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Dutch rooted in DB pensions

Although the Dutch pensions
industry is facing hard times
because of the new IFRS
accounting rules, the new financial
assessment framework FTK, and the
ageing population, its self-confidence
hasn’t been dented.
Hundreds of pensions professionals
had gathered in Noordwijk and
Scheveningen to find out about the latest
developments and opinions, especially
within the Dutch pensions industry
at two events organised by NIBCapital
and ABP/PGGM respectively.
While EU pensions commissioner
Karel van Hulle signalled the market
moving to defined benefit (DB)
schemes, British pensions academic
David Blake predicted that the markets
will force the Dutch funds to switch to
DC based schemes.
“We cannot afford unconditional
benefits in a risky world,” voiced Keith
Ambachtsheer, of KPA Advisory Services
in Canada his support. He argued
that the next generation isn’t being
compensated for their pension contributions,
and predicted adversarial
renegotiations within five years,
“unless stock prices and interest rates
rise”.
Zwi Bodie, of Integrated Finance in
the US, suggested redefining existing
arrangements to DC, but based on various
designs. “They shouldn’t increase
with future salary rises as a liability,
unless there is continuous indexation,”
he said.
Some representatives of company
funds made it clear that they consider a
shift towards a kind of collective DC
scheme inevitable, referring to the risks
of DB to the parent company under
IFRS.
Nout Wellink, president of the
Dutch Central Bank DNB, signalled
that a shift to a DC system seemed to
have started already. “But a large
majority of Dutch citizens do not want
a DC scheme,” he noted. “They
embrace security, and they are prepared
to pay for it as well.”
At least three-quarters of the audience
indicated their faith in the DB
principle. “We shouldn’t give up the
DB too easily, because the DC do not
work properly either,” voiced chairman
Karel Noordzij of healthcare
scheme PGGM. Finance director Dick
Sluimer of civil service fund ABP - the
world’s second largest scheme - went
even further, by stating that a majority
of Dutch schemes expect still to be DB
in 2020.
Pensions expert Alicia Munnell from
Boston College in the US expressed
support. She asked the conference: “I
wonder why you want to move your
lovely system to DC? Don’t tear up
your whole structure, don’t mess it up
like we have done in the States.” She,
however, indicated that moves to DC
systems in the US and Australia have
mainly been caused by competion
from Asian countries.
Munnel also warned against any
changes which will allow many choices
to members. “Too much choice
deters. The system needs to be very
easy and automatic,” she stressed.
Annika Sunden, of the Swedish
National Social Insurance Board,
pointed out a similar experience in
Sweden, where members have a choice
of 700 options for their personal
investments within company schemes.
“Probably because of a lack of knowledge,
a lot of people have shown an
irrational investment behaviour. It’s
better to let them decide on a prearranged
package, based on risk level,”
she concluded.
In line with this, the Dutch Central
Bank’s president strongly advised the
national pension schemes to search for
new ways of communication with their
members. “The traditional ways of
informing them don’t work,” he said,
referring to a recent survey.
The Central Bank’s president added
that the Dutch government doesn’t
oppose index loans any more.
“Although the market is still limited, if
demand picks up they will automatically
become an attractive financing
instrument for general government to
complementing the current financial
markets.” Most of the representatives
agreed that the government should set
up a market for adequate pension
products, eg, by issuing inflationlinked
bonds or long-term bonds.
Aerdt Houben, of pensions regulator
the Dutch Central Bank, promised in
Noordwijk to discuss the funds’ fear of
a shortage of long-term bonds at
acceptable prices - as a result of the FTK
- with the finance ministry. “But I am
confident that the supply will come.
Otherwise someone will be missing an
opportunity.”
“There is so much risk in the present
system that we needed a safety valve,”
Houben said, defending the tight rules
of the FTK. He drew a parallel with the
Titanic. “Passengers shouldn’t take
out an insurance with fellow-passengers.
Despite the extra costs, the prevention
of underfunding is cheaper
than the cure.”
“The asset mix hasn’t been constant
over time,” explained Roland van den
Brink, managing director investments
of the PME Metalektro scheme, when
asked for his opinion about the wisdom
of this. “We shouldn’t keep it constant,
but change it as an outcome of a process.
We must keep up the skill of investing.”
Van den Brink, who is also chairman
of the Dutch Actuarial Society added:
“Three-quarters of the analysts’ forecasts
of the market rates over the past
20 years have proven to be wrong. The
main thing is that you keep the input
process unchanged, don’t keep on betting
on one horse, and keep an eye on
developments. And take demographics
and general conflicts into account as
well.”
“The Dutch pensions system is still
being considered as an example. There
is so much expertise here, that it is
potentially an export article,” summarised
Jeroen Tielman of NIBCapital
at the end of its Pension Summit in
Noordwijk, hosted by NIB, IPE and
Mercer. He advised, however, against
following the example of investment
banks in the US or the UK. “We should
solve the problems the Dutch way!”

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