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Country Presentation

Dutch Pension system and its supervision

Jacqueline Lommen

Sofia, 13 October 2006

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The Netherlands:

1. Pension system

2. Pension supervision

3. The IORP Directive – a catalyst for change

Contents

Apeldoorn

33

The Netherlands:

1. Pension system

2. Pension supervision

3. The IORP Directive – a catalyst for change

Contents

Apeldoorn

4

3rd Pillar

2nd Pillar

1st Pillar

• State• PAYG• Premiums via income taxes• All citizens• Mandatory

Main Features Dutch pension system

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• State• PAYG• Premiums via income taxes• All citizens• Mandatory

• Private• Capital-funded• Employment-related• Premium paid by employer/ee• “Voluntary”• Pension funds ánd insurers• Collective

Main Features Dutch pension system

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3rd Pillar

2nd Pillar

1st Pillar

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• State• PAYG• Premiums via income taxes• All citizens• Mandatory

• Private• Capital-funded• Employment-related• Premium paid by employer/ee• “Voluntary”• Pension funds ánd insurers• Collective

• Private• Capital-funded• Voluntary• Insurers only• Individual

Main Features Dutch pension system

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3rd Pillar

2nd Pillar

1st Pillar

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• State• PAYG• Premiums via income taxes• All citizens• Mandatory

• Private• Capital-funded• Employment-related• Premium paid by employer/ee• “Voluntary”• Pension funds ánd insurers• Collective

• Private• Capital-funded• Voluntary• Insurers only• Individual

flat rate “AOW” for all Dutch citizens

Main Features Dutch pension system

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3rd Pillar

2nd Pillar

1st Pillar

8

• State• PAYG• Premiums via income taxes• All citizens• Mandatory

• Private• Capital-funded• Employment-related• Premium paid by employer/ee• “Voluntary”• Pension funds ánd insurers• Collective

• Private• Capital-funded• Voluntary• Insurers only• Individual

flat rate “AOW” for all Dutch citizens

(1) Company (2) professional (3) multi-employer industry-wide pension funds

pension funds are autonomous; no link with sponsoring company

Main Features Dutch pension system

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3rd Pillar

2nd Pillar

1st Pillar

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• State• PAYG• Premiums via income taxes• All citizens• Mandatory

• Private• Capital-funded• Employment-related• Premium paid by employer/ee• “Voluntary”• Pension funds ánd insurers• Collective

• Private• Capital-funded• Voluntary• Insurers only• Individual

flat rate “AOW” for all Dutch citizens

Self-employed; Others: “the icing on the cake”

(1) Company (2) professional (3) multi-employer industry-wide pension funds

pension funds are autonomous; no link with sponsoring company

pension premiums are tax-deductable

Main Features Dutch pension system

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3rd Pillar

2nd Pillar

1st Pillar

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Adequacy• Well-embedded pension system; long history; large pension savings (fortunately!) Pension assets of 120% of GDP; Euro 650bn

• 1st pillar: Euro 500-750 net flat benefit per person per month • 2nd pillar: Coverage ratio of >90% of employees

• 1st + 2nd pillar: Replacement rate of 70% of final salary; DB schemes

• No pension fund failures; no bankruptcies

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Sustainability

Trends & Current issues

• Ageing: reforms 1st pillar PAYG system

• IFRS: shift from DB to (collective) DC

• collectivity and solidarity vs. individualisation

• Supervision: focus on prudential supervision

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The Netherlands:

1. Pension system

2. Pension supervision

3. The IORP Directive – a catalyst for change

Contents

Apeldoorn

1313

• Regulation - 1st pillar: Old Age Act (“AOW”) - 2nd Pillar: Pensions Act (“PW”)

• Regulator - Ministry of Social Affairs: pensions

- Ministry of Finance: all other financial markets segments

• Supervisor- DNB: De Nederlandsche Bank - AFM: Autoriteit Financiële Markten

Regulation

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• DNB – De Nederlandsche Bank - founded in 1952 (pensions part) - fully independent since 1992 (pensions part) - costs paid by supervised entities

• Integrated supervisor - pensions, insurance, banking ánd asset management

- supervisors ánd central bank - separate supervisor for market conduct (“AFM”)

• Supervised entities- 90 banks, 500 insurance companies, 750 pension funds- total assets >5x GDP- 640 company, 100 industry-wide funds, 10 professional pension funds

• Organisation- 1500 employees o/w 500 in supervision- 90 pension supervision + 10 pension supervisory policy

Supervision

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• Supervisory principles:– Principle-based / Prudent person in investments– Risk-oriented– Integrity– Transparent / ICT facilitated

• Executive powers:– Quarterly and annual statements– Contractual agreements– Investment plan / strategy– Actuarial and business memorandum– Fit and proper test board & management– On-site inspections

• Sanctions and redress:– Imposing a binding direction– Fines and penalties– Appointing interim managers / administrator– Replacing the Board

In practice:• Open discussions• Principle-based• Discretionary powers• Sanctioning only if

dialogue fails• Focus on prudential

supervision (funding and solvency)

Supervisory approach

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• FTK – Financial Assessment Framework- part of new Pensions Act (“PW”) per January 2007- applied voluntarily by pension funds since 2005

• Goal - solid financial position of pension fund- promoting professional risk management within pension funds- well-structured and transparent intervention by DNB

• Background= Basel II / Solvency II= market values= risk-weighted

Prudential Supervision – FTK

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Technicalities – step by step

1. Pension liabilities calculated on market values2. Assets calculated on market values3. Fully funding requirement A/L = 1 100%4. + 5% additional funding requirement for non-quantified

risks 105%

5. Stress-testing under various risk-scenarios e.g. interest rate hike, credit default, currency crisis, mortality/longevity risk, stock market crash, etc.

6. Resulting into additional capital requirement in order to prevent a drop below minimum funding level within 1 year and 97.5% confidence level average fund 25-30% solvency buffer required 130%

7. Continuity testing within 15 year horizon in order to create self-discipline of pensions funds and increasing risk awareness, strategic planning

8. Recovery plan if needed (3-15 years)

Prudential Supervision – FTK (2) Summary:

Market values A ánd L100% funding level 5% -------- +105% minimum funding level

±25% risk-weighted solvency buffer -------- +±130% required funding level for an average pension fund

(“solvency balance”)

-------- + Self-assessment

Recovery plan

-------- =FTK

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Prudential supervision – tool - FIRM

Assessment integrity

of manageme

nt Assessment of

various risks

Net score“in control”

& organisation

Assessment solvency

position

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The Netherlands:

1. Pension system

2. Pension supervision

3. The IORP Directive – a catalyst for change

Contents

Apeldoorn

2020

• Mindset: increasing interest in EU affairs!!

• Market developments: fast increasing cross-border activities of pensions funds – Asset pooling (Unilever, IBM, AEGON, Shell, GE)– Expat solutions (Philips, 23x UK)– Niche markets (Pensplan) – Plain-vanilla solutions (Scandinavia, ……….)

• Regulatory affairs: Dutch pension funds vs. IORPS

The IORP Directive: a catalyst for change

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• Active positioning of The Netherlands in the emerging, cross-border European pension market

• 2006: public – private initiative

• Driving force: defensive ánd offensive

• Actions: – asset pooling vehicle FGR– tailor-made support authorities– tax facilities– easy access for new entrants– promotion, etc.

Nederland Pensioenland

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• Committee of European Occupational Pension Supervisors;

Chairman Mihaly Erdos

• Very valuable network: open, constructive, pro-active!

• Working Programme: 1. Supervisory convergence – EU-wide funding and solvency

framework for IORPs

2. Real life cross-border cases – Budapest Protocol

3. Review IORP Directive 2008

4. Sharing best practices

CEIOPS – OPC

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Thank you for your attention!

Questions?