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PGGM sees problems with new reference framework

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NETHERLANDS - Dutch health care and social workers’ pension fund PGGM has said there are problems within the agreed one-year recovery decided in the new financial reference framework, Financieel Toetsingskader.

The agreed framework, in which pension funds are required to increase their coverage ratio within the next 15 years, to around 120% is seen as feasible and workable.

However, the needy to put current and future pension liabilities at market value, was likely to constrain the overall performance of a fund.

PGGM’s new chairman Karel Noordzij told IPE: “We are against a possible short term view, as presented by the government and the pension_regulator PVK.”

“This short term view will only be increased if a strict coverage ratio regime will be combined with a variable market valuation of liabilities.”

Noordzij said this would “clip the wings” of a pension fund and have very negative financial results in the end. The demand that any negative coverage ratio should be rectified within 12 months was “unrealistic”.

To counter this, a extreme premium increase was seen as the only solution. Overall, the Dutch pension system is based on long-term strategic investment planning.

The fund’s chief investment officer Roderick Munsters backed this view. He told IPE that 2003’s 15% yield on investments was very positive - especially in comparison to the -7% returned in 2002. This had resulted in a coverage ratio of 105%.

If the recovery period is implemented very strictly, Munsters said, then future fluctuations would require higher premiums. If interest rates fall by one percent, the overall coverage ratio would fall 18%, necessitating a high premium increase.

PGGM’s current portfolio still has a 49% allocation to equities, which the fund says has been the basis for its positive performance in 2003. Munsters reiterated that the total volume (in percentages) will not change the coming years.

The 10.3% return on commodities and equities’ 23.8% were still an integral part of the overall success. Possible fluctuations in commodities (such as oil price) are not covered by PGGM, as the expectations are that one sector’s decrease will be covered by the better performance of other investment sectors.

Referring to the current debate on funds’ commercial activities sparked by the Staatsen report, Munsters also stated that PGGM still sees investments as the core business of a pension fund. The latter needs a large leeway and no restrictions to reap the best results of its investments.

A strict interpretation, hinted at by Minister of Social Affairs Mark Rutte, would not be positive and was even in conflict with existing EU directives.

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