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Give funds freedom to repair damage

The fall in the equity market performance meant Dutch pension funds (excluding insurance companies) lost E34bn in the first nine months of last year. This is the reason for the Dutch pension funds regulation authority for pension funds (PVK) to publish its letter at the end of September formulating the most important points for testing funds’ financial position. This contains a number of additional points to the existing rules. The pension funds are directed to think about measures to restore their financial balance.
The Dutch pensions watchdog took these measures because the weak equity market performance has eroded pension fund reserves as a percentage of their liabilities. More than 100 of the 1,000 Dutch pension funds at the end of September 2002 by then had insufficient cover ratios (at that time less than 110%).
Pension funds have as their goal the payments of pensions. That means that there should be sufficient assets to guarantee the build-up of pensions even if there are no payments from active workers. If a pension fund is no longer able to pay out the pension on a longterm basis, the PVK is legally instructed to transfer the reserves to an insurance company.
The PVK will check every pension fund on the issue of its solvency for pension payments. The current pension law gives only general guidelines. The PVK looks after the structure of liabilities, the risk profile and the policy pension funds have developed for their premiums, assets and indexation. Based on scenario studies, the PVK will be able to gain a view about the professionalism of the trustees and the managers and be confident that the pension fund will be able to fulfil the requirements over the long term. The PVK has announced that funds should be clearer than heretofore whether indexation of pensions is unconditional.
As a result of the PVK’s strict rules, pension funds may be forced to raise their premiums, which will increase labour costs and as a result hit the results of sponsor companies. A recent study undertaken for the three main Dutch pension fund bodies shows that the new requirements of the PVK could seriously affect the Dutch economy. They predicted that wage costs will rise by 5.4% and 7.8% in the private and public sectors respectively. Corporate profits would fall by some 16% and inflation rate will rise an extra 1.2%. In the period up to 2006, investment levels would fall by an additional 4.2% and 138,000 jobs would be lost.
It also could trigger a drastic change if the Dutch pension system converts from DB to DC. Overall, I think that the Dutch are not like the UK and Ireland – interested in a full change from DB to DC plans. From one Dutch insurance company, I learnt that the new business for DC plans last year fell to about 25% of all new business. The previous year the percentage was over 60%.
It would be more realistic if the PVK left more freedom for the pension funds to repair the under-funding and reactions of the PVK and the Minister of Social Affairs show that the PVK is willing to accept tailor-made solutions for every individual pension fund.
The change of longterm premium policy, asset management and the indexation policy are long term decisions and can not changed in a short time. The forced selling of stocks is not an attractive prospect, but nevertheless many pension funds will become increasingly interested in investing in asset classes with lower buffer requirements.
Max Bogaard is a freelance pension consultant and director general of EURACS, based in the Netherlands

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