Each quarter, the Dutch supervisor and regulator of pension schemes in the Netherlands, the Pensioen & VerzekeringsKamer (PVK) collects figures from nearly 1,000 pension funds. “We obtain an overview of pension fund investments, what assets they invest in, what are their benchmarks, what are their real results amoung other information,” says Rein van Dam, director pension supervision department at the PVK in Appeldoorn.
“We are able to see if the results differ significantly from the benchmark, so we can say to the fund that there is a difference and ask them to explain it. That’s one part of our supervision.” But even more important in his eyes is having the business plan of the pension fund when it starts out. “This tells us the scheme’s liabilities, how they are to be financed, the assumptions underlying the financing, how the contributions are being invested, the breakdown of the investments, the limits in any asset, active or passive approach, the risks seen for the fund, and how to control these.” In addition, the internal organisation of the pension fund needs to be detailed, which includes information about any investment and other outsourcing and the risks involved.
This plan called the actuarial and business memorandum (ABTN) is one of the most important tools for supervision. “Each year we try to visit each pension fund, to review the year and here the vital discussion document to start with is this ABTN. We ask if they still work according to the outline, what plans they have to change, why are you changing, what about the new risks, how will you handle these, and so on.” Depending on the size of the fund, these can be for a half or whole day. In fact, due to personnel shortages only 400 of the country’s 900–1,000 schemes were visited in 2001. But the very small funds and those that are fully reinsured with an insurer, do not get such frequent visits.
But the PVK thinks probably of more significance is the issue of whether the scheme’s board members are ‘fit and proper’ people. “We are even thinking that if we are sure that the scheme’s board is fit and proper the level of supervision might be less in depth.” So there is a test for board members to assess their fitness, as individuals and as a complete board. “With a good business plan and a fit and proper board, nothing can go wrong – in theory at least.”
The result of all this contact is that the PVK believes it knows what the pension funds are doing. “It is only by meeting a board face-to-face that you can really tell if they are fit and proper. Those comprising boards will always be representatives of employees, unions and of the employers.”
In addition, the funds provide their annual returns, with their full results including their outgoings, which figures the authorities do not see in the quarterly information. The PVK relies on the fact that each scheme has an auditor and an actuary certifying the information. “Every six or seven years, funds will get an in depth scrutiny, which could be an inspection lasting up to five days.”
From the annual review figures, the Dutch solvency or minimum funding requirement position of a fund is checked - this is done even though it is up to the scheme actuary to sign off the scheme as properly funded.
“We split liabilities into two,” explains van Dam. The unconditional nominal part and the conditional part depending on there being sufficient assets, relating to the indexation of the accrued liabilities.The nominal liabilities which are not indexed – are those liabilities up to the present without any inflation being currently taken into account. “They have to be 100% funded both currently and in practically all circumstances in the future, using the latest mortality tables, a rate of interest of 4% long term and market rates for short term. It is a kind of market value.”
As far as the circumstances in the future is concerned, the PVK has a rule. “We have an early warning system in-house, that roughly says equities must be able to reduce in value by 40%, and you still have to be, even at that point, fully funded to 100%. This applies mainly to equities, as the market value of bonds and the value of the liabilities move more or less together.”
This 40% fall is measured from the highest point of the relevant equitymarket, for example the peak of some 18 months ago, and taking 40% off that, the funding still has to be for 100%, he says.
So even taking into account the market falls since the peak, van Dam says no Dutch fund should currently be under 100% and should roughly able to absorb another fall of 10% in market values. “Sadly, we know that not every fund is in fact overfunded, but most are.” For a number of reasons, some funds went into 2001 poorly funded and were hit again after 11 September.
Assuming markets clear the end of 2001, without notable falls, the PVK is not unduly concerned about funding levels of funds. “We know there were some funds that were not fully 100% financed by the end of September. So once we believe they are under the level, then we contact them and ask them what they are going to do - more contributions, stop pension indexation and so on?” But he knows a number of pension funds have changed their investment strategies because of the developments this year. “In fact, funds should tell us when sending in their quarterly figures if they are changing strategies.”
Overall, the PVK is pleased with how the system is working and the last 18 months has been a good ‘stress test’ of how it operates in less favourable investment markets. “Provided the equity indices do not go much below the levels they have been at towards the end of the year, we do not see any real problems,” says van Dam. The buffer is a once and for all protection, it does not have to restored to its 140% level for equity investing by funds. “Funds will be aware that if they have 50 to 60% in equities and they have absorbed this fall, they are at risk from smaller falls bringing them below the 100% level.”
So far the PVK has not made any moves on restoring the buffer levels. “What is most important is that funds discuss this matter with the employer, to ensure their guarantee to meet the funding needs of their fund. Are they comfortable with the implications of this? If not, then they have to change their investment policy.” The onus is on the funds to respond and have a higher buffer. “It is at first their problem and not the supervisor’s,” he says.
The above concerns the first nominal part of the liabilities. The second part is the indexation of the accrued liabilities When pensions are indexed, then the fund must provide 4% per annum for these liabilities, with the difference between this and the ‘market’ rate being regarded as the provision for inflation. Currently with lower interest rates, the inflation element has to be paid for by the employers. “We do not think this is a good situation” says van Dam. The value of the indexation part is one of the major issues in the study for the new financial testing framework (see box).

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