The Netherlands' tough new standards to require underfunded pension plans to be 105% funded within 12 months leaves out one significant and fickle variable: the capital markets.
Contribute as much as they might, sponsors of pension plans in the Netherlands still face the fluctuation of the market that can confound almost any reasonable effort to boost funding. They could, in effect, be attempting to fill buckets with holes in the bottom.
A decline in interest rates beyond the assumptions used by the sponsors will cause pension liabilities to increase and, depending on the extent of the decline, shatter any attempt to fund pension plans at a precise level, e.g., 105%.
The stock market could continue to sour, wearing away typical investments pension plans make with their new contributions, while at the same time generally decreasing the value of existing portfolios. This decline, too, will serve to lower funding levels, thwarting intentions to fully fund plans.
Requiring fully funded pension plans is good public policy. But when sponsors have only 12 months to do so, and to a 105% level, the effort is detrimental to the interests of both the sponsor and pension participant. The Pensioen & Verzekeringskamer, the Apeldoorn-based Dutch pension regulator, is shortsighted in its mandate. How does the PVK expect the sponsors will be able to reach that goal?
By requiring what could amount to onerous pension contributions in the next 12 months, plan sponsors could face the unhappy tradeoff of holding off new investment in operations to finance the retirement plan.
At the same time, Dutch plans might be forced to realize millions of dollars in losses by selling off equities to reallocate to theoretically more stable fixed income.
"For most of the underfunded pension funds, getting back to the 105% ratio in that (one-year) time period is going to be difficult, if not impossible," Jan Huizinga, investment director of the e1.2 billion ($1.22 billion) Pension Fund for Dentists, Bilthoven, was quoted as saying in a recent Pensions & Investments story.
Regulators ought to get the message that full funding in a reasonable period of time has support and makes sense. But the 12-month mandate is reckless and should be scrapped.
