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Pension Supervision in the Netherlands and the
Implementation of the EU Directives

• Leendert W. van Driel
• Regional Round Table
• Skopje, February 22nd, 2007

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Contents
Apeldoorn

• The Netherlands
• Pension system
• Pension supervision
• The IORP Directive a catalyst for change

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Contents
Apeldoorn

• The Netherlands
• Pension system
• Pension supervision
• The IORP Directive a catalyst for change

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Main Features Dutch pension system
3rd Pillar 2nd Pillar 1st Pillar

• State
• PAYG
• Premiums via taxation on income
• All citizens
• Mandatory

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Main Features Dutch pension system
3rd Pillar 2nd Pillar 1st Pillar

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

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

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Main Features Dutch pension system

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

3rd Pillar 2nd Pillar 1st Pillar

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

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

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Main Features Dutch pension system

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

3rd Pillar 2nd Pillar 1st Pillar

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

flat rate AOW for all Dutch citizens

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

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Main Features Dutch pension system

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

3rd Pillar 2nd Pillar 1st Pillar
pension funds are autonomous no link with
sponsoring company

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

(1) Company (2) professional (3)
multi-employer industry-wide pension funds
flat rate AOW for all Dutch citizens

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

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Main Features Dutch pension system

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

Self-employed Others the icing on the cake
3rd Pillar 2nd Pillar 1st Pillar
pension premiums are tax-deductable
pension funds are autonomous no link with
sponsoring company

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

(1) Company (2) professional (3)
multi-employer industry-wide pension funds
flat rate AOW for all Dutch citizens

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

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Figures 2006 second pillar
Pensions in the Netherlands

• Company funds number 581/participants 890.000
• Industrywide funds number 103/participants
  5.284.000
• Occupational funds number 11/participants 46.000
• Total assets Euro 650 billion/1,2 x GDP
• Insurance companies 174.000 pension schemes/
  89.000 employers
• Total number of employees in the Netherlands
  7.200.000

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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 gt90 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 (group) DC
• Group and solidarity vs. individualisation
• Supervision focus on prudential supervision

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Contents
Apeldoorn

• The Netherlands
• Pension system
• Pension supervision
• The IORP Directive a catalyst for change

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Regulation

• 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

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Supervision

• 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 gt5x 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

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Supervisory approach

• 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)

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Prudential Supervision FTK

• 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

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Prudential Supervision FTK (2)
Summary Market values A ánd L 100
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

• Technicalities step by step
• Pension liabilities calculated on market values
• Assets calculated on market values
• Fully funding requirement A/L 1 ? 100
• 5 additional funding requirement for
  non-quantified risks ? 105
• Stress-testing under various risk-scenarios e.g.
  interest rate hike, credit default, currency
  crisis, mortality/longevity risk, stock market
  crash, etc.
• 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
• Continuity testing within 15 year horizon in
  order to create self-discipline of pensions funds
  and increasing risk awareness, strategic planning
• Recovery plan if needed (3-15 years)

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Pension supervision practices
Assets
Liabilities
Investments
Provision Pension Liabilities (PPL) Reserve/buffer

• PPL cash value of expected future benefits
• Funding ratio investments/PPL
• KEY QUESTIONS
• How to determine the value of pension liabilities
• Size of buffer
• Measures in case of deficit

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Prudential supervision tool - FIRM
Assessment solvency position
Net score in control organisation
Assessment integrity of management
Assessment of various risks
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Contents
Apeldoorn

• The Netherlands
• Pension system
• Pension supervision
• The IORP Directive a catalyst for change

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The IORP Directive a catalyst for change

• Mindset increasing interest in EU affairs!!
• Market developments fast increasing cross-border
  activities of pension funds
• Asset pooling (Unilever, IBM, AEGON, Shell, GE)
• Expat solutions (Philips)
• Niche markets (Pensplan)
• Plain-vanilla solutions (Scandinavia, .)
• Regulatory arbitrage

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Nederland Pensioenland

• 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.

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CEIOPS OPC

• Committee of European Occupational Pension
  Supervisors
• Chairman Mihaly Erdos
• Very valuable network open, constructive,
  pro-active!
• Working Programme
• Supervisory convergence EU-wide funding and
  solvency framework for IORPs
• Real life cross-border cases Budapest Protocol
• Review IORP Directive 2008
• Sharing best practices

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Thank you for your attention! Questions?
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