CXO Corner: Marc van den Berg, COO at PGGM:
Marc van den Berg, MBA, has held the post of Chief Operating Officer at PGGM Investments since 2006 and is responsible for all operations supporting the Dutch pension fund’s business.
Joining PGGM Business Development & Innovation in 2005 before becoming COO, he played a major role in the transformation of PGGM from a pension fund to a service provider with a prominent position in the industry, managing more than €100 billion in assets under management. (More information at http://www.pggm.nl/.)
Prior to that, Marc van den Berg worked at KPMG and Nolan, Norton & Co. He began his career as a consultant in the field of business and IT strategy at KPMG, becoming a Partner in 1996 with a focus on the financial sector. Marc van den Berg studied Business Management at the State University of Groningen in The Netherlands.
how to navigate the regulatory rapids
Leading off our new regular column, the ‘CXO Corner’, is Marc van den Berg, Chief Operating Officer at PGGM Investments, who takes a look at operational challenges. In our conversation, he shares some of his thought-provoking insights into how a major Dutch pension fund administrator stays on top with its investment management system in a harder regulatory climate.
# Journal: Please describe briefly PGGM and its business model.
Marc van den Berg: Founded in 1969, PGGM was a pension fund until the start of 2008. Then, due to regulations and increasing transparency in the pension funds market, it was decided to partition the pension fund itself and the services organisation providing administration and asset management. The services organisation retained the name PGGM and the pension fund itself was given a new name – PFZW. This acts as a pension fund for the healthcare and welfare sector, managing assets of around €105 billion for 1.5 million contributors to the compulsory scheme.
PGGM, then, serves as the administrative organisation for collective pension schemes and operates through a number of subsidiaries. The group provides pension administration, management support and policy advice as well as integrated asset management. At the end of 2010, PGGM managed the assets on behalf of over 2.3 million current and former employees of five Dutch pension funds.
# Journal: How does PGGM strive for competitive advantage from an operational perspective?
Marc van den Berg: One of the actions PGGM undertook when the split took effect was to enter the market to look for other clients to do their asset management for them. This is because we think we have a competitive edge in the sense that we have a pension fund’s board perspective, having lived under the same roof with a pension fund board for 30 years. Our strength lies in integral balance-sheet management of a pension fund.
To maintain this competitive advantage, while at the same time meeting the wave of new regulations sweeping the investment management industry, PGGM is gearing up its operational structure and processes. First, it has teamed up with other pension fund managers to form a common front and try to influence decision-making. Then, internally, it has a tax, legal and compliance department to report on regulatory developments and their likely impact on the business. Main legislative areas for consideration include AIFMD, central clearing of OTC
Derivatives and UCITS IV in Europe, and the Dodd-Frank Act in the USA.
# Journal: What is PGGM doing operationally to meet the regulatory challenge?
Marc van den Berg: PGGM has set a roadmap to define the main contours of legislation as it emerges and the appropriate response this will entail. As much of the legislation applies to the fund management side of the business, the fact that PGGM is divided into pension fund and asset management components means that its operational structure can accommodate and absorb new regulations more effectively and transparently. This also has repercussions in terms of improved cost efficiencies, as synergies and economies of scale can be derived from the use of either internal or external managers in the fund selection process.
One of the main regulatory issues up for review at present is central clearing of over-the-counter (OTC) derivatives. In the USA, it is the Dodd-Frank Act that is driving an overhaul of central clearing procedures and processes, as well as counterparty risk and credit exposure. For pension funds this means that they will have to deposit an initial margin at the central clearing repository, a stipulation that does not currently apply. With all our OTC derivatives contracts, we now only post the variation margin as we know the counterparty and we are not required to deposit an initial margin.
# Journal: What kind of impact will central clearing of OTC derivatives have on operational processes at PGGM?
Marc van den Berg: This regulatory change is going to have a detrimental impact on returns. So we have examined the options, asking what does it mean in terms of performance and what has to be done on the operational side to meet this challenge. What is the administrative impact of moving from variation to initial margin and what do we have to do in terms of record keeping? And on the risk side, who are the counterparties we are using?
As a Dutch-based pension fund, PGGM is required to examine the Dodd-Frank related aspects of central clearing and counterparty requirements, because the same regulatory trend is developing in the European sphere under the UCITS framework of legislative provisions for funds domiciled in Europe and also because PGGM adopts a global approach.
# Journal: What role does financial software play in this?
Marc van den Berg: If we relate this to the type of asset management software we are using, it has to support what we are trying to achieve in this area and how we keep our records. The first step is that we have to have a transparent way of working that clearly identifies and monitors key checkpoints in the business process.
So if we look at the central clearing aspects of this, we have to identify the counterparties we wish to use, what combinations of counterparties we can draw on and then to pick and choose the right ones. Once we have this, then we know how to set up the administrative side. And here we need help in deciding on the best way to proceed.
# Journal: What course of action are you pursuing to meet the regulatory challenge?
Marc van den Berg: We are currently in discussions with our investment management solution provider on the best courses of action to adopt – how to set up the system, how to work with the central clearing parties, how to get the information from them and to them, what formats to use, what instruments to apply, etc.
We have established a user group to examine the main aspects of the new central clearing requirements with the aim of identifying the functional specifications that are needed to deal with the changes in the system arising from the new requirements. These specifications relate to the instruments used in posting collateral with the central clearing party; how to account for the flows generated in order to keep track of positions; how to measure the counterparty risk and assess rating; what counterparties and clearing houses should be used; and the composition and generation of reporting devices and reports.
One of the challenges involved in assessing counterparty risk and exposure is to find and define all the underlying and often disparate assets and liabilities behind each position. Having one integrated and unified investment management system is a key advantage here, because the definition is always the same. It provides us with a holistic way to have all this information available on a daily basis, where a report calculating all the precise compositions of the various positions in the investment portfolio is generated.
# Journal: What are the major system architecture considerations here?
Marc van den Berg: A key consideration here is a keen awareness of the type of architecture the enterprise’s operating structure is built on. Having a one-system architecture as we do helps a lot, particularly in the area of data definition, as you then know that a position registered in your portfolio is a position registered everywhere else in your system. So any change made in the position only has to be applied once and that is absolutely a benefit in terms of cost, ease of use and transparency.
A checklist for what we regard as the key criteria in selecting an enterprise-driven asset management solution to ensure operational success would include: an adept system that has the capacity to grow with the business; a need for the software to keep up with all new developments; an integrated one-stop solution as opposed to best of breed; and flexibility and adaptability to deal with manifold changes.
# Journal: What is the ideal software system for today’s global investment managers?
Marc van den Berg: The ideal investment management software system should provide the key cornerstone for a resilient yet flexible operational platform with which to keep costs under control while not jeopardising business growth prospects.
Even if there will be greater costs involved in the implementation of all the new regulatory requirements coming our way, we have built-in systems of checks and balances that enable us to cap these costs. Hence the need for a flexible and adaptable asset management software system that can be implemented as an enterprise-wide solution.
# Journal: Thank you for your penetrating insights. With a view to taking the discussion a step further in the next issue of CxO Corner, whom would you like to hand over the word to and what would you like the Journal of Applied IT and Investment Management to ask this person to talk about?
Marc van den Berg: I would like to hand over the word to my German colleague, Dr. Frank Wellhöfer, COO at MEAG MUNICH ERGO Asset Management GmbH, who I would like to share his experiences on the best means of ensuring technical support to promote continued business growth.
