FTK only needs fine-tuning, claim Dutch actuaries
NETHERLANDS - The Dutch Actuarial Society (AG) believes the existing financial assessment framework for pensions (FTK) requires only fine-tuning and is not in need of a major overhaul.
The body's comments were made in anticipation of a pending FTK evaluation by pensions regulator De Nederlandsche Bank (DNB) and social affairs minister Piet Hein Donner.
According to AG, it is mainly the discrepancy between the rules for long and short investment horizons, as well as those between nominal and real pension promises, which could improve the FTK.
The AG suggested that the expected development of interest rates for continuity analyses and recovery plans should no longer be based on the forward curve but on expected interest rates, "as forward rates have turned out to be moderate indicators of real developments".
"If expected long-term interest rates are taken into account, rather than actual market rates, the inconsistency between value changes in investments and liabilities in the present parameters will disappear," argued the actuaries.
They added that such a change would also increase the stability of the assessment framework for recovery plans and continuity analyses.
The AG committee further argued that the requirement to submit a recovery plan should only be mandatory if a pension scheme's cover ratio has been consistently low for at least six months, and should then only be necessary to set a scheme-specific lower asset limit where there is a shortfall.
Sensitivity analyses and stress tests should play a larger role in the assessment of recovery plans, the body also argued.
The actuaries contend that the FTK must pay more attention to real pensions in the long-term - through its rules concerning the continuity analysis, the indexation label and the consistency check - rather than focus on nominal promises.
In this context, the use of the indexation could be limited to members' key decision-making moments, such as when there is a valuation transfer between pension funds, the AG explained.
In the opinion of the Actuarial Society, pension funds should - depending on the specific risk profile of the scheme - also be allowed to fine-tune the prescribed standard model of the FTK parameters.
"We have deliberately refrained from proposing new models which take pension funds' real cover ratios into account," commented Robert Meulenbroek, chairman of the AG committee.
"Such models will probably lead to a too-complicated and possibly even unworkable result, given the differences in schemes' working methods, as well as variables as real interest rates and inflation," he pointed out.
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