Blue Sky's Van der Stee: Cut those benefits, already!
Dutch pension fund trustees should finally take responsibility and consider cutting benefits if their scheme is under water, no matter how unpopular such measures might be, says Toine Van der Stee, chief executive at Blue Sky Group, asset manager of the Royal Dutch Airlines schemes.
Trustees continue to insist funding ratios will be all right, according to Blue Sky's Toine Van der Stee, but "we have been enduring a crisis for three years now, and it's high time trustees stop being in denial about that and start taking action". The pending pension reforms don't change the fact that pension funds are in real trouble and should take action now rather than later, he says.
But even as funding ratios circle the drain, pension fund trustees continue to take a 'wait and see' attitude. Trustee boards sit on their hands because they fear they might antagonise the social partners if they were to suggest benefit cuts, or because they hope that regulation changes might bring a stay of execution, or that long-term interest rates will recover and save the day.
However, simply standing by and watching funding ratios deteriorate is no way to run a pension fund, Van der Stee tells IPE sister publication IPNederland. "If it's clear a scheme cannot recover using the instruments presently being employed, a board should man up and draw its conclusions - even if it means cutting accrued pension rights."
Cutting benefits is not a measure likely to please the social partners - the employer and employee organisations in charge of negotiating collective benefit arrangements. But pleasing the social partners isn't part of a trustee board's job description, says Van der Stee. "The board's job is, instead, to do their utmost to honour the pension claims of their plan's participants. That job includes making hard decisions if needed, and if social partners have a problem with that, so be it."
Trustee boards should take charge and do what is necessary, he says. "If a scheme cannot recover without benefit cuts, the board should admit this and inform their participants. Don't put this off: you need to give people ample warning so they can prepare and make arrangements to offset the cuts. Telling people ahead of time what they can expect will not undermine confidence in the pensions system nearly as much as waiting to tell them till the last moment."
Trustees who do nothing because they hope all will turn out well are in fact "making like an ostrich" and sticking their heads in the sand, says Van der Stee. Hope is a "thing of beauty", but should not dictate a board's actions. "Trustee boards must face reality and act on it. It is better to be safe than sorry. If the long-term interest rate should rise and funding gaps turn out to be not as bad as expected after all, benefit cuts can always be repaired after the fact."
Likewise, trustees harbouring the tacit hope that the regulator and the supervisor will take on the role of knight in shining armour and ride to the rescue need a reality check. "Even if recovery periods were to be extended or if the discount rate were to be 'smoothed', that wouldn't change the facts. A yard is a yard, whether you measure it by inches or centimetres. You just can't indefinitely pay out more than you are receiving, no matter what regulation changes you apply."
In this regard, Van der Stee dismisses out of hand the recent recommendation by social affairs and labour minister Henk Kamp that pension funds should simply raise the pensionable age by a year starting in 2012 to bolster their funding ratios. "You can't just up and tell people they should work a year longer to receive the same benefits. Contrary to what minister Kamp suggests, there are in fact legal constraints prohibiting anything of the sort, and rightly so. Those are accrued rights that cannot easily be tampered with."
Temporarily cutting benefits to recover from a shortfall is in no way comparable to structurally cutting accrued rights. As long as the law upholds those rights, pension fund trustees should vigorously defend them, says Van der Stee - even if that puts trustee boards at odds with social partners and politicians. "Trustee boards must make their own decisions and not give in to pressure from third parties. That holds true for the new pension deal as well."
He adds: "For instance, although a number of pension funds are facing funding shortfalls, there are still well over 200 pension funds that are actually doing quite well. For participants of schemes that are reasonably well off, the choice to transfer their accrued rights to a new pension system is anything but obvious. At present, they can be reasonably sure they will receive decent benefits, as promised under the existing system. When offered a switch to an alternative system that offers a lot less certainty, I doubt there will be many people who would opt for the latter.
"In those cases, trustee boards cannot simply go ahead and transfer accrued right to a new system just on the say-so of social partners. Trustee boards should only agree to the switch if they really feel it is a wise and sensible move that will benefit their plan participants. After all, nobody is eager to face a slew of unpleasant lawsuits where participant groups demand compensation for being forced into a pension system against their best interests."