Diary of an Investor: Plus ça change, plus c’est la même chose
We Dutch value consensus - perhaps we even need it in the way we need our dikes and polders to manage our low-lying lands. That may even be the reason we call our framework of social partnership the ‘polder model’.
But the fact is, a lot of lengthy arguments and horsetrading lie behind the smiles and photo calls of a major social partners’ agreement. This was certainly also the case for our Pension Agreement, which was signed by union and employer representatives in June.
Unlike my UK and US counterparts, the investment head of a Dutch pension fund must take into account rules shaped by social consensus. Before the new FTK was introduced in 2007 we argued a lot about the move from a fixed discount rate to one based on the swap curve. Then, when the new FTK became a done deal we stopped arguing and figured out how to make it work for us. We all agreed, you see.
The greatest effect on the Dutch pension funds was to force us to buy long-dated government bonds and to use swaps to match our liabilities against the euro swap curve. I recall a conversation with one pension CIO back in 2005. ‘Interest rates will probably stay stable in the medium term, so costly hedging strategies won’t be needed,’ he said. ‘We think that hedging in the long term is a zero sum game.’
How wrong he was: the drop in ECB rates in autumn 2008 led to a pincer movement. As the swap rate plummeted liabilities soared just as equity markets had dropped by 40%. Now the Pension Agreement proposes moving to a liability discount rate based on market returns.
Back in the office, my secretary tells me that Henk, our CFO, is on the line. ‘Pieter, what does this all mean for us? What exactly do they mean by market returns? We don’t want to end up with an over-optimistic discount rate that will allow us to assume higher returns and thereby artificially deflate our liabilities.’
I tell Henk that we only have to look at the US to see what we don’t want to do here. Many state funds were chasing market returns that were unattainable. Now comes the crunch as they have to contemplate unaffordable contributions or tax rises and pile on ever more equity risk as they seek to plug their gaps.
Henk replies: ‘We also don’t want the market returns to be a ‘risk free’ government bond return rate as this would artificially pump up the liabilities on our balance sheet.’
I continue: ‘One thing we really need to do is talk about our LDI framework. We might have to rethink our strategy if we are moving to a different framework and we will probably need advice, so will have to reckon with a consultants’ bill.’
Later, I read the Agreement in full. It is clear that the Pension Agreement is only advisory. So we might be able to continue as before.
Plus ça change, plus c’est la même chose, as my wife Jeanette likes to say.
Pieter Mullen is investment director at Wasserdicht Pension Funds