The Netherlands: From FTK to FBK
Jean Frijns, Guus Boender and Theo Kocken inspired a lively debate at the IPNederland conference in June. Leen Preesman and Mariska van der Westen report
The Dutch pensions system stands on the brink of wholesale reform. In June, 130 pension fund trustees, CIOs and investment consultants attended a conference held by IPE's Dutch sister publication IPNederland to discuss how pension funds can achieve their ideal - fair and sustainable pensions - within the new pension framework as outlined by social affairs and labour minister, Henk Kamp.
The day's discussions centred on a number of challenging statements put forward by pension experts Jean Frijns, former CIO at ABP; Guus Boender, co-founder of Ortec; and Theo Kocken, chief executive at Cardano. The opinions of the three experts initially diverged quite a bit.
Frijns, professor of institutional investment at Amsterdam's Free University (VU), stressed the dangers of too much government interference and called on pension funds to switch to real conditional pension arrangements, even if that would mean going to court to defend the decision to subject past accrued rights to the new rules.
Boender, professor of asset liability management at the VU, advocated changing the real conditional contract so it would more closely resemble the existing nominal arrangements, most notably by introducing some form of ‘staggering' in the way investment results are dealt with, allowing real schemes to stagger payouts depending on financial solidity. Kocken, professor of risk management at the VU, suggested that nominal arrangements should be changed to more closely resemble real conditional contracts, particularly by allowing financial ‘shocks' to be spread out over a 10-year period. He pushed for allowing nominal schemes to spread pain and gain in a more "symmetrical" way. "This means nominal schemes would be allowed to spread cuts over time," he said.
Experts offer alternative reform
In the course of the debate, the various perspectives began to converge until, in a surprising twist, the various approaches culminated in a single viewpoint, presented jointly during the final panel session. Frijns, Boender and Kocken presented a joint alternative to the pension-system reform outlined by Henk Kamp.
"The current proposals, as put forward by minister Kamp, involve a nominal system and a real system existing side by side, which is hard to work with from a practical standpoint," said Frijns. "This creates tremendous complexity, so we would like to put forward an alternative."
Over the course of the conference it became clear that the pensions industry is concerned about the complexity of the two types of pension arrangement described in Kamp's outline. In addition, the proposed real conditional contract is lacking several features of the existing nominal arrangment that experts would prefer to keep, "particularly the possibility to apply ‘staggering' which would allow schemes to pay out less in good times in order to have to make less severe cuts in bad times," according to Guus Boender.
By the same token, the proposed nominal arrangement in Kamp's outline lacks several features of real contracts and could be significantly improved if those features could be added, noted Kocken. "The real contract, as set out in the Pension Agreement, allows for financial shocks to be spread over a 10-year period. But in the nominal arrangement, shocks have to be dealt with in just a few years by cutting benefits and accrued rights - while windfalls are dealt with much more slowly. This means older generations are treated unfairly. Therefore, we should apply the method by which shocks are spread over time equally in nominal contracts as well."
But if the real contract is changed to more closely resemble the nominal contract and vice versa, the differences between the two types of arrangement disappear. In that case, we could make do with one single type of pension arrangement and there would be no need for a complex system overhaul - a relatively straightforward adjustment to the financial framework (FTK) would suffice, according to the three experts.
The idea is to wed the very best of the nominal and real systems in a way that leads to a fair and generation-neutral division of pain and gain, according to Kocken. "Then we would not need an entirely new pension arrangement. You'd simply get a single new supervisory framework that is simple to explain to anyone."
"And to keep it really simple, we will not call the new system ‘FTK' but ‘FBK' - for Frijns, Boender, Kocken," Frijns concluded jokingly.
The day-long discussions led to a list of six recommendations, which were formally presented to the Pension Federation's director Gerard Riemen.
Concerns raised by Frijns - who suggested that politicians and authorities would increasingly try to gain control of the country's €800bn in pension savings - led to the recommendation that the Pension Federation should spearhead a vigorous defence of the legal standing of pension schemes as private schemes.
In addition, the umbrella organisation should push for allowing the "staggering" methodology in real schemes, while nominal schemes should be fair, complete, and "symmetrical" in the way benefit cuts and indexation advantages are distributed, they said.