Towers Perrin has recently conducted research as to the status of the new financial assessment framework (FTK) among Dutch pension funds will come into effect in the Netherlands from the 1st of January 2007. Towers Perrin distributed their FTK-survey so that respondents were able to report how they were faring with their preparations. This article describes the results of the survey.
FTK has received a lot of attention in the press recently. Mostly the new regulations were explained or analysed and the question is what effect these articles have had. Is FTK an issue that is being postponed or is implementation underway? This triggered Towers Perrin to find out more.
The vast majority of pension funds report that they are not delaying implementation but are seriously involved with the subject. Most pension funds view FTK as a clear improvement in comparison to current regulations. Especially the use of the liabilities´ market value would give a better understanding of the financial risks within a pension fund.
There are also less favourable comments: the FTK regulation is too severe. Especially the minimum requirement (´minimumtoets´) is a heavy burden in the short term for pension funds and their sponsors. Many of the respondents wish both to see an easing of the minimum requirement and a longer timeframe in which to reach the 105% cover ratio when falling below this threshold.
Furthermore, the mismatch issue is important. The survey shows that pension funds are considering using or are already using specific products in order to solve their interest rate mismatch. Two thirds of those surveyed have chosen to implement FTK with bonds and one third makes use of derivatives – mainly swaps.
It is interesting to note that most respondents have opted for a gradual reduction of the interest rate mismatch instead of an immediate reduction. It seems that most funds were not fully triggered by their interest rate outlook when implementing their duration strategy.
The survey also included a number of statements that needed to be answered. For example, the majority of those surveyed see a rise in interest rates in the second half of 2005. However at the time of going to press, interest rates are at their lowest level over the past 12 months. An interest rate rise lowers the necessity of reducing the interest rate mismatch which can explain the choice for gradual implementation.
The interest rate risk is taken very seriously by Dutch pension funds, thereby showing the first effects of FTK well before FTK has been implemented. FTK gives pension funds a better insight into their financial risks. After all this focus on risk it is time to look at the other side of the coin, namely the long term returns that are needed to fund the current pension schemes.
The survey was conducted among 47 representatives of predominantly corporate pension funds that jointly accounted for more than €130bn of pension assets. For some issues there was a surprisingly large consensus whereas for others this was not the case.
First some general data: The respondents were quite unanimous in stating that they all were aware of the basics and the consequences of FTK. This was less the case for being aware of the different stages (including timing) of the decision making process within FTK.
One third of the representatives stated that they were not or only slightly aware of these stages. The information about FTK received from various parties was well appreciated.
The survey also enquires about certain issues relating to balance sheet management. The survey describes different stages where a pension fund may be positioned. More than half are currently being advised by an asset manager or an actuary. One quarter are transforming their analysis into a concrete plan. Slightly more than 10% are already implementing FTK in their investment policy.
Another question related to insight they have about the effect on the ´voorziening pensioenverplichtingen’ (VPP), which is provision for pension liabilities. On a scale from 1 to 10, pension funds give themselves an average score of 6.9. The effects for the solvency ratio is also 6.9 on average. Generally the pension funds feel they have made the grade when it comes to the knowledge they have regarding the consequences of FTK.
A third area within the survey looked at the practical implications of the investment policy. How are pension funds planning to change their duration? Two thirds stated that a shift in the asset mix is the most probable course of action. However 11 funds replied that this will be highly unlikely.
If pension funds want to reduce their interest rate mismatch, then two thirds would favour a change in their bond portfolio and one third would use swaps. Almost all would utilise their interest rate outlook during such an operation and would do so gradually.
Finally, the survey included questions such as: ‘The FTK offers greater transparency and comparison of financial data’. Three quarters of those surveyed agreed. ‘The introduction of the FTK should have happened much earlier’ received 60% of the vote. A small majority feels that the pension funds ought to have done something themselves about the ´duration gap´ before being forced to do so by the regulatory authorities. Almost two thirds view the FTK as an improvement to current regulations.