Dutch pension fund governance and investment risk strategies have rarely faced such tough scrutiny. Following the publication of the Frijns and Goudswaard Committees' reports, as well as evidence of closer oversight on the part of the supervisor, De Nederlansche Bank (DNB), a number of initiatives and recommendations are expected to shake-up Dutch pensions.
It is expected that social affairs and labour minister Piet Hein Donner will use these as part of his proposals for the FTK framework at the end of March 2010, while the Goudswaard Commiitee proposals could help shape the direction of pension fund contracts. And this change is occurring just as pension actuaries acknowledge longevity will increase pension liabilities.
• FTK should be based on a real, rather than nominal, cover ratio;
• No recommendation for a discount rate based on long-term swap curve average;
• New legislation is needed to improve pension fund board expertise;
• Pension funds must consider member risk tolerance in investment strategy.
Post financial crisis, the Fijns Committee has called for a change in the focus of the financial assessment framework (FTK) from a nominal to a real cover ratio formula that takes into account the true value of obligations and future inflation. This will be considered by the cabinet by the end of March, according to Maarten Camps, director-general for labour at the social affairs and labour ministry.
Coupled with the minimum cover ratio limit, which requires either changes to the strategy or additional funding should the limit be breached, pension funds face tougher constraints and risk management over long-term strategy.
"If this lower limit is breached, an adjustment of the pension contract would be required," the Frijns report stated, further arguing that this rule would provide clarity to participants about the moment they could face a cut in benefits rights or a demand for increased contributions.
Quality control has also been raised as a key concern, and Frijns recommended the government issue additional legal requirements on the expertise of a board to ensure they are fully in control of all phases of the investment process.
The governance of smaller pension funds has been challenged by Frijns and his report has suggested that smaller pension funds should periodically check whether their size is still sufficient to deliver an optimal board composition and proper implementation of governance processes.
The bigger change, however, will relate to demands for members' risk tolerance to be better considered in the investment process, and for subsequent investment policy and risk to be published and communicated clearly.
"Pension funds with many older participants should take less risks than schemes with mainly young workers, and they also must make clear choices about the risks to be run by the differing groups of participants," said report.
• Pension funds must scale down benefit ambitions;
• The risk approach must be adjusted to keep pensions affordable;
• Conditional retirement contracts should be introduced.
The Goudswaard Commitee of Dutch pension experts claims pension funds must scale down benefit ambitions and adjust their risk approach in order to keep the present pension system affordable.
Headed by Kees Goudswaard, the committee was asked by social affairs minister Donner to investigate the effects of the financial crisis and population ageing.
It concluded that there might be a need to revise the 70% target of (nominal) final salary at retirement - just as the Netherlands Bureau for Economic Policy Analysis (CPB) found pension contributions would need to rise from 13% of gross salary to over 17% by 2025, simply to maintain the present level of pension provision.
The Goudswaard Committee has also recommended employers and employees agree to rework pensions contracts by decreasing the propertion of benefit accrued.
It suggested a capped pensionable salary, or indexation linked to the consumer index rather than to the salary index.
A potentially bigger change for pension contracts, however, is the need to introduce transparent but conditional agreements, suggested the report. This would require each individual to meet certain criteria to receive their full pension at retirement.
"The Pension Act should be adjusted to allow for increased conditional pension rights, through innovative pension contracts with more flexibility in risk-sharing," it said.
DNB focus on culture and integrity
DNB has announced it will focus its supervision in 2010 on the effect that behaviour and culture has on the integrity of pensions funds and insurers.
The supervisor has already begun investigating whether the size of pension fund financial buffers has any connection with risk profile. And additional checks are being made to find out whether pension funds need to do even more work on their recovery plans.
The DNB wants to support good practice initiatives from the pensions sector. But to ascertain the market's status, an analysis will be conducted to test the consistency of promises made by 20 pension funds and the pension schemes' financial set-up in relation to indexation policy. It will also conduct 10 surveys into investment management and the valuation of complex products, and judge the application of governance principles at pension funds, as well as the process of decision-making by internal supervisors.
A separate DNB project, labelled Quinto, will review insurers' pensions administration and focus on individual pension claims of participants.
PME reforms governance
The €21bn Dutch metal scheme PME is altering its governance structure, but has refuted claims that the pensions regulator DNB ordered the change because the supervisor felt the board lacked sufficient oversight on its assets.
"Although in our opinion the legally required expertise is already available within the board, we are further increasing the collective knowledge on investment," PME said in a statement.
It will scale down its board to one layer, and abolish the pensions and asset management committees. The 13-strong board will also be downsized and meet more frequently, "increasing the strike power of the pension plan". It plans to focus on increasing the board's grip on asset management, improving its risk management and increasing its independent expertise in asset management.
Improved member knowledge
These developments have come not long after the Dutch pensions communications regulator, AFM, said pension scheme member knowledge has to be improved. Its own research found that over 30% of pensioners are disappointed with the pension income they receive at retirement.
"By encouraging workers to take notice of their individual pension situation in time, they will be able to make additional arrangements, in cases where there is a looming pension gap," said Harman Korte, managing director of the Financial Markets Authority.
"The image of the pensions sector will suffer and support for the system will decrease if people are disappointed about the difference between their expected pension and their actual benefits," he explained.
"Together with the pension sector, we must find out how we can persuade the consumer not only to look at their individual pensions forecast, but also find out how we can make the available information as clear as possible," Korte added.
The launch of the Pension Register, which is scheduled to start operating in 2011, could be an important step in this process, alongside the uniform pension statement (UPO) which has been mandatory since 2008. In contrast to the UPO single provider forecast of a worker's pension, the Pension Register will show an individual's combined pension rights.
The move is designed to try and show those who face the prospect of a lower pension income what they might be able to do to boost future benefits - the self-employed, defined contribution pension holders, low earners, divorcing couples and people with delayed mortgage payment plans are considered to be most at risk.