01 November 2007

Small funds may be unaffordable in future – DNB

The average pension fund may well be too small to be affordable, says Klaas Knot, director of supervisory policy at the Dutch central bank DNB. In an interview with IPE today, Knot said small funds may no longer be economical: “A larger scale leads to lower costs, and many well-known academics have observed that, currently, the average [size] is possibly lower than the optimum.”

He also warns employers with smaller funds may need to be more transparent about the added value of the fund’s relative smaller size: “The added value of being small needs to compensate the cost efficiency of a large scale – many employers are currently not transparent enough about this.”

Knot is, however, adamant the regulator is not trying force pension funds towards insurers with this approach, as insurers costs levels are less attractive.

“We have investigated cost levels at insurers, and these are not significantly lower than those of pension funds; so the suggestion that the DNB wants to shoehorn funds towards insurers is absolutely untrue,” he said.

Knot added: “Insurers still have to do some more homework, moreover we are familiar with the complaints about their administrative backlog.”

According to Knot, who yesterday was appointed to the Managing Board of the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS), said pension funds today need to take significant risks to be sustainable.

“Protection of the participant and required risk management demand an optimal size. The question is if we in the Netherlands, with our 700 or so pension funds, have enough scale,” Knot told IPE.

He also suggested in the current pension landscape smaller funds cannot easily merge: “The pension law in the Netherlands is currently quite restrictive as we know only two variants: the corporate pension fund and the industry-wide pension fund.”

Knot would like to see more merger possibilities for pension funds as, for instance, smaller funds in a sector where no industry-wide fund has been established can do little to increase their scale.

“The new pension vehicle, API, proposed for pan-European schemes, could provide a solution, as small companies could together to set up an API, and hence increase scale and consolidate within their sector.”

© IPE International Publishers Ltd.