Interview: Corien Wortmann-Kool - ABP
ABP chair Corien Wortmann-Kool tells Leen Preesman about the need for speedy change to a new pension system and of the need to restore the trust of the fund’s 2.8m members
Corien Wortmann-Kool – chair of the €345bn civil service scheme ABP since January 2015 – says the switch to a new and sustainable pensions system must happen as quickly as possible. It certainly should not involve a long transition process as with the voluntary early retirement system (VUT). Contributions are still being paid into VUTs even though it was phased out years ago.
“A speedy shift would allow us to quickly explain the new system to everybody in order to create support,” Wortmann-Kool says. “Therefore, we must hurry to flesh out the new structure. If we keep on talking for too long we run the risk that both participants and politicians pull back,” she says.
Wortmann-Kool does not say how long she thinks the transition should last. However, she has said the process must be executed efficiently and in one go because “it will be very difficult to reverse these kinds of adjustments”.
As far as ABP is concerned, a new system could focus on the accrual of individual pension assets as long as this comes with collective risk sharing. “For lasting system stability, this solidary should at least consist of shared longevity risk, investment risk as well as intergenerational risk,” says Wortmann-Kool. “And the new rules should also allow participants to make choices, such as for more or less pensions accrual, or earlier or later retirement.”
A quick shift towards a pensions system based on premium and capital accrual is, according to the ABP chair, also required for another reason. “Such a design is much less subject to interest rates. It will not only rid us of the entire circus of coverage ratios, but also of the current problems with value transfer between schemes. It would be much easier for participants to move their individually accrued assets. Moreover, the new structure would increase the chances of maintaining purchasing power.”
However, in Wortmann-Kool’s opinion, the biggest concern is restoring confidence among ABP’s 2.8m members. “They must be told the true story about what they can and cannot expect from us. They need to know that promised purchasing power is conditional and that it is subject to interest rates, developments in the financial markets as well as the financial assessment framework.”
As a consequence, Wortmann-Kool considers regaining participants’ trust as her key task. She expects that a new interactive online portal will assist in this process; this website shows participants individual information in layers, including net amounts. For instance, it offers insight into the impact of a ‘high-low design’ in the benefits phase, which allows for an initial higher payment at the expense of future benefits.
Wortmann-Kool is aware that her message has not become more palatable over the last year. ABP’s coverage ratio dropped to 99% at end-November due to continuing low interest rates, the reduction of the ultimate forward rate (UFR) and the introduction of the 12-month funding average, the new criterion for indexation and rights cuts. “As a consequence, we probably need the entire recovery period to meet the required target of 128%,” she says. “And given our current financial position, indexation is not on the cards for five years.”
Recently, the ABP board indicated that the regulator, the De Nederlandsche Bank (DNB), was concerned about the significant gap between the current and ‘policy’ (12-month average) coverage ratios, and that the pension fund had based its recovery plan on the maximum allowed assumptions for returns. However, Wortmann-Kool does not see this as too optimistic and notes that the DNB has approved its recovery plan.
“We presume total annual returns of 5%, whereas we have generated returns of more than 7% on average since 1993,” she argues. “Our risk models and asset-liability management studies also indicate that our assumptions are sound for the future and that we can expect stable returns thanks to the diversification of our portfolio. For this purpose, we have held on to our private equity investments, for example.”
Wortmann-Kool also puts into perspective the ABP board’s conclusion that, if last year’s disputed salary agreement between the government and the unions is implemented, the scheme’s ‘premium funding’ – the indication of how the premium contributes to recovery – would drop from 80% to 67%. “As a consequence of low interest rates, our strongly increased assets and ageing within our participant population, the contribution is increasingly less relevant in the short-term,” she says. “Moreover, these figures don’t have eternal value as the variables, such as market rates, change constantly. Therefore, we base our premium policy on the entire situation.”
The salary agreement included a switch from salary indexation to consumer price-based inflation compensation. Does Wortmann-Kool feel that ABP is being used to meet the government’s target for budget reduction? “We respect the agreements between the social partners about the pension plan,” she replies. “As a pension fund, we are not involved in this. We just implement the arrangements.”
“If ABP can conclude an investment charter with the Dutch government, we are willing to invest an additional €6bn in sustainable projects, such as thermal grids, education-related property and biotech startups over the next five years. However, we are not a cash machine”
Wortmann-Kool was a member of the European Parliament for the centre-right European People’s Party group for 10 years, but remains the group’s deputy chair. As an MEP, she was a member of the committee for Economic and Monetary Affairs, covering the pensions (IORP) Directive, supervision as well as inancial markets legislation. “The experience and expertise acquired there is an added value for ABP,” she comments. “It offers us a better view on and understanding of what ‘Europe’ is doing.”
In the opinion of Wortmann-Kool, the European Commission is not interfering with Dutch pensions. “The review of the IORP seems to respect the Dutch system,” she says. “However, we always need to keep up our guard of course.” She acknowledges that Europe has saddled the financial markets with extensive legislation, but thinks that this regulation is good for stability.
She adds that the EU offers pension funds better opportunities for attractive investments in infrastructure and property through the €315bn Juncker Plan. However, she emphasises that national governments must be consistent in their subsidy policies to get pension funds on board. “If ABP can conclude an investment charter with the Dutch government, we are willing to invest an additional €6bn in sustainable projects, such as thermal grids, education-related property and biotech startups over the next five years. However, we are not a cash machine. Any investment will be based on a solid business case.”
Wortmann-Kool declined to comment on the economist Martin Pikaart’s recent book which was critical of the ABP. She says she does not share Pikaart’s conclusions that the pension fund adopted a new policy in 2003 by reducing the interest hedge on liabilities, financing indexation from surplus returns as well as no longer discounting liabilities against real interest rates.
“We still base our policy on fair and bad weather scenarios as well as on ALM studies,” she responds. “This means that long-term prospects, not the current situation, dictate our hedging policy. Had we focused on secure government bonds, as Pikaart suggested, our current contribution would be higher, and inflationary risk would not have been covered. We would have had the certainty of low returns.”
In her view, Pikaart’s book reflects the benefits of hindsight. “ABP’s financial position is hardly different from other large pension funds and financial organisations,” she says.
A Dutch version of this interview first appeared in our sister publication Pensioen Pro