NETHERLANDS - Peter VLaar, senior researcher at Dutch pensions regulator DNB, has concluded that the FTK legislation could lead to higher volatility and that "old-fashioned actuarial accounting works better than sophisticated finance."
DNB is responsible for developing and enforcing the country’s proposed solvency rules, FTK (Financial Assessment Framework), due to come into force in January 2007.
Vlaar delivered the results of his study at an OECD seminar on pension fund regulation and risk management in Istanbul in November. The research, a copy of which was seen by Global Pensions, stated that market valuation would lead to much more volatility and higher extremes.
It said this is in turn would lead to pension funds adopting a more aggressive adjustment policy and suffering worse timing when making investment decisions. The presentation pointed out that this could lead to a need for higher premiums, if expected returns were lower.
Vlaar also concluded that stocks were less attractive under the FTK rules.
One industry source claimed Vlaar’s presentation showed that there were clear divisions within the Dutch regulator as to the effects of the FTK.
But Robert Mosch, a policy officer at the DNB, denied there were any differences in opinion.
He said the DNB was currently working on ways to lessen the anticipated volatility. “While the FTK will start at the beginning of January, we are still not sure exactly what it will look like,” he explained.
“We are thinking of ways to decrease the volatility – it is still under discussion – so I can’t say what the outcome will be.”
However he pointedly disagreed with Vlaar’s conclusion on the new accounting standards, adding: “In general, we believe the new accounting method is far better than the way we used to do things.”
Vlaar told Global Pensions: “The point I wanted to make is that if market valuation is not only used for unconditional (in the Dutch case nominal) rights (as the FTK prescribes), but also for conditional rights and every-day (contribution) policy, unnecessary volatility and high costs result.”
He added: “The danger of a fixed discount rate is of course that funds are too optimistic about likely returns, thereby underestimating funding problems. The FTK limits this danger by prescribing a market rate for solvency calculations regarding unconditional (nominal) rights."
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