Diary of an Investor: Dog days
It is the end of August. Holidays are a distant memory, the leaves are wilting on the trees and the children are going back to school. The euro crisis isn’t getting any worse and markets have even rallied. Welcome to the dog days of summer.
Catching up with some of the office post while sitting in the garden at home, I read a letter from a long-standing pensioner of the Wasserdicht Pension Funds. Mr Smit follows the policies of the fund closely and always attends our annual meetings. He doesn’t have much criticism about Wasserdicht, I am happy to say. In fact, he is very complimentary and blames all the Dutch pension system troubles on politicians.
Driving my two children to their school in Utrecht for the first day of the new term, the subject of pensions is on the car radio. Minister Kamp, the Dutch politician in charge of pensions, is blaming everything on Brussels.
The minister says the EU is meddling in our pension system by threatening to introduce Solvency II. As Brussels isn’t there to fight back, the argument is rather one-sided.
After the kids are safely back in school, I drive down to see my friend Frank, who is an official at one of the ministries and is always up to date with the latest politics.
So much for the minister, I think as I drive along the motorway. There are enough Dutch politicians trying to meddle in our pensions system already, without Brussels.
Frank and I have coffee in town. I’d like to find out from him what direction he thinks our country’s politics will take. Politics, in the end, will determine the asset allocation and hedging strategy of our Dutch fund to a large extent. ‘Since the two leading parties are neck and neck, it will really depend on which combination of coalition parties wins out in the negotiations,’ Frank tells me.
If the Socialists get their way, they will raise the discount rate so we don’t have to cut benefits for the elderly. If the Liberals have it their way, we will be stringent with the benefits so the young do not suffer. Will the other parties be somewhere in-between to share out the pain? Frank is not sure.
Back in the office, there are other problems. At Wasserdicht, our immediate problem is what to do with our interest rate hedges. When we introduce the new UFR discount rate we could be over-hedged.
I discuss the problem over coffee with Ronald, the chairman of our trustee board, after a long chat about Mr Smit’s letter and our confusing and chaotic political scene.
Ronald has some good advice: ‘Remember Pieter, actuaries’ cash-flow projections are not the same as cash flows in real life and politicians are not going to pay our pensions, however much they put our problems off till tomorrow by changing the discount rate.’
Pieter Mullen is investment director at Wasserdicht Pension Funds