at any time, and check their pension accrual based on real-time data. Furthermore participants can submit changes to their risk profiles, investment methods, address data and value transfers through their pension account.
BeFrank offers an online helpdesk, a pension jargon index and all information regarding pension products are accessible online. Because BeFrank streams real-time data through its pension pages; prices and costs are fully visible to participants in BeFranks pension scheme.
BeFrank does not charge any costs to participants outside a management fee of on average 0,21% TER3. Participants are also free to change any aspect of their pension free of charge. Pension accrual is not affected by incidental costs for value transfers or investment changes (BeFrank 2013).
BeFrank Corporate Structure
Figure 1
Organogram BeFrank including shareholders and control structure.
BeFrank is supervised by the board of directors of Delta Lloyd, though executively no action can be taken alone, without approval of BinckBank, the kinship in pension and insurance specific knowledge implies the Delta Lloyd board is well suited to advise BeFrank as a whole. In the second tier BeFrank, has a supervisory board that consists of 4 board members, two members for BinckBank and two members for Delta Lloyd. They represent their respective shareholders in evaluating the performance of BeFrank. They also decide if targets have been met and what bonuses should be paid. One tier below are the two directors, Folkert Pama and Bas van Meegeren, managing the Sales and the Finance department respectively. Along with the lower tier of management they comprise the management team, which is responsible for all non-executive orders and planning within BeFrank. The final tier of BeFrank’s corporate structure is the respective departments. Product development is responsible for all investments and internal checks. Sales are focussed on attracting new business and expanding BeFranks client base. Finance is responsible for BeFranks operating finance and external audits. Customer Relations maintains and communicates with Be Franks active client base. Information Management is responsible for the operations and improvement of BeFrank systems (BeFrank private records 2014). During the thesis Internship the author worked at Product development and Customer Relations.
BeFrank Business model
BeFrank offers a premium contribution scheme that is based on DC. Employers pay premium
contributions for their employees that are predetermined4, BeFrank subsequently invests these
according to a lifecycle model, a model that passively5 invests accrued capital in stocks and bond by predetermined weights that favour bonds as a participant approaches retirement. This is the accrual part of BeFranks product.
Apart from pension accrual BeFrank also offers insurances, these are contracted externally, in this case through Delta Lloyd. In a BeFrank pension scheme pension
participants may be insured against death and disability. This is done through choices among five general insurances enclosed within the pension contribution. First off the partner pension insurance; which is an insurance of income for the partner of a participant in BeFranks pension scheme, upon death part of the salary is issued until retirement6 of the partner. An Orphans pension insurance may also be acquired that acts a kin to a partner’s pension but is only applicable to orphans, these issuances last until fiscal adulthood; 27 years of age in the Netherlands. The third insurance is for occupational disability; if a participant can no longer perform the labour stipulated in his contract and this is enforced by a disability specialised general practitioner, the participant is eligible to receive salary until retirement. Fourth is the surviving dependant’s pension insurance; which is an insurance that is aimed at partner and orphan for a fixed amount as an addition to the partner- and orphan pension insurances. Finally there is a contribution waiver insurance that is to continue pension accrual in case of disability; contribution will continue to be paid in the event of occupational disability. Together these insurances comprise the insurance part of the pension, the total value of the insurance in case these are applicable are based on the pension base multiplied by the amount of years left until retirement multiplied by the accrual rate7, for disability this is further multiplied by a factor 70% because pension accrual continues(BeFrank 2013).
The final part of BeFranks product is the service package, which is completely online, and allows employers to autonomously keep track of their pension participants, and allows participants to keep track of their pension accrual. This is done through online pages
4 Contributions are either fixed by a percentage of the pension base; the part of the salary upon which no pension is accrued through the state, or by percentage of the offset; which increases with age.
5 Passive investment employs a model that does not change, therefore no investment fees are payable.
6 This can be either 65 or 67 depending on the scheme by Dutch law.
7 The accrual rate in second pillar dc pensions at Befrank is 1,225 or 1,400 (BeFrank 2014)
specifically directed at the employer and the employee separately. For employers this entails payroll administration, for participants, and administration of the contributions and invoices of the contributions. For employees this entails change administration: of changes in risk profile8, investments, and address. Furthermore BeFrank shows participants real-time accrual
rates based on current prices of stocks and bonds through internet and mobile applications9
Performance
BeFrank makes margins on 3 key areas within its business, Investments, Insurances and Administration fees. The following section is aimed at the performance of BeFranks Business model.
Total invested pension capital in the Netherlands was € 1.272 bln. In 2013, accrued by 86% of the working populace. As far as assets under management are concerned BeFrank is only 1/10 of a promille of the total assets under management within the complete pension market. This makes BeFrank a small pension provider by absolute standards.
However concerning the PPI market BeFrank has a contract ratio of 36%, and is chosen by 30% of the employers within the PPI tender market (BeFrank private records). BeFrank executes a pension scheme for 253 employers with 17039 employees as of 1-1-2014.
8 Risk profile is administrated for the AFM to audit due diligence regarding BeFrank’s investment policies lining up with client preferences.
Figure 2
Assets under management and participant increase
As can be seen in Figure 2, both assets under management and the amount of participants show a steady growth over 2013, both just shy of quadrupling. As can be seen in figure three the growth in assets under management is largely attributable to a large increase in value transfers; where participants or employees transfer their previously accrued pension capital to the new pension administrator.
Figure 3
In 2013 Be Frank’s total margin in insurances was € 4.839.920,- this was allocated for 57% in Partner pension insurance, 28% in Contribution waiver insurance, 4% in orphans pension insurances, 6% in surviving dependants insurances and 4% in occupational disability pensions. This all equates to a margin on the total value of Insurances of 17,53% (BeFrank 2014)
Figure 4
Allocation on margin resale insurances
The yearly report for BeFrank has not been published yet, but due to the death of 4
participants with insurance damages exceeding 4 million euro, the expectation is BeFrank will make a small loss over 2013. This is however contained in BeFrank long term plan, profits are expected to be made in 2015(BeFrank 2013).
Thesis Internship
The next section will explain the contents of the author’s Internship at BeFrank and how it contributed to this accompanying thesis “The Pension Plan Preference and Risk within AEX
listed Companies”. This section is subdivided into three sections; developing the thesis, what
was done during the internship and a reflection on the internship thesis.
Developing the Thesis
In developing the accompanying thesis, the author was assisted through developing a thesis subject, data collection, writing and reviewing the thesis.
The subject of risk within pension funds was brought to the authors attention because
Marcus Haveman; an actuary10 of BeFrank, through his dealing with legislation11 comments
on perceived risk differences within DB and DC pensions. Mr. Haveman argued that pension funds and PPI’s are no different in their risk allocation to the employee, because pension funds were largely below a coverage ratio of a 100% , causing pension funds to short pensions (DNB 2013). The risk of shorting pensions and lower coverage is referred to as solvency risk, solvency risk is not accounted for when evaluating pension plan risk, Mr. Haveman
commented that this risk should be reflected upon in state legislation regarding pension funds,
this is also agreed upon by numerous pension experts (Reed Business 2013). Comments
on these legislations led the author to studies by regarding pension plan risk and preference, eventually combining the inference of both papers into the notion that DB is the more risk averse choice and that company risk in regard to its pension plan may be modelled by asset beta (van Rooij et a., 2007; Jin et al, 2006). Further literature review into the topic of pensions within the Netherlands led to comparisons between DB and DC (Bodie, Marcus & Merton, 1988) and a changing accounting climate in regard to pension surplus and deficits (Swinkels, 2006). This eventually culminated in a thesis internship proposal that aimed to prove asset beta is an accurate estimator of pension plan preference within the sample of AEX stock market listed companies. This was relevant for BeFrank, because Be Frank’s business model is aimed at companies with many domestic employees (BeFrank 2014), making a survey of DC versus DB plan choice among the AEX commercially interesting.
10 An Actuary is an insurance and pension specialist.
11 New legal institutions are prone to ongoing legislative changes because of new insights; legislation is then often reviewed by parties to which they apply within the Netherlands.
Data collection12 regarding the sample of AEX companies was done using Bloomberg Terminals stationed at BinckBank accessed through BeFrank to gain all variables except the dependent variable pension choice, this variable was collected using Delta Lloyd private records.
Intermediate versions of the thesis such as the literature review as well as the
methodology and empirics were reviewed by Mireille Goos and Frank van Wessel. The final version has also been checked by them. They have also reviewed the author in his internship and the final result of his thesis; this will be further addressed in the reflection section ahead.
Tasks and activities during Thesis Internship
Before the thesis internship the author was also employed at BeFrank, the next section summarizes the activities performed with the author’s role as an intern. During the author’s internship the author worked at the customer relations- and product development departments, starting at the customer relations department subsequently moving to the product development department as of the 1st of July.
In the customer relations department main tasks included working with employers in payroll management, answering participant questions, effectuating changes in pension administration. During the internship the author took on additional tasks which included aiding in internal audits of the administration system and investments, and answering all investment related questions of both employers and participants.
During the Internship the author took on more tasks related to the product
development department, eventually continuing his employment there. Current activities are developing pricings for tender offers to potential clients, performing quarterly margin reports
and supervising the conversion of Goudse Pensionfund13 to BeFrank. Additionally the author
takes part in the implementation of hybrid scheme’s; which are a combination of DB and DC. During the internship the author wrote a large portion of his thesis at BeFrank’s office, using means only available through BeFrank such as Bloomberg Terminals at BinckBank and private AEX client documentation through Delta Lloyd. The author, during his internship, gained knowledge specifically into the investment allocation of DC pension schemes and client perceived risk; furthermore the author has, during his thesis, taken part in a pension program called PP3 which awards a certificate proving thorough understanding of Pension
12 For a more detailed report please consult the data section on page 16 of the accompanying thesis.
13 Goudse pension fund will cease its pension activities as of the first of April 2014, BeFrank will take on their clients.
accrual and insurances. The abovementioned access and experience has made getting a grasp on pensions easier and inherently made writing the thesis easier as well.
Reflection on the Thesis Internship
Finding a subject that met the criteria for a thesis internship limited the authors options, the subject touches on many of the aspects that are BeFrank’s clients concern, such as changing financial standards, high pension liabilities and the tradeoffs between DB and DC. This turbulence in the pension market allowed for many sources supporting the author’s hypothesis.
Though the research in the thesis proved robustly significant, indicating asset beta may be a suited determinant of pension plan preference within the employed sample of AEX firms. A larger sample would have proved research more conclusive, furthermore a larger sample would have yielded more usable data for BeFrank to use in the evaluation of potential clients.
The thesis and internship sparked the author to engage more heavily in econometrics and statistics, synergizing well with current tasks within BeFrank. This thesis has also improved the author’s academic- reasoning, planning, and writing. Developing skills in excel and stata to manage and create have also added to the authors professional skillset, as have a more in depth understanding of the literature regarding the Dutch pension market.
References
AEGON Global, (2013), DC or CDC? The move to Defined Contribution pensions in the Netherlands, Accessed 20 januari 2013,
<http://www.aegonglobalpensions.com/en/Home/Publications/News-archive/News/DC-or-CDC-The-move-to-Defined-Contribution-pensions-in-the-Netherlands/>
AFM, Wat is de premiepenioeninstelling ofwel PPI, accessed 26-1-2014.
<http://www.afm.nl/nl/consumenten/producten/pensioen/kennis/pensioenuitvoerders/premiep ensioeninstelling-ppi.aspx>
AON Hewitt Netherlands Pensioenthermometer (2013), accessed 15 May 2013, <http://www.pensioenthermometer.nl>.
BeFrank (2013), Private records regarding margins, investment data and business plan. Accessed 26-1-2014
Bodie, Z., Marcus, A.J. and Merton, C., (1988), Defined Benefit versus Defined Contribution Pension Plans: What are the Real Trade-Offs, Pensions in the US Economy, 139-162
De Nederlandse Bank,(2013), In te dienen stukken bij vergunningaanvraag premiepensioeninstelling, accessed 24-1-2014.
<http://www.toezicht.dnb.nl/2/50-202408.jsp#>
Jin, L., Merton, R.C. and Bodie, Z. (2006), Do a firm's equity returns reflect the risk of its pension plan?, Journal of Financial Economics, 18, (1), 1–26
Reed Business, (2013), Premiepensioeninstelling: PPI’s – een stand v an zaken, Accessed 27-1-2014
<http://www.reedbusinessopleidingen.nl/artikelen/financieel/premiepensioeninstellingen-ppi-s-een-stand-van-zaken>
Swinkels, L.L. (2006), Zijn pensioenregelingen gewijzigd als gevolg van de introductie van IFRS?, Maandblad voor Accountancy en Bedrijfseconomie, November, 562-570
Van Rooij, M.C.J., Kool, C.J.M. and Prast, H.M.(2007) Risk-return preferences in the pension domain: Are people able to choose?. Journal of public economics (91), 701-722.
Wet Financieel Toezicht(2014), wet- en regelgeving, accessed 27-1-2014, < http://wetten.overheid.nl/BWBR0020368/geldigheidsdatum_29-01-2014>
