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Analysis: Dutch funds escape cut threat – for now

Almost all Dutch pension funds, including the largest five, have made a miraculous escape. For the majority of 2016 – driven by falling equity markets and interest rates – they were headed for widespread rights cuts. Tensions across the sector increased as coverage ratios at the end of December were set to reveal whether or not they had to cut pension rights to recover to the mandatory level of 125% within the prescribed 10-year term.

Right at the end of the year, funding – which had been as low as 96% in June – recovered to an average of 102%. This came in the wake of the election of Donald Trump as US president, following his promise to lower taxes and invest in infrastructure, which served as a boost to equity markets and interest rates. The 30-year swap rate – Dutch schemes’ main criterion for discounting liabilities – jumped from 0.72% in August to 1.23% at year-end.

Instead of cutting pension rights, underfunded schemes took the option of postponing the measures, in the hope that further recovery might allow them to avoid making any discounts. As long as their funding fell between the critical level – 90-95% – and the required minimum coverage of 105%, pension funds would be allowed to defer cuts for up to five years. 

The five largest schemes – which have not yet published their final funding figures – were no exception. ABP, the €381bn civil service scheme, said it would refrain from discounting pension rights because its coverage ratio was “well above the critical level of 90%”. As of the end of November, its funding stood at 95.3%. However, Corien Wortmann-Kool, ABP’s chair, said caution was needed for the mid-term, as the scheme expects low interest rates and lower returns to continue. In 2013 and under the previous financial assessment framework (FTK), ABP had cut pension rights by 0.5% when its funding dropped to 94%. After its financial position improved to 105.9% in 2014, it reversed that decision. 

PFZW, the €185bn healthcare scheme, also announced it would not cut pensions, as its funding exceeded the critical level of 87% by almost 6 percentage points. The large metal schemes PMT (€68bn) and PME (€45bn) already said last summer they would use a contribution surplus to avoid lowering pension rights. This turned out to be unnecessary, as both saw their funding increase to well above the critical level. Rights cuts were never on the cards for BpfBOUW, the €55bn scheme for the building industry. With a funding of 105.2% at the end of November, the scheme has managed to stay out of the danger zone.

Jetta Klijnsma, state secretary for social affairs, is still exploring options for easing the pressure on pension funds. With national elections looming, she suggested in November that she might extend the current 10-year recovery term. At the time, the expectation was that 30 pension funds were facing rights discounts. Recent estimates by consultancies, however, suggest the actual number is between three and 10. A longer recovery term would benefit older workers at pension funds with a low coverage ratio. A longer recovery, however, would mean slower improvement, increasing the risk of rights discounts at underfunded schemes.  

Simultaneously, the government has deferred important decisions about a new pensions system until after the elections. It is far from clear how such a system will look, as the political parties are divided. Recent polls suggest there is no majority for either of the two alternatives being considered – a ‘target’ contract for a pension in real terms and a set-up of individual pension accrual, both maintaining collective risk-sharing. The new system is scheduled for 2020. The big question is whether pension funds will still be bound by the rules for rights discounts of the current FTK by then, or bound to a new contract with new conditions. 

Nothing is certain in the meantime. As pension funds’ coverage is tied to the interest level, changes in the quantitative easing policy of the ECB will be relevant. The recent improvement in equity markets and interest rates could be reversed by the unexpected policy twists of an unpredictable US president. A 1-percentage-point cut in interest rates would cause funds’ coverage to plummet by more than 10 percentage points. 

The low growth and low-interest environment is expected to remain, at least for the medium term, keeping pension funds in a vulnerable position. They are not out of the woods yet.

PFZW’s Borgdorff calls for regulator to favour sustainability

Maarten Van Wijk & Susanna Rust

PGGM has called for more regulatory leeway for pension funds and other institutional investors when it comes to sustainable investing, although the jury is still out on whether such investments are less risky in the long-run.

The €200bn Dutch asset manager said pension funds would increase their allocations to such investments were they deemed to pose less risk by the regulator (DNB).

A spokesman for PGGM – asset manager for the €185bn healthcare pension fund PFZW – said: “At the moment, [as far as the regulator is concerned], a euro invested in a coal-fired power station counts the same as a euro invested in a wind farm, and we would like to discuss this.”

Speaking in Amsterdam at a recent GIIN Congress on impact investing, Peter Borgdorff, PFZW’s director, reiterated the fund’s belief that sustainable investments posed less long-term risk, although he conceded that this had yet to be proven.

He argued that regulatory changes in support of sustainability stood to increase institutional investment in private equity, infrastructure and real estate.

PGGM is part of a group of major Dutch investors and financial institutions that launched an investment agenda at the GIIN conference based on on the UN Sustainable Development Goals (SDGs).

The group presented a report setting out their agenda to the Dutch government and DNB. It calls on them to help unlock greater investment that would contribute to achieving SDGs, such as by blending private and public capital and by supporting the creation and use of sustainability indicators and standards based on the SDGs. 

The SDGs are attracting attention as a framework around which to orientate investment and business activity, and public policy.

Other experts at the conference, however, questioned whether sustainable investments were inherently less risky.

Corinne Wortmann-Kool, chair at the €381bn civil service scheme ABP, cited the pension fund’s investments in Spanish solar panels; the business case for the investments was lost, she said, after the local government reneged on promised subsidies.

She said she expected, however, that sustainable investments were capable of delivering better returns over the longer term.

Karlijn van Lierop, head of sustainable investment at the €114bn asset manager MN, said: “Stating that sustainable investment or impact investing carries – per definition – lower risk, is taking the corner too tightly.

“We believe in the principles of both, but we assess each individual investment [on its constituent parts] for risk and return.”

The DNB has said it is addressing the issue with the sector in a working group exploring the barriers and incentives for sustainable investment, adding that the results will be published later this year.

Meanwhile, another case of regulatory intervention in a wind farm energy deal has come to light.

A joint venture between PensionDanmark, the  Danish labour-market pension fund, and German energy company E.ON has gone to court in the US to try to recover around $300m (€284m) in losses, argued to have been incurred after Lower Colorado River Authority (LCRA) – a US water authority – terminated its deal to buy power from the joint venture’s holding company, Papalote.

The decision was reportedly made due to a drop in Texan wholesale energy prices, where the wind farms owned by the Papalote are situated, to less than $25/MWh.

Claus Lyngdal, head of alternative investments at PensionDanmark, told IPE: “We can confirm PensionDanmark has part ownership in a company currently engaged in legal proceedings against LCRA.” The pension fund refused to say more.

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