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Pension system risks underestimated - DNB

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  • Pension system risks underestimated - DNB

NETHERLANDS - The current Dutch pension system carries more risks than expected because the existing management instruments are less effective than envisaged, De Nederlandsche Bank is understood to have acknowledged.

Consultancy firm Hewitt Associates claims the pensions regulator has said pension funds must either increase their risks hedging or move their pension promises in the direction of defined contribution schemes.

Officials at Hewitt who attended an industry briefing by regulators DNB and AFM said DNB does not seem to believe increasing financial buffers is a realistic solution any longer.

"A change of our pension system is inevitable, as risk reduction does not meld with steady benefits and contributions," commented Arnold Jager, consultant at Hewitt.

But in his opinion, increased hedging will raise costs and will have a negative affect on the build-up of pensions and future benefits.

"If defined contribution schemes are introduced for younger workers who have a longer savings horizon, it seems unfair as younger employees also contribute to defined benefit arrangements for their older colleagues," he said.

"We therefore believe that a system change should be aimed at a combination of both DNB alternatives."

The consultant has dismissed a third solution proposed by DNB, which suggests pension funds' decision-making should follow the financial situation.

"This pro-cyclical approach won't work well as pension funds are supposed to respond during lean times," he argued.

"We think it is much more effective if pension funds take solid measures during an economic boom."

DNB figures have shown that of 400 pension funds which have no risk hedge, 85% have a cover shortfall, according to Hewitt.

"On average, the schemes' funding ratio is some percentage points lower than that of our average pension scheme, which has a cover ratio of approximately 90%," it added.

According to the consultancy firm, DNB has noted there has been a long-term decrease of schemes' cover ratios.

"During the last 20 years, the funding has dropped from 170% to 90% on average," it said - a phenomenon apparently attributed to a structural decrease of interest rates as well as lower performance of equities.

"While DNB allows schemes to apply equity returns of 7.5% in their calculations, the actual performance appeared to be just over 6%," Jager stated.

DNB officials were unavailable for comment at the time of publication.

If you have any comments you would like to add to this or any other story, contact Julie Henderson on + 44 (0)20 7261 4602 or email julie.henderson@ipe.com

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