A pragmatic solution to the credit crisis in the Netherlands
How can we avoid future generations being unfairly burdened by the consequences of the current credit crisis? By connecting future pension obligations and ‘bank funds’ – financed through pension funds purchasing the banks’ less liquid possessions. With this solution, the Netherlands will confirm its unique position in Europe as a ‘pension country’. Furthermore, the Dutch banking sector – and the economy as a whole – will receive the necessary stimulus to achieve an accelerated recovery.
by Albert Röell, chairman of the Managing Board
The credit crisis has affected the financial position of banks as well as the assets of Dutch pension funds. Banks must contend with the illiquid assets on their balance sheets, while pension funds find that the value of their own assets has fallen sharply following the declining market and economic recession in the Netherlands (and Europe). In addition, pension funds face the additional risk of asset depreciation, should inflation in Europe rise. This danger is no longer hypothetical, with central bankers resorting to quantitative easing (or printing money) to avert the crisis. Furthermore, the Netherlands is harming itself by enforcing strictly regulated recovery plans as soon as a pension scheme’s funding ratio drops below 105 percent. The obligation for pension funds to restructure their securities portfolios conservatively will in the long run have a negative influence on their financial positions. And so future generations will have to pay the bill for the current credit crisis – in the form of later retirement, pension payments not indexed above inflation and increased premiums for organisations and staff members. Therefore, they will profit considerably from a fast recovery in both the asset and credit markets.
The unique position of the Netherlands as a pension country provides an excellent opportunity for a pragmatic and future-proof solution to the credit crisis.
Put pension assets ‘to work’ by investing a part of the Є 600 billion in ‘bank funds’. The banks’ illiquid investments can be placed in these funds in order to remove them from their balance sheets, and allow banks to return to their role as providers of credit to the business sector. As soon as the economy improves, the value of these assets will also increase, and the investments will provide sufficient return. The government can also make a contribution by revising the strict prevailing legislation relating to the recovery plans of pension funds and their assets.
This type of cooperation between government, banks and pension funds will provide an unprecedented opportunity for the Dutch banking sector to recover and protect pension assets from depreciation as a result of rising inflation.
One: amend the rules regarding the calculation of future pension fund obligations based on realistic principles
The current legislation impedes pension funds in counterbalancing inflation risk and returning their funding ratios to the obligatory 105 percent. Due to the requirement under the present regulations to match their future obligations to their current assets, they are forced to make further investments in long-term government loans with relatively low risk, but a proportionally low return. In addition, they will prefer to sell their equities in favour of long-term government stock.
The Dutch Central Bank (DNB), in its capacity as supervisory institution, could therefore reassess its policy on the discount rate for future pension obligations, based on a long-term moving average instead of the interest rate at year end. In this way, pension scheme funding ratios will structurally exceed the 105 percent threshold as a result of accounting principles, with no additional measures required. The Netherlands can take the measures proposed here without European consultation and, in addition, can implement them very quickly.
Two: For the recovery of trust, it is vital that the banks’ balance sheets are cleaned up and inter-bank liquidity is secured
Illiquid investments must be removed from the banks’ balance sheets wherever possible. As soon as the balance sheets have been restored, the lack of mutual trust will disappear and banks can again focus on their core duty: the extension of credit to the consumer and business sector.
Within the private sector, Dutch pension funds – with regards to size and investment horizon – are the only parties capable of taking over the banks’ less liquid possessions. If they reserve a small amount of their collected assets of EUR 600 billion – five percent, for argument’s sake – to acquire the less liquid loans of banks, these ‘bank funds’ will be of sufficient size to help the Dutch financial sector effectively. The government should then be in the position to make additional financing possible, from the existing liquidity fund of EUR 200 billion, for example.
A ‘bank fund’ has advantages for all parties
The pension funds (and potentially the insurers to avoid unfair competition) can acquire assets through the fund which may be reasonably expected to return to their former value as soon as the liquidity of, and trust in, the market has recovered. The Dutch Central Bank could increase the attractiveness of this investment, by reducing solvency requirements on capital to zero. If the extension of credit, and with this the real economy, is allowed to get into stride it will reduce the danger that pension fund investments in other sectors of the Dutch economy will also depreciate significantly in the long term.
The banks will be released from their less liquid loans, which impact heavily on the calculation of their solvency, and can again focus on the extension of credit to the business sector.
The Dutch state is no longer on the front line in the extension of credit, as this role will be taken over by the bank funds and the underlying pension funds. However, as co-financer, it can set conditions and direct the process in broad outline. In addition, the Netherlands will be spared possible criticism from Brussels regarding government assistance or insufficient neutrality, and the creditworthiness of the government will be completely guaranteed. This will enable the government better to fulfil its role as regulator and referee while the market performs its activities in a controlled manner. An additional advantage is that private investors will be unable to profit unduly from the finance provided by the Dutch state, since pension funds are fully regulated and supervised and are therefore appropriate guardians of these assets.
For future generations collected pension assets will be protected against the danger of rising inflation, and where possible augmented with further inflation-proof investments. With this, the Netherlands pensions industry can retain its long-cherished and unique position within Europe.
Final consideration
The current crisis has created a unique opportunity to convert our strength in the pension area – our collected pension assets – into hard cash. The proposed joining of forces between the pension sector, banking sector and the government is unique in Europe and actually strengthens the position of the Netherlands as a financial centre (and hub of knowledge). By relieving the banking sector of its illiquid investments, a clear win-win situation will arise, which will be beneficial to the Dutch economy. This advantage also enables the pension sector to maximise its return without running considerable additional risk. In the majority of cases pension agreements will survive without an increase in the tax and premium burden, or postponement of indexation, which will further increase the international position of the Netherlands as a ‘pension country’.
Amsterdam, June 2009
Albert Röell
Chairman of the Managing Board of KAS BANK N.V.