NETHERLANDS – Frans Prins, director of the Dutch Association of Industry-wide pension funds (VB) believes a number of schemes will drop below the minimum Z-score level next year, when the first performance test will mean that employers can opt out of the compulsory system.

Speaking at the Eurofunds conference today in Rome, Prins comments that while significant differences in performance have been recorded to date, not one single pension fund has performed below standard level.
However, he explains that one reason for this is found in the formula of the performance test, to be adjusted for next year’s opt-out test.
“ The yearly Z-score is not divided by the number of years but by the root of it. This means that the formula is more strict after five years than it is after three years,
so therefore we expect that next year some of the funds will drop below the minimal level.”

Of the 80 members of the VB around 80% belong to the category of compulsory, industry-wide, second pillar pension funds.
In 1998, the Dutch ministry of social affairs introduced the STAR legislation that laid down the conditions for schemes to be obliged to participate in industry-wide funds.

The ‘Z-score’ test determines whether the objectives and the policy of the fund as formulated by the social partners on its board have actually been realised.
The Z-score is the comparison of the actual yield from the fund portfolio compared with the projected yield of a standard portfolio over a period of five years – in order to see whether performance has been substantially lower than could objectively been expected on the basis of market indices.

Prins notes that in a retrospective study of pension funds from 1992 to 1996, about 10% of the funds would have been forced to grant this exemption as a result of the STAR criterion.
But he says the system is still being modified: “We will try to amend the exemption scheme in the near future because some of the technical imperfections still existing need to be eliminated.”
And he points out that the market risk is much higher today that it was for the 92-96 period.
“ The formula is based on the 90% expectation that any pension fund with a sound investment policy will show, nevertheless, an unsatisfactory performance. So theoretically more than 10% of the pension funds would be unable to meet the standard.
“Therefore the formula should change and allow an increased proportion of downwards performances.”

Conversely, he argues that if no funds do fall below the Z-score then the government may take action to tighten up the performance banding.
“ If no-one drops out then the politicians will perhaps change the rules and make the system more severe.”