01 February 2008

DNB steps up pensions supervision on market worries

The Dutch Central Bank (DNB), has warned it is increasing its supervision of Dutch pension funds’ management and investment strategies on the back of growing concern about the negative impact of the US financial crisis.

Nout Wellink, chairman of the DNB, reiterated twice earlier this week – including during an address to the Dutch Parliament on the global financial crisis - pension funds have to commit themselves to a prudent investment strategy, based on the rules set regarding solvency and liabilities and suggested recent turbulence in the equity markets could affect pension funds’ coverage ratios.

According to Welllink, the international financial crisis has put pressure on the financial position of pension funds as he stated: “Due to lower share prices, pension fund’s investment portfolios have become less. As supervisor, the DNB will have to keep an eye on the coverage ratios of the respective pension funds”.

More specifically, Wellink indicated the DNB is placing increased attention on pension funds which have been showing weaker coverage ratios the last couple of years but he notes the larger Dutch pension funds, such as ABP, PGGM, SPF or PME, are not considered to be in any solvency or liability danger, as their coverage ratios and financial buffers are sufficient to cope with current market shifts.

In reaction, Olaf Sleijpen, director of strategy and policy at ABP, the largest Dutch pension fund, stated even thought the overall effects of the crisis have been negative, the fund does not yet see any reason to increase the pension premiums.

"Up to now, the impact of the subprime crisis in the USA is still unclear. For ABP, the effects have been still minimal as the positive effects of investments in hedge funds are still there. At the same time, in August 2007, when the subprime crisis emerged, ABP did not have any direct exposure to the latter. However, it needs to be reiterated that in the long term, the effects of the current financial crisis will have a negative impact on the financial position of the respective pension funds," Sleijpen told IPE.

He reiterated the financial fundaments of the Dutch pension sector are solid. Pension fund investments on the stock market and other sectors are also with a long-term view, he stated.

But, remarkably, he argued the effects of the current financial crisis also can looked upon as positive, as the situation will result in the end in a reasonably positive effect on total risks exposure taken by pension funds.

He noted most of the current negative developments on the financial markets are happening in what are considered to be the more complex markets. The latter maybe needs to be assessed further, and possible new rules or supervision is needed. The valuation and rating of complex and opaque structured products needs to be assessed.

In contrast to concerns about the US economy, triggered largely by the subprime mortgage crisis, the Netherlands is still considered to be heading towards economic growth, yet instead of being wary of the negative developments on the stock markets, which has had some impact, Dutch pension funds are more worried about interest rate developments.

The coverage ratio of Dutch pension funds is much more under pressure by fixed income capital market interest changes than yields on investments made in the stock market.

ABP’s director Dick Sluimers notes the latter is because pension funds have to report their respective liabilities against market interest rates, so when interest rates are lowered, as has been the case again in the US this week, pensions liabilities become exponentially higher.

When asked by the Parliament, Wellink reacted to these recent market developments by indicating the DNB will keep to a strict implementation of the 125% coverage ratio rule.

He told MPs if the coverage ratio of a pension fund falls below 105%, officials at that fund will have to present a recovery plan to the DNB – a move which normally entails an increase of the pension premiums. The latter situation would not be taken lightly, as economic growth could be threatened even further.

Evidence suggests, such direct danger has yet to be seen by most pension funds, as average coverage ratios  - based 2007 figures seen so far – indicate ratios are above the 140%, although the effects of last week’s ‘Black Monday’ and other stock market plunges have yet to be fully assessed.

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