Inflation-linked benefits could be part of a redesign of Dutch pension regulations, potentially resulting in fundamental changes in portfolio management affecting the €649 billion ($887 billion) market.
If inflation is taken in account, real pension liabilities could increase by as much as 40% compared with the nominal liabilities now used to measure solvency levels, according to several consultants. That could mean a required funding target of between 140% and 160% rather than the current 105%, depending on the investment risk taken.
“It's not yet clear; no one has a clue as to what the regulators will require,” said Leen Meijaard, London-based managing director and head of the institutional business for Europe, the Middle East and Africa at BlackRock Inc.
Financieel Toetsingskader, the regulatory framework that was launched in 2007, does not now require pension funds to link benefits to inflation, also known as indexation. However, many fund officials had been doing so — mainly because of strong social pressure — until the financial crisis hit. Plummeting funding levels at the end of 2008 and early 2009 meant no inflation indexation for the bulk of the funds nationwide last year.
The fear among pension officials is that retirees' purchasing power will be severely weakened if fund officials continue to forgo indexation for a long period, consultants said.
Such questions over the sustainability of the Dutch pension system led the country's Ministry of Social Affairs and Employment to commission two committee reports published earlier this year. One committee was chaired by Jean Frijns, former chief investment officer at the €208 billion Stichting Pensioenfonds ABP, Heerlen, and the other was chaired by Kees Goudswaard, professor of applied economics and social security at Leiden University.
Both committees recommended a shift to a real solvency framework that takes inflation into account. Over a period of about 40 years, purchasing power could more than halve if pension benefits are not indexed to inflation throughout that time, according to an estimate in the report by Mr. Frijns' committee.