NETHERLANDS - The Dutch government could increase certainty for pensions by issuing inflation-linked bonds, pensions regulator De Nederlandsche Bank (DNB) has said.
A liquid market for index-linked bonds would offer pension funds more options for managing inflation risk through their investment mix, the DNB said in an explanation of its proposals to improve the financial assessment framework (FTK).
It added: "The fact pension funds finance indexation from uncertain returns is in part caused by the very limited options in the capital markets to hedge against inflation risk."
The supervisor came up with its recommendations after expert committees concluded the Dutch pension system was insufficiently shockproof and that it must scale down its ambitions or accept increased uncertainty.
According to DNB, the proposed adjustments are aimed at improving the balance between risk and return, limiting volatile policy responses and increasing certainty.
Friction between a nominal and a real approach of pensions could be eased by making pension funds' communication of the real coverage ratio mandatory, the regulator suggested, adding that this should also apply to information about purchasing power in the standard bad-weather scenario
In addition, any contribution discount should be linked to a real funding ratio of 100%, rather than 70% at present, the supervisor said.
To improve the balance between risk and return, the DNB recommended additional stress tests to the continuity analysis, and financial contingency plans describing the available steering instruments and intended financial effects.
Moreover, cost-covering contributions should not be based on expected returns, according to the pensions watchdog.
It proposed a new standard that would not take risk premiums into account that had not yet been realised.
In the opinion of DNB, the effects of volatility could be limited by introducing a waiting period of nine months before a recovery plan had to be submitted.
The regulator further noted that it could adjust the forward curve for swap rates, which pension funds must apply for calculating their liabilities, in the event of distortions, such as a temporary shortage of liquidity.
However, it fell short of proposing concrete changes to the forward curve.
The pension fund's lobbying organisations VB, OPF and UvB declined to comment on the DNB's proposals, as they plan to present their own view on the evaluation of the FTK to the minister of social affairs, according to Gert Kloosterboer, spokesman for VB.