In October 2005, bleary-eyed from an early morning flight, I found myself crossing the canals of Amsterdam on my way to the cylindrical tower that houses the Dutch Central Bank. Life & Pensions was only a month old, but improbably, I had been granted an interview (Life & Pensions, Nov/Dec 2005, p12) with Dirk Witteveen, a senior director of the Bank, who lost his battle with prostate cancer last month. Greeting me in his office, Wittteveen was genial but behind the warmth was a steely intellectual honesty. He needed it. As the architect of the financial supervisory framework (FTK) for Dutch pension funds, Witteveen had infuriated his country's pensions establishment.
Having their carefully crafted asset-liability models thrown out of whack by market-consistent liability valuation was bad enough. But for the years of ALM studies to be replaced overnight by a solvency framework based on value-at-risk that forced them to hold capital against their huge equity portfolios - this made the powerful pensions grandees splutter with rage.
When I saw Witteveen, the pensions establishment had just managed to get the implementation of FTK postponed by a year. The pensions magazines and Dutch financial press were full of arguments in favour of long-term equity returns and perhaps the grandees were hoping to hobble FTK in its final form. But Witteveen quickly gave me the impression that they had misjudged their man. Shrugging off the delay in implementation, he neatly dispatched his opponents with a series of withering arguments.
The Dutch pensions industry should not, he said, be too proud of their ALM studies which had allowed them to be over-generous during the equity boom and forced them to cut pensions indexation while jacking up contribution levels. And Witteveen enjoyed pointing out that during the boom, the industry had lobbied for a UK-style regulatory system, which in the UK had led to chronic deficits and losses in pension benefits.
Moreover, said Witteveen, the Dutch pensions grandees were guilty of a 'polder mentality' because their decisions lacked transparency - which went against the interests of society. He was particularly proud of his team of quants who had produced 15-year simulations demonstrating the need for the 130% solvency ratio and the one-year emergency recovery period if the ratio fell below 105%. Shaking his head at the intellectual dishonesty of his opponents, Witteveen concluded the interview by saying he looked forward to the day when Dutch pension funds produced viable internal models, and treated indexation as a transparent consumer product.
Two years on, all this has come to pass. The same funds that battled Witteveen over FTK are now users of derivatives hedges and alternative investments, and are presenting their internal models for DNB approval. Of course, it may be too early - at least compared with the 15-year timeframe used for the DNB simulations - to make definitive statements about the success of FTK. Looking further afield, it will be interesting to see how much overlap there will be between FTK and Solvency II.
But looking at the tortuous debate over pension guarantee funds in other countries, it's hard not to perceive the Dutch system as a superior model. I like to think that Witteveen was drawn to Life & Pensions as a kindred spirit in his lonely campaign for FTK. He may have lost his fight with cancer, but the Dutch should probably be grateful he won the most important battle of his career.
The week on Risk.net, December 2–8, 2017Receive this by email