pensioen forum 2009, rotterdam, 30 september 2009

30 September 2009

Falco R. Valkenburg

© 2009 Towers Perrin

PPI, API, Pension Captive

Why are multinationals so interested?

© 2009 Towers Perrin 2

W A R N I N G

I have been asked to make provocative statements


W A R N I N G

Statement 1

We, pension experts, look at pensions from a pension perspective

We should look at pensions from a business perspective


As the magnitude of pension risk has grown, there’s a need to understand it in an enterprise risk context

…LongevityEquityInflationInterest Rate

Interest RateInflation……

Business Risk 3

Business Risk 2

Business Risk 1

Enterprise RisksBusiness Risks Pension Risks

Relative sizes?

and ??

4

Pension Risk Business Risk

Business RiskPension Risk and


Alternative strategiesfrom a finance perspective

CorporateTransaction

AnnuityPurchase

ReduceTail Risk

CurrentState

Costs and Risks transferred

Costs and Risks kept

Costs and Risks shared

Expected Costs

“Downside” Risk* Towers Perrin patent pending

Dynamic ExitStrategy

AssetImmunization

Overlay / Long BondStrategies

CDC

MultiEmployer

fundIORP

GuaranteeContract

Guarantee Contract

US GAAP proof

GlobalPension Captive*


Emerging approach: Cross-border financing arrangements

Country employee group

IMEA B E F G HIMEC D

Local country DC plan

Local country DC plan

Local country DB plan




IME plan

Cross-border DC platform (e.g., cross-

border IORP*)

Cross-border DB platform (e.g., PenCAP,

cross-border IORP*)

Cross-border asset pooling vehicle (with sub-sections)

Optimizes financial, demographic and plan governance

risks (in an enterprise context)

Optimizes asset management arrangements (governance, cost, return)

Optimizes fiduciary, compliance and plan

governance risks

Defined Contribution Defined Benefit

*Institution for Occupational Retirement Provision, under EU Directive


W A R N I N G

Statement 2

Unless our neighbors, The Belgians, we, the Dutch, have not yet been making use of the full breadth of possibilities coming from the European Pensions Directive, also called the Bolkestein Directive


W A R N I N G

Statement 3

No innovative developments since we are protecting (we believe) our own interests.

The crisis has shown that for sustainability we ought the focus first on the needs of our customers.


Some history

3 June 2003: European Pension DirectiveInstitution of Occupational Retirement Provision— Pan-European Pension Fund

January 2007: Belgium implements Directive compliant Pension Act

OFP = Organisation for the Financing of Pensions— Belgian IORP

March 2007: attention in Dutch media that NL is lagging behind

Legal set up of API (general pension institution) requested


Some history II

Full blown API turned out to be too complicatedLevel-playing field with insurers is an obstacle

Forward in three stages1. PPI = Premium Pension Institution (IORP for DC)2. Multi OPF = Multiple Company Pension Fund3. API = Full DB IORP

Amendments pension Act to Parliament:13 March 2009: PPI23 September 2009: Multi OPF


PPI: main characteristics

An IORP based legal Dutch vehicleExecution of DC schemes for multiple companies

Ringfencing allowedExecution multiple DC schemes within one company

Cross border activities are possible if approval DNB Social and labour rules of other EU host countries apply

Independent of sponsoring companyLegal form is a plc, a limited or an European plcDutch Pension Act governs a Dutch DC scheme

But the various governance bodies are not requiredTax implications are the same as a DC plan with a pension fund or insurance companyBiometrical risks (death, long life and disability) outside PPI Assets per sponsor to be placed to a separate legal entityA DC pension plan with (potentially) links to many investment managers


W A R N I N G

Statement 4

There is a business case for a PPI


PPI: a business case?

Pension field doesn’t believe in the PPIA Member of Parliament confirmed last week that he didn’t expect that the PPI proposal would make it

Why?

Increasing number of pension funds with full DC plans or combined DB/DC plans

Insurance companies: of all insured company pension plans: more than 50% is a DC planCurrent DC assets already: 15 – 25 billion euro (rough estimate)Current growth estimate: 15 - 20% per yearGrowth likely to excellerateNeed for unbundling of administration, communication and investment management


PPI: a business case?

And what about the issue of solidarity?Are DB schemes sustainable?

The middle aged group is subsidizing both the older and the youngerBlue collar is subsidizing white collarGrowing group of independent workers (currently some 800,000 or 10% of the working population!)

Increasing demand for individual solutions

If DC we add risk management tools, DC could be a way forwardRisk Management:

Currently all risks for individualOnly a Life Cycle approach to mitigate risksAddition of CPI linked vehicles would make DC robustTwo lines to choose from: nominal pension target / real pension target

Full risk management implementation requires top expertiseThis can be arranged via specialized, independent PPI’s

Yes, I do see a business case!


W A R N I N G

Statement 5

DC becomes a sustainable alternative to DB if both nominal and price-linked pensions can be achieved with acceptable risks or, if desired, with certainty


Multi OPF – a Multiple Employer Pension Fund

A Multi OPF is a vehicles aimed at the Dutch marketIt is not meant as a pan-European vehicle

Pension Fund can merge with other fund(s):One tier boardRingfencing enabledNo restriction in type of pension schemeBoard has to agree with every new entrant (and revise Board structure appropriately)

Companies with a small pension fund are interested in multi-OPF: Fund is seen as too small— Liquidation and direct insurance is an alternativeEconomies of scale — Experience— Cost reduction

Only for existing pension funds (minimal 5 years old)No transfer of direct insured arrangements into Multi OPF allowed

Governance requirements Pension Act are applicable


Case: spin-off (same pension scheme)

Parent A Parent B

Daughter A NL Daughter B NL(formerly A)

Pension Fund A NL Pension Fund B NL

Inefficiently and costly


Case: spin-off (same pension scheme) both in one pension fund

Parent A Parent B


Pension Fund A NL

Pension A NL Pension B NL

Efficient, cost-savings,

but financial solidarity between A and B


Case: spin-off (not necessarily same pension scheme) both

in one multiple company pension fund

Parent A Parent B


Multiple Company Pension Fund A BE

Pension A NL Pension B NL

Efficient, cost-savings, and financially separated

This will be possible under the new Multiple Company Pension Fund


Case: various Business Units in NL

Parent

Daughter NL C

Pension Fund NL C

Daughter NL B

Pension Fund NL B

Daughter NL A

Pension Fund NL A

Inefficiently and costly


Case: various Business Units in NLtogether in one pension fund in NL

Parent

Daughter NL CDaughter NL BDaughter NL A

Pension NL A Pension NL B Pension NL C

Efficient, cost-savings,

but financial solidarity between A, B and C


Case: various Business Units in NLall in one Multiple Company Pension Fund in

NLParent

Daughter NL CDaughter NL BDaughter NL A

Multiple Company Pension Fund NLPension NL A Pension NL B Pension NL C

Efficient, cost-savings, and financially seperated



Pension Fund NL A

Company NL A Company NL B Company NL C

Case: independent companies in NL

Participating in one pension fund by non-related companies is not allowed under Dutch law


Case: independent companies in NL share one Multiple Company Pension Fund

Multiple Company Pension Fund NLPension NL A Pension NL B Pension NL C

Company NL A Company NL B Company NL C

Efficient, cost-savings, and financially seperated



Full Dutch DB-IORPunlikely to emerge in near term

The last stage after the PPI and the Multi OPF

Unlikely to emerge soon

Too much own interest in the debate between insurers, pension fund associations and government slows down proactive development of the API (general pension institution)

There is an alternative with global reach

The Global Pension Captive


Pension plan purchases a single premium annuity at the prevailing market cost

Capital determination based on Value At Risk analysis by asset class –Solvency II and SST consistent

PensionCAP structure

Pension Plan

Insurer

Captive

Annuity premium

Annuity payments

Reinsurance


PensionCAP value proposition

Addresses common issues in several countries by:Shifts control of the plan assets to the sponsor Allows for unfettered and quick decisions on asset allocationPrevents the trapping of surplus assets through the payment of dividends to the sponsor

Satisfies the fiduciary concerns of the trustees, works councils and regulators by:

Increasing the funded status to allow for the settlement of liabilitiesSettling the plan liabilities through the purchase of annuities from an AA rated insurance company

Improves flexibility of the sponsor to invest and mitigate risk by:Allowing the pooling of assets for all plans covered in the program irrespective of countryAllowing for most of the risk reduction solutions outlined previously to be implemented and applied to FAS accounting results


PensionCAP advantages and considerations

Cash flow cost likely to purchase fronted annuity

Plan expected return on assets and any volatility unchanged unless pre-captive investment strategy modified

IAS and FAS accounting unchanged at the consolidated group level

Financial

Trustee need to verify and assess support of needs

Simplified administration, valuation, and corporate governance

Participant protection

Governance

Plan may be wound-up but requires agreement of Trustees and Works Council where applicable

Elimination of regulatory considerations for the settled liability

Stranded assets avoided

Control

CONSIDERATIONSADVANTAGESMAJOR CONCERNS


W A R N I N G

Statement 6

Let’s stop the development of a Dutch Full DB IORP, the API. There are already good alternatives:

- IORP vehicles in other countries, like the Belgian OFP

- A Global Pension Captive

But shame on us, Dutch, who desire to play an important role in pensions


W A R N I N G Summary of Statements

1. We, pension experts, look at pensions from a pension perspective. We should look at pensions from a business perspective

2. Unless our neighbors, The Belgians, we, the Dutch, have not yet been making use of the full breadth of possibilities coming from the European Pensions Directive, also called the Bolkestein Directive

3. No innovative developments since we are protecting (we believe) our own interests.■ The crisis has shown that for sustainability we ought the focus first

on the needs of our customers.4. There is a business case for a PPI5. DC becomes a sustainable alternative to DB if both nominal and price-

linked pensions can be achieved with acceptable risks or, if desired, with certainty

6. Let’s stop the development of a Dutch Full DB IORP, the API. There are already good alternatives:■ IORP vehicles in other countries, like the Belgian OFP■ A Global Pension CaptiveBut shame on us, Dutch, who desire to play an important role in pensions

pensioen forum 2009, rotterdam, 30 september 2009

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