Brans Brief number 8, year 8, August 2005

In this issue of the Brans Brief:
 

	Businesses and pension funds come closer together
	Monitoring of investments and commitments
	Bill implementing the Pension Funds Directive passed
	Basic training course for directors of pension funds

Businesses and pension funds come closer together

The business sector is currently preparing for changes in the bookkeeping rules according to IFRS or the Dutch RJ 271. In practice, there are not many businesses that are not confronted with these changes. Your accountant can tell you what bookkeeping rules apply to your business. The media have now started presenting a picture of businesses taking up arms en masse against the implications of the new bookkeeping rules for pension commitments by switching to Defined Contribution (DC) schemes. Generally, rather than setting up individual DC schemes, the relationship between the business and the pension fund is arranged differently. Under such collective DC schemes, employees remain eligible for pension claims in principle, but the business is only obliged to pay the pension fund a fixed premium. In difficult times, the fund will have to manage for itself. If that ultimately proves impossible, the pensions’ index link generally comes under threat first; however, eventually the envisioned pension claims will also be at risk. Clarity is required regarding the sequence of reduction measures. The flip side of the coin is that in prosperous times the pension fund will pay out more than the envisioned pension claims.

Setting up a collective DC scheme is no simple matter, which is perhaps the reason why far from all the businesses mentioned in the media have so far succeeded in finalising that DC status for their bookkeeping commitments. In addition, the desired qualification of the pension scheme should be properly considered in advance.

The advantage of the DC status for bookkeeping purposes seems obvious. The business has no pension commitments on its balance sheet, and only includes the premiums paid in its profit and loss account. In order to achieve that status, however, the premium will usually have to be raised (significantly) in advance because that increases the possibility that the pension fund will actually be able to pay the envisioned claims, which is a demand many employees will make under the new system. Moreover, it is accepted economic theory to pay a premium to cover risks. In most cases, the pension fund’s deficit will also have to be made good first of all, which will also call for additional payments. Afterwards, however, the business will generally no longer be ‘troubled’ by fluctuations in the pension commitments in relation to the available funds.

However, in order for the business to retain its DC status, it is important that no one ‘bends’ if the pension fund actually does find itself in difficulties. Suspicion of providing aid will result in the loss of the DC status. This also requires continual, careful and properly coordinated communication about the nature of the schemes and the parties bearing the risks.
Therefore all of the above needs to be very clear when a business considers whether or not to attempt to obtain the DC status, since non-DC environments also offer possibilities to avoid or mitigate the generally unwelcome fluctuations in pension commitments. The new Financial Assessment Framework (Financieel Toetsingskader, FTK) makes it possible for businesses and pension funds to come closer together: under this system, pension funds are also confronted with fluctuating commitments, whereas under the current system of fixed standard interest rates they are less affected by those fluctuations. Many pension funds are reconsidering their investment policy, in light of the FTK, and are showing a tendency to increase the sensitivity of their assets to the interest rate. As a result, under the new bookkeeping rules, the financial position of the business will also fluctuate less. The required transparency about the index-linking to be realised also helps. Many pension funds will have to acknowledge that it is not very realistic to always grant full index-linking. For example, if half of the price movement is real, this can also be taken into account in the IFRS or Dutch RJ calculation. With the present uncertainty concerning the required index-linking, conversely, the commitment in the accounts is generally based on full index-linking, which exaggerates any deficits. One final point that should be noted is that the transition from a final pay system to an average pay system has already helped to some degree. All in all, it is time first of all to thoroughly assess the risks and opportunities of the pension situation, from the point of view of both the pension fund and the business.

Certainly now that the requirements for pension funds and the company’s commitments appear to be moving closer together.

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Monitoring of investments and commitments

In part owing to the poor returns in recent years and the introduction of the new Financial Assessment Framework, the market is showing a clear trend toward increasing complexity of investment portfolios. This drastically increases the importance of continually measuring and assessing the investments, which is the responsibility of the board of the pension fund.

Proper monitoring is a solid foundation to make it possible to adjust the investment policy in time, and it can be used to carefully account for the policy adopted to participants and supervisory bodies. Watson Wyatt has a great deal of experience in assisting boards and investment committees with investments and commitments. Based on the know-how and experience that we have gained in this area, we are pleased to offer you a new service that may help you in monitoring your investments and commitments: LiabilityWatch & PortfolioWatch.

LiabilityWatch & PortfolioWatch
In recent years, we have been developing reports that aid our consultants in monitoring asset management structures and individual asset managers. We have now made these reports (called Watches) available to our clients, thus giving them continual and efficient access to our know-how and expertise.

A LiabilityWatch is a simple way of monitoring the movements in the financial position of your own pension fund. It also provides you with information about the developments in the principal factors affecting that financial position, both on the commitments side and on the side of your investments.

A PortfolioWatch provides you with more information about the movements in your investment portfolio and the performances of the individual asset managers. PortfolioWatch reports include a description of the market developments (MarketWatch), a numerical assessment of the investment portfolio in terms of yield achieved, risks and investment style (PerformanceWatch, RiskWatch, StyleWatch), and a qualitative assessment of the asset managers (ManagerWatch).

Would you like to learn more about monitoring? On 15 September 2005, Watson Wyatt is organising an information meeting to discuss the monitoring wishes of boards and investment committees in greater detail.

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Bill implementing the Pension Funds Directive passed

On 30 June 2005, the Lower House of the Dutch Parliament passed the ‘Bill amending the Pensions and Savings Funds Act’, as well as a number of other laws in connection with the implementation of Directive 2003/41/EC. After the summer recess, the Upper House will examine the bill. Minister De Geus hopes to be able to implement the bill in the Pensions and Savings Funds Act (Pensioen- en spaarfondsenwet, PSW) as of 23 September 2005. For more information, please refer to our Brans Brief of June 2005, which addresses the details of some important changes in the PSW stemming from the bill.

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Basic training course for directors of pension funds

Another basic training course for directors of pension funds will be held soon. At this two-day course, directors gain a basic understanding of the relevant laws and regulations; types of pension schemes; financing systems; actuarial reporting; and the investment process. The course is also suitable for members of works councils, participants' councils or people working for a pension fund. The course will be held on 12 and 13 October 2005 in Bunnik in the Netherlands. For more information about this course, please contact Alice Christiaans (tel. +31 (0)20 54 33 000).

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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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