Managing the paradox
In a special joint interview at ING’s global headquarters in Amsterdam, Dick de Beus, chairman of the health care fund PGGM, and Jan Nijssen, global head of pensions at ING, shared their thoughts.
IPE: What are the main issues facing people like yourselves in your positions on a day-to-day basis?
DE BEUS: There are so many topics now in the Netherlands, a serious point of discussion now is the financial rules for pension funds. What is the minimum funding ratio you have to implement?
It’s a little bit of a paradox. I think everyone wants to have a sure system that is almost 100% certain that you will get your pension money. On the other hand, too many guarantees cost a lot of money. Perhaps we were a little bit too over-responsible in implementing regulations. And of course, the Netherlands is not an island. We are in the middle of Europe and what’s going on in pension affairs is very important for our system.
IPE: By Europe do you mean the Pension Directive?
DE BEUS: The framework – what is the implementation in different countries? Because not all countries have the same system. And focusing on one system, for example pay-as-you-go, can have serious other consequences when you are focusing on a final salary scheme. That’s still a very intensive debate.
IPE: And Jan - from your point of view?
NIJSSEN: I’m very much struck by the paradox between the Dutch view of the Dutch system and the view that people outside the Netherlands have of the system. From outside the Netherlands people seem to look at the Dutch system, that has to be something going on with investment returns, not the returns they are used to – but still the system is of a kind of quality that it actually proved in the last couple of years that it could absorb substantial shocks. And I think that view is right.
Whereas within the Netherlands people seem to have the idea of what the Americas call a ‘perpetual home run’ or a kind of free lunch. Investment returns were very nice, the labour market was fine, employees thought future benefits would be increased and so on. And then you say, well, all of a sudden you have to pay for it.
I am concerned that, although I am proud to be Dutch, that that amongst themselves the Dutch view strengthens itself and we talk ourselves into a kind of situation of fear and distrust which is totally not justified.
And it think that’s something that goes beyond the separate players in such a system. It’s actually something that is important to be realised as a society. We need to explain as well as possible to the Dutch public that we’ve got a system that’s proved itself able to withstand very substantial shocks – that we should act, react, but not overreact.
IPE: To what extent is the “Dutch model” sustainable going forward?
DE BEUS: I strongly believe in the sustainability of the Dutch three-pillar system. The PAYG state provision, the second pillar collective schemes and the third pillar individual schemes. It’s a robust system because you don’t have an over-focus on one of the finance systems. You have scenarios when PAYG is performing very well and you have scenarios when the collective schemes are delivering good results. It’s a special element of the Dutch system that we have such a nice combination.
We don’t have to sell any part of our portfolio to finance our pension schemes until 2050 – so what’s the importance of a temporary correction on the stock markets?
But on the other hand if you wanted to have almost 100% certainty that at each moment that you are fully funded then you perhaps we are forced to change our pension scheme or to change our investment scheme. And that’s for me the big question, the paradox.
IPE: I think you are alluding to the solvency regulation of the PVK, the pension industry regulator.
DE BEUS: I do respect their position. The supervisory authority has a legal task to look at the system and to make sure pensions providers can keep their promises. But it’s very important to look at the consequences of regulation. And I think that during a certain period it was a little too shortsighted. And now I think we have a better balance, yes.
IPE: Was it a case of the pension industry not getting its message across to government, to the
DE BEUS: I think that’s a very good point. I think we can learn some lessons. On the other hand we have always known that you can have periods of impressive results and fairly negative results and in the past we have experienced such periods. But for one reason or another for the past two or three years, reactions have been much more aggressive and nervous than for example 10 years ago. The culture has changed and it’s very very important, as you say, to explain how our system works.
NIJSSEN: I’m inclined to believe that the best communication response in the Netherlands is not to have representatives of certain pillars trying to argue and to convince people, but rather to have the pension industry as a whole having a proper and transparent communication with the public. I really believe there’s a proper role for each system. In an open economy each party has to play their role. The pension world has to communicate with the non-pension world.
IPE: The non-pension world is the policy-makers, the regulators, the media, and the social partners. It seems that somewhere along the line, communications have broken down. People are even worried about their pensions not being paid.
DE BEUS: This is a new problem, and it’s the paradox of transparency. It’s a real pension problem. This chain of paradoxes – when you are explaining your indexation policy you have to communicate in general terms only. That’s not 100% transparency more or less, and that’s a big problem. I know there were fears in the past that we were explaining our system in general terms. And people said, ‘well, you are a big pension fund, these are fairly easy statements’. Transparency generates differing views – disclaimers. It’s a big problem for the future how we can get the message clear.
IPE: There seems to be more transparency but less trust.
DE BEUS: I wouldn’t put it like that but we are looking for a new balance. Dutch culture is changing we are importing more or less the American culture.
NIJSSEN: The word paradox has been mentioned a few times and I think it goes back to managing a number of paradoxes. On the one hand you have the absolute conviction that the Dutch pension industry and its respective partners has to intensify its communication to its stakeholders about accounting rules and indexation and the very narrow boundaries of legislation. On the other it’s also very complicated to communicate the pension promise, that there are no absolute guarantees
I think that both Dick and myself feel that we both have to manage that kind of message. That 100% guarantees are not achievable. And the thing to add to that is the people say in the Netherlands and other parts of the world that the solution is to move from defined benefits to defined contribution. I am certainly not a believer that a straightforward move from defined benefit to defined contribution is the solution.
IPE: That’s one of the big questions. Dick could you expand on that?
DE BEUS: Before I comment on that issue I want to mention one particularly successful element of the Dutch system. The social partners in the Netherlands have promoted the system so that almost everyone is joining a funded scheme so there is a clear connection between the second pillar and labour conditions.
It’s a very important issue, defined benefits or defined contribution. I do believe in defined benefit because it’s more efficient – you are not investing too much more, you have a certain goal, for example 50% of average salary. For reaching the same pension goal DC will be much more expensive.