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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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5
• 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
5
3rd Pillar
2nd Pillar
1st Pillar
6
• 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
6
3rd Pillar
2nd Pillar
1st Pillar
7
• 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
7
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
8
3rd Pillar
2nd Pillar
1st Pillar
9
• 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
9
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?