AMSTERDAM - New funding rules being drafted for Dutch pension funds might discourage investments in equities, many pension experts warn.
By requiring pension funds to maintain a funding cushion for their stock and real estate investments, Holland's insurance chamber, known as the Verzekeringskamer, aims to ensure Dutch funds are well funded in the event of a market crash on the order of 40%. The chamber is the regulatory group that supervises Dutch insurance companies and pension funds.
At a time when Dutch funds have been boosting both their domestic and international equity investments, the Verzekeringskamer's actions might dampen further moves in that direction. Dutch pension funds, with about $477 billion in assets, have increased their average equity allocation to 29% at the end of 1995 from 20% five years previously, according to The WM Co., Edinburgh.
But Rein van Dam, director of the Apeldoorn-based Verzekeringskamer's pension department, said the regulator does not want to discourage equity investment. Rather, he said pension funds need to maintain adequate reserves beyond a minimum 100% funding level in the event of a market decline.
Mr. van Dam said the insurance chamber, which hopes to issue draft rules before summer, aims to discourage corporations from recapturing pension surpluses or giving large benefit increases and thus depleting funding cushions.
Last year, for example, Rotterdam-based Royal Nedlloyd N.V. recaptured 75 million guilders ($45 million) from its pension fund. In 1994, Unilever NV, Rotterdam, took back 220 million guilders ($133 million) from its fund, as a result of high contributions in the 1980s.
Adrian Putters, a consultant with Watson Wyatt in Hoofddorp, said the Verzekeringskamer's intentions are good, but he questioned their approach, saying it would dampen stock investments by Dutch funds.
Gert Verheij, head of asset consulting services for Towers Perrin in Amsterdam, said: "We are meeting with pension funds who say if we go into equities, we should have a 30% to 35% reserve."
But some demur. Henk Klein Haneveld, chief executive of William M. Mercer Klein Haneveld Investment Consulting B.V., The Hague, said the rules would affect individual pension funds differently. "I don't think in the long run it will inhibit people from investing in equities," he said.
The problem, some argue, is the Verzekeringskamer is attempting to impose an insurance standard upon Dutch pension funds.
The insurance chamber's current approach is to discount pension liabilities at a 4% rate, a fairly conservative figure, but not to take into account any future contributions or benefit accruals. Under the contemplated approach, plans would be valued as if they had shut down, which tends to make their funding appear less solid, rather than as ongoing entities.
The result is to take a short-term, static approach to a long-term, dynamic process, experts said.
"That's the paradox," said David Voute, managing director of Fortis Investments, Utrecht. "You are looking for long-term investments. The wisest thing is to get the most possible in equities." But the insurance chamber's approach will subject pension funds to "the dictatorship of the annual report," he added.
Some others hint the Verzekeringskamer is subject to heavy lobbying by Holland's powerful insurance industry. Insurance companies stand to gain if the rules favor purchase of insurance-backed products, they said.
Cultural factors also are important. Continental Europeans are far more accustomed to insurance products than U.S. and U.K. pension funds, which rely more on equity-based investments.
In addition, some speculate the chamber is being forced to act tough in light of criticism it received for failing to adequately supervise the insurer Vie d'Or, a Dutch insurer that went belly up in late 1993. Policyholders lost 40% of their premiums, and criminal proceedings against a former Vie d'Or executive have ensued.
Mr. van Dam said the insurance chamber's approach is modeled on the European Commission's Third Life Directive, which regulates investments for insurance companies.
The Verzekeringskamer is drafting the new rules so Dutch funds know where they stand, Mr. van Dam added. Now, he said, there are no concrete funding rules for Dutch funds.
For example, pension funds are free to use either market value or book value accounting, which makes it hard to know their true level of funding. (The new rules would impose a standard for reporting to the insurance chamber, although pension funds could report on another basis to plan participants.)
But Mr. van Dam said speculation that pension funds would have to provide a 30% to 35% buffer to support equity and property investments is unlikely to occur.
Rather, the insurance chamber is developing a variable standard that will hinge on each pension fund's level of funding, the relative riskiness of its investments, and historical performance of capital markets, Mr. van Dam explained.
Thus, reserve requirements would increase if the stock market hits a historic high, he said. This would hinder employers from recapturing pension surpluses or distributing excess assets in benefit improvements, he said.
Mr. van Dam implied Dutch pension funds should be able to withstand a 40%-plus hit on their equity investments. "Every pension fund has to have adequate reserves when the market falls down," he said.
The insurance chamber relied in part on a client paper prepared by Evert Greup, a managing director at Kempen Capital Management, Amsterdam. That paper said guilder-based portfolios invested in Dutch equities, European stocks and global equities plunged between 40% and 50% during the 1973-'74 oil crisis.
The Japanese stock market has fallen by a greater amount in the 1990s, Mr. Greup noted.
But pension experts said there are problems with this approach.
They question how regulators will know when the stock market hits a historic peak. "What is a bull market? Who can you tell you it will come to an end?" asked Jan Willem Baan, chief investment officer of Stichting Bedriftspensioenfonds KPN, the 7.2 billion guilder, Groningen-based telephone company pension fund.
Lou ten Cate, director of Triple-A, an Amsterdam-based consultant, said pension funds should not have to rejigger their portfolios because of a once-in-40-year market decline.
What's more, international diversification should lower risk in pension fund portfolios, he said.
The irony is the Verzekeringskamer's draft rules are coming as the Dutch government has been pressuring companies to reduce their pension costs as part of an effort to make Dutch firms more competitive in global markets, said Rob ten Wolde, secretary general of the Vereniging van Bedrijspensioenfondsen, the Rijswijk-based Association of Industrywide Pension Funds.
The rules, experts argue, will make pension funding more expensive. If Dutch funds lower or restrain their investments in better-returning equities because of the reserve requirements, that ultimately will increase their level of contributions.
Mr. van Dam, however, said the insurance chamber does not want to discourage equity investments by pension funds. "We think it's very important to have more in equities," he said. The real issue is how companies use their surplus pension assets, he explained.