NETHERLANDS - Pension experts in the Netherlands have argued that the numbers used recently by TV news programme Zembla are off by as much as €650bn due to “grave miscalculations”.

Earlier this week, Zembla controversially claimed that Dutch pension funds had missed out on €146bn due to “bad management” and were short by €799bn due to insufficient contributions and premium restitutions.

The news programme based its conclusions on a report by consultant Frits Bosch. But Guus Boender of Ortec and Theo Kocken of Cardano both said the figures were “poppycock”.

Boender said: “Bosch’s calculation of the contribution shortfall is based on the assumption that cost-covering contributions grow in tandem with liabilities and also cover inflation compensation. That is not, in fact, the case.”

He pointed out that, when liabilities increase due to the underlying discount rate or market valuation, the increase is paid out of investment returns, not out of contributions.
Inflation compensation is funded out of investment results as well.

Because Bosch counts these “costs” as part of cost-covering contributions, he comes up with “an extremely high estimate of the contribution that should have been paid”, Boender said.

He added: “In his analysis, he further adds the returns these overestimated contributions would have delivered if they had been invested.”

Cardano’s Kocken said Bosch made an initial and very basic mistake, which was then compounded by others.

“According to Bosch, contributions increase in lockstep with liabilities,” he said. “But the discount rate is already accounted for in the liabilities. He then adds the realised returns.

By doing so, the interest is counted twice: both in the returns - interest plus risk premium - and in the contributions.

“Over longer periods, this makes a huge difference and leads to exponentially incorrect results.”

This is not a matter of quibbling over benchmarks, but a “fundamental calculation error”, resulting in incorrect numbers that increase year by year, Kocken said.

“In this case,” he added, “it is a number that is overestimated by some €300bn-350bn.”
Boender also argues that Bosch compounds this error by assuming that the rise in life expectancy as well as indexation are paid out of pension contributions.

“Indexation, for instance, is paid out of investment returns by agreement,” he said.
Jean Frijns, former CIO of civil servant fund ABP and pensions advisor to the government, said Zembla’s figures were based on “highly dubious” calculations.

“I believe Bosch applied the wrong benchmarks, particularly when it comes to fixed income,” he said. “Investments in risk-free government bonds, such as Dutch and German paper, would have returned on average about 6.5% annually from 1990-2009.

That is assuming a duration of five years, as was common before the introduction of the new supervisory framework.

“According to Bosch, Dutch pension funds returned 6.9%. He states this should have been 7.8%, according to his chosen benchmark. But based on the above, pension funds would have actually realised outperformance.”

Theo Nijman of Tilburg University added: “This ‘underperformance’ does not in any way agree with what we know about the accepted z-score benchmarks, which often show a slight outperformance of assumed returns.

“In addition, long-term investment results of Dutch pension funds show returns that are significantly higher than could have been achieved with risk-free investments.”

For his part, Bosch has conceded that Zembla was hasty in its conclusions. The view that pension funds have engaged in overly risky behaviour by investing too much in equities is one he said he would particularly like to put in a more nuanced way.

“I never meant to say pension funds should refrain from investing in equities,” he said. “It’s not as simple as that.”

Bosch agreed that equities tended to outperform fixed income in the longer term, but he said pension funds were by nature risk averse and that equities in the long run were more volatile than fixed income.

“On the other hand,” he added, “in the short term, fixed income may actually be the more risky asset class. This is a tactical game. Strategically speaking, pension funds have no business allocating 50-60% to equities, but, tactically speaking, at times it may be wise to invest more in equities - as is the case at present.”
 

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