Spotlight on ABP
Written by Ilonka Oudenampsen
Ilonka Oudenampsen asks Xander den Uyl how ABP has managed through the recent economic turmoil
After a rough ride through the financial crisis, the Netherlands’ biggest pen-sion fund Stichting Pensioenfonds ABP has been recovering well, although second vice-chairman Xander den Uyl (pictured) admits that the target has not yet been hit.
ABP has been recovering grad-ually since the difficult times in 2008-2009, although the second half of 2010 saw a short downfall again due to the rating of their liabilities. Den Uyl explains: “Accor-ding to the law, we have to rate our liabilities with the current interest rates. Those went down, resulting in a rise of the rating of our liabilities, which meant our coverage ratio all of a sudden sharply declined.”
However, since then the interest rates have gone up, meaning the coverage ratio is looking a bit better, although it is still not to the satisfaction of the trustee board. ABP’s board has 12 members, half of which represent the employers while the other six are represen-tatives of the employees.
Xander den Uyl is part of the latter group. He was a board member of ABP for four years in the nineties, and returned in 2007 to take up the position of second vice-chairman on behalf of the employee organisations, in particular for the FNV unions.
At the end of 2010, ABP, the pension fund for 2.8 million people who have worked or are still working in the public and educational sector, had €237 billion in assets after two positive years. In 2009 the fund had a return of 20 per cent or €35.2 billion, and in 2010 this was 13.5 per cent or €28 billion. Den Uyl says that the fund is therefore definitely on the way to recovery.
Although its coverage ratio of 110 per cent is above the absolute minimum of 105 per cent required by Dutch law, its target coverage ratio is at least 125 per cent. Den Uyl states: “We are progressing towards that target, but we are not there yet. We really suffer from volatility, particularly of the interest rates as they of course have an effect on the coverage ratio.”
ABP is trying to increase its coverage ratio by holding on to the set course in order to slowly improve its financial position. Den Uyl adds: “Of course we expect further growth, but not exuberantly. In the last period we haven’t indexed the pensions. That means we’re actually behind, but as long as the coverage ratio is not a bit higher, we can’t, or only by very little, increase those pensions. So what we’re doing in order to recover is, on one hand trust the financial markets, and on the other hand be really cautious with the adjustment of pensions.”
ABP’s latest change is a premium increase of 0.5 per cent from 1 April 2011 in order to deal with the increased longevity, which will cost the average employee about an extra E2 a month. Life expectancy had been steadily increasing until 2001, after which the Netherlands saw a sharp decrease in mortality rates. Den Uyl: “This meant our liabilities rose by seven per cent, but we have had to raise our premium in two steps. However, this increase is only due to increased life expec-tancy and has nothing to do with underfunding or the coverage ratio.”
In early March the fund also said that it would not yet let go of the temporary one per cent increase of the premium, which was introd-uced to improve the fund’s financial position. ABP said the coverage ratio was still too volatile and that it was too early in the recovery process to abolish it.
One of the main discussions in the Netherlands at the moment is around the new pensions contract. The Dutch social partners have reached an agreement on a new contract, and it is currently being developed. Den Uyl says that pension funds are merely waiting for the government and the social partners to reach an agreement on this. They are busy negotiating and when an agreement is reached, ABP will, like any other pension fund, implement the new legislation.
Since the crisis, the Government has been keeping a closer eye on finances in general and De Nederlandsche Bank, the Dutch regulator, is regulating pension funds more strictly. Den Uyl says: “The pressure of DNB and the government to increase the solidarity demands regarding exist-ing pension agreements makes it increasingly difficult to keep these contracts in place.”
In a letter to the Government in March, Minister of Social Affairs Henk Kamp stated that a good contract is more important than a quick agreement. His letter said that dealing with the old pension rights and past accrual was judicially a very difficult task, but he stressed that progress was still being made and that he hoped to have a new contract ready early in the spring.
Den Uyl sees two main problems with which the contract is dealing. “One is increased life expectancy, which is not really a problem, as it is a happy fact that people live longer, but it does need to be paid for. But there are thoughts on and solutions for that, which in the end all have to do with people retiring at a later age. The second problem is, of course, the instability of the financial markets. We have had two major crises this century, but at the same time we are dealing with the maturing of our pension arrange-ments. This means we have already allocated a vast amount for future pension liabilities in the Netherlands, around e800 billion already. But that also means that, in order to meet these liabilities, and especially indexing them, we are depending on the financial markets. Therefore it is necessary to make it clear how to deal with that. Currently we have DB-systems in the Netherlands, but we can’t avoid building in more DC-elements because we are so dependent on the performance of the financial markets.”
With some restraint, as they do face the problems of longevity and unstable financial markets, ABP is positive about the future. Den Uyl concludes: “We have a starting point that is not extremely good, but also not terribly bad. Actually, both the Netherlands and ABP are trying to get into a situation in which we are better equipped to deal with the volatility of the financial markets.”