Operating on a number of fronts
Peter Borgdorff, director of the Vereniging van Bedrijfstakpensioenfondsen or VB, for short, the association for Dutch industry-wide pension funds in The Hague, says there is reason for his members to be pleased with the outcome of the recent government proposals on pension reform.
Harking back to the infamous September 2002 PVK letter on solvency, Borgdorff explains that the VB had been unhappy with proceedings back then. He argues that the association felt its members should be regulated by the government, not by the supervisor.
According to Borgdorff, a meeting of Dutch social partners in May last year saw the government agree to tackle regulatory issues; shifting the emphasis from Apeldoorn, home of the PVK, back to The Hague.
“We are very glad with the framework we have now for the financial position of pension funds and we were glad that the social partners asked us for technical assistance.” Borgdorff says that one area where the VB successfully lobbied the government was on the issue of indexation: “At the beginning the government said give us a guarantee for indexation. We said, OK, that would involve a coverage rate of 170% and cost about e190bn in premium collection.
“We then argued that we couldn’t afford this; not only as a pension sector, but also because the Dutch economy couldn’t handle such an amount of money.”
Borgdorff says he appreciates what the government was trying to achieve though.
“They were looking out for rights of the elderly whose indexation in the last year was 1.6% while inflation was 2.1%, and, of course, this is a large segment of the voters.
“The question though is who pays for this indexation.”
The Parliament agreement on an indexation disclaimer for pension funds where they explain clearly the position to scheme members, says Borgdorff, means they now know exactly what is “possible and impossible”.
However, he points out that in the world of industry wide pension funds he can’t think of one fund that won’t use the disclaimer.
But with schemes having 15 years to get up to a 130% buffer, he argues that some will undoubtedly use any surpluses to index their pensions during this time.
Borgdorff’s tone changes, however, when the conversation moves on to the subject of the Staatsen Commission and last year’s supporting letter by junior Minister for Social Affairs, Mark Rutte: “Staatsen is a bit strange. It was set up in 2001 to monitor the issue pension funds with insurance and healthcare interests.
“Last year though the government said Staatsen would also start to propose regulations working alongside representatives from law firm Allen & Overy and the PVK supervisor.”
Borgdorff says the VB’s principle gripe lies with a proposal to cap investments in private equity and real estate to 20%.
“This is a direct affront to the prudent person rule that governs the investment of Dutch plans.
"What is being suggested is that a pension fund cannot have more than 20% in a private equity company, for example, because when they have more than 20% they are considered not as investors but as entrepreneurs.
“The PVK is making its own job with these suggested regulations because if a pension fund has more than 20% in assets that are not considered ‘normal’ then they have to ask the PVK if it is allowed.”
Should there be no change in the current position, Borgdorff says the VB may have to take the Dutch government to court to protect the prudent person principle.
And he says he believes the proposed changes are linked to mixed messages from the government about the impact of the EU pensions directive on the activities of Dutch plans.
"When you look at the European directive, especially Article 18, it states that there should be no quantitative restrictions on investment.
"We think, but we don't quite know, that Rutte wants to escape from Article 7 of the directive, which says that pension funds can't have other activities than pensions.
"We know that there are several companies and organisations that are close to pension funds and mostly owned by pension funds such as Loyalis [linked to ABP) or NIB Capital owned by ABP and PGGM, or the mortgages arm of the railway pension fund, whose activities could be affected by Article 7 of the directive.
"We think that Rutte sees that he can't stop these activities but that under EU law he can't allow them to continue either.
"What he seems to be saying to himself is that he won't allow these activities to take place when they represent more than 20% of a fund's investments, but he also seems to be asking the PVK to decide whether this is allowed."
Borgdorff argues that rather than play with prudent person rules, the Dutch government must decide whether the EU directive affects these different service arms of pension funds or whether it is actually forbidden for all such activities not directly linked to the scheme.
A consultation process on the proposed reforms is currently taking place between the Ministry of Social Affairs and experts on private equity, real estate and the stock market prior to a public hearing on the issue.
Says Borgdorff: "If necessary we will go to court to try and get a good opinion on this. We don't want to do this but we will. When there is a quantitative restriction on your asset allocation then we all have a problem."
Another Staatsen related issue Borgdorff raises concerns the impact on reciprocal pension fund tax agreements with the US, whereby if Dutch pension funds are not taxed domestically then they enjoy similar treatment for investment activities in the US.
According to Borgdorff the Dutch government is looking to recoup about e100m from the commercial activities of pension funds via Staatsen.
He argues that if this happens the Dutch could also lose their fiscal agreement with the US.
“We told members of Parliament about this, saying that it could lose Dutch pension funds about e200m in tax in the US, so that would be about e300m that Dutch pension funds would lose in total.
“How would we then get this money? It would have to be from contributions because it has to come from somewhere.”
“The government says that there will be no loss of tax freedom in the US, but we don’t believe them and we are asking them to write it down so we can be sure!”
At the same time as lobbying the government on the outcome of Staatsen, the VB is working on a pensions governance code for its members to be released in June. The timing mirrors that of a government report on governance to come out in June also – surely no coincidence.
Says the VB chief: “We want something that says Dutch industry-wide pension funds can take care of their governance with good board control, etc.”
Much of this drive on governance has been driven by the findings of the Tabaksblat Commission on corporate governance, which Borgdorff points out now requires pension funds who don’t vote their shareholdings to explain why they did not do so.
This, he says, poses some issues regarding pension fund investments in their sponsors: “What do you do when you have another relationship with the company because if you are the pension fund of Shell you can have up to 10% of your stock invested?”
Answering his own question somewhat, Borgdorff notes that Dutch giants ABP and PGGM have shown the way in dealing with this by producing their voting records on their websites.
It’s been a busy couple of years then for the VB; faced with an unprecedented number of industry pension fund causes to fight for. But, as Borgdorff concludes: “That’s what we’re here for!”