The Netherlands’ new financial assessment framework (FTK) will generally be positive for the Dutch pensions industry, and the drop in indexation resulting from the legislation will not be as great as many industry experts predict, according to Mercer.
Speaking at a Mercer seminar for pension funds, actuary Sasja Keijmel argued that, with an interest level of 2-2.5% and a return on investments of 6-7%, coverage ratios would improve by up to 5% every year.
“Rising interest rates will also help getting closer to indexation,” said Keijmel, who underlined that extra returns would be a condition for inflation compensation anyway.
He further noted that the new FTK would have a limited impact on pension funds’ indexation tables, “as most start granting indexation with a funding of more than 110%”.
Under the proposed indexation rules, pension funds can grant inflation compensation if they do so “sustainably”.
As a rule of thumb, this would be one-tenth of a scheme’s financial buffers exceeding 110%, according to Jetta Klijnsma, state secretary for Social Affairs.
Currently, pension funds can start indexing if their funding is more than 105%.
Keijmel added that a low discount rate was beneficial for the future pensions of younger workers.
He argued it was impossible to establish in advance which generation would benefit or suffer from the current FTK proposals.
“The FTK offers sufficient steering instruments for a balanced approach of the various generations,” he said.
He also noted that the FTK was not about disputed elements such as the average contribution, or freedom of choice for pension arrangements.
“These issues are to be discussed during the society-wide dialogue about the future of the system,” he said.
But Keijmel does not believe the FTK is perfect, citing the fact a pension fund cannot adjust its risk profile whilst subject to a recovery plan, as well as too strict rules for indexation and reversing previous rights discounts.
He said the proposed increase in financial buffers to counter credit risk might lead to additional system risks, as this would make investing in “safe” long-term governments bonds, Dutch mortgages and loans to small and medium-sized businesses more attractive.
Keijmel also argued that the hedging of interest risk should be a policy decision made by a pension fund, rather than prescribed by the assessment framework.
He said he expected Parliament to discuss the FTK proposals after the end of October.
The new FTK is scheduled to come into force from 1 January 2015, but Klijnsma, state secretary for Social Affairs, has already indicated that some elements of the legislation will be introduced later.