ECB action having unintended effects in Netherlands – DNB

The European Central Bank’s (ECB) decision to lower interest rates to make more savings available for the economy is having the opposite effect in countries such as the Netherlands that already enjoy high savings levels, according to Klaas Knot, president at Dutch regulator De Nederlandsche Bank (DNB).

Knot, speaking at DNB’s annual report presentation, argued that the low-interest-rate environment encouraged people to increase saving for their pension rather than to spend money, as the ECB intended.

He also questioned whether the impact of quantitative easing on the economy had been positive, “as the effect of growth decreases the more stimulus is applied, while side-effects might also increase”.

Knot argued that, if people save a significant amount for a specific purpose, such as a pension, they tend to save more as the returns on existing capital decline, resulting in uncertainty over the chances of achieving the savings target.

He acknowledged, however, that the objection applied chiefly to the Netherlands and “maybe a number of other countries”, while the ECB’s monetary policy was aimed at the euro-zone as a whole.

Knot said he had explained to ECB board members that the Netherlands was now debating a new pensions system, but he said they were left “unimpressed”, as combined pension assets are twice the country’s GDP. 

He also ruled out the possibility of granting concessions on the discount rate for liabilities – by raising the ultimate forward rate (UFR), for example.

“Any adjustment,” Knot said, “would be shifting effects between the generations of pension funds’ participants. DNB’s only task is to set a realistic rate, taking potential future growth and inflation from which returns and risk-free rates are derived, into account.”

Frank Elderson, supervisory director for pension funds at DNB, argued that adjusting the discount rate was the last thing the watchdog should do.

“We can’t just add pension assets by magic,” he said.

Knot added that the current defined benefit promises were what made the Dutch pension system so susceptible to low interest rates and reiterated his call for a quick switchover to a new system without fixed promises.