What are significant changes in the Asset Management Market, especially regarding pension funds?

Money is a valuable concept in the human world. It flows, shows what is important, shows the demand and the supply, and enables you to own, buy, and make choices. Daily, people manage their money: they decide where their money goes and where it does not. This movement of money has implications. It determines who or what gets to make a revenue and is, therefore, a vital measurement tool of assigned value. Consequently, it is logical to assume that an asset manager's role is critical.

Meanwhile, the world keeps changing. Perceptions change, decisions change, regulations change, the market changes and thus, the money flows change. More and more pension funds realise they can make a difference in creating a better world. An important step is to put the most exciting changes into the light. Thus, this article will discuss the significant changes in the asset management market, especially regarding pension funds.

It cannot be denied that customer awareness and moral values are growing. Customers want to know what is going on within the pension fund’s walls and want more power to decide where their money is going. This is reflected in this year’s demonstration of Extinction Rebellion members, a global environmental movement that aims to act for justice on the climate and ecological emergency, in front of the office of APB at the Zuidas (Wolzak, 2022). An asset manager relies on their clients to generate revenue and thus should take measures to consider the clients’ demands. In fact, listening and acting to the customer’s voice implies switching from a Business-to-Business to a Business-to-Business-to-Customer orientation. This shows that the future system requires a more significant degree of individualisation (Heisen, 2020). What supports is the newly created pension fund system in the Netherlands that pushes to become more personalised and transparent for individuals (Pelgrim, 2022; Alliance, 2022). Understandability for the individual is also a discussed topic; simplifying the pension fund market helps clients understand but creates a risk of decreasing its quality (Pelgrim, 2022). However, Koeleman et al. (2017) state that transparent communication will be an essential subject for the future of asset management (Koeleman et al., 2017). These individualistic trends are crucial for asset management to respond to. How to become a frontrunner in this, how to balance client and company demands, and what operational steps can be taken?

These increasing demands of customers have a clear link to socially responsible investing. More and more voices call upon ‘investing in good’. There is also a demand for responsible investing from within the company, as younger investors put responsible investing more to the fore (Funds Society, 2016). Moreover, it is widely known that pension funds can create a sizeable positive impact, much more than when individuals change their lifestyles (Jesse., 2022). Furthermore, it has become a competitive necessity, as more and more pension funds are analysing Environmental, Social & Governmental related risks. The market provides increasing numbers of tools to measure these risks (Duiker & Bakker, 2021). Also, there are new rules, such as the Sustainable Finance Disclosure Regulation, which require institutions to show that they invest responsibly. Consequently, there is no way to get out of sustainable investing.

Duiker & Bakker, 2021, state that the knowledge within the companies on how to invest sustainably with the right impact needs improvement. It is essential to put ESG tools, namely exclusion, ESG integration, engagement, voting and impact investing, into practice in overall investment categories (Duiker en Bakker, 2021). However, only mitigating the environmental risks and reducing the CO2 in the portfolio does not lead to a sustainable society. There should be an increasing focus on a livable world, creating a real impact, seizing opportunities, and only mitigating climate change (Duiker & Bakker, 2021; Koeleman, 2017). The main recommendations are: Define board room accountability and leadership, require specialist asset managers, and define an escalation strategy and a strategy to implement climate commitments. Especially the specialist teams and the board are interesting to look at, as this concerns valuable operational changes (Uhe, 2022). These departments should be allowed to have autonomy and to take meaningful steps (Uhe, 2022). Becoming a frontrunner in this could be a competitive advantage. However, as this goes against older financial models, it is not easy.

Providing (high) returns is the financial aim of a pension fund. Thus, there is a discussion on the balance between financial returns and the positive impact of investments. The PFZW president states that it is not questionable whether sustainable investments lead to higher percentages. More specifically, long-term sustainable investments are expected to lead to higher returns (Ingram, 2022; Wolzak, 2020). Nevertheless, members of the House of Representatives state that 'the primary duty of a pension fund is to maximise returns through its investment policy for its participants' (Wolzak, 2022). Pension funds are forced to stay economically viable due to historically low returns on investments in equity (Koeleman, 2017). What pension funds should mostly be cautious about is not promising the world to their clients (Uhe, 2022, Conducted Interview). This way, clients know what to expect from sustainable investments in the long term, and the company's credibility does not fall apart (Uhe, 2022). Pension funds must create a distinctive vision which shows its ideas about the world and is catered to specific customers, and stick with that vision (Uhe, 2022). This is important as pension funds are so different that having one rating that equates to sustainable efforts is insufficient (Uhe, 2022).

The low returns nowadays mostly come from new compliance regulations pressured by regulatory bodies and the current inflation, which is affected by the wars and pandemics (Heisen, 2020). New technologies can come into play to cope with these financial situations and avoid extremely high prices. There is a need to standardise, simplify and automate to keep revenues high (Heisen, 2020). Data analysis and Artificial Intelligence can improve investment performance to boost customer satisfaction (Heisen, 2020). Petrutiu pointed out that algorithms can assist in creating transparency (Petrutiu, 2022). Simon Ramos, a Deloitte Partner, states that rethinking and re-inventing asset managers' business models can also be enhanced using algorithmically driven “Robot Advice” (Fund Raiser, 2016). This creates new human roles, such as building automation and code environments (Heisen). Technology should be used as a tool, not to decide on things independently (Petrutiu, 2022). Still (Uhe, 2022) states that data collection tools bring high purchasing costs and might not stay beneficial long-term without monitoring. Large players with money might become dominant in this market and consequently provide valuable data to others through reports (Uhe, 2022). Thus, the analysis should be done to what extent in-house digitalisation should be done to stay competitive.

Out of the many things changing worldwide, these three are very mentionable. A pension fund has the ability to support significant positive changes. This way, institutions and individuals can create the impact they desire.

Koeleman W., Starnink B., Helsen P., Kortenhorst, M., Velthuijzen J.W. & Duijnhoven L. (2017). Pension 2025: Scenarios for the future of the pension sector, PWC. Retrieved from: https://www.pwc.nl/nl/assets/documents/pwc-pension-2025.pdf

Heisen P. (2020). Asset managers need to become more operationally resilient, PWC. Retrieved from: https://www.pwc.nl/en/insights-and-publications/services-and-industries/asset-management/asset-managers-need-to-become-more-operationally-resilient.html

Urbach X., de Bakker L., Boersma S., Duiker J., Koopal T. & Wijnands J. (2021) Benchmark on Responsible Investment by Pension Funds in the Netherlands 2021 Mainstream RI in an unsustainable world, assosiation of investors for sustainable development. Retrieved from: https://www.vbdo.nl/2021/11/duurzaam-beleggen-bij-pensioenfondsen-vertaalt-zich-nog-niet-naar-een-duurzame-wereld/

Duiker J. & de Bakker L. (2021) The sustainable impact of investments, assosiation of investors for sustainable development. Retrieved from: https://www.vbdo.nl/2021/02/de-duurzame-impact-van-beleggingen/

Ingram V. (2022). A pensionfund must also look after the future of the planet, NRC. Retrieved from: https://www.nrc.nl/nieuws/2022/05/02/een-pensioenfonds-moet-ook-toezien-op-de-toekomst-van-de-planeet-a4119342

Wolzak M. (2022) 'Prevent young people from having to demonstrate Infront of their pension fund’, Financieel Dagblad (Dutch financial newspaper). Retrieved from: https://fd.nl/politiek/1435149/voorkom-dat-jongeren-moeten-demonstreren-voor-de-deur-van-hun-pensioenfonds-lni2cakQcajw

Pelgrim C. (2022). A multi-billion dollar operation with pensions – what is it for?, NRC. Retrieved from: https://www.nrc.nl/nieuws/2022/03/30/een-miljardenoperatie-met-de-pensioenen-waar-is-dat-voor-nodig-a4105733?t=1662730164

Funds Society (2016). What Will the Asset Management Industry Look Like in 2030? Retrieved from: https://www.fundssociety.com/en/news/business/what-will-the-asset-management-industry-look-like-in-2030-2/

Jesse L. (2022). The impact of sustainable investment of pension money,  KPMG. Retrieved from: https://home.kpmg/nl/en/blogs/home/posts/2022/05/de-impact-van-duurzaam-beleggen-van-pensioengeld.html

Wolzak M. (2020). PFZW chairman: ‘Whether sustainability is good for returns? That question is so 2010’, Financieel Dagblad. Retrieved from: https://fd.nl/beurs/1364040/pfzw-voorzitter-of-duurzaam-goed-is-voor-rendement-die-vraag-is-zo-2010-pni2cakQcajw

Interview with Jasper Uhe: Partner en financieel consultant bij Boston Consulting Group. Graduated from the London School of Economics. They were conducted on the 13th of August, 2022, by Hidde Griek.

Interview with Vlad Petrutiu: machine-learning engineer at Huawei in the self-driving-car division and an engineer at an AI startup developing innovative supermarket software. They were conducted on the 15th of August, 2022, by Hidde Griek.

Pension Fund Alliance Foundation (2022). The Pension Agreement: how is it going? And what will change for you? Retrieved from: https://www.alliancepensioenen.nl/pensioenakkoord