APELDOORN, The Netherlands - Holland's Insurance Chamber is toughening funding and reporting requirements for Dutch pension funds.
Shifting focus to the asset side of the balance sheet from the liability side, the Apeldoorn-based Verzekeringskamer is coming up with some demanding guidelines for Dutch pension funds to ensure there are sufficient assets for plan participants.
Among the major initiatives:
New actuarial principles require funds to be fully funded at all times. While Insurance Chamber officials insist the guidelines will not inhibit investments in equities, Dutch pension experts say the guidelines would require creation of a funding cushion if equity investment exceeds 20% of total assets. Some funds are reluctant to boost funding levels.
Increased reporting requirements likely will speed up due dates for annual reports to July 1 from Oct. 1, as well as mandate interim reporting where a fund falls below 100% funding. One of the chamber's knottiest problems is that fully half of the plans don't file reports on time.
The chamber also might require new public disclosure requirements on liabilities and assets, personnel, and changes to plan rules and investment policies. Trends toward flexibility in plan design and individual choice are instigating a move toward release of key information.
New whistleblowing agreements with insurers, accountants and actuaries will compel plan actuaries and auditors to tip off the Insurance Chamber on any funding shortfalls when trustees or company officials fail to take action.
Legislation the government might propose this year would give the chamber new sanctions to impose when plans fail to meet its rules. Possible sanctions include: the ability to impose fines; imposition of an outside "silent administrator"; issuance of directions to plans; and informing plan participant groups, the plan sponsor and others of problems.
New derivatives guidelines are expected to be issued shortly. But the focus is expected to be on whether derivatives are used properly and whether appropriate controls are in place.
New focus on investments
In the past, the Verzekeringskamer focused almost exclusively on the liability side of pension funds' balance sheet.
But the growing importance of investments and mounting sophistication of Dutch fund executives has led to a dramatic shift to the asset side during the past few years.
Investments now provide two-thirds of Dutch pension fund income. Equities comprise a growing proportion of plan assets, rising to 32% of assets at year-end 1996 from 22% five years earlier, according to The WM Co., Amsterdam.
In addition, some pension consultants believe the 1995 failure of Dutch insurer Vie d'Or - for which the chamber was criticized sharply in Parliament - also has spurred the tougher approach.
"Historically, we've looked more from an accountancy (perspective), ex post control," explained J. Ruud Pijpers, head of research for the Insurance Chamber's pension department.
Now, "discussions have shifted from an accountancy type of control to 'Where are you going with your pension funds?'*" Mr. Pijpers said.
Verzekeringskamer officials want to ensure funds have a structured investment policy, covering issues such as: asset/liability management; asset allocation strategies; currency policies; indexed vs. active management; internal vs. external management; derivatives; performance measurement; and custody.
The point is not to tell Dutch, pension executives how to invest but to ensure they have seriously weighed their investment policies and procedures and understand the instruments in which they are investing, he explained.
In some ways, the Insurance Chamber almost acts as consultant. Rein van Dam, director of the pensions department and a well-known actuary, regularly lectures on the need to relate assets to liabilities, spurring the use of asset-liability studies.
Dutch pension experts say smaller funds especially need guidance, and applaud chamber officials for the steps they have been taking. "Activities, especially in smaller pension funds, have to be controlled and to be checked," said Dick Snijders, managing director of the Philips Pensioenfonds, Eindhoven.
"I think they are (moving) in the right direction," said Henk Klein Haneveld, chief executive of William M. Mercer Klein Haneveld Investment Consulting B.V., The Hague.
Even big funds turn to the chamber for guidance at times. Marinus Keijzer, chief economist and strategist for Pensioenfonds PGGM, Zeist, the 65 billion guilder ($33.8 billion) fund for health-care workers, said fund officials routinely submit innovative investment strategies to chamber officials for their approval. This approach avoids any problems down the road, he noted.
Funding rules challenged
Still the chamber, which was privatized in 1992, has not entirely avoided controversy.
New actuarial principles, issued in late February, require pension funds to be fully funded at all times. Insurance Chamber officials are pushing pension funds to build up a funding cushion to protect against downside risk from equity investments.
"The more you build up the funding level, the more short-term volatility you can stomach," Mr. van Dam said.
He acknowledged this rule is tougher than those in the United States and Britain. He said that, in the Netherlands, only the pension fund stands behind the pension promise; in comparison, U.S. and U.K. employers are responsible for pumping in additional funding.
Dutch pension consultants disagreed, saying Dutch companies also have to make up funding shortfalls. "I don't see their view being that different," said Adrian Putters, a consultant with Watson Wyatt B.V., Hoofddorp.
Experts also warned the funding rules will be tougher on younger plans that should be taking higher equity positions.
Mr. van Dam shrugged off this concern. He believes the Insurance Chamber must protect against the risk of the employer not surviving and leaving the pension fund with inadequate assets to cover its liabilities.
Some experts noted the Insurance Chamber has made concessions. Under a trial balloon floated earlier, equities were hit twice, Mr. Klein Haneveld said. Not only would a funding cushion be required but government bonds would receive advantageous treatment in meeting funding rules.
Because sovereign debt was viewed as riskless, pension funds would have been able to count both principal and the expected future stream of coupons coming off of those bonds. In effect, the future income stream could be used to cover funding gaps, Mr. Klein Haneveld explained.
Now, chamber officials have reversed that view, he said.
Chamber officials said they must be conservative in their approach. While the legal right to a pension is the nominal benefit in 98% of Dutch plans, regulators try to encourage funds to provide an inflation-adjusted benefit. They do this by setting a very low discount rate of 4% in real terms, forcing plans to fund on a very conservative basis.
Regulators also are wary about insurance protections, particularly in smaller plans. While 700 Dutch corporate funds are self-administered, another 450 are reinsured. In reality, however, those plans are not fully insured because profits and losses are charged to the pension funds, Mr. van Dam said.
Elsewhere, chamber officials are seeking legislation to ban certain funding methods that are backloaded.
New derivatives policy
As part of its educational efforts, regulators also are focusing on risk. While regulators still are drafting new rules, they have said they are seeking to limit risks attached to using derivatives without unnecessarily restraining prudent use of the instruments. Helpful uses of derivatives include tactical asset allocation, currency risk management and duration management, in their view.
"The Verzekeringskamer recognizes the useful role derivatives can play in efficient asset management, in the hedging of certain market risks, or in the pursuit of additional investment returns," regulators said in a paper last summer.
"Incompetent or imprudent use of derivatives has in several instances led to substantial financial losses. This does not mean, however, that derivatives in themselves are unacceptably risky financial instruments.
"'Traditional' investments are also liable to risks . . . In fact, not using derivatives may at times be more risky than using these instruments," the paper said.
The regulators leave the main responsibility for setting investment policy to institutions, but urge them to pay attention to controlling operational risk; setting clear policies, guidelines and limits; and providing a strict separation between execution of orders and control of derivatives.
The Insurance Chamber also likely will toughen annual reporting requirements on derivatives use, which it deems inadequate.