IORP to heighten Dutch strengths
With the adoption of the directive on the activities and supervision of institutions for occupational retirement provision (IORPs), the EU has made a step towards creating an internal market for occupational retirement provision. The aim is to set clear standards for how the IORPs should function to ensure a high level of protection for members and beneficiaries of pension funds.
What are the consequences of the directive for the Dutch pension funds – for example, in terms of their investment policy, financial structure and communication policy? And what is the role of the supervisor?
The directive, which must be implemented by EU member states within 24 months of its publication are aimed at:
o Ensuring a high level of protection for members and beneficiaries of pension funds;
o Allowing institutions to accept as members companies located in other member states and to manage their pension schemes;
o Allowing institutions to implement investment strategies suited to the characteristics of their pension schemes;
o And ensuring member states’ prerogatives regarding social protection and pension schemes are respected.
To attain these goals three sets of rules have been established. Firstly, the directive contains strict rules to protect members and beneficiaries. They must have sufficient information about the rules of the pension scheme, the institution’s financial situation and about their rights.
Secondly, investment rules must cater for the characteristics of IORPs and to efficient management of savings since IORPs invest on a long-term basis and have to diversify their assets by taking full advantage of the benefits offered by the single market and the euro. If each institution is to establish the safest and most efficient investment policy, the investment rules, and in particular the rules for investing in shares, must be not too restrictive.
Finally, rules permitting cross-border management of occupational pension schemes require mutual recognition of supervisory methods in force, since an IORP will be able to manage the schemes of companies in other member states by applying the prudential rules of the member state where it is established.
In May this year social affairs and employability minister Aart-Jan de Geus submitted the bill implementing the directive on pension institutions to the Lower House of the Dutch Parliament. The bill puts into effect the pension funds directive . In September the lower house discussed the implementation of the bill in the Pensions and Savings Act (PSW). The new Pensions and Savings Act should come into force by the beginning of 2006. Adjustment of the PSW will be limited. While only the provisions with which the PSW does not comply will be added, it means that the Netherlands will not be among the member states to implement the directive in time.
The investment regulations from the directive will be included in the PSW. This means that investments should be such as to guarantee the safety, quality, liquidity and return of the entire portfolio. This interpretation does not differ from the ‘solid invesment’ principle already laid down in the PSW. Loans can only be contracted if they are temporary and are contracted for liquidity purposes. In respect of subordinated loans, further rules will be laid down by Order in Council.
A further consequence for company pension funds is that free reserves may no longer be taken into account in calculating the maximum account for investments in the fund’s own business. The possibilities for investing in the other business of the group will be extended.
It seems that there are limited consequences for the Dutch pension funds’ investment policy. In fact, it appears that the directive might create new opportunities for them. The Dutch traditionally are at the forefront in knowledge of investment policy and provision. So the time is right for Dutch pension funds to become players outside their borders.
To sum up, the new directive forces pension funds to inform their members and beneficiaries sufficiently so that they can make choices concerning their pensions. The new PSW prescribes how pension funds should inform their stakeholders. In this way the directive comes together with the new PSW. The new pension law will extend the disclosure requirements for the pension administrators. One change in comparison with the present PSW provisions is that information must also be provided on request to former participants, pensioners and others entitled to a pension.
The provision of more information on pensions will meet the demands of society. In the past few years the interest in pensions has grown rapidly. For example, this summer there has been much discussion over whether the younger or older generations should finance the pension schemes in the future. A few years ago this kind of discussion should have been impossible due to the lack of interest in pensions.
A further step towards better information about pensions will be the introduction a of common pension statement at the beginning of 2007. All employers will have to use the same type of statement. But the information also has to be improved. As many employees - both collectively and individually - have built up pension rights within several schemes one common database should be developed. The importance of such a database will grow rapidly as the Act on Early Retirement Pre-Pension and Life Course Planning will come into force within a few months.
Pension funds and insurance companies should submit their information to this database to make it possible for individuals to have an overview of their total pension rights. Maybe the Dutch should take a tip from Denmark. In that Scandinavian country such a common database has existed for some time. Or maybe we should even be dreaming about a common European database.
The Dutch IORPs are waiting for the introduction of the new financial reference framework (FTK). The FTK will lead to a stronger supervision of, for instance, the investment policy of pension funds. It seems to have a strong focus on the short-term financial strength of a pension fund. This short-term focus can also be seen in the demands laid down in the so-called recovery plans. This appears to be at some variance with the new directive which aims to look at the financial position on a more long-term basis. Therefore, one may wonder if the tough Dutch supervision will deter foreign IORPs from entering the Dutch pension market.
From the perspective of the Dutch pension funds the question is whether supervision will open up opportunities for Dutch institutions to export knowledge in investment policy and pension provision. Maybe the requirements set by the FTK are too high. On the other hand, the requirements might have a positive effect as it can be argued that transparency and certainty are powerful assets for pension funds.
Kees Verhagen is a freelance public relations and issues manager based in the Netherlands