THE NETHERLANDS - One-third of Dutch pension funds have failed to fully implement the new financial assessment framework FTK as of 1 January, a KPMG survey has shown.
"The complexity and the wide scope of potential solutions for the changed interest risks are causing delays," the financial consultant concludes in its annual study.
The new FTK requires pension schemes to offer a better insight in their financial risks and demonstrate proper capital funding of their liabilities. Moreover, their liabilities must be valued against the variable market rates, which makes them susceptible to interest changes.
According to Edward Snieder of KPMG, many pension funds have difficulties in making a choice between risk management and returns.
"If the scheme doesn't fully hedge its interest risk, it could face large swings of its coverage ratio. But fully hedging may lead to insufficient returns, which fall short of the indexation ambition," Snieder explained.
"Therefore, the pension funds must formulate a policy on the risks that need to be managed and accepted. The schemes must choose between short-term and long-term risks as well."
In Snieder's opinion, schemes should consider improving the risk-return ratio of their portfolio, by opting for government bonds with a very long duration, interest rate swaps and swaptions, in addition.
"Moreover, smaller pension funds in particular should think of hedging their interest risks using an external party, like an asset manager," he added.
Asset managers are more likely to have the necessary expertise, for example, on derivates, legislation and asset liability management, available at acceptable costs, Snieder indicated.
KMPG has found that almost 50% of the pension funds is using interest techniques to extend the duration of their bonds portfolio. Over 30% of the schemes aim at an extension of over 10 years, and over 10% have chosen for three to 10 years, it said.
Over one-third of the pensions funds have indicated to increase the use of interest techniques this year.
"As of 2007, our supervision will be based on the FTK. If we encounter schemes which don't comply with the Pensions Act, we will respond as previously under the Pensioen- en Spaarfondsenwet," spokesman Herman Lutke Schipholt of regulator De Nederlandsche Bank commented to IPE.
"But we will take into account the fact that we are dealing with new legislation. This year, financially weak schemes and the largest pension funds will get our main attention."