“Oh dear, whoops and crikey”, are expressions used by the British to describe feelings when facing unusual situations. Well, I use them because we are being visited by Central Bank supervisor. These visits must evoke similar reactions from my peers in other European countries. Yet in Holland, no matter how the coverage ratio looks, we know we are all about to be told off. 

Maria brings in coffee and biscuits. I suggested we offer our speculaas biscuits, recommended if you do not know them, and so help our supervisor think of adjectives like ‘spectacular’. But my colleague Hans suggested they might think of ‘speculate’, which we might want to avoid. Anyway, the biscuits stay on the table.

Four Central Bank officials begin the process of communication. The focus is risk. Now in Dutch bureaucrat land, risk is any amount of volatility above the risk-free rate, and which no sensible pension fund should take on. Hans enquired about the risk of not being able to pay pensions because of this lack of risk but he was not understood. I decided to ask a question.

‘Does the Central bank believe in the equity risk premium?’ ‘Pieter we do in certain time frames, but at the moment equities seem to be trending sideways, so we are not sure that equities should be given the weighting they once had.’ Oh dear, a little knowledge is a dangerous thing. And when a little knowledge is acquired by people who have most of the power we are then faced with real problems.

‘Pieter, Wasserdicht Pensioefonds is 125% funded, which is good, but we and the European financial regulators deem it appropriate that more emphasis is placed on risk controls. We need to know that unnecessary risk is eradicated.’ ‘Is leverage is a bad thing?’ ‘Of course it is. We are encouraging all pension funds to minimise leverage.’ ‘But if we leverage our sovereign bond allocations at 2:1 the portfolio would be less volatile than a long-only emerging markets portfolio.’ ‘Don’t confuse us, Pieter, our task is to ensure you have proper risk controls.’ ‘Ah.’

‘Pieter, let’s come straight to the point. There has been enormous volatility and we have collectively lost a lot of money. People are angry and board members of pension funds need to take their share of the responsibility. We have started visiting the very largest funds and have made an example of one of them.’ ‘Why?’ ‘Because risk controls needed to improve.’ ‘You mean people are being penalised for not knowing what the markets are going to do?’ ‘No, penalised for not being in a position to limit losses if the markets reacted the way they did.’

‘But we have the fiduciary responsibility to pay pensions. Should we not be able to invest and use the instruments available to maximise portfolio returns for appropriate volatility’ ‘No.’ ‘But that is a problem.’ ‘Not for us.’ ‘Oh? So who manages the Central Bank’s fund then?”

Pieter Mullen is investment director at Wasserdicht Pension Funds