Learning to live with new rules
It’s been some time since occupational pension funds in the Netherlands have found themselves under the kind of scrutiny of the last few years.
On the whole, though, says Jeroen Steenvoorden, director of the OPF association for company pension schemes, the recent government discussions on second pillar pensions have been relatively good for OPF members: “We worked hard with the government in creating this new solvency requirement.
“In the past there only used to be a little in the law about solvency. Because of that the PVK had to fill this gap and make regulations.”
However, he notes that the discussion was not one-way-traffic for the government: “We argued that pension funds are a significant economic power and that it is very easy to say that they should meet such solvency requirements at all times, but this means that you also have to have very high buffers and this implies a cost.
“We were also afraid that the indirect effect of any strict law could be a shift to DC.
“Finally though, we were happy that the Parliament agreed with the new set of laws. They are stricter than five or six years ago, but they are more up-to-date with market valuations, etc.”
Steenvoorden says the OPF initially favoured a system with a 95% security level giving a 5% chance of underfunding and a transition period of 10 years.
“The government actually wanted to have a higher level of security, but they were afraid of the economic cost, so they went for 97.5% over 15 years to get to a 130% funding level at market value.
“On average if you look at the yearly cost it’s about the same as what we were suggesting, although it is a little bit longer in terms of timing so probably a bit more expensive in the end. We can live with the outcome of what has been reached, particularly when you think that the PVK was originally thinking of 99.5% as a suggested target.”
Steenvoorden expects his members to have few problems meeting the new requirements, noting that the PVK letter of September 2002 also required schemes to get to a 105% solvency level in one year.
“We have passed that year and the markets have developed well so I think that most schemes are above the 105% level.”
Asked what the supervisor could do in the case of non-compliance, he acknowledges the risk: “You’ve got the financing agreement with the company and there may be a need to increase contributions or take other measures. In essence though as a pension fund you need to be thinking how you avoid these kinds of situations.”
Steenvoorden believes the question of indexation was the most difficult issue broached by the government.
“For the last 20 years almost all pension funds indexed because of the good state of the markets. Even when the markets went down pension funds still had enough assets to index their pension payments, so in the minds of many people this was a normal thing for pensions, whereas it is actually conditional in the pension plan regulations.”
However, again he believes the government has maintained a healthy balance by retaining the conditional aspect, but allowing funds to create a reserve for indexation if they want. Had the government made indexation compulsory, as some parties in the Netherlands had suggested, Steenvoorden believes pension funds would have been able to take less risk and shifted more into bonds.
“At the same time indexation is not something that can be ignored and you have to do something with your premiums and investment policy to make some effort to move towards an indexation target and to communicate this to members.
“Above the 130% funding level indexation is still conditional for pension funds and this is a decision that should be taken by trustees who will decide if there are funds available.”
Steenvoorden acknowledges that there is communication work to do though on the issue of the disclaimer that will be used by pension funds to tell members that indexation is conditional.
“In principle though we’re quite happy with the disclaimer because of another issue which is the introduction of new accounting standards. It makes it clear to auditors and accountants that indexation is conditional and that this has been communicated to participants.”
Asked whether pension funds could stop indexing as a result of the get-out clause, Steenvoorden is optimistic: “No I don’t think so. I think on average, although it depends on the circumstances of course, that pension funds will try to give some form of indexation.
“There may be a few ‘black tulips’ that might be funds with sponsors that have a policy of not indexing in general. What helps though is that even if the buffer is not fully realised you are allowed to index if it is prudent. We hope that indexation can be paid by pension funds from investment returns or additional premiums.”
Aside from the recent regulatory discussions, pension fund governance is the other topic exercising the OPF of late; anticipating a government report on the subject to come out in June.
“We have a working group setting up guidelines for our own governance. At the same time the government is looking at pensions governance and one of the discussions is the trustee model.
“We are not unhappy with the current model, but there is the question of whether trustees should be compensated because at the moment they are professional, but not full time.”
Steenvoorden points out that company pension fund boards will often include the corporate finance director, but he concedes that some boards are very professional while others have to improve. “Investment committees, however, often have outside experts who are well paid and that is a model you see frequently.”
Much of the discussion on pension fund governance has trailed the findings of the Tabaksblat commission on corporate governance published in late 2003.
While much of Tabaksblat fell out of the pension fund sphere, Steenvoorden says the OPF was involved in lobbying on the proposal that institutional investors should have a shareholder policy and inform their members of their votes accordingly.
He explains: “This could be problematic for small pension fund, some of whom prefer to vote with their feet because the cost of active corporate governance can be expensive.
“In the UK, for example, pension funds have a relatively big share of what’s traded in the UK market, but Dutch funds are international investors and we don’t hold more than 10% of the Dutch market.
“The big shareholders here are the foreign institutions, not the Dutch ones, and you can’t force them to do anything.”
On the other big commission of the day: Staatsen, Steenvoorden has further concerns for his members.
“We agree with the intentions of Staatsen that pension funds should stick to their core business. If you are a pension fund you have to be careful with buying insurance companies, etc. because of the business you are in. There are some pension funds that have some problems and should quit some activities. The overwhelming majority of the corporate pension funds though don’t have any problem with Staatsen.”
Staatsen’s involvement with the investment process, however, he says is something different; particularly with the proposed 20% investment cap for real estate.
“It depends on the market situation, but if you have to ask permission from the PVK regarding what you buy then this could have an economic effect.”
Another issue, he points out, is that of subordinated loans, which he says around 30 pension funds took from their sponsors in response to the September 2002 letter from the PVK, but which may now fall foul of the European pension directive.
“This was proposed by the PVK as one of the solutions to improve the solvency of schemes.
“However, Minister Rutte is now saying that pension funds are not allowed to loan money and he is pointing to the European Commission directive. What I understand is that this clause maybe came in because some parties were afraid that pension funds were going to borrow money on the capital markets and then loan this to companies, etc so that they would be operating like banks.
“If this is not allowed any more and you have to pay tax on this then there are funds that are not in a good position.This isn’t a loan like equity where you have unfair competition, it’s just a way of funding the pension!”
Another area up for discussion under the interpretation in the European directive, says Steenvoorden, is pension fund use of interest rate swaps: “We see this as an area for risk reduction and efficiency in portfolios, and we think this should be allowed.
“These are two issues in the area of loans where we don’t think we should be interpreting the European directive too tightly, because this was not the intention.
Additionally, he points out that the directive explicitly backs the prudent person investment rule: “These loans are part of an investment process, so we don’t agree with strict definitions here.”