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Dutch FTK delayed for insurers, not pension funds

NETHERLANDS - The new financial assessment framework won’t come into force for the insurance sector by 2006, says the Dutch pensions regulator, central bank DNB.

But the exception won’t apply to pension funds. The bank had previously denied rumours that it would be delayed.

The bank has decided to postpone the implementation of the new rules – also known as the Financieel Toetsings Kader – for insurers because of urgent requests for more time from them.

Insurers had referred to other developments like the EU’s Solvency II project, the introduction of International Financial Reporting Standards and the need to cut administrative costs.

The new FTK will however be incorporated in the new pensions legislation, the DNB said in a statement. It underlines the usefulness of the FTK as part of the system innovation within the care sector.

The DNB will consult with the Finance Ministry and the Union of Insurers about how to implement the FTK, whilst taking into account the introduction of other regulations. A DNB spokesman couldn’t indicate a timetable for this.

As recently as last month the DNB told IPE that the FTK would come in as planned on January 1 2006. There had been market rumours that it would extend the deadline for the new regime but it said the rumours were “totally untrue and not based on fact”.

Meanwhile the DNB has announced as of 2006 the swap curve will be used for calculating the net present value of Dutch pension liabilities, as part of the FTK.

The use of this interest rate term structure method will be mandatory for pension funds opting for financial assessment by DNB.

Apart from introducing the swap curve method, DNB has responded to consultation results by not applying discount vis-à-vis the swap curve. As DNB states “because differences between the swap curve and the rates on government bonds are driven in part by scarcity effects, they cannot be interpreted unequivocally as a measure of credit risk on swaps”.

“The drop of the discount means that pension funds, which opt for a swap overlay, in order to reduce the difference in interest rate sensitivity between the assets and liabilities, will no longer be facing a basis risk,” explained Jitzes Noorman of Rabobank International.

“Duration hedging with ultra-long government bonds will now be the strategy with basis risk.”

Noorman said the move would result in higher discount rates as well, and therefore a lower value of the liabilities and a higher coverage ratio.

“An average state-swap spread of 10bp, with a 16-years duration for the liabilities of the average Dutch pensions fund, will result in a 1.9% higher coverage”.

The Foundation for Company Pensions Funds was pleased with the move. “The main gain is the unshortened swap curve that will be used. This will allow matching and will yield a higher interest than state bonds”, it says.

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