As the social partners are about to decide on the final draft of the financial assessment framework, the Dutch pension funds are holding their breath. They want the strict rules of the new regulator DNB to be watered down, because they consider them as an – unaffordable – overkill in security. As time goes by the prospect of a delay of the introduction of the Financieel Toetings Kader (FTK) beyond January 1 is becoming clearer. The coordinating pensions bill still needs a long way to go for its approval by parliament.
Among the most vocal in their criticism of the FTK have been the large healthcare scheme PGGM and railway fund SPF. PGGM wants to get rid of the stringent FTK requirement that a coverage of less than 105% has to be restored within a year.
“The rule must secure the nominal rights of members and pensioners in case of immediate closure of the scheme. But for a sector scheme like ours, there isn’t any risk of discontinuance”, argues senior director Karel Noordzij.
He believes the requirement is thwarting PGGM’s investment policy. The scheme has many young participants, which puts the accent of pension payments in the far future. That’s why the fund is able to take relatively high risks on the stock exchange.
More than half of PGGM’s assets are in equity and about 30% in bonds. This is considerably more than the average Dutch pension fund, which has invested about 35% in equity.
“The focus of the regulator is too much on short-term risks. Absolute security in the short run will provide insufficient pensions in the further future,” explains Noordzij. A short period for restoring will cause an average doubling of premiums to 30% and it will be very cyclical, which will lead to high premiums during bad times.
Noordzij does, however, agree with the period of 15 years for bringing the coverage up to at least 130%. The average coverage of Dutch schemes is 118% at the moment.
The railways scheme Spoorwegpensioenfonds SPF doesn’t agree with DNB’s demand for investing a larger part of its assets in bonds. “During this period of low returns, it will negatively affect the yields”, said SPF in its annual report. “It might even lead to a cut down of the schemes, instead of increasing the security for our members”.
According to SPF the new FTK rules shouldn’t apply to healthy pension funds like itself. “Long-term reviews show that schemes are perfectly able to judge the risks of their investments and to adjust their investment policy likewise”, it added.
The coverage ratio remained at 120% based on an interest rate of 2%, or even 165% based on the commonly used rate of 4%.
Because of its financial state, SPF is one of the few Dutch funds able to pay an inflation adjustment of 2%, without asking its members for cost-covering contributions. However, DNB’s demand for extra reserves will decrease the coverage ratio to below the critical 105%.
“The necessary restoration will require a threefold rise in contributions. Employers and employees won’t be willing to pay,” says director Albert Akkerman. He is in favour of covering the largest possible shortfall of the reserves, instead of stacking different requirements for reserves.
Dick Sluimers, finance director of civil service scheme ABP, says he fully supports PGGM’s vision. “The Financieel Toetsings Kader will be an improvement, because there is hardly an assessment framework for pension funds at the moment. But we still don’t agree with the short restoration term of a year if the coverage ratio falls below 105%, the required financial buffers and the extending of the age prognoses to the next 50 years”.
In Sluimers’s opinion the FTK proposals will lead to an overkill in security. “It will result in a very expensive system, and possibly lower pensions. It’s like a car with 10 bumpers and 20 safety belts: it won’t be safer, but much more expensive,” he illustrates.
The finance director of ABP – the world’s second largest scheme, with assets of e170bn – says he is hoping for a quick decision on the controversial FTK parts. “Because ABP will take part in the transitional scheme, we have agreed to submitting our restoration plan on 1 July. We could be running out of time”.
As far as the Association of Company Funds, OPF, is concerned, two barriers need to be broken down before it can fully support the assessment framework. “We still need clarity about the way the indexation will be financed,” says director Jeroen Steenvoorden. “What we don’t want is financing of the indexation, if it doesn’t fit within the conditional indexation promise. The premium should follow out of the total financial set-up of the pension scheme. And we want to be able to use the financial buffer for investments during high times as well. Especially if a coverage ratio of 140% has been accepted as a sufficient ambition level.”
OPF also objects to the contributions return limit, which at present only allows lowering the contributions at a full indexation. “If the social partners decide on a 50% indexation, then we should also be allowed to negotiate this within the contributions. The DNB should respect what has been agreed between the government and the social partners,” says Steenvoorden.
His views are shared by VB, the Association of Industry-wide Pension Funds, which predicts “a too high price for the last percentage points of certainty”. The organisation strongly disagrees with the regulator’s interpretation that a fund’s provisional promise of indexation should mean a full indexation, and that a contributions rise is only permitted if the scheme has made reservations for a maximum indexation. “The resulting coverage ratio will be considerably higher than the 130% set by the regulator,” argues VB. It wants to stick to the initial agreement with the cabinet on the FTK, which states that agreements and raised expectations are decisive.
VB says: “Each of these aspects apart, but surely together, will lead to more security than has been agreed between the social partners and the cabinet. The result will be explosively rising costs, which might have a negative impact on nominal pensions and the possibility of indexation,” it warns in a position paper.
According to VB, the prescribed mandatory premium rises - for solvency and indexation for possible liabilities and risks - have a double purpose. “So there is no need for adding-up these separate rises. Stacking will mean too high premiums and unnecessary capital.”
Another point of discontent for the VB is the FTK rule that schemes with coverage ratios of less than 105% should bring them up to the mark within a year. VB says: “This will often only be possible by discounting existing pension rights, or by multiplying premiums”. In VB’s opinion a longer recovery period will limit the negative impact for the members, while the risks of a temporary under-coverage will be small, and capable of solution by a limited contributions rise.
The application of the market rates - with its coverage ratio-affecting fluctuations - instead of the fixed 4% rate, will make it even more difficult to stay above the 105% floor, VB fears. “The lower market rates have wiped out the high returns on investments of 10% in 2004. The coverage ratios have fallen on all points. An interest rise will have the opposite effect,” it says.
Criticism has also come from academics. During VB’s recent annual meeting Guus Boender, professor of asset liability management at Amsterdam’s VU University, and Ortec partner, advocated moderating the strict rules of the FTK – for example, the restoration of a coverage ratio of 105% within a year. “Because of the already existing buffers, the pension funds still had a coverage ratio of approximately 100% after the crash of 2001/2002.”
W Kroes of the Labour Foundation, which represents trade unions and employers, voices support for the pension funds’ views. “We still want to avoid building up of buffers and contribution components. It will lead to an overkill of security, and therefore too much costs,” he notes. His organisation - known as STAR - is, together with the regulator, a main partner in the discussions, in which the ministry of social affairs and employment has the leading role. “Our aim is a matrix that is recognisable to the pension funds as well,” says Kroes.
Meanwhile, other sources have said that the required financing buffers and the extending of the age recommendations, might eventually disappear as part of a compromise. The mandatory restoring of the minimum coverage ratio of 105% within a year, however, will probably remain intact in the outcome.
A spokeswoman from the ministry declined to comment on possible changes. She points to the long way the new pensions bill, of which the financial assessment framework is a part, still needs to go before it can be debated in parliament. “We can’t be absolutely sure if the FTK can come into force for pension funds on
1 January as planned,” she stated. There has been widespread criticism within the pensions industry on the, in their opinion, too tight timetable being pursued by social affairs minister Aart Jan de Geus.
Gaston Siegelaer, FTK co-ordinator at the DNB, admits that time is getting short for the introduction of the assessment framework. “But a delay won’t be a disaster”, he says. “The pension funds can already participate in the transitional scheme for the accounting year 2006.”