All hands on deck for this system
Despite being in the job for not more than a year, Dirk Witteveen, chairman of the Dutch Pensions and Insurance Supervisory Authority (PVK), made a name for himself – for better or for worse – when he wrote his infamous solvency letter to Dutch pension funds in September 2002.
The PVK letter was the precursor for government action on second pillar pension funding levels in the Netherlands, but as Witteveen notes, he was taken back by some of the ill-will visited upon him by the country’s pensions sector.
“It’s not in my character to stir deliberately to get a reaction and I was a bit surprised, I have to say, by the reaction because it was quite intense.”
Interestingly, Witteveen explains that the PVK had tried to send out the letter one year before: “We drafted a letter with the pension fund organisations that left my desk on the 7 September, but after September 11th, of course, we didn’t want to have any disturbance in the market and so the letter was not sent.”
In the PVK’s defence, he points out that the distribution of the letter was not made lightly: “We still were confronted with the issue though and we spent the following year discussing whether we should have a letter or not.”
Nevertheless, with hindsight he reflects that the letter’s publication forced pension funds to sit up and take notice of some fundamental concerns within the Dutch pensions arena.
“First of all we passed the marker saying that the cornerstone of good pension fund governance was to have a premium that covers all the costs.
“The second big advantage was that we managed to bring far more transparency into the debate on indexation. If you listen to the ECB saying that price stability is more or less 2% inflation each year then that means a pension should be indexed at least a bit otherwise it will decrease and leave you in poverty when you are 80.”
Witteveen says the PVK’s aim was transparency, believing that pension funds should be as consistent with their internal rules as the messages they give out to their members.
“Previously funds were flexible in looking at indexation, although they were welcoming clients and telling them they could have an indexed pension.
“Now they have to write telling employees whether they have money for indexing or not.”
In early April, the PVK tried to demonstrate what had happened to the historical coverage ratio of Dutch pension plans by drawing a timeline starting in the early 1990s all the way up to 2004.
Witteveen explains that it shows pension funds with a coverage ratio of around 200% at the start of the 1990s, meaning that even with indexation, buffers and solvency margins, they easily covered a full pension package for Dutch employees.
By 1994 this had dropped off quite dramatically, he says, reflecting inaction over the lowering of long-term interest rate, despite the fact that the stock market was very much in the ascendancy.
“People thought, OK, because we will have good returns we can deny the point that long-term interest rates are going down and that therefore the market value of the liabilities is increasing.
“However, by the second half of the 1990s the fundamentals of the crisis were apparent. These would later come out into the open when I wrote my letter. The letter was the outcome of something that had been happening for quite a while.”
Witteveen says he believes that in a couple of years it would be useful to have a thorough investigation of what happened, but for now, he adds, it’s “all hands on deck” to shore up the system.
Nonetheless, he says he also appreciates the concerns of pension funds, which in the late 1980s were under huge pressure from government saying they were overfunded and had to slim down. “I can understand why pension funds like PGGM get angry and say that in the late 1980s they were being told to reduce premiums because the labour costs were too high and yet are now being blamed for being underfunded!”
Regarding the new pensions framework being adopted by the government, Witteveen calls it a “good step”, adding that junior minister Mark Rutte has done well to advance a delicate issue.
“Perhaps we could have done with it in 1995 and not 2004, but that’s hindsight!”
However, he also raises the point that with the proposed safety ratio – 97.5% with a 15 year recovery period – it could be possible that more than 50% of Dutch pension plans are in a state of ‘recovery’ at any one time, meaning that many will not be indexing pensions.
“This depends on what the policy will be. Until now with less strict regulation the pension system was always willing to steer away from the bottom line and provide more in the way of benefits.
“Even after the stock market crash half of Dutch pension funds were in no danger at all.
“We want to have a solvency margin but we want pension funds that are as clear from this as possible.
“I think that if the pensions sector as a whole continues doing what it is now, then there will just be a few pension funds for various reasons that are close to the bottom line and will have to talk to the supervisor. The others will want to provide as good a pension as possible for as low a price as possible.”
As if being in the firing line once wasn’t enough, Witteveen also sat on the controversial Staatsen Commission, another matter he believes has provoked an “uproar” it didn’t deserve.
“I’m glad that Mark Rutte supported the findings of Staatsen for the most part.”
But, he acknowledges that there are unresolved areas such as real estate allocations for pension funds where they may own property companies or whole buildings, which have been called into question by Staatsen and where the government will have to find a resolution.
“In the meantime pension funds should not be entering into an area where they have difficulties by perhaps being a real estate developer.
“A pension fund should not be a real estate developer because that is not their business. They should be an investor.
“The same applies with venture capital. Pension funds should have the opportunity to be in the market as an investor but not as an entrepreneur.”
Asked whether he believes that Staatsen could have the major impact on pension fund services that some have predicted, Witteveen is strong in his rebuttal.
“Absolutely not! Staatsen made a survey of the present situation in the market to see what would change after full implementation of the report – and the impact was next to nothing.
“It can’t have a major impact. If there has been one, it concerns plans people had and never announced.”
Referring to the oft-cited problem of ventures like ABP Loyalis, he claims that any conflicts of interest were settled “two to three years ago”.
“I think ABP Loyalis, for example, is almost 100% in conformity with the Staatsen report.”
Despite some of these issues, Witteveen says he still considers the Dutch pensions system to be one of the strongest in the world.
The PVK chief believes that facing up to the difficulties of the last couple of years can only consolidate that.
“Strong belief in the system is essential,” he concludes.