NETHERLANDS - Dutch investors and their advisers have accepted the central bank's claim that pension funds are investing in alternatives without understanding the risks.

An advisory letter issued by the Dutch central bank (DNB) last week alleged pension funds had failed to understand the complexity of "innovative" asset classes, including infrastructure and forestry.

Based on a survey of 35 Dutch schemes, the letter said they had accepted "unsubstantiated and unjustified" claims for the value added by alternatives, and had failed to monitor their investment performance.

Describing the letter as "pretty comprehensive", adviser Almazara partner Wietse de Vries said it would help pension funds better understand the risks of investing in infrastructure - but that it would scupper pension fund efforts to outsource responsibility for assets to external fund managers.

"What the letter tells pension funds - and it will stick - is that they can't do due diligence just on the fund and its manager," he said.

"They have to look at some assets very closely, perform stress tests and understand the income and cost drivers. There needs to be more than a feeling about the risk of the underlying assets."

An investment risk manager at a large Dutch pension scheme, speaking on condition of anonymity, said the letter provided additional impetus to ongoing demand from pension funds for more control over the funds they invest in. 

"In the past, if you were a 1% investor in a multi-billion fund, you had no say," he said.

"That's not what we want any more. Pension funds want more decision-making rights. If fund managers don't provide details, they don't have to prove that what the claims for the fund is true. That will change."

He said managers across asset classes would also have to get used to a 'cost-plus' fee model.

"As a pension fund, you have to look at the return but also the cost," he said. "If you get a 6% return on a hedge fund, but it costs you 2%, you have to ask whether it would make more sense to invest in another asset class."

An infrastructure specialist at a Dutch fiduciary management firm pointed out that the cost implications of the DNB's guidelines were likely to affect smaller pension funds disproportionately if fund managers tried to pass on the fees for additional reporting.

"If you're a small pension fund, you may have to outsource control to a fund manager," he said. "Large pension funds will be able to make a decision whether to outsource."

The fiduciary manager also demurred from the DNB's recommendation that pension funds should bring in a "countervailing power" to provide independent third-party advice as a counterbalance to fiduciary and external asset managers.

"You can more easily hold an in-house manager responsible," he said. 

At the very least, said de Vries, the letter would provide clarity for pension funds investing in real estate and infrastructure.

"Some are still using strategic investment plans dating back to 2008," he said.

"The letter may force them to reconsider whether they should revisit their plans.

"I've seen worse letters from the regulator - at least this one was quite short."