Dutch look ambitiously beyond DB funds

As the social partners in the Netherlands debate the future of the pension system, Amanda White spoke with chief institutional business and deputy CEO at PGGM, Else Bos, about the preferred reform outcome which may be a move towards a “defined ambition” structure, as well as PGGM’s vision of retirement provision which moves beyond just monetary considerations.

The Dutch are not afraid to tackle the big issues. Take the pension system reform agenda as an example. The social partners – employers and employees – are now discussing fundamental issues about the future of the system with a view to designing a new pension contract, including balancing the nominal guarantee and the indexation ambition; longevity risk; and even whether the mandatory system still fits.

The Dutch system is mature, around since the 1950s, and with accolades such as a number one ranking in the Mercer global pension index, there is no doubt it is well-respected.

Coverage is good, with about 90 per cent of employees participating, across an industry of 600 pension funds and about €750 billion ($1,042 billion).

Chief institutional business and deputy CEO at PGGM, Else Bos, says there is a recognition that the system needs to develop to make it robust for financial shocks, and be sustainable for the future.

In particular, because the Dutch regulatory system is based on a fair market value approach of the assets and liabilities, during the crisis the decrease in interest rate yield caused an increase in the value of the liabilities, resulting in a double negative effect on the funding ratio of the Dutch funds. About 90 per cent of the system is defined benefit.

“The financial crisis as such is not the problem but it made the underlying fundamental questions and dilemmas about the viability of the system more apparent,” she says.

She says one of the critical debates is whether the “hybrid” that exists in the existing defined benefit contract is sustainable. At the moment there is a combination of a nominal guarantee and an indexation ambition, which have conflicting asset mixes that can potentially put the other at stake.

“This combination creates conflicting messages for the investment policy: to manage the nominal coverage ratio, the investment risk should be limited, with a preference to invest in nominal bonds. But to manage the indexation ambition, a different asset mix is needed, with a higher percentage allocated to real assets such as equities, inflation-linked bonds and real estate,” she says.

There is also a discussion about the right discount rate to calculate the value of the liabilities.

The discussions around the new pension contract are in their final stages, and while a number of possible solutions are on the table, Bos says, the conversation is leading in the direction of a fully adjustable real contract.

“This is a so-called defined ambition contract. In that scenario we continue taking investment risks and accept a mismatch between the assets and nominal liabilities. In that situation we maximise the changes for a real pension with indexation,” she says.

Bos says the important aspects of the discussion are maintaining the collectivity, solidarity and mandatory elements; making sure there is no differential between generations; and a regulatory framework and communication system based on real terms.

One of the other major issues being discussed is the mandatory nature of the system, with one argument that the lack of choice creates unease and puts pressure on the system, especially in difficult times.

“We only provide options in the de-cumulation phase at the moment, we can’t make our own decisions about savings. I would expect more choices in the accumulation phase in the future,” she says.

Bos says a possible solution to the ageing population in the Netherlands is to split the funds according to age, and manage the funds separately with different investment mixes.

“This has had limited support but there could be further investigation,” she says.

PGGM itself is also reviewing the provision of its services, based on a view of retirement.

Bos, who set up a new client service division a year ago that now employs 100 people, says the firm recently created a separate pension innovation department, to focus on real outgoing innovation.

“The big discussion about the pension arrangement, (will) focus on whether to have three areas together – housing, healthcare and pensions. A pension is not just about money but a way of life, and health and housing are part of that,” she says.

“At PGGM we are looking at the future of pensions in a different way, it is not just about money but healthcare and housing as well – we call it ‘the new old age’.”

The €100 billion ($139 billion) PGGM which has 1,000 employees and manages most assets in house has signed its fifth pension fund client and manages pensions for two million people.