Sections

Pushing ahead with reform

Aart Jan de Geus: “At the moment I got this job but before I knew what would be in my in-tray, I wrote myself a memo outlining my view of the system. I wrote: ‘Pension funds are under pressure because of the unsatisfactory results of their equity portfolios after years of very positive performance. In the period of very positive results equity performance enabled funds to reduce premiums. Ageing is growing continuously so a rise of premiums is inevitable. At the same time the Dutch system is under pressure from Europe, while in our own country there is criticism of the fiscal possibilities that our system offers. The influence of the elderly is not managed adequately. I am proud of our system but to stabilise it for the future this government has to come to a new national pension agreement, also with the social partners’.”

George Coats: You talk of stabilisation, what are the bits of the system you want to preserve as you stabilise?

AJdG: “We want to stabilise the understanding that we have a vibrant system, that we pay a state pension, the AOW, up to the level of the minimum wage so that everyone in the Netherlands, working and not working, can have a guaranteed minimum level of security, and that on top of that we have a private funded system.
“The state pension system is pay-as-you-go so it has no pension funding and therefore is not vulnerable to financial market fluctuations. But is very vulnerable to ageing. And the capital funded part gives stability against ageing risks. So, we have the best of both systems.
“Second, our system is the result of a fruitful sharing of responsibility between government and the social partners. While the government guarantees by law that there is a compulsory system that delivers at least a basic level of existence, anything more, which is in fact a postponed wage, is the responsibility of the social partners.
“Third is that it gives the social partners room, within certain guidelines, to fulfil their own preferences. The government can support an agreement on postponed wage, though the granting of a tax advantage, because society as a whole will profit from it. In addition we intervene in the free market by confirming the circle of participants that the social partners define for themselves. For example, if the construction industry has a collective bargaining agreement between the employees and the employers, then all construction firms, including those that are not members of the employers’ organisation, are bound by that agreement. We support that because we don’t want to allow some firms to undercut the others by not making contributions for its workers’ old age pensions.”

GC: Dutch pension funds feel they are under pressure; the market downturn at the beginning of the decade saw no the pension fund collapse but it has triggered an over-engineered response from the government, so that to preserve the system you are endangering it. Why the hurry?

AJdG: “We consider it very urgent that pension schemes for people under the age of 65 change from collective agreements to optional agreements where people the choose for themselves whether to take their pension at 62 or work on to 65 and get a better pension. Before I came into this job many schemes held that you could only touch this money if you stopped work at 62. But for the sustainability of our demographic situation and our labour market we need people to stay in the workforce until 65.
“In addition, like all Dutch, pension funds like freedom. But what should be the rules of supervision in financial terms, how much capital do you have to reserve if you have an agreement like this or like that? We discussed this with the sector and with the social partners and we arrived at a solution that I felt met the concerns of the social partners.
“And although people who work in pension funds have said that we have over reacted, it became evident from the supervision side that the level of the future benefits that were being promised to the participants should be defined very clearly. If you say, ‘you’ll get a pension of so much and possibly something more’, then you have to have a capital reserve of the cash value of this pledge. But if you say, ‘probably your pension will do this on the basis of previous performance and expectations of China and so on’ then the supervision rules say ‘no problem, you must make reservations for this’.
“However, then the pension funds protested, claiming that it was too much but when we demand that they communicate to their participants that they are not making a promise, although where there is enough money they may give it, they reply that they don’t want to communicate such an unpleasant message.
“We have told them that if the message is unpleasant, decide on another message, and they have countered with ‘we are used to give an indexation every year and excluding calamities this will be the case for the next years’. But then they must define what the calamities are, and their reserve must be adequate to meet them.
“At that point it becomes evident that the real problem is that they want to communicate security but they don’t want make the reserves. And that’s the real debate now.
“And why is the debate urgent now? Because in the past the difference between what was necessary for indexation and the profit that they made on their equities was so much in their favour that there was no case at all. But the crash of 2001 and 2002 has taught us that it is necessary.”

GC: There have been crashes before. When you have an industry with a 40-year horizon why impose a four-year timescale in which all has to be decided, agreed, legislated and implemented? On solvency, for example, banks must be solvent every day; pension funds must be solvent over 40 years.

AJdG: “Why the hurry? Because the changes in our labour market, our economic position, our competitiveness is over estimated. We have to reform, we have to get people back into the labour market, we have to wake up after the years when we thought that everything went on by itself and that if you bought €100 abroad then 10 years later you could get €1,000 back and we thought that we were awake and Asia was sleeping. We have to change, we really have to change.
“Wake up pension funds. We need a labour market and we need it now.
“We came to an agreement with the social partners and then we asked for a very strong effort from the pension funds, especially in adapting to the idea of extending the working age to 65, and then we asked them to implement this in one year where normally it would take five-to-10 years. We are trying to make 2006 the year of transformation and in this year everyone who says they have decided to adapt gets another year to do the paperwork and so on. Then they have to declare to the fiscal authority that they have decided to adapt. So, I am aware that we have asked for the utmost, but not the impossible.
“On the issue of financial security, we have decided that if a pension fund is under the level that we have asked then it has additional years to come back to solvency. I don’t think this is a political debate, it is more a debate among experts.”

GC: You’ve said that they must have everything ready by 1 January 2007. When is the next election?

AJdG: “That will be in May 2007.”

GC: That raises the suggestion that the rush is for party-political reasons, so that you can go to the electorate and say ‘I’ve secured your pensions’.

AJdG: “If you are convinced that you have to reform, then four years is very short to take the necessary steps, but if you want to reform you have to pass the point of no return during one parliament. If you do not then there may be a new political constellation, a new debate and blah, blah, blah. So speed is very necessary.
“I don’t say that you have to realise everything, and that’s why we said that people aged over 55 will not be affected and we have to build in transition periods. But if you speak about the long-term provisions, laws and the political decisions have to be made in time.
“You have to make changes within the period of the match, and the time of my match is four years. If I score a goal after the referee has blown the final whistle, then people say ‘let’s see the next match’, and this goal does not count.
“But my main objective is to get a system that is solid and that is sustainable both for now and the next generation. We have already waited too long and if we postpone it further, will the next initiative be on time? If we do not answer ageing and global economic challenges, if we do not adapt in time, then we will have to make much more radical changes in the future and take much more unpopular decisions.”

GC: The law of unintended consequences in pension reform ensures that when governments make policy decisions they trigger unforeseen changes down the line. The new initiatives are driving pension funds to move into bonds at a time when it is not a good decision from an investment point of view, so asset management decisions are being made to meet a regulatory requirement rather than a market demand.

AJdG: “The only thing I can say to this is that it is a debate between experts. Of course I have to make a political decision on it and I made it the moment that there was an agreement at expert level.
“Maybe some people who work in pension funds are now disappointed about losing some freedom, but my statement on this point is that I had no political reasons to form the nFTK in any other way than I have because the format was based on discussions and agreements between experts from our supervision authority, our department and the social partners.
“I cannot satisfy everyone and of course in the case where there such an agreement has emerged I would be a fool if I did not give it my political endorsement, so I did. And at that point some people who had wanted another outcome or who lost their point in the debate came to me and complained. That’s a politician’s role.”

GC: I’m interested in your relationship with your partners in the coalition. Finance minister Gerrit Zalm (of the Liberal Party) has been outspoken on pension issues but it often seems you’re more right wing than he is – some of your initiatives would have seemed more appropriate if they came from a Liberal.
AJdG: “I recognise that I am working more along the lines of some concepts and that Zalm is more pragmatic as a style. But more than Zalm I am fighting for a solid system and solutions that are sustainable. And I recognise also that if experts agree something then everyone who is dissatisfied of course comes to me and complains.”

GC: The Liberals want to remove trade union representatives from the boards of pension funds, claiming that they are not educated enough in financial matters to perform their role adequately. Is that something you’d like to see happen?

AJdG: “I think that the level of expertise among the representatives of the social partners who take part in pension fund governing bodies is not high enough to make decisions on all kinds of asset management. But their responsibility is then to make decisions based on expert opinions. That is what I see as the solution to that problem. It is obvious that asset management is more complex than it was previously because there are other issues to consider. But it is essential that the social partners are the owners of the pension fund and that they should be the decision makers about the regulation of the fund and about what to do with the money, but based on expert opinion.
“Second, I see a division between pension funds as a social-political body and a professional firm that gets the best results in the financial markets and has the lowest costs for administration. The professional side of the financial organisation can serve the other. And this is a reason for me to support having trade unionists in the governing bodies because in my view this is not the place where the financial knowledge level has to be that high.”

GC: People tell me you are a man with a programme but not a vision for pensions, and that your vision is the levensloop.

AJdG: “That is the classical way that people who do not feel very comfortable with the programme and who are dissatisfied with the programme’s timeframe raise questions about what was my vision. But people who know me better know that my vision is very clear: it is to have a sustainable pensions scheme and to achieve a very fast adaptation of our labour market.”

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2467

    Asset class: Search for a broker (mainly ETFs).
    Asset region: Global.
    Size: 250m.
    Closing date: 2018-08-28.

  • DS-2468

    Closing date: 2018-08-24.

Begin Your Search Here