NETHERLANDS - Dutch Pension funds must focus their contributions and indexation policy on long-term needs instead of short-term targets, according to supervisor De Nederlandsche Bank.
This is the main lesson learned from the recent turmoil in the financial markets, which has already wiped €50bn off the financial buffers of the Dutch pension funds, DNB director Arnold Schilder indicated during his annual meeting with pension funds.
Between mid-July and mid-August, the average coverage ratio of Dutch schemes has dropped by 12% to 146%, he said.
But in Schilder's opinion it is unlikely the shock has already reached its full effect.
"The ‘perfect storm' earlier this century made the average funding ratio drop from 200% to 120% within three years," he reminded pension funds.
"If we want to avoid a similar blow, we mustn't assume the present coverage ratio is a generous one."
According to the DNB director, recent volatility underlines the undesirability to let the contributions be swayed too much by the issues of the day.
"A policy aimed at tuning premiums with the actual coverage ratio will lead to pro-cyclical premium changes, which in turn will make the pension system a source of macro-economic disruption," he referred to the earlier experience.
Schilder advised pension funds should take the true coverage ratio as a reference for indexation, rather than the nominal funding ratio prescribed by the new Pension Act.
"The nominal coverage ratio does not offer a direct insight in how pension funds can realize their indexation ambitions because this depends mainly on the age build-up of a scheme's participants," he explained.
Under normal conditions, the legal requirements should be the minimum target for pension funds' indexation policy, Schilder concluded.
In addition, the DNB director stressed the importance of the ‘continuity analysis' - a part of the new financial assessment framework nFTK - as a way of gaining insight into the financial effects of unexpected events during the next 15 years.
This continuity analysis can be used as a solid base for the new indexation label for pension funds' participants, Schilder stated, while hinting at a future obligation to do so.
The indexation label must offer participants clarity on the likelihood and the extent of future indexation at a pension fund.
No comments yet