Dick Kamp: Risk management and value proposition

November 21, 2023

^{This column was originally written in Dutch. This is an English translation.}

By Dick Kamp, Director Pension, Investment and Risk at Milliman Pensioen

Value proposition is an item that is close to my heart. The articulation of this concept is tricky, but I'll give it a try. It might make you think.

Every organization, in whatever form, has a value proposition, which focuses on who the customer is, what problem that customer has and how that problem is solved by the organization involved. The customer's strengths and how they can be further strengthened by the organization are also examined.

Now let's translate that to the world of pension funds. The problem of the customer (the participant) traditionally concerns taking care of a financial old age. The pension fund ensures this by receiving premiums, investing them and making payments. See here the formulation of the value proposition, included in the mission of probably all pension funds. Investing and administration are things that pension funds are very good at. And increasingly also in communication.

I increasingly realize that having assets from premiums and returns also entails another responsibility, in addition to making payments. In my opinion, this responsibility is social in nature. I will try to illustrate this further below.

Of course, an SRI policy has now been formulated. Investments are sometimes made enthusiastically and sometimes reluctantly based on SRI principles. Investments are also made on the basis of risk analyses, to prevent risks resulting from the climate transition, physical climate risks and to prevent, in particular, reputational risks resulting from ESG issues in companies and countries.

I'm referring more to the inclusion of an 'inherently felt offensive' objective. The participant is part of society. The primary objective of a pension from a social and economic perspective is to ensure a secure financial old age, so that consumption can be enjoyed in the future with only limited demand on the then working population. At the same time, saved capital is an important source of investment in the same economy, but at this moment. A beautiful circular story that is based on continuity.

What if the pension funds also feel responsible for working towards a better society? For example, by ensuring that the air, water and soil become cleaner. That the consumption of raw materials that are not renewable should be reduced and perhaps even stopped. The list is almost endless.

By formulating a broader objective – read: value proposition – than just making benefits, pension funds place themselves in a broader social framework. With the consolidation that is now underway and the increased professionalism, this is also possible.

Does this come at the expense of financial returns? That's just the question. With the necessary expertise, I think this could possibly be very limited. The problem, however, is our thinking. We are not simply able to express social returns in such figures that they can be added to financial returns. What we do know is that if we do not actively work to improve society, the price to pay is high. Methods are being developed to make quantitative and qualitative returns more transparent and therefore 'additive'.

Where does this take us? I argue for explicitly including a social objective in the value proposition of a pension fund, in addition to the financial objective. This social objective focuses on an 'improvement of the world', which must be visible and measurable as much as possible over a time horizon of 5 to 25 years and for which accountability is provided in the fund's annual report. This should ensure that in addition to a well-cared for old age, there is also a better living environment in all respects for all generations.

Dear director, now that you are thinking about the value proposition of your pension fund in the context of the new pension system, what social objective would you like to formulate?

This is the twenty-second column in a series on risk management. The series aims to encourage the reader to consider risk management as an integral part of running a pension fund.

More columns by Dick Kamp