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Impact Investing

IPE special report May 2018

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Netherlands: Pragmatism reigns

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  • Netherlands: Pragmatism reigns
  • Netherlands: Pragmatism reigns

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Mariska van der Westen and Liam Kennedy review the changes that The Hague has in mind for Dutch pension funds this year and next

Dutch pension funds' investments in equity and fixed income decreased by 19% to €529bn over the fourth quarter of 2008, according to the supervisor, De Nederlandsche Bank (DNB). By the end of the first quarter of this year, pension funds had lost a total of €94bn since their combined assets peaked at the end of the first quarter of 2008, leaving assets at €670bn.

This drastic drop in asset levels, and the fact that many funds fell below the required minimum solvency ratio of 105%, led to a relaxation of the FTK rules on pension fund solvency.

Pension funds can now take five rather than three years to replenish their funding ratios, and can postpone pension cuts until 1 January 2012. This new, and widely expected, approach was announced in a communication by the ministry of social affairs on 4 March this year. Following lobbying by a number of pension funds, it was also a much-anticipated move.

Consultants such as Anton van Nunen have called for a radical overhaul of the FTK regime, which has been compulsory for pension funds since 2007. Van Nunen has argued that the compound discount rate used under the FTK is no longer up to the job, and promotes pro-cyclical investment. Instead he has suggested a rate based on the long-term average, which would avoid temporary market distortions, as have been observed in the financial crisis.

A re-evaluation of the FTK is also now under way. In a letter addressed to the Lower House dated 25 May, social affairs minister Piet Hein Donner raised the question of the fluctuation of coverage ratios and the mark-to-market principle, as well as the interest rate that pension funds use to discount their liabilities. He also raised the issue of the "sometimes conflicting" measurement criteria for assets and liabilities and whether the requirement for short-term solvency conflicts with the aim for long-term security.

"As a consequence of the financial crisis," said Donner, "the question has come more sharply into focus as to whether the design of the current FTK is entirely appropriate for situations when an extensive negative financial shock has arisen."

Several committees have now been appointed to evaluate the FTK framework, including the parameters used and the validity of for instance the swap rate as a discount rate for plan liabilities, but also to look into the prudence of pension schemes' investment policies, and the sustainability of the pension system in general.

One panel will draw up recommendations on the FTK, to be based on quantitative analysis from the DNB. It will consist of a representative each from the DNB and the Central Planning Bureau, two from the Labour Market Foundation and an independent chair, and was to have reported to the minister by 1 September.

Otherwise, results will start trickling in later this year and early next year. Donner will sign a new set of parameters into law as of 1 January 2010 and decisions will be made mid-2010 as to the future of the pensions system.

Several other issues are also in the pipeline. First is the matter of raising the retirement age from 65 to 67 not just for the first pillar, the Dutch state pension AOW, but also for the second pillar. The unions oppose this cabinet proposal, and the Social-Economic Council (SER) has until 1 October to come up with a viable alternative.

Second, soon after summer recess, Donner is expected to present a proposal to change legislation that now forbids pension managers such as PGGM and APG to advertise their connection with the pension funds that own them or have a beneficial stake in them, namely PFZW and ABP. This is a hotly contested issue, as insurers are opposed to any slackening of the existing rules.

In the latest parliamentary debate on the subject on 25 June, Donner refused to give any indication as to which way his decision would fall. However, he did reaffirm that compulsory participation in industry-wide pension funds is beneficial: "This must not be jeopardised by the manner in which certain activities in relation to information must be carried out. This is the most important starting point in the assessment of the aspects that must be decided upon. At the same time, there are questions about what can and what cannot take place on a level playing field."

Third, Donner has announced a ‘streamlining' of pension fund governance and co-decision making rules, for which he will present proposals after summer recess.
A concern of pension fund organisations had been a duplication between accountability council and the participants' council, and Donner has acknowledged that small and mid-sized pension funds have had difficulty implementing the governance rules.

Interviewed in the August/September issue of our Dutch language sister publication IPN, Frans Prins, director of the Opf organisation for company pension funds, said he was happy with the proposals of Donner's office. "The current governance rules are like a millstone around the neck of sponsoring companies and the funds themselves. Our task is to find a way to maintain the functions of management, supervision and responsibility with less effort and fewer committees."

In a letter dated 22 June, the three pension organisations, the VB, Opf and the UvB, representing industry, company and professional pension funds respectively, wrote to the members of the social affairs committee of the Lower Chamber. They welcomed the minister's approach to streamlining the system, to avoid duplication of activity and to minimise the administrative burden. They also signalled their intention to develop concrete proposals to add to the range of options.

A further regulatory change is that corporate schemes can now form a ‘multi-opf' or multi-employer fund, following the advice of the Labour Foundation (STAR). The legislative change, announced in March, makes it possible for corporate schemes to achieve economies of scale by bundling management, the participants' council and the accountability council, without forming one financial entity or sharing financial risks. The number of company pension funds has reduced in the past 10 years from 938 to some 597 this year.

 

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