Dutch Pensions and Financial Markets Turmoil. Roderick Munsters ICPM Toronto, June 10 th 2009

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1 Dutch Pensions and Financial Markets Turmoil Roderick Munsters ICPM Toronto, June 10 th 2009

2 Agenda 1. Financial Market Turmoil and funding ratios of Dutch pension funds in 2008 & 2009 ytd 2. Responses to the fall in funding ratios 3. Need of pension plan redesign

3 Funding ratio Jan 2008 May 2009

4 Fall funding ratio autumn 2008 caused by fall in rate of interest and negative return assets; July 2008 May % 0.0% -5.0% 8/1/08 10/1/08 12/1/08 2/1/09 4/1/09 6/1/ % -15.0% -20.0% -25.0% -30.0% -35.0% Rate of return (cumulative) Effect rate of interest

5 Dutch Pension Funds Funding Ratio Assets marked to market Valuation rules (set by individual pension fund) for liquid investments similar, varying for illiquid investments (both rules and application) Liabilities marked to market Use of Euro Swap curve mandatory, market value dependant specific curve that best matches duration of pension fund liabilities

6 Risk exposure differs amongst pension funds Hedged position towards main risks Interest rate risk, inflation risk and equity risk Corporate Pension Funds of Rabobank, ABN Amro, and Philips Reallocation asset-mix to a more conservative risk profile Continuation long term orientation in risk taking ABP Large industry pension funds in general (they typically do not have a sponsor company that uses IFRS, and on average have a lower equity allocation)

7 Different risk exposure 2008 implies different performance 2008 pension funds ABP PFZW PME PMT Investment return NA Return on interest rate hedge NA Total return drop of funding ratio (%-pts) end of year funding ratio

8 Effects of fall in funding ratios 1. Recovery plans 2. Swap markets out of balance 3. Additional funding 4. Politicians 5. New ideas from the sector

9 Supervision: recovery plans Dutch Government relaxed Funding Ratio requirements: Forward Swap Curve frozen 3 year recovery plan term expanded to 5 years Supervisor requirements recovery funding ratio within 5 years to 105% ( minimum required ) within 15 years to around 125% ( solvency required including buffers ) End of % of funds below 105% 16% of funds between 105% and 125% Discussion Supervisor and pension funds Parameters to be used in recovery projections Formal Gov t limits (equity returns max 7.5%, wage inflation min 3.0%)

10 Swap market out of balance due to demand for hedging long nominal rates 30 year swap spread: jan 2006 may 2009 Autumn 2008

11 Effect of different Liability Discount Rates 30 years rates as per end of March 2009 and average impact on funding ratio: yield change FR Euro Swap 3.65% German Treasuries 3.86% + 3% Dutch Treasuries 4.07% + 7% Dutch Treasuries + 20 bp. 4.27% +10% AA-corporate (approx) 5.5% +22%

12 Daily (!!) volatility funding ratio 8% 8% 6% 4% 2% 0% -2% -4% 6% 4% 2% 0% -2% -4% -6% -6% okt-08 nov-08 dec-08 ja n feb-09 mrt-09 Volatiliteit dekkingsgraad (% -punten) Dagelijkse mutatie dekkingsgraad (% -punten) -8% Dagelijkse mutatie 15-jaar sw aprente (%-punten) -0,3% -0,2% -0,1% 0,0% 0,1% 0,2% 0,3%

13 Smoothed discount rate to achieve stable development liabilities (Jan May 2009) 10% 9% 8% 7% 6% 5% 4% 3% Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Huidige rekenrente Huidige rekenrente 3-jaars gemiddelde rente 5-jaars gemiddelde rente 7-jaars gemiddelde rente

14 Additional funding by company pension funds Company additional funding % AuM pf % equity company ING 814 mln euro 8.9% 2.8% KPN 120 mln euro 3.5% 3.2% Shell 4000 mln euro worldwide 3.9% Reed Elsevier 54 mln euro 12.0% 5.4% Pension fund solvency ratio shortfall force companies to make (significant) additional contributions in 2009

15 Dutch Politics 1. Letter of minister Donner 6 commissions; Task = evaluate policy of pension funds and assessments sustainability current plans in relation to future developments Fields of interests: investments, funding, parameters, economic expectations, and so on 2. Possible increase of retirement age Public pension scheme (AOW, PAYG): from 65 to 67 May also lead to higher retirement age in pension fund plans

16 Changing pension plans (1) 1. More sober pension deals 2. Additional funding and IFRS impact makes corporate pension funds rethink their pension deals and/or investment strategy 3. Ideas about redesign pension plans APG presentation at ICPM autumn 2008 (Seattle) APG variant A: new indexation rule APG variant B: First DC, then DB

17 Changing pension plans (2) 4. Pension deal to change from one size fits all wrt assetmix, indexation, pension premium and risk sharing towards taking ageing (more retirees which also live longer) into account and differentiate according to age along ideas of optimal life cycle planning 5. Pension deal (risk bearing capacity, cost, possible outcome) to be made more explicit to participants. Choice for participants?? 6. Pension fund participation to remain compulsory (currently 95% of Dutch emp;oyees covered)

18 Changing pension plans (3) 7. Targets set on expertise and reporting will lead to further consolidation (Mn Services, PGGM and APG as examples) 8. Stay with current low cost, high trust and compulsory setup. Pensions run by trustworthy co-ops in the sole interest of the beneficiaries. 9. In the Netherlands the continued support of employers and trade unions will remain vital for the future Dutch Pension Deal to remain attractive (and thus successful)

Towards age differentiation in funded collective pensions

Towards age differentiation in funded collective pensions ICPM, October 2008 Roderick Molenaar Roderick Munsters Eduard Ponds Agenda 1. Pension funds Netherlands 2. Increasing maturity 3. Optimal Lifecycle