18 October 2013

Recent developments regarding governance of Dutch pension funds

On 7 August 2013 legislation aimed at strengthening the governance structure of Dutch pension funds came into force. Apart from introducing new governance models and new rules on the composition and role of various bodies within pension funds, the new legislation has also introduced a few rules that will have consequences for outsourcing by Dutch pension funds.

More in particular, investment managers must be aware that their Dutch pension fund clients are now subject to a rule that requires them to have a certain “insight” into the remuneration policies of the parties to which they outsource activities, such as portfolio management. In addition, pension funds are now under a statutory obligation to take the remuneration policies of investment managers into account in the manager selection process, and to publish their own policy for the way in which they do that.

Following the coming into force of the new legislation for the strengthening of the governance structures of pension funds, a governance code (“Pension Fund Code”, “PFC”), was published in early September, replacing the former Principles for good pension fund governance. The Pension Act requires pension funds to safeguard “good governance” and provides that a decree under the Pension Act may specify the principles that pension funds must comply with for good pension fund governance. A proposal for these further rules was published on 11 October 2013, introducing a “comply or explain” system, already in place for the governance codes that apply to Dutch listed companies, banks and insurance companies. In their annual reports, pension funds will now have to disclose their compliance with the PFC, that will be designated as the set of principles for good pension fund governance as referred to by the Pension Act. If a pension fund has not complied with, or if it does not intend to comply with the PFC, the annual report must include an explanation. The PFC is stated to come into force on 1 January 2014. The further rules, which amend the decree under the Pension Act, are expected to come into force on 1 July 2014, but it is not excluded that they will also come into force on 1 January 2014. It would seem that, in any event, the first year with respect to which pension funds must make the disclosure in their annual reports will be the calendar year 2014.

The PFC contains a paragraph on outsourcing. Particularly the principle regarding the remuneration policies of the parties to which activities are outsourced will have consequences for the contractual relationships between Dutch pension funds and investment managers. The relevant principle requires the pension fund’s board to ensure that the remuneration policy of for example an investment manager does not encourage the taking of more risks than would be acceptable for the pension fund. The PFC explicitly sets out that the pension fund’s board must make this part of the contractual arrangements upon the conclusion or prolongation of the outsourcing agreement (through an investment management agreement, for example). The PFC also requires a pension fund’s board to encourage pension fund service providers, including investment managers, to adopt regulations for the protection of whistle-blowers.

In addition, the PFC provides that the outsourcing agreement must contain adequate provisions for the possible failure by the outsourcee (or a party to which the outsourcee has delegated tasks) in performing its contractual obligations and for any damage caused by the outsourcee’s acts or failure to act. This could fuel the debate between investment managers and pension funds on the limitation of liability of investment managers. A pension fund could argue that it cannot accept a limitation of liability as that would not be deemed “adequate” as referred to in the PFC. The PFC, however, does not specify what standard of liability would be adequate. In our view, a limitation of liability which is in line with current market practice, should be deemed to be adequate for the purposes of the PFC.

Following the introduction of these new rules on pension fund governance, investment managers may expect their prospective and existing Dutch pension fund clients to raise the issues highlighted in this Legal Alert in selection processes and negotiations about new contracts, in discussions following evaluation of existing contracts (which the PFC requires to be carried out annually) or upon prolongation.

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