| Dutch pensions at the dawn of the FTK |
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| 19/03/2006 | ||
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The Netherlands: population 16.5 million, pension assets €650 billion. Its pension system, based on a mix of funded and pay-as-you-go schemes, is admired throughout the world. But this hasn't stopped the Dutch government from going ahead with the new Financial Assessment Framework, or Financieel Toetsingskader (FTK) in the wake of the troubled period at the beginning of this decade. "The FTK is not an exception in the pension world", says Bart Heenk, managing director of the Dutch operations of SEI Europe, the asset management services provider. "The rules are very similar to what has already been implemented in Sweden and Denmark, as well as in the US and the UK. The bad news is the set of onerous rules that has been developed in parallel to the Basel and the IFRS rules." This new supervision framework (see FTK 101), which will be compulsory for Dutch pension funds from January 2007, seeks to make the Dutch retirement system more secure by further guaranteeing the solvability of pension schemes. Critiques of the FTK say that while this objective is both justified and relevant, it is also likely to impose a heavy burden on the Dutch pension industry, and even on the Dutch economy as a whole. Under the FTK, pension funds that fall below the minimum coverage ratio of 105% of their indexed liabilities will have one year to correct their situation. Given this tight timeframe, their choice will likely be limited to the easy but unpopular solution of higher contributions, or a change in pension benefits. They will also be subject to a series of stress tests (minimum test, solvency test, continuity test) that are expected to encourage more investments in fixed income. "The shock of those stress tests is pretty extreme. In fact, there is no time in the recent history where shocks as extreme as the FTK imposes have actually occurred – not even in 2000-2001", says Mr Heenk. Liabilities will be valued on a marked-to-market basis, making them much more volatile. This will make the matching of assets and liabilities more complicated and is likely to drive pension funds to favour fixed income over corporate equities. At present, only the assets of Dutch pension funds are subject to a market valuation. Liabilities are discounted at fixed 4% rate, which eases the asset-liability modelling. "Those measures force pension funds to concentrate not just on the asset side of the balance sheet, but also on the liability side", says Mr Heenk. "The other advantage is that it forces pension funds to think in terms of risk management much more so than they have done in the past." Trauma As in other major pension markets, Dutch pension funds have been hit by falling interest rates, which have increased the value of their liabilities and created vast pension deficits at the beginning of the 2000s. In a speech at the beginning of the year, Dutch Minister of Finance Gerrit Zalm said that had a policy such as the FTK been in place a decade ago, some excesses in contribution reductions and holidays would have likely been avoided. "That's precisely why the Dutch government has developed the FTK. They worry about the fact that the funding ratios went down so much – about 50% from 2000-2003", comments Mr. Heenk. Since then, those gaps have been plugged by most pension schemes, with liability coverage now averaging 120%. The fear of falling behind the 105% ratio and the implementation of drastic stop-gap measures, as well as the desire to pass the series of stress tests, are expected to push Dutch pension schemes to invest heavily in fixed income to avoid such a plight. There's a precedent for such a reaction according to SEI Europe, which compares the Dutch FTK to the British FRS 17. The company stated: "This point is supported by evidence of the current situation in the UK where the application of the FRS 17 accounting standard, which is underpinned by the same economic theory as the FTK, has led to a "bond bubble" with current yields on UK index linked gilts the lowest since the market was introduced 25 years ago." Bart Heenk also points to an eventual outflow of capital from the private sector (equities) and into the less productive public sector (government bonds), which would be harmful to the Dutch economy and hence to its ability to deal with the ageing problem longer term. Even if some pension funds have been complaining about the framework and have won a delay in the implementation of the FTK to January 2007, the legislation is here to stay. "The Dutch government won't withdraw its legislation since there has been so much time, money and resources poured into the project", comments Mr Heenk, adding that some amendments could be modified to make life easier for pension funds. "For instance, the 1-year period for making up any coverage deficit could be extended to up to five years", he says. "Pension funds would have more flexibility and more time for finding solutions. That would make their life much easier and pension provision cheaper."
J.L. |
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Articles of the same Topic : Pension funds Western Europe
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