NETHERLANDS - The Dutch pension regulator De Nederlandsche Bank has released new recommendations about the parameters for the new Financial Assessment Framework, or Financieel Toezichtskader (FTK), for pension funds.

The suggestions involve a series of changes after controversial reactions that emerged in consultation, the DNB said. Social affairs minister Aart Jan de Geus had asked the DNB to assess whether the values agreed earlier still held in the current economic climate.

Changes include changes to parameters for investment assumptions, emerging market equities, indirect real estate and commodities.

"Setting the parameters has not been easy," the DNB says. "On the one hand, the outlooks underlying estimation were not overly rosy, while, on the other, the estimations are not unnecessarily conservative."

The first proposal is for the treatment of insurance-technical risks to be refined from the original "coarsely-meshed" approach. "This proposal is merely of benefit to small pension funds," the DNB says.

The second amendment is a "slight change in the assumptions on investment return for continuity analysis" since the assumed maximum yield of 5% on fixed income is now "hardly tenable, given current interest rate levels". This has been lowered to 4.5%.

And the risk premium on equities should be broken down by mature markets, private equity and emerging markets, the DNB proposes. The maximum risk premiums are set at 3%, 3.5% and 4% respectively, taking the maximum total yield to 7.5%, 8% and 8.5%.

The DNB also proposes to raise the parmenter for emerging markets equities from 30% to 35%. "The current fall of 30% has turned out to be an underestimation of risks," the DNB says, adding the new proposal "presents a more accurate picture of the underlying risks".

Another proposal is for indirect real estate to be treated as equities in mature markets - "owing to their comparable characteristics". And the maximum risk premium on commodities is proposed to be 2%, "consistent with the treatment of equities and real estate".

"For a standard pension fund, the total impact of the proposed changes raises the requited funding ratio by +0.47 to 125.64, which means it remains below the maximum of 130."

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