Dutch pension funds are striving to address concerns about the high performance fees they pay to private equity funds by increasing accountability and explaining the dilemmas and choices surrounding these investments.
Despite international efforts, reducing these fees remains a challenge, as detailed by the Dutch minister responsible for pensions in a letter to the parliament. In May 2022, the parliament passed a motion urging the government to discuss with pension funds the distribution of “exorbitantly high bonuses” to private equity firms, which could be better allocated to pension participants.
This motion was prompted by the substantial performance fees paid by large pension funds in 2021: a total of 6.9 billion euro, against roughly 100 billion invested in private equity. In December 2022, the government was again urged by the parliament to take action to significantly lower these costs.
Many pension funds have expressed concerns about the high performance fees, finding them difficult to justify to members. However, the sector also recognises the challenge of missing out on profitable investment opportunities that are in the participants’ interest.
Poor investment outcomes
A recent report by Bell PCA on pension funds work showed a significant decrease in private equity performance fees in 2022, primarily due to poor investment outcomes. The total fees paid decreased from 6.9 billion euros in 2021 to 1.6 billion euros in 2022. For example, ABP, a major private equity investor, paid 3.4 billion euros in performance fees in 2021, which reduced to 0.8 billion euros in 2022.
Minister Schouten highlighted that the sector has mainly focused on improving accountability and communication about decision-making processes related to private equity investments. Marc van Voorst tot Voorst, of the Dutch Association of Participation Companies (NVP), emphasised the responsibility of pension fund investment committees in deciding acceptable investment categories and costs, considering the expected returns. He confirmed the necessity of enhancing communication about the workings of private equity.
On an international front, the Pension Federation engaged with pension funds in Denmark and Finland to discuss this issue, exploring possibilities for joint action. However, Minister Schouten noted that this issue is more prevalent in the Netherlands and less so in Scandinavian countries. In response to a call from the House of Representatives and Minister Adriaansens of Economic Affairs and Climate, pension funds have been encouraged to invest more in Dutch venture capital. This suggestion, however, comes with the caveat of associated high costs. A spokesperson from ABP has highlighted the difficulty in justifying high management and performance fees to the fund participants.
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