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

2 2 The Netherlands: 1.Pension system 2.Pension supervision 3.The IORP Directive – a catalyst for change Contents Apeldoorn

3 3 The Netherlands: 1.Pension system 2.Pension supervision 3.The IORP Directive – a catalyst for change Contents Apeldoorn

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

5 State PAYG Premiums via income taxes All citizens Mandatory Private Capital-funded Employment-related Premium paid by employer/ee “Voluntary” Pension funds ánd insurers Collective Main Features Dutch pension system 5 3rd Pillar 2nd Pillar 1st Pillar

6 State PAYG Premiums via income taxes All citizens Mandatory Private Capital-funded Employment-related Premium paid by employer/ee “Voluntary” Pension funds ánd insurers Collective Private Capital-funded Voluntary Insurers only Individual Main Features Dutch pension system 6 3rd Pillar 2nd Pillar 1st Pillar

7 State PAYG Premiums via income taxes All citizens Mandatory Private Capital-funded Employment-related Premium paid by employer/ee “Voluntary” Pension funds ánd insurers Collective Private Capital-funded Voluntary Insurers only Individual flat rate “AOW” for all Dutch citizens Main Features Dutch pension system 7 3rd Pillar 2nd Pillar 1st Pillar

8 State PAYG Premiums via income taxes All citizens Mandatory Private Capital-funded Employment-related Premium paid by employer/ee “Voluntary” Pension funds ánd insurers Collective Private Capital-funded Voluntary Insurers only Individual flat rate “AOW” for all Dutch citizens (1) Company (2) professional (3) multi-employer industry-wide pension funds pension funds are autonomous; no link with sponsoring company Main Features Dutch pension system 8 3rd Pillar 2nd Pillar 1st Pillar

9 State PAYG Premiums via income taxes All citizens Mandatory Private Capital-funded Employment-related Premium paid by employer/ee “Voluntary” Pension funds ánd insurers Collective Private Capital-funded Voluntary Insurers only Individual flat rate “AOW” for all Dutch citizens Self-employed; Others: “the icing on the cake” (1) Company (2) professional (3) multi-employer industry-wide pension funds pension funds are autonomous; no link with sponsoring company pension premiums are tax-deductable Main Features Dutch pension system 9 3rd Pillar 2nd Pillar 1st Pillar

10 Adequacy Well-embedded pension system; long history; large pension savings (fortunately!) Pension assets of 120% of GDP; Euro 650bn 1st pillar: Euro 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

11 Sustainability Trends & Current issues Ageing: reforms 1 st pillar PAYG system IFRS: shift from DB to (collective) DC collectivity and solidarity vs. individualisation Supervision: focus on prudential supervision

12 The Netherlands: 1.Pension system 2.Pension supervision 3.The IORP Directive – a catalyst for change Contents Apeldoorn

13 Regulation - 1 st pillar: Old Age Act (“AOW”) - 2 nd 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 Regulation

14 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 company, 100 industry-wide funds, 10 professional pension funds Organisation employees o/w 500 in supervision - 90 pension supervision + 10 pension supervisory policy Supervision

15 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) Supervisory approach

16 FTK – Financial Assessment Framework - part of new Pensions Act (“PW”) per January 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 Prudential Supervision – FTK

17 Technicalities – step by step 1.Pension liabilities calculated on market values 2.Assets calculated on market values 3.Fully funding requirement A/L = 1  100% 4.+ 5% additional funding requirement for non-quantified risks  105% 5.Stress-testing under various risk-scenarios e.g. interest rate hike, credit default, currency crisis, mortality/longevity risk, stock market crash, etc. 6.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 % solvency buffer required  130% 7.Continuity testing within 15 year horizon in order to create self-discipline of pensions funds and increasing risk awareness, strategic planning 8.Recovery plan if needed (3-15 years) Prudential Supervision – FTK (2) Summary: Market values A ánd L 100% funding level 5% % minimum funding level ±25% risk-weighted solvency buffer ±130% required funding level for an average pension fund (“solvency balance”) Self-assessment Recovery plan = FTK

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

19 The Netherlands: 1.Pension system 2.Pension supervision 3.The IORP Directive – a catalyst for change Contents Apeldoorn

20 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 The IORP Directive: a catalyst for change 

21 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. Nederland Pensioenland

22 Committee of European Occupational Pension Supervisors; Chairman Mihaly Erdos Very valuable network: open, constructive, pro-active! Working Programme: 1.Supervisory convergence – EU-wide funding and solvency framework for IORPs 2.Real life cross-border cases – Budapest Protocol 3.Review IORP Directive Sharing best practices CEIOPS – OPC

23 Thank you for your attention! Questions?