Country Presentation Dutch Pension system and its supervision

1. Country Presentation Dutch Pension system and its supervision • Jacqueline Lommen • Sofia, 13 October 2006

2. Contents Apeldoorn • The Netherlands: • Pension system • Pension supervision • The IORP Directive – a catalyst for change 2

3. Contents Apeldoorn • The Netherlands: • Pension system • Pension supervision • The IORP Directive – a catalyst for change 3

4. Main Features Dutch pension system 3rd Pillar 2nd Pillar 1st Pillar • State • PAYG • Premiums via income taxes • All citizens • Mandatory 4

5. 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 5

6. 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 6

7. 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 7

8. 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 8

9. 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 9

10. 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 10

11. 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 11

12. Contents Apeldoorn • The Netherlands: • Pension system • Pension supervision • The IORP Directive – a catalyst for change 12

13. 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 13

14. 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 >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 14

15. 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) 15

16. 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 16

17. 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) 17

18. Prudential supervision – tool - FIRM Assessment solvency position Net score “in control” & organisation Assessment integrity of management Assessment of various risks 18

19. Contents Apeldoorn • The Netherlands: • Pension system • Pension supervision • The IORP Directive – a catalyst for change 19

20. The IORP Directive: a catalyst for change • 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   20

21. 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. 21

22. 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 22

23. Thank you for your attention! Questions? 23