NETHERLANDS - Trustees at Dutch pension funds failed to fully understand the risks being taken in their portfolios, a new report by a government appointed committee found.
Committee Frijns, led by former ABP investment chief Jean Frijns, recommended boards of trustees include some investment experts. The report was presented to the Ministry of Social Affairs and Employment yesterday.
Speaking to Global Pensions, Frijns said trustees had been too focused on returns and not enough on risk management. He said trustees were "too aloof" during the financial crisis and allowed managers to take on too much risk.
In 2008, pension funs lost €120bn, with €20 of that attributed to active management.
But the Committee did not question the use of active management like in some other countries. Today, the Norwegian Ministry of Finance is conducting a seminar to discuss the use of active management at the Government Pension Fund Global. (Global Pensions; January 18, 2009)
The recent financial crisis has highlighted weaknesses in the Dutch pension system.
"The most important conclusion was that pension funds are vulnerable," said Frijns. Pressure is mounting from increased life expectancy, an older population, and the risk of long-term market corrections.
"But more important is that the instruments pension funds have to recover are becoming less and less effective," he said.
The Commission found that 60% of total pension fund obligations will have to be paid out within 15 to 20 years.
Frijns and the other commissioners also said the way solvency ratios are calculated in the Netherlands fails to take into account long-term inflation expectations, and have called on the government to redefine the way the ratio is calculated.
Despite a few specific calls for regulatory changes, the commission urges pension funds to make changes on their own through the use of a code of practice.
"We found that there were weaknesses in the investment policies and governance of pension funds, but most of these weaknesses could be resolved by the pension funds themselves," said Frijns.
"We are glad to see the commission did not (issue) a ‘one size fits all' report," said Dutch Association of Industry Wide Pension Funds spokesman Gert Kloosterboer, adding pension funds should be able to make the recommended changes a way best suited to them.
The report pre-dates a second review due at the end of this month that will look at the structural set-up of the Dutch pension system. That report will look at issues surround the use of collective defined contribution schemes, differing systems between age groups, and other potential changes to the pension system.
Minister of Social Affairs and Employment Piet Hein Donner will comment on both reports before April1.
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