The Dutch keep piling the agony on their pension funds. If there are any nuts to be cracked, the regulators and the different commissions come in swinging their sledgehammers. It is almost as if the system has to be tested to destruction before it can be accepted that it works.
The new financial framework, the nFTK, is due to comes on stream in January, despite increasing protests from members of parliament as to its impact, particularly the negative effect of higher pension contribution rates on the economy. The regulator is to confirm this month that it is holding to this schedule.
The issues that nFTK faces
funds with include how to
restore the coverage ratio of 105% within one year at current rates of return on assets, how to assess the market values of pension liabilities, reappraising longevity and mortality tables, and the increasing level of pensions contributions.
The pre-pension discussions aimed at wean the Dutch from early retirement could endanger the social consensus. Trade unions are determined to ensure that every euro that goes into the replacement ‘levensloop contracts’ can be used for upgrading normal pensions, which is not quite what the government has in mind.
Then there are ministry moves to get pension funds to separate pensions administration and investment in the name of European competition law, though how such large pension providers as ABP and PGGM will be able to manage this is uncertain.
Pensions governance is another long runner, which now looks like being a set of principles, approved at STAR labour foundation employers and union level, and which funds will have to apply to their own circumstances. The aim of the different pension bodies and associations is to have a satisfactory outcome that will avoid legislation and restore public confidence and trust in pension funds.
Meanwhile, the Staatsen inquiry into pension fund activities still bubbles on. Questions relating to pension fund investment activities may have been dropped from the agenda, but there are other concerns, such as administration. As one observer puts it, if pensions governance can be shown to be working properly, then perhaps Staatsen will fade away.
Fund managers are pragmatic folk. “The only thing that concerns us is whether there will be enough time for investing after speaking to the different commissions on governance,” says John van Markwijk, CIO of the €10.4bn SPF Beheer, which looks after the Rail Pension Fund and other funds.
He points out that the railway funds have been leaders in pensions governance since the 1990s, when SPF Beheer was separated off from the pension fund.
At DSM Pension Service, which runs e4.8bn in assets for the DSM and other corporate funds, agrees that the governance proposals are a hot topic. “How will we deal with what is required – will we have to have some kind of stakeholders’ meeting?” asks managing director Wil Beckers. “If you have to add another supervision board and some kind of stakeholders’ meeting, it will become very complicated.”
The timing of the nFTK’s introduction is an irrelevance in Van Markwijk’s view. “That does not matter, the issue is that of lower interest rates. With or without FTK, you have to deal with the low rates of interest as a pension fund. The FTK just makes you think about it.’
Similarly, Beckers asks: “How wise is it to postpone FTK for another year, because the problem is still there?”. DSM’s funds are actively adapting their ALM models to bring them into line with the requirements of the DNB, the pensions regulator. “This involves preparing different scenarios to see how our investment policy could be affected.”
The new pensions act is set to have a dramatic impact on the €1.8bn Pension Fund Horeca & Catering (PH&C), the sector fund for the hotels and catering industry, because of its high concentrations of young workers, says general manager Eric Uijen.
“Up to now, people joined at the age 25, next year they will join at 18, resulting in nearly a doubling in membership numbers. “But actual contributions increases will be small in euro terms. “We will be involved in a huge amount of additional administration, as active numbers rise from 200,000 to around twice that.”
This will have the effect of extending the duration of the fund’s liabilities by some three to four years. “We are now discussing how we can lower the duration gap,” says Uijen.
His big concern is the current levels of interest, particularly in the light of the DNB regulations. Like other fund managers, he is hoping for an increase to ease pressures on liabilities.
Generally, managers are happy with their funds’ performance this year. PH&C had very good results, with outperformance by almost all of its seven managers, says Uijen. ”Our average performance came in at slightly above 8% for the first six months. That is satisfying,” says Beckers at DSM.
The results have been good at SPF Beheer too. “It has been good in both absolute and relative terms, with equity, real estate and private equity performing well,” says Van Markwijk. The fund returned 4.2% for the second quarter and 5.8% for the half year, with equities producing 7.5% before currency hedging.
SPF’s expectations are still very positive for this year, but some asset classes are beginning to become overvalued, in particular bonds and real estate, in his view. The fund will be exploring new investment avenues with its board in the coming months. “We see lots of opportunities.”
While the pensions directive fails to elicit much interest, the international accounting standards certainly are at PH&C, where Uijen points out: “We have 35,000 employers as part of the scheme and just eight or nine of these are quoted on the stock exchange.
As a result we are discussing changing our scheme next year to a qualified defined contribution scheme to fall outside the international accounting rules for defined benefit plans.” In particular, this will help smaller employers who will have a constant contribution rate per member.