Brans Brief number 5, year 8, may 2005

In this issue of the Brans Brief:
 

	Fuss about the euro: a storm in a teacup?
	Bond yield now below 4%
	Indexation matrix
	Age-related employee contribution for defined contribution schemes
	2005 Benefits and Employment Terms & Conditions Reports

Fuss about the euro: a storm in a teacup?

According to recent articles in the press, there is still some ‘fuss’ about the introduction of the euro in 1999, mainly regarding the conversion rate used for the guilder. This may be a storm in a teacup, but it cannot do any harm to point out the benefits of the new currency for pension funds. The euro has actually brought about a more efficient capital market in which it is easier to diversify and hedge risk. There is now a much wider supply of bonds, index-linked bonds, interest-rate swaps and inflation swaps available in the single currency.
At the end of May 2005, the nominal market yield for a 30-year maturity was 3.8%, with the real yield coming to 1.6%. The expected level of inflation in the long term cannot therefore be much more than 2.0%, if one can assume an inflation risk premium of 0.2%, (since 3.8 – 1.6 = 2.2 = 2.0 + 0.2). The European Central Bank, by the way, rightly strives to keep inflation below - but close to - 2%, to avoid deflation and a situation such as occurred in Japan. Looked at in this way, the euro is a strong currency, and the market clearly has confidence in the stability of the new monetary system. This is in the national interest, since pension funds invest hundreds of billions to safeguard the pensions of millions of Dutch citizens.

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Bond yield now below 4%

It is notable that the nominal market yield is currently (end of May 2005) lower than the traditional fixed base interest rate of 4%. This means that 4% can no longer be considered to be a prudent measure of the risk-free interest rate. The market rate was already around 4¼% at the end of 2004, and now stands at approximately 3¾%. This rate is a weighted average discount rate for the calculation of the cash value of nominal pensions, derived from the current forward interest-rate structure of risk-free market interest rates and taking into account the maturities and size of the liabilities of an average pension fund.

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Indexation matrix

Last month, the Ministry of Social Affairs and Employment [Ministerie van Sociale Zaken and Werkgelegenheid, or SZW] issued a document on the regulation of the surcharge policy applied by pension funds (see the official publication of 13 April 2005 on www.szw.nl). This ‘Indexation matrix’, with accompanying manual, can be seen as a supplement to the General Principles Note [Hoofdlijnennota, SZW, February 2004] and the Implementation Note [Uitwerkingsnota, SZW, October 2004]. While the two last-mentioned documents relate to the new Pensions Act, which is expected to come into force in 2006, it is intended that the regulator (De Nederlandsche Bank) should apply the Indexation matrix immediately.

The Indexation matrix makes a distinction between various forms of conditional and unconditional surcharge policy and combinations thereof:

• no indexation allocation

• no targeted indexation policy

• indexation not linked to a measure determined in advance

• indexation linked to a measure determined in advance

Moreover, a distinction is made by financing method:

• no financing

• financing from one-off benefits

• pre-financing at the same time as financing of the nominal pensions

• financing at the time the surcharge is granted with an employer’s guarantee

• financing via a reserve allocated for this purpose or a technical provision

As stipulated in the General Principles Note, premium discounts and the like are not permitted, unless both the unconditional and conditional parts of the pension agreement can be met, also in the longer term. The Indexation matrix gives information regarding how the premium discount threshold in the various situations should be calculated.

The Indexation also contains standard texts for the pension scheme and the provision of information.

The question of whether to stack or not
From the Indexation matrix manual, it can be inferred that ‘stacking’ the premium components for indexation and required shareholders’ equity is not obligatory in all situations in the case of conditional indexation. In principle therefore, the premium component intended for indexation can be used to keep the required shareholders’ equity up to the appropriate level. A continuity analysis must in any case show that the formulated intended indexation and the “required certainty regarding the unconditional commitments” are being observed.

On this important point and concerning the distinction between the various types of surcharges and financing, the Indexation matrix meets the wishes expressed in the report Indexation by Nederlandse Pension funds: naar een transparante inspanningsverplichting [Indexation by Dutch Pension Funds: towards a transparent commitment requirement] (Watson Wyatt Brans & Co, November 2003).

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Age-related employee contribution for defined contribution schemes

In his letter of 21 April 2005, Minister De Geus (SZW) indicated that in his view an employee contribution differentiated by age in defined contribution schemes is not in conflict with the Dutch Equal Treatment Act on the Basis of Age in Employment [Wet gelijke behandeling op grond van leeftijd bij the arbeid , or WGBL]. According to De Geus, the legislator intended the employee contribution to come under an exception to EC Directive 2000/78. On the basis of this directive, which forms the basis of the WGBL, the use of age criteria in actuarial calculations regarding supplementary pension schemes does not constitute discrimination on the basis of age. In De Geus’s opinion, it is not logical to say that the use of age criteria in actuarial calculations does not constitute discrimination but the effect of these calculations, i.e. varying employee contributions, does. We do not find the arguments used by De Geus convincing. In our opinion there are not sufficient indications that an obligatory application of salary such as an employee pension contribution may be age-related. An opinion expressed by the implementing authority as to the intentions of the legislator seems to us to be of minor significance. For the time being therefore, our standpoint is still that employee contributions should not be age-related. With reference to this point, see also our note on age discrimination on our website.

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2005 Benefits and Employment Terms & Conditions Reports

The Benefits Report Europe and the report Employment Terms & Conditions Europe are published annually. The 2005 edition appeared this month.

Benefits Report Europe
The Benefits Report Europe gives a brief overview of the ‘benefits’ (such as Retirement, Survivor’s, Disability and Health Care Benefits) and the potential impact of future planned changes for the various European countries. Attention is also devoted to recent developments such as pan-European pensions and the International Accounting Standards.

Employment Terms & Conditions Report Europe
This report gives a brief overview of the applicable legislation and case law in each country. Issues covered include conditions of employment contracts and formalities such as: “Trial Periods, Non-Compete Clauses, Part-Timers and Pay, Working Hours, Equal Treatment, Health & Safety, Terminations”.

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Questions or Remarks?

If you have any questions or remarks concerning this issue of the BransBrief, please let us know.

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