## _cr11209

## Source details

**Canonical URL:** [_cr11209](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11209.pdf)

## Other formats

- [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11209.pdf.md)
- [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11209.pdf.json)

---

### I. Summary and conclusions
- System structure
  - Three pillars: government-sponsored basic pension (AOW), fully funded occupational pension schemes (Second Pillar), and private pension products (Third Pillar).
  - Second pillar manages assets in the order of 100 percent of GDP and is the second largest financial sector after banking.
  - Total premiums paid into occupational pension funds in 2009: 5.2 percent of GDP.
- Market position and concentration
  - Number of pension funds: 800 (2005); 767 (2006); 713 (2007); 656 (2008); 579 (2009); 545 (2010 2Q).
  - Assets under management: 640,346; 746,356; 717,984; 605,394; 692,900; 707,000.
  - Technical provisions: 501,508; 498,062; 491,745; 619,676; 633,911; 704,000.
  - Average cover ratio: 128; 135; 141; 132; 92; 100.
  - Sector concentration: largest two funds hold 44 percent of assets; ten largest funds hold 78 percent of assets.
- Crisis impact and solvency
  - Cover ratios fell from 130 percent to an average of 95 percent in 2008; around 100 percent subsequently but below regulatory solvency requirements.
  - Cover ratios below 105 percent triggered technical and supervisory measures.
  - Measures taken include stopping conditional indexation of accrued benefits for the last two years (with few exceptions).
  - Reported supervisory recovery plan counts: "430 pension funds are under supervisory recovery plans"; DNB required 308 pension funds to file supervisory recovery plans during 2008 and is currently supervising 308 plans.
- Longevity and capital needs
  - New mortality tables in 2010 reduced cover ratios by seven to ten percentage points and implied an additional capital need of around € 50 billion.
- Stress testing and tail risk
  - IMF/DNB top-down stress tests show vulnerability to low interest rates, equity and real estate risks.
  - Assuming indexation of future benefits, additional drop in cover ratio is over 30 percent.
  - Cost of payment of the pension tail: estimated to rise by 18 percent of the total reserve, or € 140 billion, should expected mortality improve by five years.
- Supervision and institutional response
  - DNB responded proactively; set up an expert team and the “Vita” project; analyzed over 300 recovery plans.
  - Frijns Report and Goudswaard commission identified issues in investment alignment, outsourcing controls, and board countervailing power; DNB assigned resources to boost compliance.
- Public perception
  - Benefit cuts and suspension of indexation have produced a public image crisis and erosion of perceived pension safety.

### II. Key quantitative findings
- Premiums into occupational funds in 2009: 5.2 percent of GDP.
- Assets under management (selected): 640,346; 746,356; 717,984; 605,394; 692,900; 707,000.
- Technical provisions (selected): 501,508; 498,062; 491,745; 619,676; 633,911; 704,000.
- Average cover ratio (selected): 128; 135; 141; 132; 92; 100.
- Additional capital need from longevity update: around € 50 billion.
- Estimated tail cost if mortality improves by five years: 18 percent of total reserve, or € 140 billion.
- Number of pension funds: decline from 800 (2005) to 545 (2010 2Q).
- Total contributions paid in 2009: € 30,252 (total contributions, Table 7); contribution share in 2009: 70.5 percent paid by the employer.
- Pension funds servicing 5.8 million participants and 2.7 million beneficiaries.
- Assets accumulated in occupational funds amount to € 750 billion (Q3. 2010).

### III. Core vulnerabilities
- Sensitivity to:
  - Low interest rate environment.
  - Equity and real estate market shocks.
- Funding shortfalls and governance weaknesses:
  - Misalignment between investment strategies and benefit expectations/demographic profiles.
  - Deficiencies in outsourcing controls and board countervailing power.
  - Large-scale outsourcing into unsupervised entities creates a supervisory gap.
- Small-fund challenges:
  - Large number of small pension funds raises compliance and cost-efficiency challenges; fixed costs in small funds can be five times higher.
- Longevity risk:
  - New mortality tables reduced cover ratios by seven to ten percentage points; additional capital need around € 50 billion.
- Public confidence:
  - Benefit cutting measures have produced an image crisis in public perception.

### IV. Financial Assessment Framework (FTK) and supervisory mechanics
- FTK principles: market valuation, risk-based financial requirements, and transparency.
- Technical provision determined by discounting expected future cash flows against current nominal term structure of interest rates provided by DNB and using latest mortality information.
- Solvency capital calculated with a confidence level of 97.5 percent over one year.
- On average FTK leads to a cover ratio of 125 percent; minimum regulatory own funds requirement translates into a cover ratio of 105 percent.
- Recovery plan rules:
  - Reserve deficit (between regulatory requirement and minimum): long-term recovery plan within three months; eliminate deficit within 15 years.
  - Funding shortfall (below minimum): short-term recovery plan within two months; eliminate shortfall within three years.
- Continuity analysis: stochastic over fifteen years; tests ability to satisfy long-term obligations.
- FTK last resort: benefits may be reduced only if technical provisions and minimum regulatory own funds are not covered, recovery without disproportionate harm is impossible, and all other available means (except investment policy) have been applied to comply within three years.

### V. Stress testing scenarios and resilience findings
- IMF/DNB top-down stress test: single parameter tests assessing sensitivity and cost of pension tail.
- System vulnerabilities: particularly sensitive to low interest, equity and real estate risks.
- Scenario findings for large 10 pension funds:
  - Japan scenario (low interest) and 50 percent low interest scenarios lasting two years generate average drops in cover ratio of 12 percent and 22 percent respectively.
- Stress test including indexation of future benefits:
  - Additional drop in cover ratio from assumed indexation is over 30 percent.
- Tail-cost proxies:
  - Cost of 10 percent of the technical reserve for payment of pensions beyond age 85.
  - Cost of 25 percent for pensions paid beyond age 80.

### VI. Governance, outsourcing, and board effectiveness
- Board responsibilities (Article references preserved): ensure solid financial structure, risk management, governance, operational management, asset management, regulatory compliance, external communication, and contact with supervisory authorities.
- Board composition rules:
  - Industry-wide funds: equal seats for employers’ associations and employees’ associations.
  - Company funds: employees’ representatives must hold at least as many seats as employers’ representatives; if beneficiaries hold seats, employees plus beneficiaries must hold at least as many seats as employers.
  - Appointment mechanisms for employees’ representatives: election, nomination by scheme members’ council, works council nomination, or other manner with works council consent.
- Knowledge and expertise requirements: Articles 99, 105, 110; Chapter 7 of the Decree amplifies expertise and trustworthiness terms.
- Identified governance gaps:
  - Insufficient independence, expertise and accountability; need for stronger countervailing power.
- Recommendations and supervisory actions:
  - Consider mandatory board committees depending on fund size and complexity.
  - DNB proposal to mandate incorporation of professional board members for pension funds above a certain size; proposal to be transcribed into regulation in coming months.
  - DNB made governance a central supervisory theme for 2010–2014 and allocated resources.

### VII. Investments and asset allocation (selected)
- Asset allocation (most recent data):
  - Equities: 35 percent of total assets (down from 45.8 percent in 1999).
  - Fixed income instruments: 50 percent.
  - Real estate: 10 percent.
  - Other alternative investments: 5 percent.
- Currency and instruments:
  - Around two thirds Euro-nominated investments and 19 percent in sovereign bonds.
  - Some funds hedging low interest risk; some have asset durations longer than liability durations.
- Table 9 (selected figures):
  - Total assets: 469,440 (1999); 553,069 (2004); 692,900 (2009).
  - Equities: 45.8% (1999); 41.0% (2004); 36.3% (2009).
  - Fixed income securities: 30.2% (1999); 41.6% (2004); 49.0% (2009).
  - Real estate investments: 9.3% (1999); 10.0% (2004); 9.8% (2009).
  - Other: 14.7% (1999); 7.4% (2004); 4.9% (2009).
- Appendix I — Pension assets invested at pension fund’s risk (EUR Million, end of period, 2009Q4):
  - Total investments at funds' risk 655,200 / 8,710 / 663,910 / 100.0%
  - Equities total 235,085 / 497 / 235,582 / 35.5%
  - Total fixed yield securities 321,692 / 7,293 / 328,985 / 49.6%
  - Total real estate investments 66,271 / -536 / 66,218 / 10.0%
  - Total other investments 32,152 / 974 / 33,125 / 5.0%
  - By currency: Euro 403,364; Non euro 251,836.

### VIII. First Pillar (AOW): framework, finances, and projections
- Features
  - Pay-as-you-go statutory pension; flat-rate benefit guaranteeing in principle 70 percent of the statutory minimum wage.
  - Entitlement accrual: 2 percent per year of residence between ages 15 and 64; full entitlement at age 65.
  - Around 2.8 million people will receive € 28.6 billion in 2010.
- Benefit levels (as of 2009)
  - Singles: gross pension benefit is € 1038 a month.
  - Couples (both partners 65 or over): gross benefit for each partner is € 723 a month.
- Financing
  - AOW premium currently set at the legal maximum of 17.9 percent of taxable income (subject to a maximum income level).
  - Government makes yearly contribution to the AOW fund; contribution expected to rise because ageing-driven expense growth will exceed premium income growth.
- AOW financing table (x € 1 mln.)
  - Premiums: 2005 17 944; 2006 17 377; 2007 17 637; 2008 20 288; 2009 17 883; 2010 (estimate) 16 793
  - Government contribution: 2005 5 644; 2006 6 591; 2007 8 379; 2008 6 486; 2009 9 749; 2010 (estimate) 11 388
  - Expenses: 2005 23 369; 2006 24 169; 2007 25 198; 2008 26 446; 2009 27 649; 2010 (estimate) 28 559
  - Balance (relevant for EMU balance): 2005 52; 2006 - 334; 2007 677; 2008 209; 2009 - 781; 2010 - 612
  - Fin. Position (relevant for EMU-debt): 2005 1 621; 2006 1 287; 2007 1 964; 2008 2 173; 2009 1 989; 2010 1 377
- Sustainability gap and projections
  - Projected necessary adjustment (sustainability gap) calculated at 4.5 percent of GDP; gap has grown by 1.5 percent GDP since the 2006 CPB ageing study.
  - Under assumption benefits indexed to average wages, costs rise from about 4 percent of GDP in 2008 to 8 percent by 2033.
- AOW — Expenditure (Percentage of GDP) (selected periods)
  - 2005 4.820338.0
  - 2006 4.720348.1
  - 2007 4.620358.2
  - 2008 4.620368.4
  - 2009 5.020378.4
  - 2010 5.020388.5
  - 2011 5.020398.5
  - 2012 5.020408.5
  - 2013 5.220418.5
  - 2014 5.320428.5
  - 2015 5.420438.4
  - 2016 5.520448.4
  - 2017 5.620458.3
  - 2018 5.720468.3
  - 2019 5.920478.3
  - 2020 6.020488.2
  - 2021 6.120498.1
  - 2022 6.320508.1
  - 2023 6.420518.1
  - 2024 6.620528.0
  - 2025 6.720538.0
  - 2026 6.920548.0
  - 2027 7.120557.9
  - 2028 7.220567.9
  - 2029 7.420577.9
  - 2030 7.620587.9
  - 2031 7.720597.9
  - 2032 7.920607.9
- Recent measures and reforms
  - 2005: temporary compensations introduced; supplement to be transformed into a permanent measure.
  - 2009: AOW and compensation increased to compensate for change in tax deductibility of medical expenses.
  - 2015: AOW supplement for nonworking partners younger than 65 will be abolished.
  - Retirement age: government planning to increase retirement age; timing and magnitude under discussion.
  - AOW Savings Fund established in 1997 will be closed; build-up and termination have no impact on government deficit or debt.

### IX. Second Pillar (occupational pensions): structure, flows, and reforms
- Participation and scheme design
  - More than 90 percent of employees (close to 6 million people) participate in occupational pension schemes established by labor agreements.
  - Around 87 percent of active members participate in a career-average scheme; accrual rates around 2 percent or more.
  - Indexation is conditional, usually linked to wage growth or inflation.
- Assets and contributions
  - End of 2008: € 605 billion.
  - End of 2009: € 693 billion.
  - June 2010: € 707 billion.
  - Figure 1 data (selected points): 2004 553,069; 2005 640,346; 2006 746,356; 2007 717,984; 2008 605,394; 2009 692,900; 2010 707,000 (In millions of Euros).
  - Total contributions: 2007 24,883; 2008 27,220; 2009 30,252. Employer contributions: 2009 21,331; employee contributions: 2009 8,918.
- Concentration and consolidation
  - Two largest funds (ABP and PFZW) account for around 44 percent of assets; top 10 funds account for around 78 percent.
  - Consolidation reduced number of pension funds by 30 percent over past 5 years from 800 (2005) to 545 (2010 2Q); company pension funds reduced by around 40 percent.
- Costs, efficiency, and regulation
  - Mandatory character ensures steady inflow and cost-efficient contribution collection.
  - Anticipated new standards on internal controls and risk management expected to increase costs.
  - Pension funds organized as foundations (Stichting); Pension Act effective January 1, 2007 introduced FTK.
  - Supervisors: AFM (conduct of business) and DNB (prudential and material supervision) per Article 151 of the Law of December 7, 2006.
- Recovery plans and fund status (June–Oct 2010 summary)
  - June 2010: Percentage funds in report 304 (97%); Average funding ratio 100,3%; Percentage funds in funding ratio deficit 224 (71%); Percentage funds in reserve deficit 71 (23%); Percentage funds without deficit 9 (3%); Percentage funds below existing recovery plan 196 (63%); Percentage funds above existing recovery plan 108 (34%).
  - July 2010: Percentage funds in report 302 (97%); Average funding ratio 102,9%; Percentage funds in funding ratio deficit 181 (58%); Percentage funds in reserve deficit 101 (33%); Percentage funds without deficit 20 (6%); Percentage funds below existing recovery plan 115 (37%); Percentage funds above existing recovery plan 187 (60%).
  - Aug 2010: Percentage funds in report 308 (99,7%); Average funding ratio 96,0%; Percentage funds in funding ratio deficit 261 (87%); Percentage funds in reserve deficit 34 (11%); Percentage funds without deficit 5 (2%); Percentage funds below existing recovery plan 267 (86%); Percentage funds above existing recovery plan 41 (13%).
  - Sept 2010: Percentage funds in report 308 (99,7%); Average funding ratio 98,8%; Percentage funds in funding ratio deficit 233 (76%); Percentage funds in reserve deficit 65 (21%); Percentage funds without deficit 10 (3%); Percentage funds below existing recovery plan 233 (76%); Percentage funds above existing recovery plan 75 (24%).
  - Oct 2010: Percentage funds in report 297 (96,4%); Average funding ratio 99,9%; Percentage funds in funding ratio deficit 217 (71%); Percentage funds in reserve deficit 65 (21%); Percentage funds without deficit 15 (5%); Percentage funds below existing recovery plan 209 (68%); Percentage funds above existing recovery plan 88 (28%).
- Policy options and commissions
  - June 2010 pension accord: commits to collectivity, solidarity and compulsory membership; rules out increasing contributions; opens willingness to lower expectations and sureness of benefits.
  - Goudswaard commission: confirmed need for adjustments; two approaches suggested (both require Pension Act amendments):
    - First: reduction of the cover ratio of currently 70 percent, together with linkage of retirement age to life expectancy.
    - Second: transfer to participants of longevity and investment risks, introducing soft guarantees and entitlements dependent on the fund’s financial condition.
  - Alternative structural consideration: separate management of market risk and longevity risk; assign current funds responsibility for stronger guarantees for 20 or 25 years of payments; pension tail provided by another mechanism with larger participant base and cost-limited elderly support.

### X. Third Pillar: private products and scale
- Third pillar products issued by insurers and banks; mainly for self-employed and higher income workers.
- Size estimated around € 7.5 billion; two thirds managed by insurers and one third by banks.
- Product types: unit linked, profit policies, fixed interest guarantees; payout forms: annuity or lump sum to purchase an annuity.
- Trend: increasing banking share in tax-deferred retirement saving products.

### XI. Policy recommendations (selected)
- Improve fiscal sustainability without significantly harming income adequacy, reflecting GAP Index findings.
- Separate management of market risk and longevity risk; consider assigning current funds responsibility for stronger guarantees for a fixed period and a separate mechanism for the pension tail.
- Implement a communication plan and media training to restore realistic public perception of pension fund quality.
- Ensure careful understanding of new risks in any pension contractual reforms during risk-transferring negotiations.
- Prepare regulation creating a direct supervisory regime for entities performing large portions of pension fund activities to close outsourcing supervisory gaps.
- Adjust the Financial Assessment Framework (FTK) to better assess portfolio riskiness.
- Require incorporation of professional board members for pension funds above defined thresholds of size and complexity to strengthen accountability and governance.
- Consider mandatory board committees depending upon fund size and complexity.
- Strengthen supervision of investment firms and managers of investment funds as part of DNB supervisory themes for 2010–2014.

*International Monetary Fund — Monetary and Capital Markets Department, Technical Note: Pensions Sector Issues (June 2011).*

### 2011. The views expressed in this document are those of the staff team and do not necessarily reflect

### PENSIONS SECTOR ISSUES — TECHNICAL NOTE (JUNE 2011)

### I. Summary and conclusions
- System structure
  - The Dutch pension system comprises three pillars: a government-sponsored basic pension (AOW), fully funded occupational pension schemes (Second Pillar), and private pension products (Third Pillar).
  - Second pillar: manages assets in the order of 100 percent of GDP and is the second largest financial sector after banking.
  - Total premiums paid into occupational pension funds in 2009: 5.2 percent of GDP.

- Market position and concentration (from Table 1)
  - Total number of pension funds: 800 (2005), 767 (2006), 713 (2007), 656 (2008), 579 (2009), 545 (2010 2Q).
  - Assets under management: 640,346 (2005), 746,356 (2006), 717,984 (2007), 605,394 (2008), 692,900 (2009), 707,000 (2010 2Q).
  - Technical provisions: 501,508 (2005), 498,062 (2006), 491,745 (2007), 619,676 (2008), 633,911 (2009), 704,000 (2010 2Q).
  - Average cover ratio: 128 (2005), 135 (2006), 141 (2007), 132 (2008), 92 (2009), 100 (2010 2Q).
  - Sector concentration: largest two funds hold 44 percent of assets; ten largest funds hold 78 percent of assets.

- Crisis impact and solvency
  - Cover ratios fell from 130 percent to an average of 95 percent in 2008, and were around 100 percent subsequently but still below regulatory solvency requirements.
  - Cover ratios below 105 percent triggered unprecedented technical and supervisory measures.
  - Measures taken by pension plans include stopping conditional indexation of accrued benefits for the last two years (with few exceptions).
  - Reported supervisory recovery plan counts: "430 pension funds are under supervisory recovery plans" (paragraph 3); DNB required 308 pension funds to file supervisory recovery plans during 2008 and is currently supervising 308 plans (paragraph 10).

- Longevity and capital needs
  - New mortality tables in 2010 produced an important increment in longevity, reducing cover ratios by seven to ten percentage points and implying an additional capital need of around € 50 billion.

- Stress testing and tail risk
  - IMF/DNB top-down stress tests show vulnerability to low interest rates, equity and real estate risks.
  - Assuming indexation of future benefits, additional drop in cover ratio is over 30 percent.
  - Cost of payment of the pension tail: estimated to rise by 18 percent of the total reserve, or € 140 billion, should expected mortality improve by five years.

- Supervision and institutional response
  - DNB responded proactively, demonstrating independence and competence; set up an effective mechanism to analyze over 300 recovery plans.
  - DNB created an expert team with industry experience for investment, asset management, administration, trading and stress testing—model being replicated in DNB’s “Vita” project.
  - Frijns Report and Goudswaard commission analysis identified problematic issues in investment alignment, outsourcing controls, and board countervailing power; DNB has assigned resources to boost compliance.

- Public perception and communications
  - Benefit cuts and suspension of indexation—though lawful—have led to a public image crisis and an erosion of the perception of pensions’ safety.

### II. Key quantitative findings (selected)
- Premiums into occupational funds in 2009: 5.2 percent of GDP.
- Assets under management (selected years; from Table 1): 640,346; 746,356; 717,984; 605,394; 692,900; 707,000.
- Technical provisions (selected years; from Table 1): 501,508; 498,062; 491,745; 619,676; 633,911; 704,000.
- Average cover ratio (selected years; from Table 1): 128; 135; 141; 132; 92; 100.
- Additional capital need from longevity update: around € 50 billion.
- Estimated tail cost if mortality improves by five years: 18 percent of total reserve, or € 140 billion.
- Number of pension funds: decline from 800 (2005) to 545 (2010 2Q).

### III. Core vulnerabilities
- Sensitivity to:
  - Low interest rate environment.
  - Equity and real estate market shocks.
- Funding shortfalls and governance weaknesses:
  - Misalignment between investment strategies and benefit expectations/demographic profiles.
  - Deficiencies in outsourcing controls and board countervailing power.
  - Large-scale outsourcing of operations into unsupervised entities creates a supervisory gap.

### IV. Institutional and supervisory strengths
- DNB’s active supervisory approach, established expert team, and the Vita project have enhanced capacity to supervise investment strategy, administration, and stress testing.
- DNB’s analysis and supervision of recovery plans for hundreds of funds.

### V. International rankings (Melbourne Mercer Global Pension Index, October 2010)
- Netherlands ranked 1 in the Melbourne Mercer Global Pension Index (overall index value 78.3; adequacy 76.1; sustainability 71.6; integrity 91.4).
- Average values reported: Overall 61.7; Adequacy 63.1; Sustainability 51.9; Integrity 73.1.
- Gap in fiscal vulnerability: The Global Aging Preparedness Index (GAP Index) ranks the Netherlands 1st for resilience against income adequacy risk, but 19th out of 20 for fiscal cost vulnerability (recommendation drawn from this finding).

### VI. Notable operational developments and impacts
- Conditional indexation largely suspended across plans for two years.
- Seven pension funds required to cut benefits in the near term if they do not reach minimal regulatory cover ratios.
- Public reaction: major reputational challenge for pension funds, arising from unexpected visibility of benefit cutting mechanisms embedded in contracts.

### VII. Policy recommendations (selected)
- Improve fiscal sustainability without significantly harming income adequacy, reflecting GAP Index findings.
- Separate management of market risk and longevity risk; proposal to assign current pension funds responsibility for stronger guarantees for a fixed period, while the pension tail could be covered by a separate mechanism with a larger participant base and cost-limited elderly support.
- Implement a communication plan and media training to restore realistic public perception of pension fund quality.
- Ensure careful understanding of new risks assumed in any pension contractual reforms during risk-transferring negotiations.
- Prepare regulation creating a direct supervisory regime for entities performing large portions of pension fund activities to close outsourcing supervisory gaps.
- Adjust the Financial Assessment Framework (FTK) to better assess portfolio riskiness.
- Require incorporation of professional board members for pension funds above defined thresholds of size and complexity to strengthen accountability and governance.

### VIII. Other observations
- The Frijns Report’s diagnostics prompted DNB’s intensified supervisory focus on investment strategy alignment, outsourcing controls, and governance.
- The sector’s systemic importance is increasing due to macroeconomic relevance and market footprint.

*International Monetary Fund — Monetary and Capital Markets Department, Technical Note: Pensions Sector Issues (June 2011).*

### 15.      Well-known demographic challenges affecting the pension systems in an aging

### _cr11209 - 15.      Well-known demographic challenges affecting the pension systems in an aging

### Demographic challenges and GAP Index findings
- The GAP Index (CSIS, October 2010) ranks the Netherlands:
  - 1 with respect to resilience against the income adequacy risk (Income Adequacy Index).
  - 19 out of 20 analyzed countries with respect to fiscal cost vulnerability (Fiscal Sustainability Index).
- Interpretation:
  - Findings "suggest the need for adjustments improving fiscal sustainability without severely affecting the income adequacy condition."

### Structure of the pension system (three pillars)
- Pillar 1: State pension (AOW)
  - Only statutory pension scheme; financed on a pay-as-you-go basis by the government.
  - Flat-rate pension benefit in principle guarantees 70 percent of the statutory minimum wage.
  - Entitlement builds up by 2 percent for each year of residence between ages 15 and 64, leading to 100 percent entitlement at age 65.
  - Around 2.8 million people will receive € 28.6 billion in 2010.
- Pillar 2: Supplementary collective occupational pensions
  - Primarily financed by contributions paid by employer and employees; fully funded.
  - Participation for most employees is automatically linked to employment contract, resulting in 90 percent coverage of the working population.
  - Assets accumulated in these funds amount to € 750 billion (Q3. 2010).
  - Around 95 percent of the assets are managed by pension funds and less than 5 percent by insurance companies.
  - Retirement age currently set at 65 years for industry wide parameter.
  - Most schemes are defined benefit, using career average salary, conditional indexation, annual accrual between 1 percent and 2 percent, and disability and survivor benefits.
  - Ambition: occupational pension to supplement the first layer to achieve a total pension of 70 percent of the average income; this ambition is currently being revised and a lower amount is in discussion.
  - On average the supplement provides an equal amount to the first layer.
- Pillar 3: Individual private saving products
  - Offered by insurers and banks; usually incentivized by favorable tax treatment.
  - Size estimated around € 7.5 billion where two thirds of the assets are managed by insurers and one third by banks, with a trend to increase the banking share.

### First Pillar — AOW: framework and administration
- Benefit levels (as of 2009):
  - Singles: gross pension benefit is € 1038 a month.
  - Couples (both partners 65 or over): gross benefit for each partner is € 723 a month.
- No means-test for eligibility.
- Entitlement accrual: 2 percent per year of residence between ages 15 and 64; full entitlement at age 65.
- Administration:
  - AOW administered by the Social Insurance Bank (SVB), operationally independent from the government.
  - SVB board of directors manages SVB in consultation with a board of advisors.
  - Ministry of Social Affairs and Employment (SZW) appoints board members and approves annual plan and budget.
  - SVB subject to oversight by the Inspection on Work and Income (IWI), a section of SZW.

### Financing of the AOW and AOW finances (Table data preserved)
- AOW financing:
  - AOW is an integral part of government finances; (negative) balance consolidated within national fiscal balance and debt.
  - AOW financed by a premium currently set at the legal maximum of 17.9 percent of taxable income (subject to a maximum income level).
  - In addition to premium income, the government makes a yearly contribution to the AOW fund, expected to rise because growth in expenses caused by ageing will exceed growth in premium income.
- Table 5 (AOW Finances, x € 1 mln.)
  - Premiums: 2005 17 944; 2006 17 377; 2007 17 637; 2008 20 288; 2009 17 883; 2010 (estimate) 16 793
  - Government contribution: 2005 5 644; 2006 6 591; 2007 8 379; 2008 6 486; 2009 9 749; 2010 (estimate) 11 388
  - Expenses: 2005 23 369; 2006 24 169; 2007 25 198; 2008 26 446; 2009 27 649; 2010 (estimate) 28 559
  - Balance (relevant for EMU balance): 2005 52; 2006 - 334; 2007 677; 2008 209; 2009 - 781; 2010 - 612
  - Fin. Position (relevant for EMU-debt): 2005 1 621; 2006 1 287; 2007 1 964; 2008 2 173; 2009 1 989; 2010 1 377
  - Source: DNB.

### Vulnerabilities, projections and recent measures for the First Pillar
- Sustainability gap and demographic impact:
  - Projected necessary adjustment (sustainability gap) is calculated at 4.5 percent of GDP.
  - This gap has grown by 1.5 percent GDP since the previous ageing study by Centraal Planbureau (CPB) in 2006.
  - Under the assumption that benefits will be indexed to average wages (and not to contract wages), costs will rise from about 4 percent of GDP in 2008 to 8 percent by 2033 (Table 6).
- Recent changes introduced:
  - 2005: temporary compensations introduced (“Tijdelijke regeling tegemoetkoming AOW’ers” and “Tijdelijke regeling eenmalige tegemoetkoming AOW’ers”) to support income of the elderly; supplement introduced as temporary measure but will be transformed into a permanent measure the coming year.
  - 2009: AOW and the compensation AOW were increased to compensate for a change in the tax deductibility of medical expenses.
  - 2015: AOW supplement for nonworking partners younger than 65 will be abolished.
- Retirement age:
  - Dutch government is planning to increase the retirement age; timing and magnitude remain under discussion.
- AOW Savings Fund:
  - Established in 1997, integral part of national fiscal balance and debt, will be closed in the coming year.
  - Build-up and termination have no impact on government deficit or debt as this was a nominal fund holding no assets.

### AOW expenditure trajectory (Table 6 preserved)
- AOW — Expenditure (Percentage of GDP) by period (as presented):
  - 2005 4.820338.0
  - 2006 4.720348.1
  - 2007 4.620358.2
  - 2008 4.620368.4
  - 2009 5.020378.4
  - 2010 5.020388.5
  - 2011 5.020398.5
  - 2012 5.020408.5
  - 2013 5.220418.5
  - 2014 5.320428.5
  - 2015 5.420438.4
  - 2016 5.520448.4
  - 2017 5.620458.3
  - 2018 5.720468.3
  - 2019 5.920478.3
  - 2020 6.020488.2
  - 2021 6.120498.1
  - 2022 6.320508.1
  - 2023 6.420518.1
  - 2024 6.620528.0
  - 2025 6.720538.0
  - 2026 6.920548.0
  - 2027 7.120557.9
  - 2028 7.220567.9
  - 2029 7.420577.9
  - 2030 7.620587.9
  - 2031 7.720597.9
  - 2032 7.920607.9
- Source for table: DNB (based on CPB (2010) Ageing: the clash between generations, Special Publication 86).

### Second Pillar — occupational pensions: framework, size and trends
- Participation and scheme design:
  - More than 90 percent of employees or close to 6 million people participate in occupational pension schemes established by labor agreements.
  - Around 87 percent of all active members participate in a career-average scheme.
  - Accrual rates around 2 percent or more under career-average schemes.
  - Indexation usually to wage growth or inflation but not guaranteed; conditional indexation depends on fund financial situation.
  - Over half of plans link conditional indexation to wage growth; over 20 percent link accrual to general consumer price movements.
  - Some funds operate collective defined contribution plans; fully individual defined contributions schemes are less popular.
- Assets under management:
  - End of 2008: € 605 billion.
  - End of 2009: € 693 billion.
  - June 2010: € 707 billion.
  - Figure 1 data (selected historical points shown): 2004 553,069; 2005 640,346; 2006 746,356; 2007 717,984; 2008 605,394; 2009 692,900; 2010 707,000 (In millions of Euros). Source: DNB.
- Industry concentration and consolidation:
  - Two largest industry-wide pension funds, ABP and PFZW, responsible for around 44 percent of all assets.
  - Top 10 pension funds account for around 78 percent of total market.
  - Consolidation reduced number of pension funds by 30 percent over past 5 years from 800 in 2005 down to 545; company pension funds reduction around 40 percent.
- Participants, beneficiaries and flows:
  - Pension funds servicing 5.8 million participants and 2.7 million beneficiaries.
  - Total contributions paid in 2009 amounted to € 30 billion.
  - Contribution share in 2009: 70.5 percent paid by the employer.
- Table 7 (Contributions and Benefits, totals)
  - Contributions from employers: 2007 17,136; 2008 19,029; 2009 21,331
  - Contributions from employees: 2007 7,746; 2008 8,189; 2009 8,918
  - Total contributions: 2007 24,883; 2008 27,220; 2009 30,252
  - Benefits — Retirement pension (temporary, lifelong): 2007 14,323; 2008 15,414; 2009 17,044
  - Benefits — Dependants' pension: 2007 4,007; 2008 4,175; 2009 4,300
  - Benefits — Disability: 2007 730; 2008 681; 2009 643
  - Benefits — Other: 2007 1,479; 2008 1,577; 2009 952
  - Total benefits: 2007 20,539; 2008 21,847; 2009 22,939
  - Source: DNB.
- Costs and efficiency:
  - Mandatory character ensures steady inflow of participants and cost-efficient contribution collection (payroll deduction).
  - Market concentration yields economies of scale and relatively low costs; however, lacking scale, fixed costs can be five times higher.
  - Expenses in smaller funds have been growing at the same pace as assets.
  - Anticipated new standards on internal controls and risk management expected to increase costs.
- Legal and supervisory framework:
  - Pension funds organized as foundations (Stichting); company pension funds legally independent of companies.
  - No general statutory obligation for employers to make pension commitments, but once made, Pension and Savings Funds Act (PSW) safeguards rights.
  - Pension and Savings Funds Act (1952) replaced by the Pension Act (Pensioenwet), effective January 1, 2007.
  - Pension Act introduced supervisory framework Financial Assessment Framework (FTK).
  - Article 151 of the Law of December 7, 2006 of the Pension Act provides two pension supervisors:
    - Authority on Financial Markets (AFM): conduct of business supervision.
    - Dutch Central Bank (DNB): prudential supervision and material supervision.

*Source: _cr11209 - 15.      Well-known demographic challenges affecting the pension systems in an aging (PDF chapter content provided).*

### 32.      A pension fund may be established by a company, an industrial sector (branch)

### 32.      A pension fund may be established by a company, an industrial sector (branch) or a professional group

### Establishment and mandatory membership
- A pension fund may be established by a company, an industrial sector (branch) or a professional group.
- If an employer’s organization and a trade union in an industrial branch wish to establish an industry-wide pension fund, they may request the government to declare the pension agreement binding on all employers and employees in the branch, under the Mandatory Membership of an Industry-wide Pension Fund Act of 2000.
- The law requires a representative portion of the employers in an industrial branch to agree. Footnote: This is interpreted to mean employers of at least 60 percent of the employees in the branch.
- The intent of making the “collective” pension agreement binding is to avoid excessive competition among companies in the same branch on terms and conditions of pensions.

### Tax treatment
- According to Article 5 Section 1 Subsection b of the corporation tax act (Wet op de Vennootschapsbelasting), pension funds are not liable to pay corporation taxes. This includes the investment income and the profit of the fund.
- Article 3 of the implementation decree on the corporation tax (Uitvoeringsbesluit vennootschapsbelasting 1971) lists the provision that a pension fund must use its profits solely for the benefit of the policy holder.
- Contributions of the employees or policy holders of the pension funds are excluded from income tax according to Article 11 of the act on income tax (Wet op de loonbelasting 1964).
- Pension contributions are deemed as deferred income, and therefore are liable for taxation at the moment the pension is paid to the retiree.

### Investments (asset allocation and observations)
- Most recent data show asset allocation:
  - Equities: 35 percent of total assets (down from the 1999 peak of 45.8 percent).
  - Fixed income instruments: 50 percent.
  - Real estate: 10 percent.
  - Other alternative investments: 5 percent.
- Around two thirds are Euro nominated investments and 19 percent are in sovereign bonds.
- Some pension funds have hedged the low interest rate environment, and have asset durations longer than liability durations.
- Table 9 (selected figures):
  - Total assets: 469,440 (1999) ; 553,069 (2004) ; 692,900 (2009)
  - Equities: 45.8% (1999) 41.0% (2004) 36.3% (2009)
  - Fixed income securities: 30.2% (1999) 41.6% (2004) 49.0% (2009)
  - Real estate investments: 9.3% (1999) 10.0% (2004) 9.8% (2009)
  - Other: 14.7% (1999) 7.4% (2004) 4.9% (2009)
  - Total investments at the Fund's risk: 100.0% (1999) 100.0% (2004) 100.0% (2009)

### Financial assessment framework (FTK)
- The FTK was introduced with the Pension Act in 2007 and lays down statutory financial requirements for pension funds.
- FTK principles: market valuation, risk-based financial requirements, and transparency.
- Technical provision determined by discounting expected future cash flows against the current nominal term structure of interest rates provided by DNB and by using the latest available mortality information.
- Regulatory own funds calculation is risk-based; requirements change with the fund's exposure to risk.
- Solvency capital is calculated with a confidence level of 97.5 percent, over one year period.
- On average this leads to a cover ratio (total market value of the assets as a percentage of pension commitments) of 125 percent.
- The minimum regulatory own funds requirement translates into a cover ratio of 105 percent.
- Recovery plan rules:
  - If fund balance falls below the regulatory requirement but is above the minimum regulatory own funds requirement (reserve deficit): fund must draw up a long-term recovery plan within three months, eliminating the reserve deficit within 15 years via gradual recovery.
  - If fund balance falls below the minimum regulatory own funds requirement (funding shortfall): fund must draw up a short-term recovery plan within two months, eliminating the funding shortfall within three years.
- FTK provisions also cover actuarial and market consistent sufficiency of contributions, conditional obligations (indexation of accrual benefits and pensions), reporting, controls, and governance.
- Continuity analysis:
  - Future solvency tested by a stochastic continuity analysis over a period of fifteen years.
  - Analysis assesses ability to satisfy long-term obligations and considers instruments such as adjusting payments, additional contributions and conditional indexation.
  - Analysis does not require valuation of future indexation but must be consistent between expectations raised and financial means.
- As last resort, FTK allows pension funds to reduce benefits and pension entitlements only if:
  - the technical provisions and the minimum regulatory own funds are not covered by the investments,
  - the pension fund is not in a position to recover without disproportionately harming interests of members, deferred beneficiaries, pension beneficiaries, other entitlement beneficiaries, or the employer, and
  - all other available means of influence, except investment policy, have been applied to comply with the minimum regulatory own funds within three years.

### Reporting requirements and assurance
- Under Article 147 of the Pension Act and 142 of the Obligatory Occupational Pension Schemes Act, pension funds must provide periodic statements comprising:
  - a. information on the organization of the pension fund;
  - b. a management report;
  - c. a balance sheet;
  - d. information on the financial contacts and transactions of the pension fund;
  - e. an account of income and expenditures;
  - f. information on the cover ratio;
  - g. information on the regulatory own funds;
  - h. actuarial statements, authenticated by a competent actuary, including an actuarial report accompanied by an actuary’s statement;
  - i. information on the scheme member file;
  - j. information concerning the pension scheme implemented and any other schemes implemented by the pension fund;
  - k. premium information;
  - l. re-insurance information; and
  - m. information on obligations of the pension fund at the risk of the scheme members.
- Actuarial certification:
  - An actuary must confirm satisfaction that the provisions of Articles 126 up to and including 140 have been met, may provide more detailed information or reservations, and must be independent of the pension fund and carry out no other work for the pension fund.
- Auditor assurance:
  - Statements are periodically accompanied by a statement concerning their reliability, issued by an auditor, who authenticates the statements as evidence of review.

### Vulnerabilities, recent developments, and quantitative indicators
- Financial crisis and interest rate decline severely strained the occupational pension system.
- Cover ratios (total market value of assets as a percentage of pension commitments):
  - Dropped from 130 percent in 2007 to an average of 95 percent in 2008,
  - Recovered to 110 percent at the end of 2009,
  - In the second quarter of 2010 down again around 100 percent, below regulatory solvency requirements.
- Solvency requirements generally align with portfolio risk, but major dispersions indicate limits of the standard model to capture portfolio risk.
- Cover ratios below 105 percent triggered technical and supervisory measures: conditional indexation suspended in many plans; 308 pension funds filed supervisory recovery plans during 2008; 7 of them required to cut benefits in upcoming months.
- Table 10 (pension funds under recovery plans; status over June–Oct 2010):
  - June 2010: Percentage funds in report 304 (97%) ; Average funding ratio 100,3% ; Percentage funds in funding ratio deficit 224 (71%) ; Percentage funds in reserve deficit 71 (23%) ; Percentage funds without deficit 9 (3%) ; Percentage funds below existing recovery plan 196 (63%) ; Percentage funds above existing recovery plan 108 (34%)
  - July 2010: Percentage funds in report 302 (97%) ; Average funding ratio 102,9% ; Percentage funds in funding ratio deficit 181 (58%) ; Percentage funds in reserve deficit 101 (33%) ; Percentage funds without deficit 20 (6%) ; Percentage funds below existing recovery plan 115 (37%) ; Percentage funds above existing recovery plan 187 (60%)
  - Aug 2010: Percentage funds in report 308 (99,7%) ; Average funding ratio 96,0% ; Percentage funds in funding ratio deficit 261 (87%) ; Percentage funds in reserve deficit 34 (11%) ; Percentage funds without deficit 5 (2%) ; Percentage funds below existing recovery plan 267 (86%) ; Percentage funds above existing recovery plan 41 (13%)
  - Sept 2010: Percentage funds in report 308 (99,7%) ; Average funding ratio 98,8% ; Percentage funds in funding ratio deficit 233 (76%) ; Percentage funds in reserve deficit 65 (21%) ; Percentage funds without deficit 10 (3%) ; Percentage funds below existing recovery plan 233 (76%) ; Percentage funds above existing recovery plan 75 (24%)
  - Oct 2010: Percentage funds in report 297 (96,4%) ; Average funding ratio 99,9% ; Percentage funds in funding ratio deficit 217 (71%) ; Percentage funds in reserve deficit 65 (21%) ; Percentage funds without deficit 15 (5%) ; Percentage funds below existing recovery plan 209 (68%) ; Percentage funds above existing recovery plan 88 (28%)
- Longevity risk materialized during 2010 due to new mortality tables; impact reduced average cover ratio by seven to ten percentage points, implying an additional capital need of around € 50 billion.
- Public confidence: benefit cutting measures have produced an image crisis in the public perception of pension safety.

### Policy options, commissions, and proposed reforms
- June 2010 pension accord signed by social partners highlights strategy to cope with sustainability challenge; contains proposals regarding future stability of the related state pension in the first pillar.
  - The accord: commits to collectivity, solidarity and compulsory membership; rules out increasing contributions; opens willingness to lower expectations and sureness of pension benefits.
- Goudswaard commission established to examine sustainability of Supplementary Pension Schemes; findings:
  - Confirmed need for adjustments to cope with expectations, contribution levels, ageing population and financial market conditions.
  - Two possible approaches suggested (both require Pension Act amendments):
    - First solution: reduction of the cover ratio of currently 70 percent, together with a linkage of the retirement age to the life expectancy of the population.
    - Second approach: transfer to participants of longevity and investment risks, introducing soft guarantees and entitlements that depend on the financial condition of the pension fund.
- Alternative structural consideration:
  - Separate risk management for market risk and longevity risk.
  - One option: assign current pension funds responsibility for stronger guarantees and entitlements for only 20 or 25 years of payments (starting age of retirement still flexible); the pension’s tail to be provided by another mechanism tailored for the elderly, combining a larger base of participants, adjusting down income but providing assurances on health expenses.
  - FSAP stress test proxy cost indicators for the pension tail:
    - Cost of 10 percent of the technical reserve for payment of pensions beyond age 85.
    - Cost of 25 percent for pensions paid beyond age 80.
  - A new mechanism to cover tail risk must have a lower cost than existing costs (including gains from improved effectiveness linked to reduced risk management responsibility).

### Stress testing and resilience findings
- IMF staff, working with DNB, conducted a top down stress test consisting of single parameter tests to assess sensitivity of the system and cost of the pension tail.
- Stress test highlights continued vulnerability to market risks: particularly sensitive to low interest rate, equity and real estate risks.
- Continued low interest rate environment would be detrimental given low solvency coverage.
- Scenario findings for large 10 pension funds:
  - Japan scenario (low interest) and the 50 percent low interest scenarios even lasting for only two years generate an average drop in cover ratio of 12 percent and 22 percent for each scenario respectively.
- Some pension funds are hedging low interest risk effectively for shorter durations.
- Stress test including indexation of future benefits:
  - Additional drop in cover ratio resulting from assumed indexation is over 30 percent, underscoring urgency to adopt strong and explicit conditionality of indexation of future benefits including accrued benefits.

*Source: _cr11209 - 32.      A pension fund may be established by a company, an industrial sector (branch) or a professional group*

### 57.      Another area of vulnerability is the lack of risk controls prevalent in the pension

### Another area of vulnerability is the lack of risk controls prevalent in the pension

### Key vulnerabilities in pension funds
- The large number of small pension funds poses a challenge to compliance with regulation and supervision.
- The Frijns Report (requested by the minister of Social Affairs and Employment) examined developments since 1990 in investment policy, risk management, administration and governance relative to pension funds’ aims and risk acceptance level.
- Frijns Report findings (investment policy, risk controls, governance):
  - The importance of risk policy and how investment policy is implemented structurally undervalued.
  - Management of the assets is outsourced without due attention to the outsourcing risks.
  - The governance model needs improvement with respect to independence, expertise and accountability.

### Investment policy and regulatory framework
- The Pension Act and the FTK assign responsibility for investment activities to the board.
- Pursuant Article 135 of the Pension Act, a pension fund must have an investment policy compliant with the prudent person rule (based on Article 18 of the European Pension directive (2003/41/EG)):
  - (i) the assets are invested in the interest of pension beneficiaries;
  - (ii) investments in the contributing company are limited to a maximum of 5 percent of the portfolio as a whole, and if the contributing company belongs to a group, investments in the companies belonging to the same group as the contributing company are limited to a maximum of 10 percent of the portfolio. If a group of companies pays premiums to the pension fund, investments in these contributing companies will be made prudently, taking into account the need for appropriate diversification;
  - (iii) the investments are valued at market price.
- Article 13 of the FTK further requires to guarantee a prudent investment policy:
  - The assets are invested in such a way as to guarantee the safety, quality, liquidity and the return of the portfolio as a whole.
  - Assets held as coverage for technical provisions are invested in a way that fits with the nature and duration of the expected future pension payments.
  - Assets will primarily be invested in a regulated market. Investments in assets in non-regulated market will be restricted to a prudent level.
  - Investments in derivatives are permitted in so far as they contribute to a reduction of the risk profile or increase the effectiveness of the portfolio management. Pension funds limit the concentration risk.
  - Diversification of assets is required to prevent any dependence in certain assets and concentration risk.

### Identified gaps and supervisory response
- Reported inconsistencies and deficiencies:
  - Investment strategies do not appear aligned with benefit expectations and demographic profile of pension funds.
  - Deficiencies in effective outsourcing controls.
  - Deficiencies in countervailing power at the board level.
- DNB responses:
  - Assigned resources and expertise to boost compliance.
  - Detailed analyses of financial structure, investment strategy, and risk controls have been and continue to be carried out.
  - Supervision of investment firms and managers of investment funds is part of the 2010–2014 DNB supervisory themes.

### Governance: responsibilities, composition, and expertise
- Board responsibilities stated in the Pension Act. Directors should take care of:
  - (i) a solid financial structure and position to face the financial obligations to the participants,
  - (ii) the risk-management within the pension fund,
  - (iii) the governance of the pension fund,
  - (iv) the operational management,
  - (v) the asset management,
  - (vi) pension fund’s compliance with regulation,
  - (vii) the external communication, and
  - (viii) the contact with the supervisory authorities.
- Organizational and internal supervision requirements (paragraph 1 of Article 33 of the Pension Act and Article 42 of the Obligatory Occupational Pension Schemes Act):
  - (i) account to the entitlement and pension beneficiaries and the employer, for which purpose an accounting body is established,
  - (ii) internal supervision is provided.
  - Further rules may be set out by Order in Council relating to compliance with principles for sound pension fund management.
- Article 11 of the Decree on the Implementation indicates the Guidelines for Pension Fund Governance of the Labour Foundation as good principles, relating to:
  - (i) the board (articles of association, regulations, segregation of functions, careful and fair weighing of stakeholder interests, transparency, communication, expertise);
  - (ii) accountability (active members, retired members, employee(s), assessment of past management and of policy projections);
  - (iii) internal supervision by at least three independent experts (critical assessment of performance, policy and governance procedures, approach to longer-term risks).

### Board composition and appointment rules
- Balanced board composition requirements:
  - Industry-wide pension funds: Article 99 paragraph 1 of the Pension Act requires representatives of employers’ associations and of employees’ associations in the relevant sector(s) hold equal numbers of seats.
  - Company pension funds: Article 99 paragraph 3 requires employees’ representatives hold at least as many seats as employers’ representatives; if representatives of pension beneficiaries hold seats, these representatives together with employees’ representatives must hold at least as many seats as employers’ representatives.
  - Paragraph 5 of Article 99 sets appointment mechanisms for employees’ representatives: (i) election by and from scheme members, (ii) nomination by scheme members’ council as defined in Article 110, (iii) nomination of the works council, or (iv) another manner with works council consent.
- Knowledge and expertise provisions:
  - Articles 99 and 105 include requirements on composition, policy, expertise and trustworthiness of board members for industry-wide and company pension funds.
  - Article 105 requires everyday policy to be determined by at least two natural persons who follow interests of scheme members, former scheme members, other pension right-entitled persons, pension beneficiaries and the employer, ensuring balanced representation.
  - Article 105 paragraph 3: policy determined, or partly determined, by persons with expertise relating to the operation of the pension fund’s business.
  - Article 105 paragraph 5: board bears responsibility for ensuring trustworthiness beyond question.
  - Article 110 of the Obligatory Occupational Pension Schemes Act applies these requirements to occupation pension funds.
  - Chapter 7 of the Decree amplifies the terms expertise and trustworthiness.
- Board committees:
  - Existing regulation does not require mandatory board committees; presence varies by fund.
  - Many funds have pension committee, asset management committee, audit-committee and a committee for complaints/individual cases.
  - Recommendation: mandatory board committees, depending upon fund size and complexity, should be considered.

### Strengthening board effectiveness and governance supervision
- Frijns Report and FSAP mission indicate more needs to be done on expertise and knowledge at board level.
- Due to product complexity and mandatory participation, effectiveness and accountability of boards need to be significantly raised to better protect participants.
- DNB proposal: elaborating new requirements to mandate incorporation of professional board members for pension funds above a certain size; proposal will be ready for approval and transcription into regulation in the next months.
- DNB has made pension fund governance a central theme of supervisory activities from 2010 to 2014; allocating resources and new supervisory models to achieve higher compliance will be important.

### Outsourcing, pension administration companies, and supervision
- Most pension funds outsource operations to related pension administration organizations.
- Pension administrators are allowed to serve other pension funds and provide additional services like insurance.
- Cross-selling strategy for large industry-wide pension funds has stagnated since the 2008 crisis but has created institutions providing all services to pension funds that are not subject to direct supervision.
- Recommendation: include a direct supervisory regime for these pension administration institutions.

### Third pillar: framework and products
- The third pillar provides pensions through annuity products and retirement saving plans issued by insurers and banks, mainly for self-employed workers and higher income workers.
- Income from annuity products can supplement the AOW and/or an occupational pension.
- Although anyone can enter a private pension arrangement with an insurer, the system is often used by higher earners as a mean for deferring income tax and to supplement other pensions.
- Compared to the second pillar, total assets under annuity contracts are relatively small. The size of this pillar is estimated around € 7.5 billion, where two thirds of the assets are managed by insurers and one third by banks after only 2 years some banks have been allowed to sell similar tax deferred retirement saving products. The trend to increase the banking share in this activity appears to be confirmed.
- Types of third pillar products:
  - Unit linked products, with profit policies, and products with fixed interest guarantees.
  - Payout forms: annuity or a lump sum to purchase an annuity.
  - Annuity insurance: A fixed term, consistent and periodical payment for either a fixed period of years sold by insurers and banks, or having a lifelong payment period offered only by insurers.
  - Retirement saving plans: A lump sum payment to purchase annuity. The interest components can remain free from taxation, if certain conditions on premium payments are met. This product can be offered by banks and insurers. The insurance product adds a death benefit protection.

### Appendix I — Pension assets invested at pension fund’s risk (EUR Million, end of period, 2009Q4)
- Real estate investments (Excl. Derivatives / Incl. Derivatives / Share in %):
  - Direct investments in real estate 17,155 / 0 / 17,155 / 2.6%
  - Indirect investments in real estate 49,116 / -534 / 49,063 / 7.4%
- By currency (Real estate):
  - Euro 47,795
  - Non euro 18,476
  - Total real estate investments 66,271 / -536 / 66,218 / 10.0%
- Equities:
  - By type:
    - Mature markets 172,488 / 490 / 172,979 / 26.1%
    - Emerging markets 32,550 / 532 / 32,555 / 4.9%
    - Private equity 18,668 / -518 / 18,664 / 2.8%
    - Investment funds 11,379 / 6 / 11,385 / 1.7%
  - By currency:
    - Euro 85,259
    - Non euro 149,826
  - Total equities 235,085 / 497 / 235,582 / 35.5%
- Fixed yield securities:
  - By type:
    - Government bonds, Non index-linked 119,996 / 6,750 / 126,745 / 19.1%
    - Index-linked bonds 42,509 / -266 / 42,243 / 6.4%
    - Mortgage loans 31,807 / 263 / 31,833 / 4.8%
    - Credits 104,452 / 1,981 / 106,432 / 16.0%
    - Investment funds 8,738 / 678 / 8,805 / 1.3%
    - Short term claims on banks 14,190 / -1,265 / 12,926 / 1.9%
  - By currency:
    - Euro 255,154
    - Non euro 66,538
  - By rating:
    - AAA 149,940
    - AA 50,952
    - A 46,172
    - BBB 27,924
    - Lower then BBB 24,515
    - No rating 22,187
  - Total fixed yield securities 321,692 / 7,293 / 328,985 / 49.6%
- Other investments:
  - By type:
    - Hedge funds 20,338 / 292 / 20,366 / 3.1%
    - Commodities 10,019 / 737 / 10,756 / 1.6%
    - Investment funds 3,301 / 0 / 3,301 / 0.5%
    - Liquid assets 9,005 / -320 / 8,685 / 1.3%
    - Other -10,511 / 528 / -9,983 / -1.5%
  - By currency:
    - Euro 15,155
    - Non euro 16,997
  - Total other investments 32,152 / 974 / 33,125 / 5.0%
- Total investments at funds' risk:
  - By currency:
    - Euro 403,364
    - Non euro 251,836
  - Total investments at funds' risk 655,200 / 8,710 / 663,910 / 100.0%

*Source: DNB*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11209.pdf_