Dutch funding framework ‘has met most targets’, says minister
The Netherland’s new financial assessment framework (nFTK) has met most of its targets since its introduction in 2015, according to Wouter Koolmees, the minister for social affairs.
In a letter to the Dutch parliament, Koolmees said the pensions sector had responded predominantly positively to the framework. He cited a survey by Willis Towers Watson (WTW) of 22 pension funds, supervisors, employers, unions, scientists and pension advisers. The survey was commissioned by the minister.
The work found that sudden and significant rights discounts no longer occurred, despite many schemes’ funding falling short of 100% in 2016 and 2017.
However, the minister indicated that an extension of the permitted recovery period had tempted many pension funds with a funding shortfall to postpone recovery measures. He noted that the five-year period during which a scheme must reach the minimum required coverage of 105% – introduced as part of the nFTK – hasn’t expired yet.
The survey also revealed that pension contributions have stabilised, while clarity has improved about schemes’ risk attitude and how the impact of financial windfalls and setbacks are to be divided across participants.
Most respondents were also positive about other elements of the nFTK such as the effect of a rolling 10-year recovery term and the option of a one-off increase of a pension fund’s risk profile, which decreased the clash between nominal certainty and indexation in schemes’ investment policies.
Koolmees said the adjustment of the recovery system and the rules for future-proof indexation had stabilised pension funds’ financial policy, as a scheme with a funding of between 90% and 110% didn’t have to apply rights cuts – although it was not allowed to grant inflation-linked uplifts either.
However, the minister also noted that many pension funds had delayed recovery measures by linking their recovery plans to high expected returns, risking more serious measures if they didn’t achieve the anticipated results.
The parameters for the return assumptions pension funds are allowed to apply will be reviewed in 2020.
Koolmees also noted that pension premiums had largely remained stable since 2015, attributing this to to fact that premiums no longer had to contribute to recovery payments.
However, the drawback was that, as a consequence, part of participants’ pensions accrual needed to be financed from pension funds’ existing assets rather than from returns on investments, he said.
What is the nFTK?
The update to the FTK in 2015 included the introduction of an annually updated rolling 10-year recovery plan, with mandatory immediate benefit cuts if a pension fund was expected not to recover to a funding level of approximately 125% within this period.
Schemes that fail to reach the minimum required funding of 105% within five years (instead of three years previously) must also apply cuts immediately. However, the necessary discounts may be smoothed out over 10 years.
The nFTK also raised the threshold for indexation, allowing inflation compensation to be paid in part when a scheme had reached a coverage ratio of 110%, and only in full once it had exceeded 125%.
In order to counter the effect of daily interest rates on schemes’ funding, the nFTK came with a new “policy coverage ratio” – based on the funding level calculated on a rolling 12-month basis – as the main criterion for cuts and indexation.
In his letter to parliament, Wouter Koolmees emphasised that changes in 2015 were “necessary maintenance”, and that it was separate from the overall review of the pension system.
However, he made clear that the new recovery system and rules for a future-proof indexation model were relevant for dividing up financial windfalls and setbacks across pension funds’ participants, and would therefore also be taken into account for the overall update of the pensions system.
Minister sticks to market-based discount rate for liabilities
Meanwhile, Koolmees indicated that he was not considering abolishing the current discount rate for liabilities based on market valuations.
Answering parliamentary questions from Rik Grashoff, MP for the left-wing party GroenLinks, he said that introducing “subjective adjustments would make the discount rate a plaything of [the] opposing financial interests of certain groups”, which would in turn undermine faith in the pensions system.
Grashoff wanted to know whether the cabinet was prepared to consider a suggestion from Han de Jong, head economist at ABN Amro, that expected returns should be included when discounting liabilities – as was already the case with establishing contributions.
Explaining his refusal, Koolmees said this would mean that pension funds would both account for and distribute returns that still had to be achieved.
“In case of collective assets and shared risks, this would lead to a redistribution [of risks] between generations of participants,” he said.