Internal risk models could help clear up differences of interpretation on investment policies under the current ‘prudent person’ approach between pension funds and Dutch regulator De Nederlandsche Bank (DNB), according to Tjerk Kroes, chairman of the committee for alternative financing arrangements for the housing market.

Stef Blok, the minister for Housing and Government Services, recently asked Kroes to assess whether the DNB’s supervision hindered investment in non-regulated rental property in the Netherlands.

In a letter responding to Blok, Kroes said he focused on the importance of internal risk models after holding talks with the three largest pension funds – ABP, PFZW and PMT – as well as the supervisor.

He said the DNB was willing to discuss the application of internal risk models and suggested they could reduce differences of interpretation on parameters for investment.

In the opinion of pension funds, the caps for returns on alternative investments, such as non-listed property, private equity and infrastructure, have been a problem, Kroes said.

“After costs, only a risk-free return remains, whereas these investments carry greater risks,” he said.

The chairman added that internal risk models could be useful for assessing whether real and matching assets would fit in the investment mix for inflation-proof pensions under the future hybrid pensions contract.

Kroes emphasised that the government should be willing to adjust its own policy to increase the attractiveness of local investment for pension funds.

As an example, he recommended relaxing the current rules for the sale of blocks of rental property, as well as allowing an inflation compensation on loans to building societies.

Bram van Els, spokesman for the €90bn asset manager MN, pointed out that the application of internal risk models was already possible.

“But, because of the often rigid interpretation of the prudent person [rule] by the DNB – in particular, on illiquid investments – many schemes have ceased submitting their models,” he said.

In his opinion, Kroes’s letter should generate debate about the issue.

The €145bn asset manager PGGM said it was assessing the options of taking over rental property from housing corporations.

According to its spokesman, this would approximate a matching asset.

“However, these assets are already subject to extra solvency conditions,” he said.

“Internal risk models might be a better fitting solution in this case.”

Harmen Geers, spokesman for the €337bn asset manager APG, stressed that the prudent person principle in itself offered “welcome leeway” for pension funds to optimise the risk/return ratio at portfolio level.

“In the case of an internal risk model – to be approved by the DNB – schemes are responsible for the portfolio construction,” he said.

“Within this framework, they can decide on the exact allocation. This way, the freedom of investment under the prudent person principle could remain.”

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