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A tale of two funding ratios

Just before Christmas I met my friend Ronald, who is CEO of the pension fund for forklift truck drivers. We meet for a beer one evening after work in our regular haunt in Utrecht. As usual, Ronald is not a happy man, and as usual, it comes down to numbers.

At Wasserdicht in the Netherlands, we are lucky enough to be well funded, thanks to a good risk-adjusted performance. Some would say it’s down to a good investment policy.
Of course, I would say it was down to the prudent decision making of the sponsor, trustees and management. The happy outcome is that we are not facing benefit cuts for our members.

For Ronald, the situation is a little different. When he became chief executive a little over two years ago, he inherited a deficit and the fund was in a recovery period.

‘It’s hard to recover when you have to sell the assets that might help you get out of the deficit,’ Ronald says as he takes a sip from his beer glass. ‘I think our fund is proof that you can’t cut risk and grow your way back to a healthy funding ratio.’

Ronald wants to get into a blame game. ‘You could pin the blame on our former premier Ruud Lubbers. Back in the early 1990s he wanted to tax pension funds because he thought we were rich.’

‘True,’ I reply. ‘It seems like a luxury but back in the 1990s we were worried about who would benefit from the pension surpluses we all had. Now we realise these surpluses were a mirage and we were undervaluing our future liabilities.

‘And the FTK then made us all buy the same hedging instruments at the same time, which depressed the euro swap curve further and piled on our liabilities.’

‘It’s not as if the ultimate forward rate will help us by much,’ Ronald says. ‘If anything it caused us a problem by leaving us overhedged at the long end of the curve.

‘And we will still have to implement benefit cuts, even though no-one really wants to do that.’

For Ronald the worst thing is that the regulator is now making him sell his private equity fund of funds. ‘I know no-one likes private equity these days. Everyone thinks those guys are locusts and they charge us high fees. But you know what? That fund of funds is currently our best performing investment. And can you believe we have to sell our best performing assets just before we implement rights cuts?’

‘It’s rough,’ I reply. ‘You wouldn’t think we are in a long-term game. Some of my members are going to be around long after me and someone has to pay their pensions.’
‘What’s your new year’s resolution for 2013?’ I ask Ronald as we walk back through Utrecht’s city centre?

‘Never to forget that hindsight is a wonderful thing,’ Ronald replies.

Pieter Mullen is investment director at Wasserdicht Pension Funds

 

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