NETHERLANDS - Dutch pensions regulator De Nederlandsche Bank and the pension fund industry bodies are to overhaul pensions risk management, as a DNB study found several pension funds have underestimated investment risks and are paying insufficient attention to governance.

The pensions watchdog has calculated that Dutch schemes incurred a combined loss of €112bn in 2008, at the same time as decreasing interest rates increased their liabilities by almost €108bn.

Although DNB's comprehensive survey was conducted during a period of significant market turbulence in 2009, its results are largely unrelated to the crisis, DNB stressed, so it is advocating legal changes to improve pensions risk management.

According to the regulator, its research revealed there were bottlenecks and hiatuses among pension funds not only in their strategy, implementation and financial buffers, but also in the governance and management at pension funds.

For example, DNB noted that pension funds' standard model for their required assets is based on calculations assuming financial shocks could lower investments by 25%, when in reality the MSCI World equity index actually dropped 39% during the period it studied.

The real drop in interest rates was also more extreme than the standard model, while the supposed benefits of diversification failed to materialise, according to the study.

"Schemes with additional risk, and therefore requiring additional assets, have incurred larger losses," the watchdog stated.

DNB found some pension schemes lost significantly more than expected - in some case they suffered losses of 150% of the legally required buffers - and some pension funds lost up to 100 percentage points of their funding ratio.

According to the pensions regulator, schemes paid insufficient attention to risk aversion because they were optimistic in their returns assumptions, and a riskier investment mix was sometimes adopted because sponsoring companies were willing to plug a possible future funding gap.

The process of translating strategic investment policy into a portfolio also carried risks, which were often related to innovative investments and active management with unclear mandates, the DNB discovered.

The pensions regulator found pension funds had also exposed themselves to liquidity risk and refinancing risk through derivatives, as well as through their participation in securities-lending and loans.

In the opinion of the watchdog, the standard model for financial buffers failed because it does not encourage additional assets to be held to cover liquidity risks and the risks of active management, while its study found a lack of governance and board control significantly contributed to schemes' losses.

DNB further noted that the position of the risk manager at pension funds is not always clear, as it is felt the officers involved are often insufficiently independent or incapable of fulfilling the role.

Arrangements with external asset managers also often left pension funds' board with insufficient control or without clear reporting structures, according to the regulator.

The DNB said the integrated survey study results have now triggered separate studies of individual schemes.

The regulator will adjust the financial assessment framework (FTK) in order to encourage pension funds to improve balancing risks and returns.

Gerard Riemen, director of the Association of Industry-wide Pension Funds (VB) said the pensions organisations supported DNB's conclusions.

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