Dutch pensions and change: Lessons from Darwin

Transcription

1 Dutch pensions and change: Lessons from Darwin Roderick Munsters Toronto, October 6 th 2014 This presentation shows my personal observations and opinion 1

2 Dutch pensions / Society changes Dutch population ageing Global financial crisis / Markets volatile Interest rates falling Internet providing more info, facilitates raising questions and making comparisons Dutch Government developed an interest for Pensions (and future tax claims) Trade Unions losing members and power Workforce less homogeneous: international employees, almost 10% of workforce is self-employed, without pensions arrangement Dutch Regulators more vocal on pensions 2

3 Dutch pensions / some numbers 2 nd pillar pensions AuM 1050 bn. Solvency rate on average 112% Discount rate 1.90% (15y nominal zero) Asset mix: 35% equity, 50% bonds, 15% other (source: TowersWatson) Source: DNB Statistics 3

4 Dutch pensions / Set up & Governance 2 nd pillar pensions compulsory for most employees, 80% of Dutch participants with industry-wide pension funds Industry-wide funds: Boards governed by employers and Trade Unions Corporate Pension Funds Governance: Board governed by employers and employees/works Council Recent test and addition of professionals to Boards, and new evaluation committees Strong decline of number of Pension Funds 4

5 Major changes in Dutch regulation in recent years Mark-to-market (RM:?) of liabilities instead of fixed 4% discount rate Termination of voluntary & unfunded early retirement option Move from Final to Average pay DB schemes Introduction of minimum solvency rate & recovery plan Discount rate changes, based on: daily market quote/3-m average rate/ultimate forward rate/10 y average 20 year rate Enforcement of cutting liabilities & pensions when recovery plan not met in time Discussion on nominal vs. real defined pensions contract Limitations to tax-exempt pension savings Higher minimum solvency rate & longer recovery period 5

6 Dutch Corporate Pension Funds Corporate sponsors confronted with strict IFRSregulations on pension accounting DB pension deal thus possibly very costly and volatile to sponsor P&L Boards typically show diverse age-groups Pension plan design-change cost vs IFRS-cost mitigation can be exchanged Massive shift from DB to DC, with flexibility for participants and stable cost for Corporate In recent years continued indexation of pension payments and liabilities 6

7 Dutch Industry-wide Pension Funds Pension premiums typically accounted for on cash = cost basis Sponsor(s) budget routine shows little flexibility for premium rise or one-off funding cash supplements Trade union boards typically packed with 50+ white males Trade Unions by and large have vetoed change towards flexibility; thus one-size-fits-all premium/indexation/investment/risk policy for all participants remains. No change: no shift from DB to DC; young participants vocal on perceived unfair treatment In recent years no indexation of pension payments and liabilities 7

8 Ambachtsheer Pension Fund Governance Focus: Netherlands 2014 Complete, simple & fair pension contract Boards are skilled and experienced Make use of Board self-evaluation Clarity between Board & Management Roles Adopt high performance stance Board effectiveness regulator required Source: The Ambachtsheer Letter July

9 Robeco 2014 study on the effect of the financial crisis on Dutch working population 70% of participants expect a lower and/or less certain pension 50% of participants expect the above to have a large to very large impact 40% expect that lower pensions will not be repaired 56% started to save more to (partly) compensate the above mentioned shortfall Source: Ruigrok Netpanel / Impact Crisis op Pensioen, June

10 Dutch pensions in 2014 / Personal observations Retirement savings higher than anywhere else on the globe Participants, politicians and regulators worried and riskaverse Regulatory changes massive and non-coherent Endless discussions amongst politicians, academics, social partners: everyone still confused, albeit at a higher level Corporate Pensions changing towards DC, individual rights and flexible. Industry wide funds (dominated by Trade Unions) not adapting to changed reality (demographics, customer preferences & markets) 10

11 Dutch pensions in 2020? 11

12 Dutch pensions & Darwin: It is not the strongest of species that survives, nor the most intelligent. It is the one that is the most adaptable to change 12

13 Dutch pensions in 2016 / Personal thoughts Shift to a fair and transparent Pension Contract, with individual accounts, managed collectively and low cost, keep tax incentives Promote effective Pension Boards & separate Pension Mgt Companies who transparently compete Keep compulsory savings, start early and save +/- 20% of income Earn long term real risk premia, smart life-cycle asset-mix, sustainability investing Make retirement age and percentage flexible End compulsory nominal annuitization. After retirement remain invested and earn risk-premia Buy longevity insurance at retirement, invest and spend remaining pension capital 13