Controversial regulatory proposals and a growing insurance market could change the Dutch pensions market indelibly over the next five years. Chris Panteli finds out more
Plans to overhaul pension legislation in the Netherlands could see a radical change in the way pension funds invest their assets, with some industry experts believing the entire pension system is at stake as a result.
Under plans outlined in the Pension Agreement (Pensioenakkoord) in June 2010 and fleshed out in a further agreement in June this year, schemes will be given unprecedented freedom over their investment strategies through the introduction of a new financial assessment framework (FTK).
Under the proposed FTK2, pension funds will be allowed to apply a higher discount rate which will be linked to the expected return on their assets. The Pension Agreement recommends scaling the expected return on assets down with the level of expected inflation, which means if the expected return on assets is 6.2% and the expected inflation is 2%, the discount rate could be set at 4.2%.
Essentially, this means the actual discount rate will vary from pension fund to pension fund in line with their asset allocation, and schemes will therefore no longer be “punished” for taking a bigger investment risk. Under the current FTK (with a yield curve based on the risk free swap curve), the required buffer is higher for pension funds with a bigger allocation to risky assets.
“I would say the Pension Agreement will change our investment world dramatically,” said Mercer’s Benelux market business leader Arnout Korteweg. “It gives pension funds a lot more freedom in the way they are invested.
“You could say you are going to be 100% invested in equities and expect a return of 7%-8%, then use that rate calculate your liabilities. All of a sudden you seem very rich, although the pot of money hasn’t changed. You can suddenly do a lot more with that money though and it seems as though you can suddenly and easily deliver all your promises, but you never know whether you’ll get those returns.”
Korteweg believes if pension funds opt to use the new system – and it is thought the new freedom on offer will mean most will – it is vital the industry considers how that investment risk will be monitored and how actual investment risk will be compared with anticipated and communicated investment risk.
He added: “You would have to be very communicative about your investment strategy. It could mean some funds want a more aggressive policy with all the risks that entails, and we think the sustainability of the pension system in the Netherlands could be at stake by doing so.”
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