Interview: The bigger picture
Maarten van Wijk spoke to René van de Kieft , the incoming CEO of MN, about the current state of the Dutch pension system and its destructive focus on average contributions
It is regrettable that the Dutch government has already opted for a transition to a system of degressive pensions accrual, believes René van de Kieft, the new CEO of MN, the €110bn asset manager of the metal pension funds PMT and PME. “The debate about the average premium distracts from the real problems.”
The outline of the future pensions system provided by Jetta Klijnsma, the state secretary for social affairs, contains few concrete proposals. But this is a good thing, according to van de Kieft – who joined MN this May. “I am pleased that the Cabinet is offering the social partners in the Social and Economic Council (SER) considerable leeway for their assessment.”
The concept of an average pension contribution is not a problem, according to van de Kieft. “If you ask 20 people in the street about the average premium, most of them won’t have a clue,” he says. “It’s mainly a few professionals and political stakeholders who are dealing with the issue.”
The problem is moving away from the simplicity of a system that uses one contribution level for all members. For van de Kieft it is not clear why critics should emphasise inter-generational solidarity and not solidarity between participants with different levels of education, for instance.
“I am afraid that much energy will be spent on the discussion about the transition costs of possibly €100bn. Having a discussion about the amount and only then about who is going to pay for it seems to be a waste of time.”
So if the debate is focusing on the wrong areas, what does van de Kieft see as the most important problems?
“Two important ones have already been solved: the retirement age now tracks life expectancy, and sudden benefit cuts at times of stress are no longer necessary,” he says.
“The greatest problem is that we have a pensions system that is no longer trusted by participants, for instance because we cannot grant indexation despite 15% returns. People just don’t understand. The current system has become complicated, and everything has been closed off. How many trustees still fully comprehend the new financial assessment framework, let alone the participants?”
And what is the solution to the problem of high asset returns that are unable to keep up with the pace of liabilities growth? “We would need to adjust the financial set-up,” replies van de Kieft. “Discounting liabilities at times of low interest rates spoils the outcome.” What could help is increasing transparency of the pensions contract, he says, clarifying the risks to the participants as well as the sponsor’s role.
“The more opaque a contract, the more precautionary mechanisms are needed throughout the whole pension fund, resulting in a stricter supervisory framework. We mustn’t add another layer on top of the existing system; we should start from scratch and figure out how to organise income on top of the state pension while still sharing certain risks.”
Bond markets have been volatile of late. What does van den Kieft say pension funds should do? “While interest rates are extremely low, pension funds have invested a large part of their assets in fixed income and now have low funding ratios. Rising interest rates would be a serious stress scenario as the investment that is supposed to provide security would suddenly generate a loss. Although pension funds are seeking additional returns in niches in their fixed-income portfolios they should be allowed more leeway to deviate from the standard rules so they can establish their own risk budget.”
What should schemes do if they do get more wiggle room? “I don’t have a general solution, but a lower-interest hedge should certainly be considered. A smaller pension fund could switch more easily to a dynamic hedging policy, although this would be more difficult for large schemes.”
MN recently sold its UK operations to Kempen after seven years. What has MN learned from that experience? “Looking back, it has been a useful period,” van de Kieft responds. “We have experienced another market, which has kept both our asset management and fiduciary management on its toes. The UK market has made progress in terms of internationalisation and in its move towards defined contribution. The financial outcome was positive on balance.”
MN’s withdrawal from the UK forms part of a re-evaluation of the company’s activities, a project known as ‘MN 3.0’ within the firm. “Together with the stakeholders we have taken into account the business case and the voice of the participating pension funds in the process, as well as the preconditions for the IT,” van de Kieft says. “The financing has been mapped out. The decision needs to be made about whether the costs must come at the expense of the returns for the shareholders or be charged as expenses. What counts to me is that the agreement is clear and that MN can operate as a financially sound business. I expect a ‘go’ by the end of the summer.”
One MN shareholder, the metal scheme PME said in its annual report that MN’s service had not met its target. How does van den Kieft respond? “Our IT was primarily developed for our other large shareholder, PMT. PME does not optimally fit within this system. As some processes still need to be done manually we must increase the level of automation, including the improvement of the communication chain.” MN 3.0, he emphasises, aims to revamp the whole administration process.
PMT and PME are already subject to a single pension arrangement, covering contributions and benefits, and there has been regular talk of a merger between the two. How will that affect MN? “Two schemes means two pensions bureaux to deal with and two pension funds that require memorandums and answers. It also means two websites as well as dual communication.” A single arrangement would mean a streamlined portfolio and lower asset management costs, so van de Kieft is positive.
“Moreover, the manufacturing sector, alongside the civil service scheme ABP and healthcare scheme PFZW, could express itself more clearly in the debate about a future pensions system. And members would benefit from costs-saving, simplicity and improved service.”
While the pace of pension fund mergers increases, this would not be simple. Much black coffee will doubtless be consumed as the various social partners hammer out terms.
A version of this interview appeared in July on the website of our sister publication PensioenPro, www.pensioenpro.fd.nl