The Netherlands: United in face of challenges
The financial crisis triggered closer co-operation between the three Dutch pension fund organisations. In November last year the Pension Federation became the single external voice of all 550 Dutch pension schemes, as director Gerard Riemen, explains to Leen Preesman
As far back as 2008, the Association of Industry-wide Pension Funds (VB), the
Foundation of Company Pension Funds (OPF) and the Union of Occupational Pension Funds (UvB) entered into a covenant for co-operation on joint issues such as governance, socially-responsible investment and the planned indexation label for pension funds. "Being together in rough seas, we realised that further co-operation was a no-brainer," says Gerard Riemen in the federation's office in The Hague.
The federation faces a range of challenges. At home, and during the next two years it will be busy with the planned new pension contracts, a corresponding overhaul of the financial assessment framework (FTK), improving governance and developing communication with the pension funds' participants.
In Europe, the new representative body is expecting a struggle to retain the identity of the Dutch system within the revised IORP Directive. A lobby aimed at the proposed EU legislation on derivatives and solvency is in full swing.
At present, the federation is preparing itself for a role as linchpin between the pending new pension contracts and the pension providers that will implement the new arrangements. This spring, the social partners of employers and employees are expected to finalise their negotiations on a new pension contract that will take rising longevity as well as increased market risks into account. Without financial provision for both of these risks - and with the decreased effectiveness of contribution rises due to population ageing - pension funds will eventually face a serious shortfall. So they can no longer afford to guarantee nominal pensions in the Dutch system, which is still dominated by defined benefit plans.
"We must ensure that the new contract is not only practicable, but also sufficiently clear that pension funds can explain them to their participants," says Riemen, defining the most important challenge. "During the past two years, the pension sector has found out to its detriment that it has failed to check whether all its messages about the possibility of disappointing results have actually come across. As a result, quite a few people have lost faith in the system that was once trusted blindly by everybody. We now need to regain trust through transparent new contracts, as well as good governance. We must show that pension funds are well-run organisations, with proper checks and balances."
In his opinion, the indexation label that was introduced two years ago is the result of failed communication. "A picture of stacked coins, to indicate the indexation potential of a pension fund, was too simple a way to explain a complicated issue, and therefore prone to misunderstanding. And following the effect of the crisis, the label hasn't actually been used at all during the first year. Therefore, we are pleased that the social affairs minister has scrapped the mandatory application of the label. We think the label in its present form should be binned."
Even so, the federation's director is aware of the delicate balance between the over simple and the over complicated, and that a five-page story won't convey any message on pensions either. "We don't have a tailor-made solution yet," he acknowledges. "But we know it is crucial that people become interested in the subject, and understand that risk not only has a negative connotation, but also means opportunities. Subsequently, we must develop ways of informing the participants. A good start is the new digital Pension Register that offers an overview of accrued pension rights, including second-pillar claims at insurers as well as the state pension AOW."
A new pension contract also requires a new financial assessment framework (FTK) for pension funds, to ensure that they can honour their promises for the next decades. "At present, we are contributing to the discussions about the new FTK rules at the department of social affairs," says Riemen. Referring to the minister's plan to develop a two-tier framework - for either nominal security, or a real coverage that depends on market developments and longevity - he makes clear that he favours a single FTK. "Otherwise, pension funds need to split up their assets, meaning our treasured principles of collectivity and solidarity go out of the window."
On governance, the Pension Federation is putting its weight behind the improvement of the competence of board members, well-functioning bodies with co-decision making and proper internal supervision. Currently, it is waiting for the Senate's response to initiative legislation from the Lower House, allowing pensioners a seat on the board of all pension funds.
"As we prefer a board to mirror the participants, including younger workers and women, we are not happy with this initiative," the director points out. "Adding pensioners to boards of predominantly balding and grey white males, is a move in the wrong direction. We would like legislation covering all governance aspects as is being developed by the social affairs minister."
The federation also wants pension funds' participants council and accountability body to merge into a "solid body with co-decision making rights", according to Riemen. "Because of competence issues, the present set-up doesn't work properly," he says. "We need clarity about who is responsible for what."
On the other hand, the Pensioen Federatie umbrella, does not support a single model for internal supervision. "Although we acknowledge the effectiveness of, for example, a visitation committee of external experts, we don't want to regulate everything in detail because of the differences between pension funds," the director explains. "What really counts is clarity about the accountability, and that boards make clear whether and how they have applied the findings of the internal supervisors."
Developments in Europe are also closely watched by the federation. Recently, during a meeting of the federation in Brussels which was also attended by social affairs minister Henk Kamp, EU Commissioner Michel Barnier said that the European Commission will not take any initiative that could harm the Dutch pension system. However, this has not entirely satisfied the representative organisations. "We are pleased that the EC acknowledges that the rules of Solvency II shouldn't fully apply to pension funds, and that he described our FTK as a ‘source of inspiration' for future EU legislation," says Riemen. "But at the same time we are getting signals that the announced review of the IORP Directive will be hostile to the current mandatory participation of employers in industry-wide pension funds. This principle is the very foundation of the Dutch pension system..."
The federation is also lobbying for an exception for pension funds in the pending EU legislation on derivatives. "We do support rules for transparency and against speculation. But as Dutch pension schemes don't speculate, and only deploy derivatives as a hedge against interest risks, we don't want our pensioners to foot the bill for expensive clearing houses," comments the director.
Riemen doesn't want to look too far ahead. "For the coming years, we will be busy with the pension contracts and governance, as well as the introduction of the ‘multi-opf', the joint pension fund for companies," he says. "And the consolidation of pension funds will continue. Not as a goal in itself, but as a spontaneous process, following pressure of mainly governance." He expects the present number of 550 schemes to significantly decrease, "but not as far as 100, as has been suggested by pensions regulator De Nederlandsche Bank".
The director also forecasts a full merger of VB, OPF and UvB as a logical development, albeit without indicating when that might happen. Riemen: "It will happen when the pension funds start wondering which added value their own umbrella organisation provides."