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In this Watson Wyatt Update:
The statutory framework for securities-related market conduct supervision for pension funds changed on 1 January 2007. With effect from that date, this supervision is included as part of the Dutch Financial Supervision Act (Wet op het financieel toezicht or Wft) with further details being incorporated into Chapter 6 of the Dutch Market Abuse (Financial Supervision Act) Decree [Besluit Marktmisbruik Wft]. The Netherlands Authority for the Financial Markets (AFM) is the supervisory authority responsible for securities-related market conduct supervision.
One key change is that the Wft does not include the generic exemption based on the transaction volume criterion. Under that exemption, pension funds the investment transactions of which did not exceed the threshold of €20 million per year could apply for exemption from all of the AFM’s securities-related market conduct supervision activities.
Pursuant to the rules laid down in the Wft, pension funds are required to implement measures for the following:
The Market Abuse Decree stipulates an exemption for pension funds the transaction volume of which did not exceed the €20 million threshold during the previous calendar year. Such pension funds need not introduce codes of conduct for private transactions (insider trading regulations). This exemption is granted by operation of law and need therefore not be applied for. Pension funds that believe they fall within the scope of this exemption must calculate their transaction volumes themselves every year, in order to determine whether the exemption still applies. The AFM may request to see those calculations. All other provisions governing securities-related market conduct supervision are applicable, including the appointment of a compliance officer.
The structure of the Wft is ‘principle-based’. As such, pension funds must determine for themselves how to implement the measures stipulated within their own organisation. The AFM will monitor compliance with the rules stemming from the securities-related market conduct supervision.
The AFM’s website states that the pension umbrella organisations will soon present a model code of conduct in which the requirements for securities-related market conduct supervision from the Wft are given shape.
Pension funds that in 2006 were exempt from securities-related market conduct supervision must comply with the new requirements by no later than 1 July 2007. All other pension funds had to meet the Wft requirements by 1 January 2007.
For more information contact: Harmen Pullen.
The consumer affairs programme Radar recently presented a disheartening portrayal of the risks and costs associated with defined contribution plans (Tros, Nederland 1, 28 May 2007). Watson Wyatt would like to address this issue in response to this report.
Introduction
Defined contribution (DC) plans are schemes under which annual premiums are specified rather than a specific level of pension. Those premiums are generally calculated according to an age-linked percentage of part of the worker’s salary. Under such schemes, each worker has his or her own account into which the premiums are paid. With most schemes, the amount saved, including the accumulated returns on the investments, is not converted into a fixed pension until the worker reaches retirement age. The Dutch Pensions Act (Pensioenwet) refers to them as ‘premium agreements’ (premieovereenkomsten). This article only discusses pure premium agreements, and not collective DC plans structured as benefit agreements.
Popularity in the Netherlands
DC plans are not popular in the Netherlands due to a number of major drawbacks associated with them, which are addressed below. Another factor is that in this country the traditional pension system (DB = defined benefit, referred to as uitkeringsovereenkomsten – ‘benefit agreements’ – in the Dutch Pensions Act) works efficiently, is properly financed and inspires confidence. Yet DC plans are frequently used to supplement traditional pension schemes of board members, for example. Moreover, the pension packages of smaller subsidiaries of foreign multinationals are often limited to DC plans.
High costs
The implementation costs of many DC plans are high. Firstly, there are the costs withheld from the annual contributions, such as administration fees (5%) and commission (4%). Secondly, every year as much as one percentage point is deducted from the returns on the savings for all manner of visible or hidden costs related to asset management. Thirdly, when the pension commences, the balance is converted into a fixed pension based on a prudent rate of insurance, which in turn is generally based on a somewhat conservative actuarial interest rate that is below the market rate of interest and on a margin for costs.
Difficult choices
Many DC plans offer their members the choice of investing their savings in various combinations of short-term currency, bonds and shares. Although there are advantages to such choices, what is the value of that flexibility if it is true that most people are totally incapable of realistically estimating future returns and risks and considering the choices rationally? Moreover, more choices mean more complications and higher costs.
Unpredictable pensions
Even experts are just able to reliably predict the eventual pension results, since those results are dependent on future returns (net result after deducting the costs described above) and, in particular, upon the future market interest rates. The current market rate of interest remains the decisive factor for the amount of pension that can theoretically be financed from a given amount of premium. As such, this drawback also applies in the case of DC plans under which pensions are purchased from an insurance company as soon as the premiums are paid and at a current market rate of interest.
So what is the right way of doing things?
For more information contact: Roland van Gaalen.
If you have any questions or remarks concerning this issue of the Watson Wyatt Update, please let us know.
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