Newsletter of the Network for Studies on Pensions, Aging and Retirement Issue 9 Autumn 2009
Theme: Lessons from the Credit Crisis 3 Robert C. Merton Silent on Financial Market Failure 9 Issue 9 – Autumn 2009
Contents
Theme: Lessons from the Credit Crisis Fighting to Keep Retirement at 65 3 What is Truth? 6
Research Netspar Selected New Themes 8 Merton Silent on Market Failure 9
Partner Profile Cardano in the Pension Industry 10
Education Theses and Awards 12 Paper Page 13
Events Past and Upcoming Events 14 Colophon 15 Short News 16
2 Netspar News Issue 9 Autumn 2009 Theme
Fighting to Keep Retirement at 65
The financial impact of population aging has been looming on the horizon for several years, but the additional effect of the economic crisis has changed the problem into an acute one. In order to save four billion Euros a year in 2040, as well as to increase labor participation, the Dutch government wants to (gradually) increase the retirement age for the state pension (AOW) from 65 to 67. Leen Preesman asked leading representatives of the main trade unions in the Netherlands for their view on the issue. Bert van Boggelen recently became acting chairman of the National Federation of Christian Trade Unions, CNV. With 350,000 members, CNV is the second largest in the country. Peter Gortzak is vice-president of FNV Bondgenoten, which has 1.4 million members.
By Leen Preesman intensive jobs, who started their working these groups to remain.” According to the career early. Their life expectancy is already CNV chairman, the level of the contribu- The cabinet has decided to increase the shorter, after all.” tions must follow the retirement age for retirement age of the state pension (AOW) Both union representatives agree that additional pensions, but the differences by two years to 67, but has also agreed to the tax-deductibility of interest should between sectors and companies don’t allow take into account the findings of a study by be limited to mortgages of less than a for a general approach. the Social and Economic Council (SER) into million Euros. Gortzak: “The FNV thinks that “Before we can decide on the retirement alternatives. (At the time of the interview, changing the way the AOW is financed, from age for supplemental pensions, there must the SER was still deliberating.) What is the a pay-as-you-go to a tax-based system, be a new balance in the whole system. exact position of both federations? will also help to meet the government’s To us, it’s the present overemphasis on financial target.” Van Boggelen adds that security, such as the financial assessment “Raising the AOW age is not a taboo to the CNV also wants to re-introduce the 60% framework FTK, rather than the retirement us, but we’ll go along with it only if other tax band on salaries over 181,000 Euros, age, that is undermining the affordability of alternatives aren’t sufficient,” states Bert which equals the Prime Minister’s salary. pensions,” he adds. van Boggelen. “First and foremost, we In Gortzak’s opinion, the retirement age want proof that delaying the state pension The present AOW age of 65 is the same as for supplemental pensions doesn’t need to will indeed significantly increase labor the standard retirement age for second- rise. “Employers are not desperate to keep participation for under-65s. At present, and third-pillar pensions. Should the their 65s, and we think it is a good age to over-55s are already having great difficulty additional pension arrangements follow quit. But employees who’d like to continue in finding a job, and employers are hardly suit, if parliament adopts the cabinet’s working, should be encouraged.” (The FNV investing in this group. There won’t be proposal to increase the AOW age? representative, however, admits that the any money saved if older workers receive pressure will be difficult to resist, if the unemployment benefits instead of AOW,” he Van Boggelen indicates he can’t be government bases its fiscal framework on points out. explicit. “It’s too simplistic to say that the a retirement age of 67. “But as a pension To the FNV, the issue is more clear-cut. additional pension arrangements should is a postponed salary, we will definitely “We fully oppose a state pension age of follow a raised AOW age. This would affect claim back the unused funds from the 67. Solutions must be found elsewhere,” pension funds’ participants in different employers,” he warns.) states Gortzak. “Our alternatives focus on ways, and we want the solidarity between a flexible AOW age — but with the benefit level for 65s unchanged. We are seeking to prevent a situation in which the brunt of the crisis is borne by people in labor-
Netspar News Issue 9 Autumn 2009 3 Peter Gortzak (FNV): “Linking the AOW to labor history will erode the principle of the AOW as a social insurance.”
Peter Gortzak (Vice President of Trade Union Confederation FNV Bondgenoten) Bert van Boggelen (Interim Chairman of National Federation of Christian Trade Unions in the Netherlands CNV)
Flexibility in retirement arrangements The cabinet argues that an increase of the Van Boggelen: “In order to avoid long appears to be a crucial part of the AOW age is in part aimed at increasing the discussions, we propose that people alternative arrangements proposed by labor participation of older workers. Do the who have contributed to society for 45 both unions. Where do the opinions differ, unions agree? years— through work, or care for young given the fact there is already a bill waiting children or ailing relatives— should be in parliament providing for voluntary Although CPB (CPB Netherlands Bureau for entitled to AOW at the age of 65.” He admits postponement of the AOW until the age of Economic Policy Analysis) has indicated that implementing the suggestion might 70, with increased benefits? that the financial gains from greater labor be hampered by the absence of a solid participation will be marginal, both Van registration of workers’ labor history, but “We support the principle of a flexible AOW, Boggelen and Gortzak say they believe in its notes that the schemes in the building so that people with a small pension can potential. “By offering employees in labor- industry have shown that it can work. continue if they want. This trend is already intensive jobs less hard work after ten or His FNV colleague is skeptical. “The visible, which implies that we don’t need a twenty years, it must be possible to increase practical problem of identifying physically raised AOW age,” says Peter Gortzak. “That the number of active over-60s to six out of demanding jobs was another reason said, the bill still needs some work. The ten,” argues the CNV representative. why we want to stick to the present AOW financial rewards for working after the age “To make this really work, we must keep ceiling,” Gortzak responds. “Retirement of 65 aren’t attractive, for example, and the present— crucial— measures to protect after a labor history of 45 years doesn’t do the bill doesn’t provide for employment older employees from damaging work,” justice to a bricklayer. Moreover, linking the protection, either. Moreover, the present Gortzak adds. “And we need to put more AOW to labor history will erode the principle concept doesn’t offer employees the right to effort into convincing employers about the of the AOW as a social insurance.” keep on working,” he explains. potential of their older staff.” “It’s too early to talk about retirement age, because it also depends on how funds A hot issue within the debate has been can be made available through reshaping how to identify and define more precisely the system,” reiterates Van Boggelen. “We “physically demanding jobs”. What is the must have a proper look into the matter unions’ position on this now? first. But basically, workers themselves should have the choice when to stop.”
4 Netspar News Issue 9 Autumn 2009 How will a rise of the pensionable age affect Gortzak says he is also worried about different groups of workers? the effect of an increased AOW age on the hundreds of thousands of self-employed “As they have fewer opportunities to save persons without staff. “As they can’t join for the moment at which they would like regular pension funds under the present to retire, low-wage workers are likely to be legislation, most of them haven’t made the most affected,” Van Boggelen predicts. provisions for retirement.” Gortzak agrees. “To many people, the AOW will be an important income component after retirement. High earners will therefore be in a better position to bridge a financial gap between retirement at 65 and a state pension at 67.”
Bert van Boggelen (CNV): “To us, it’s the present overemphasis on security, such as the financial assessment framework FTK, rather than the retirement age, that is undermining the affordability of pensions.”
Netspar News Issue 9 Autumn 2009 5 Theme
What is Truth?
"What is truth?" Pilate asked. As we all know, opinions differ – also about fair Hans Gortemaker (Professor Accountancy, EUR) and market valuation. Netspar News asked Hans Gortemaker (Professor Accountancy, EUR) and Pieter Kasse (actuary, Cordares) to discuss this subject.
By Rik Oerlemans we live, and ask: What is truth and who years risk scenario, because that is actually holds the patent on it? What is an actuary factored into that 97.5% certainty margin. Actuarial or fair market valuation? really after? What about an accountant? It’s a good idea to scrutinize the parameters An accountant is able to calculate the value More specifically: What are the views of that pension funds are permitted to use for of a pension fund to the slightest decimal Pieter Kasse, actuary at Cordares, and Hans their computations every couple of years if it were to be cashed in tomorrow – or Gortemaker, accountancy professor at EUR? and to take a comprehensive look at the when the figures must be submitted to assumptions regarding risk and return. the Netherlands central bank (DNB). An Purpose, funding and valuation of pension While the insured are pushing now for actuary can do this as well, but he does it funds greater guarantees, pension funds are faced differently: He takes into account economic The purpose of a pension fund is to provide with having to explain that things might downturns as well as the life expectancy pension payments at a reasonable cost. An not turn out as planned. Many pension of participants, calculating thereby – just assessment framework – in this case the fund participants still think that the condi- like the accountant – how much financial Dutch government’s Financial Assessment tionally indexed benefits can be seen as a weight a pension fund brings to the table. Framework (“Financieel Toetsingskader”, guarantee. The pension funds need to do For several years now, DNB has wanted FTK) – is in place to ensure that a pension a better job of explaining how things really pension funds to use the mark-to-market fund will be able to meet its benefit work.” method. Although the method does provide commitments. That is why buffers are so Accountancy professor Hans Gortemaker clarity, its use could also, in these tough important. The size of the buffer needed thinks that, besides the FTK, the times, present some nasty surprises. If this depends on the level of certainty desired. International Financial Reporting Standards new method were to be used to compute If the insured parties want a high degree of are also important. These accounting value, then the ravaged stock market values certainty in terms of guaranteed nominal principles dictate that “fair value” be used of the past year would also cause pension benefits, then contributions will have to in determining the value of a company (in funds to drop dramatically in value. In order increase several times over. this case, the pension fund). That means to avoid nasty fluctuations and aggravation, The FTK considers a capital buffer to be that reporting must be based on present DNB allows pension funds to use a sort sufficient if it provides 97.5% certainty of value. “You cannot view purpose, funding of fixed actuarial interest for setting the a pension fund’s ability to meet obliga- and value as separate from each another,” amount of their contribution. And that is as tions. “But,” says actuary Pieter Kasse, he says. “Fair value is a good starting point, it should be. For the moment, though, let’s “with buffers like that, we appear to be but for each sector we also need rules and look beyond the perilous times in which underestimating the risks associated with regulations – and these must be able to market fluctuations. Either that, or what we accommodate exceptional circumstances. are now experiencing is a once-in-forty- No one likes hard-and-fast rules. Principle- based practices are therefore preferable to rules-based ones.”
6 Netspar News Issue 9 Autumn 2009 Pieter Kasse (actuary, Cordares) debate on valuation.
Benefits latitude? “Pension funds and insurers nominal funding ratio, when the buffers Consider the following, however: If it each have their own kinds of management (as imposed by the FTK) provide that room. becomes entirely clear that funds will be tools,” Kasse explains, “which justifies Promise less, give more.” unable to honor certain pension benefits certain differences. Pension funds, for in troubled financial times, can those instance, can raise contributions or limit Room for reaching the wrong conclusions benefits still be listed on the pension fund’s indexation – actions that work to dissipate All of it certainly is confusing, as Kasse balance sheet? Kasse believes that the risk. This helps to explain why they are not readily recognizes. “The difference assumption must always be that defined subject to the same solvency requirements. between defined pension liabilities and pension benefits can be met. We should “Both players, however, operate on the conditional allowances feels very arbitrary not, therefore, tinker around with the financial markets and, in that sense, both for participants,” he says. “There is plenty intervention rate that is based on defined are exposed to the same market risks. In of room for drawing the wrong conclusions benefits in determining pension liabilities. 2008 the fluctuations in interest rates and from the nominal funding ratio. Plus, up This does not diminish the fact that under stock prices caused an enormous impact on until now, we thought that the real target certain conditions, even the nominal the funding ratios at pension funds. I can was obtainable – but let’s make sure first entitlements cannot always be guaranteed. imagine that greater stability in the funding that the pension funds are able to make It is precisely because the benefits are not ratios would be desirable – in terms of good on the nominal benefits. When we set in stone and the fund does not have to both pension fund policy and interfacing reach the point where the coffers once be liquidated on a day-to-day basis that with participants.” Gortemaker agrees that again have enough money in them, we can a fund is in a position to take investment regulation must be sector-specific, because start looking at alternatives. One possibility risks – in the hope that they will deliver a the differences between sectors are too is a real funding ratio, but computing that greater return than risk-free investments. great to impose on them a single model. will not be easy.” Kasse argues that that is what keeps a good Real or nominal, one thing is clear: plan affordable. Money illusion the pension sector needs to report on Gortemaker agrees with him on that Is it truly responsible, given the purpose facts, opportunities and risks in a better, point. “Pension benefits are part of the of a pension fund, to operate on the clearer and more frequent manner for its compensation and benefits package,” he basis of nominal value? Doesn’t playing participants. Open communication will points out, “and those are, of course, set in to the participant’s money illusion run preclude participants having inflated stone. The annual financial statements are counter to the duty entrusted to actuaries dreams of all their wealth, while being predicated on the notion of a company’s and accountants to inform participants? oblivious to the risks that their pension is continuity. If there is any discontinuity, Gortemaker’s answer is short and to the exposed to. The pension sector is becoming we will employ other valuation principles point: “A real-value framework should more aware of this, which can be evidenced and parameters. You can explain the be the guiding principle, unless nominal in the pension register, the uniform pension implications of different scenarios in the commitments have been made.” Kasse’s statement (“Uniform Pensioenoverzicht”, notes.” response is more nuanced: “The FTK UPO), conditionality declaration, and computes pension fund values in nominal indexation label. And it’s a good thing, Fair market valuation not always an option terms, whereas the targets of most funds too – because having your pension exposed It turns out that not only banks, but also are in real terms. If those targets are made to risk is not so bad, but running that risk insurance companies, have plenty of leeway unconditional, then additional reserves without knowing about it is. to deviate from fair value in valuating both will have to be set aside. There is definitely the assets and liabilities on their balance room for conditional indexation in the sheets. Isn’t it, then, rather strange that pension funds are not permitted the same
Netspar News Issue 9 Autumn 2009 7 Research
Netspar Selected New Themes
Four new themes have been selected by Netspar for the This Netspar theme will deal with the period of October 2009 till October 2012. One of the themes question how such a trade-off should is of American origin, the other three research projects are be made. It will thus provide a scientific affiliated with Dutch university partners. In total, two million framework for the difficult decisions that Euros is allocated. must be made by insurance companies and pension funds in the wake of the financial crisis. Financial Literacy markets has important effects on the risk Annamaria Lusardi (Dartmouth College, US) management of financial institutions. Work and Care Across the Lifecycle investigates financial literacy. Individuals When many large institutions are selling Maarten Lindeboom (VU University are increasingly in charge of securing their at the same time, demand may be Amsterdam) and Eddy van Doorslaer own financial well-being after retirement. lacking and prices can fall rapidly. In such (Erasmus University Rotterdam) are in charge The aging population has put considerable circumstances, the solvency of pension of a project to investigate the relations strain on existing pay-as-you-go social funds and insurers may be severely affected between health, income and retirement. security and pension systems. Many pension and the supervisory framework imposes This theme is the continuation and reforms throughout Europe have increased drastic actions. The question is if and extension of the preceding theme “Income, workers’ responsibility regarding both how how market valuation should be adjusted health and work across the life cycle”. much to save for retirement and how to for possible temporary liquidity effects In the past decades in The Netherlands allocate retirement wealth. Individuals in distressed markets. A second related changes in care (ZVW and AWBZ) and labor are faced with a proliferation of new question is whether the liquidity premium market institutions (the pension and investment products and with investment can make illiquid assets attractive for long- disability insurance system) have been opportunities that have expanded beyond term investors. implemented and more are expected. The national borders. effect of institutional changes on (inequality However, as the financial crisis has made Short Term Risks and Long Term Goals in) care use and on labor market behavior clear, it is very hard to navigate this new Tension between short term risks and of older workers is interesting in itself. On financial system, and the consequences of long term policy of pension funds is the other hand, the behavioral changes mistakes can be devastating. Just how well investigated by Michel Vellekoop (University induced by changes in the institutions equipped are individuals to make financial of Amsterdam). The current financial crisis can be used to learn more about the decisions? How much do individuals know has severe consequences for insurance mechanisms underlying associations about economics and finance? And how can companies and pension funds. The effect between income, health, work and care. we promote saving and retirement planning of all problems on funding ratios since the For instance, changes in the pension system in a cost-effective way? credit crisis has been dramatic. Many Dutch may induce workers to change their labor pension funds have formulated recovery supply and it is of importance for policy Value and Risk on Balance Sheets plans in which they design strategies to get purposes to see whether these behavioral Peter Schotman (Maastricht University) their funding ratios back to the required changes have consequences for later life studies the valuation of pensions and levels within a given time period. It is to be health. desired investment policy. Pension fund expected that the financial crisis will lead to The most important panel datasets for and insurance companies have many items a new regulatory framework to determine the US, Europe and the Netherlands will be on their balance sheet that are not easy to the amount of risk that life insurance used as these panels have now grown into evaluate using fair value principles. Some companies and pension funds will be maturity with multiple waves available. assets only occasionally have market values. allowed to take in the future. Extensive use will also be made of two An example is direct real estate, which In the new regulation there must be a important new linked datasets for the sometimes is unique and has market price careful trade-off between long term goals Netherlands from Statistics Netherlands and only when it is bought or sold. Another for investment strategies and short term Sweden. The theme has direct access to the example is private equity, which only has constraints on the associated risks. For Dutch data from Statistics Netherlands. an observed value when participations are pension funds, this often translates into a sold or undergo an IPO. tension between constraints that are based The recent financial crisis has highlighted on nominal valuations, and goals that are a number of issues where liquidity of formulated in real terms.
8 Netspar News Issue 9 Autumn 2009 Research
Merton Silent on Market Failure
This year’s Van Lanschot Lecture was given by 1997 Nobel laureate Robert C. Merton, famous Of course, this by no means lets banks in finance for his seminal contributions to the discipline, and known further afield for the or other market professionals off the hook. spectacular success— and equally spectacular subsequent demise— of LTCM, a hedge fund of Yet Merton remained remarkably silent on which he was a partner. Needless to say, Merton’s talk focused on the current credit crisis. their flaws. Not so his doctoral advisor Paul In many ways it was a defense of the financial engineering technology that he helped A. Samuelson (winner of the Nobel Prize develop and which many now see as one of the culprits of the crisis. twenty-seven years before his student), who recently blamed the financial fiasco on Indeed, Merton demonstrated that the since the sensitivity (or delta) of the put has the “new fiendish Frankenstein monsters theoretical toolkit goes a long way toward gone up. This means that, unless the lender of financial engineering”— referring, understanding the seemingly freakish readjusts his portfolio, another asset drop for instance, to the packaged mortgage risks of credit. Even the most basic forms will increase the value of the guarantee securities that banks shuffled off their of risky credit, such as bank loans or (and therefore the loss to the lender) by a books and sold as prime-rated debt to the mortgages, always perform two functions disproportionately larger amount. The next market. Of course, this is exactly the type of simultaneously: the lending of money hit will lead to yet greater losses. And so risk transfer that occurs without hindrance and the issuance of guarantees. A lender what seemed to be a relatively small risk in Merton’s models, but which in reality not only lends money, but also writes a can mutate into an enormous problem— compromises the due-diligence efforts on guarantee on the assets of the borrower; even though (or rather: because) loan the part of mortgage sellers and therefore if the asset value falls short of the value portfolios are left unchanged. raises the risks to the end investor and, of the loan at maturity, the lender faces Merton did not fail to point out that the ultimately, as it turned out, to society. a loss equal to the difference. Risky credit explicit and implicit guarantees that his And so, while Merton’s lecture did is therefore functionally the same as and many other governments have issued offer some food for thought, it was what government (i.e., risk-free) debt plus a put in order to curb the crisis are subject to the he did not say that made it all the more option. same logic. In fact, he argued, they have interesting. Now, if asset values go down (as issued these guarantees often in ways that sub-prime mortgaged US homes began to are non-transparent and off the budget, Rob van den Goorbergh do in 2006-07), the guarantee becomes and are therefore susceptible to the same September 2009 more valuable. And not only that, the criticism of financial trickery that banks lender’s position also becomes more risky, have been accused of.
Netspar News Issue 9 Autumn 2009 9 Partner Profile
Cardano in the Pension Industry
Over the last nine years, Cardano has focused on reshaping strategic risk management for defined-benefit pension funds. From the beginning, Cardano’s aim has been to integrate the development of sound strategic risk management for pension funds with the implementation of the preferred strategy. Nowadays, we are European market leader in designing, implementing and managing derivative overlay strategies, serving over 40 larger pension plans by managing their funding-level risks. Derivative overlay strategies are now widely used in the industry: a majority of Dutch pension funds directly or indirectly uses interest rate, equity and inflation derivatives as one of the most important tools in strategic risk management.
By Bart Oldenkamp, Cardano financial market solutions. From the at all of the risks and returns to which the beginning of Cardano, however, we have various stakeholders (employees, employers, In 2007, Cardano moved to the UK, with an also been actively involved in innovation retirees) are exposed – and redesign the office in London, and extended its service for the pension industry in a much wider entitlements and risks within the pension to so-called “solvency management”, sense. The innovative approach of Theo deal such that it becomes sustainable for which integrates strategic risk management Kocken, the founder of Cardano, to use the long run. This pension “redesign” occurs through overlays with managing the option valuation to explicitly assess the risk at both the individual pension-fund level underlying investment portfolio. Solvency and reward trade-offs of all stakeholders and at the level of society as a whole. How management allows our clients to manage in a pension plan, has gained wide can we ensure that the various pillars in our the risks present in their entire balance recognition. Kocken’s approach has been system still add up? What demographic and sheet through a unified, coherent approach. applied to a number of real-life challenges economic pressures exist at a country level Every risk-management or investment in the industry, and the pension-redesign that we need to account for? decision made within the fund is assessed recommendations in his books and articles in terms of solvency improvement and risk, are part of the current debate around the Netspar and Cardano without relying on derived objectives such future of the DB pension system. Netspar partners such as Cardano can as outperformance relative to asset-class- be of help to the pension industry only specific benchmarks. Solvency management The challenges for pension funds when they are fully aware of all the leads to an approach that relies on risk Innovation will be the key element for strategic challenges and risks — financial allocation, rather than asset allocation, pension funds that strive to reach their or non-financial — that pension funds as the most important tool to manage the objectives: to provide retirement income face. To offer sustainable solutions to fund’s solvency position— an approach that for current and future participants over the industry, financial risk management is quickly gaining wider acceptance in both a long time horizon. The tasks for the needs to team up with solutions such as the UK and the Netherlands. Our offices in industry are challenging— take a barely pension redesign. This is why Netspar is London and Rotterdam employ 80 people solvent system and heightened insecurity important to Cardano: through Netspar’s in total, equally shared between the two in financial markets, and combine these research and partner network, partners like locations. with demographic pressures such as ageing, Cardano obtain access to a platform where Through derivative overlays and solvency on top of the ever-increasing maturity of all current and future challenges to the management, the services offered to pension funds: the result is a retirement pension industry can be addressed. Many of our clients have mainly been built upon system about to crumble under a huge the Netspar research themes are directly or amount of pressure. Pension fund Boards indirectly relevant to our clients and hence, will feel increasingly more pressured to look to us. We believe that three major themes, challenges and drivers for further research will dominate the future.
10 Netspar News Issue 9 Autumn 2009 Governance and Risk Management Dealing with Uncertainty The most important lesson from the The last theme deals with the information current crisis is that the pension industry we need to make strategic decisions has come to realize that we need a better under uncertainty. We expect, apart from understanding of what risk management a further fine-tuning of econometric and really means to pension funds. Historically, time-series models, more focus on how Pension fund redesign there has been a strong focus on merely to deal, rigorously and intuitively, with Beyond the current credit crisis, there are assessing and measuring risks present in the potentially stressed market conditions. other challenges presented by ageing, a portfolios, without making explicit how risks How can shorter-term event risk analysis maturing pension system (i.e. the ratio are managed. The usual investment process, be combined with existing approaches to of actives to inactives/retirees is steadily which involves investment consultants, decision making? How do demographic diminishing) and continued deterioration the Board, investment managers and the changes, or changing patterns in of real funding levels that will require Investment Committee, while thorough, consumption behavior (consider, for massive changes and risk redistributions may take several months to implement example, the growing importance of health within our current pension system. We have required changes. We have also learned care) affect the economy and the pension been able to observe what happens when that once under pressure, pension funds do system? How does the design of our one or multiple stakeholders observe that start to act as shorter-term risk managers: retirement system affect the economy? How the risk/reward trade-off is tipping to the ignoring the short run may render the long does the changing global economy affect wrong side: pension funds close or risks term irrelevant. So risk management needs future asset returns? In short: how can become transferred to other stakeholders, to seek a balance between short-term and we take account of the fact that pension who (we hope) are better able to bear longer-term risks, with the focus shifting design, the economy, demographics and adverse consequences. The fundamental more towards the short run as pension asset returns are all connected? question is what retirement systems will funds become more mature. How do we The research agenda is enormous and the be affordable, while maintaining solidarity implement risk management in the existing tasks are daunting, but as an industry, between generations. How can financial risk structures? What information and what we can’t afford to ignore what’s ahead management help stakeholders bear the mandate does risk management require? of us. Cardano is confident that through risks? Who “owns” the pension funds? How Who should the Board involve in order to participating in Netspar, we support an do we reward stakeholders who take up bring about the required changes? In short, important initiative to deal better with the more risk? what governance model allows for a better- challenge to provide a healthy retirement functioning risk-management model? income for generations to come.
Netspar News Issue 9 Autumn 2009 11 Education
New Name for Netspar-UMBS Academy MSc Economics and Finance of Aging Master class on effects crisis As of September 1, 2009 the Netspar-UMBS Two students graduated in August 2009 on pension funds Academy has a new name. Maastricht from the Netspar Master’s program Following the credit crisis, Netspar will University changed the name of UMBS to Economics and Finance of Aging at Tilburg organize a two-day master class in March, Maastricht University School of Business University. Netspar congratulates Lisanne in which the effects of the current crisis and and Economics. So the new official name Maas and Jairo Rivera Rozo. possible new crises on pension funds are of our institute for professional education In September, a new cohort started with discussed. will be Netspar – Maastricht University SBE eight Dutch and eight non-Dutch students. The master class will focus on the causes Academy. These students are already looking forward of the crisis (how could bad ratings and In April the Academy offered Solvency to arranging their internships, which will subprime mortgages have such a disastrous II and Internal Models; in June followed begin in March 2010. For more information effect), but mostly on the effect on pension Responsible Investing. November 4 and on the internships and how to provide funds. How could funding ratios go down so 5, the subject of the course was Pension Netspar with internship positions, please quickly, how likely is this to happen again? Fund Governance. Rob Bauer (Maastricht check the MSc’s website www.netspar.nl/ In addition: how feasible are recovery University and Netspar) had invited some education/master/internships. plans and what are the implications for the of the hot shots in this field to participate, pension system as a whole in the long run? including Jaap Koelewijn (Nyenrode), Thesis Awards The master class will be taught by Lans Gordon Clark (Oxford University) and During the Pension Workshop (January Bovenberg, Theo Nijman, Bas Werker and Juan Yermo (OECD). Location: Zeist. More 27–29, 2010), the Netspar Thesis Award Frans de Roon. information on the academy is available on winners will be presented. This year there www.netspar.nl/education/academy. is an award for a bachelor’s thesis and for a master’s thesis. Eight bachelor’s students, and as many as 21 master’s students from different Dutch universities, have submitted their thesis. More information is available on www.netspar.nl/events.
12 Netspar News Issue 9 Autumn 2009 Paper Page
Recently Published Papers Hans Fehr, Manuell Kallweit and Fabian sector partners, as well as international This page offers the recently published Kindermann: Marital risk, family academics, act as discussants. The papers papers in the Netspar papers series. insurance, and public policy (DP 07/2009- are published in a special PP booklet series. More papers and all pdf versions 020) Eddy van Doorslaer, Hans van Kippersluis, can be found on our website Peter Diamond and Johannes Spinnewijn: Owen O’Donnell and Tom van Ourti: www.netspar.nl/research/database. Capital income taxes with heterogeneous Socioeconomic Differences in Health over discount rates (DP 07/2009-019) the Life Cycle: Evidence and Explanations Discussion Papers (DP) are produced by Adriaan Kalwij, Giacomo Pasini and Mingqin (PP 12) all Netspar researchers and Ph.D. students Wu: Home care for the elderly: Family, Antoon Pelsser and Peter Vlaar: Consistent who are involved in one or more Netspar friends, and the state (DP 07/2009-018) Valuation of Pension Liabilities (PP 11) research programs or themes. A DP aims Bert Scholtens and Laura Spierdijk: Does Matthijs Kalmijn and Rob Alessie: Life course at publication in high-standard scientific money grow on trees? The diversification changes in income: An exploration of journals. It is usually the output of a properties of US Timberland Investments age- and stage effects in a 15-year panel research proposal funded by Netspar. It is (DP 03/2009-017) in the Netherlands (PP 10) published on the Netspar website jointly Jan de Dreu and Jacob Bikker: Pension fund with a management summary. The DPs are sophistication and investment policy (DP discussed during Netspar activities and 05/2009-016) NEA (Netspar Economic Advice) Papers digitally published on our website and Giacomo Pasini and Dimitris Georgarakos: describe and motivate the position of SSRN. Trust, sociability and stock market the author on a policy-relevant topic. In Igor Fedotenkov and Lex Meijdam: The participation (DP 04/2009-015) contrast to the PPs, these papers contain spillover effects of pension reform with Hans van Kippersluis, Owen O’Donnell and strong statements. Although Netspar as labor and capital mobility (DP 09-2009- Eddy van Doorslaer: Long run returns to such is impartial, individual researchers of 029) education: Does schooling lead to an Netspar may very well have (and express) a Adriaan Kalwij: An empirical analysis of extended old age? (DP 04/2009-014) personal opinion. Netspar simply offers a the association between neighborhood Hans Fehr and Fabian Kindermann: Pension forum for in-depth discussion. The authors income and unit nonresponse in the funding and individual accounts in present the NEA Papers at meetings and survey of health, ageing and retirement economies with life-cyclers and myopes discuss them with the audience. NEA Papers in Europe (DP 09-2009-028) (DP 02/2009-013) are also published in a booklet series. Arie Kapteyn, James P. Smith and Arthur Adriaan Kalwij, Arie Kapteyn and Klaas de Fieke van der Lecq and Alwin Oerlemans: van Soest: Work disability, Work, and Vos: Early retirement and employment of Zelfstandigen zonder pensioen (NEA 24) justification bias in Europe and the U.S. the Young (DP 03/2009-012) Jolande Sap, Joop Schippers and Jan (DP 08-2009-027) David Hollanders: The political economy Nijssen: Langer doorwerken en flexibel Jason Fletcher and Steven Lehrer: Genetic of intergenerational risk sharing (DP pensioen (NEA 23) lotteries within families (DP 08-2009-026) 01/2009-011) Zvi Bodie: TIPS for Holland (NEA 22) Willem Heeringa and Lans Bovenberg: Andries de Grip, Maarten Lindeboom and Geert Bekaert: Inflation Risk and the Stabilizing Pay-As-You-Go Pension Raymond Montizaan: Shattered dreams: Inflation Risk Premium (NEA 21) Schemes in the Face of Rising Longevity The effects of changing the pension René Maatman and Sander Steneker: and Falling Fertility: An application to the system late in the game (DP 02/2009-010) Ringfencing van pensioenvermogens (NEA Netherlands (DP 08-2009-025) Roy Hoevenaars, Theo Kocken and Eduard 20) Arie Kapteyn and Federica Teppa: Subjective Ponds: Pricing risk in corporate pension Frank de Jong: Naar een flexibele measures of risk aversion, fixed costs, and plans: understanding the real pension pensioenregeling voor ZZP’ers (NEA 19) portfolio choice (DP 07-2009-024) deal (DP 02/2009-009) Lans Bovenberg and Theo Nijman: Rients Galema, Robert Lensink and Laura Arie Kapteyn, James P. Smith and Arthur van Kredietcrisis en pensioenen: structurele Spierdijk: International diversification Soest: Life satisfaction (DP 01/2009-008) lessen en kortetermijnbeleid (NEA 18) and microfinance (DP 05-2009-023) Adriaan Kalwij: The impact of family policy Guus Boender: Kredietcrisis en pensioenen: Pierre-Carl Michaud, Dana Goldman, Darius expenditure on fertility in Western Europe Modellen (NEA 17) Lakdawalla, Yuhui Zheng and Adam (DP 01/2009-007) Casper van Ewijk, Pascal Janssen, Niels Gailey: Understanding the economic Kortleve and Ed Westerhout, in consequences of shifting trends in Panel Papers (PP) outline the implications corporation with Arie ten Cate: Naar een population health (DP 04-2009-022) of new developments in the academic reëel kader voor pensioenfondsen (NEA 16) Pierre-Carl Michaud, Dana Goldman, literature for policy questions faced by Guus Boender, Sacha van Hoogdalem and Darius Lakdawalla, Yuhui Zheng and Netspar’s partners. The PPs are meant Jitske van Londen: Het managen van Adam Gailey: International differences in for professionals in the pension and lange- en kortetermijnrisico’s (NEA 15) longevity and health and their economic insurance sectors and are discussed twice Gerard Verheij: Het Nederlandse consequences (DP 06/2009-021) a year during one-day panel meetings. pensioenstelsel: weerbaar en wendbaar Representatives from academic and private (NEA 14)
Netspar News Issue 9 Autumn 2009 13 Events
Debate, May 28 Netspar Events During the Netspar Debate, three Netspar NEA Papers were discussed. The Dutch presenters and discussants definitely did not always agree. With Eva Kuit leading the debate, the discussion really got to the next level. Alwin Oerlemans (Cordares) and Fieke van der Lecq (EUR) presented their paper on ‘Self-employed Past Events without pension savings’. This opinion really piqued the interest of the audience, because while almost everybody agreed with this Annual Conference, April 23 - 24 statement, there were great differences in how they wanted to Netspar’s Annual Conference, with the theme, ‘Rethinking solve this problem. Retirement’, took place in April in The Hague. A lot of big names Jolande Sap (Member of Parliament for Dutch Socialist Party) from the Netherlands, Europe and the US presented their views talked about flexible retirement age. In her paper (with co-writers on pensions and the labor market for the elderly. Among the Jan Nijssen (Montae) and Joop Schippers (OSA)) and presentation researchers discussing their findings were Edward Lazear (Stanford she showed why she favors greater flexibility for retirees. One of the Graduate School of Business), Jonathan Skinner (Dartmouth main conclusions was that the social partners, united in the SER, College), Maarten Lindeboom (University of Amsterdam) and Vegard should come up with an alternative for raising the AOW age to 67 Skirbekk (International Institute for Applied Systems Analysis). and that flexibility had the potential to be that alternative. Policy-oriented participants, including Eric French (Federal Program, papers and presentations (all in Dutch) are available on Reserve Bank of Chicago), Coen Teulings and Ruud de Mooij our website www.netspar.nl/debat. (both Statistics Netherlands) presented their points of view on retirement in the near future. In addition, some politicians were Pension Workshop Stockholm, June 8 - 9 invited. Piet-Hein Donner (Dutch Minister of Social Affairs and The first international Pension Workshop was held in Stockholm Employability), Alexander Pechtold (Dutch Social Liberal Party) and (Sweden) this June. This Conference brought together experts on Stefano Scarpetta (OECD) pointed out to the audience the political all areas of pension research. The conference was organized by implications (national and international) of the issues at stake in Netspar and the Institute for Financial Research (SIFR). The first day the retirement debate. of this two-day workshop was targeted at both academics and The complete program, papers and presentations are available practitioners. The second day had two parallel sessions and a more on our website www.netspar.nl/annual2009. academic focus. Richard Thaler (University of Chicago), Christopher Jones (Financial Engines), Motohiro Yogo (Wharton), Francisco Gomes (London Business School), Daniel Barr (Premium Pension Authority), Magnus Johannesson (Stockholm School of Economics) and Cees Dert (ABN AMRO pension fund) were the keynote speakers.
14 Netspar News Issue 9 Autumn 2009 The pension systems of various countries, including Sweden, the US and the Netherlands, were compared and discussed. Another main topic was whether and how to arrange opportunities for choice of pension products. Richard Thaler (Chicago) argued that behavior is influenced by the way alternatives are presented, even without changing the choice menu itself. All presentations and papers can be found on www.netspar.nl/events/2009/pw/june/.
Debate ‘Pensions After the Credit Crisis’, June 29 As a result of the credit crisis, an extra Dutch debate was held in The Hague— specifically on policy issues regarding pensions after the crisis. Among the contributions, Lans Bovenberg and Theo Nijman proposed lower indexation of existing pension claims for the elderly, reducing pension claims for the younger generations and increasing the retirement age. Peter Gortzak proposed holding on to the existing pension deal, but either strengthening it or to adding individual preferences. Guus Boender evaluated the application and value of using (asset & liability) models for pension funds. Other contributions were made by Benne van Popta, Sweder van Wijnbergen and Arnoud Boot. See the website www.netspar.nl/events/2009/june29/ for all papers and presentations. Also available on that site are the four television interviews RTL Z had.
Piet-Hein Donner, Dutch Minister of Social Affairs and Employability, at the Netspar Upcoming Events Annual Conference Longevity Risk, Theme Conference, December 2 On December 2 Netspar has organized a theme event on longevity Pension Workshop, January 27 – 29, 2010 risk. This conference aims to provide insight into the current “state The workshop, which will be held in Amsterdam, starts with a of the art” with regard to longevity risk, both from the academic training day. The second and third days will be in the form of an side as well as from the practitioners’ side. academic conference with contributed papers. Mike Orszag (Watson Netspar is very pleased to announce that David Blake, a leading Wyatt) and Laurence Kotlikoff (Boston University) are the two scholar in the area of longevity risk, has accepted Netspar’s keynote speakers at this workshop. invitation to deliver a talk on this day. More Information on Upcoming Events Supporting Consumer Pension Decisions Online, Theme Conference, For more information on all our events, please check out December 8 www.netspar.nl/events and the monthly digital newsletter More information to follow on our website. Newsflash.
Netspar News is published by Netspar, Network for Studies on Pensions, Aging and Retirement
Netspar Advisory Board Harmen Verbruggen, VU Editors Visiting address Jean Frijns, chair a.i. Theo Verhallen, UvT/FSW Gaby Versmissen Tilburg School of Economics and Management Wim Walsteijn, ABN AMRO Etc. Editorial Services, Breda Warandelaan 2, 5037 AB Tilburg Executive Members Ton van Welie, ORTEC Postal address Marco Keim, AEGON George Yip, EUR Guest Authors P.O. Box 90153, 5000 LE Tilburg Dick Sluimers, APG Rik Oerlemans The Netherlands Job Swank, DNB Netspar Partners Bart Oldenkamp Phone +31 13 466 2109 Tom Wansbeek, UvA Private sector Leen Preesman Fax +31 13 466 3066 ABN AMRO, Achmea, AEGON, APG, ASR E-mail [email protected] Verzekeringen, Cardano, Cordares, ING, Translations Website www.netspar.nl Board Members Interpolis, Mn Services, ORTEC, PGGM Nina Woodson Peter Apers, UTwente Board of Directors Jeroen van Breda Vriesman, Interpolis/ Public sector Photography Frank van der Duyn Schouten (chair) Achmea DNB, Ministry of Economic Affairs, Ministry Alief fotografie, Tilburg Theo Nijman Maarten Camps, SZW of Finance, Ministry of Social Affairs and Arenda Oomen, Den Haag Frans de Roon Lard Friese, ING/NN Employment, Ministry of Education, Culture Cor Salverius, Fotopersburo Dijkstra Ruud Hagendijk, Mn Services and Science, NWO, Stichting Instituut Gak, Ton Toemen, Tilburg Dick den Hertog, UvT/TiSEM SVB Theo Kocken, Cardano Graphic Design Ruud Koning, RUG Universities Laverbe, Nijmegen (Concept) Clemens Kool, UU Erasmus University Rotterdam, Maastricht Sander Neijnens, Tilburg Franz Palm, UM University, Tilburg University, University Theo Pluijter, ASR Verzekeringen of Amsterdam, University of Groningen, ISSN 1574-8790 Martin van Rijn, PGGMNetspar News Issue 9 AutumnUniversity 2009 of Twente, Utrecht University, © 2009 Netspar, The Netherlands 15 Erry Stoové, SVB VU University Amsterdam
Short News Netspar Partners
Chinese Vice-Minister visited Netspar
A Chinese delegation with Xiaoyi Hu, Vice- Minister of Human Resources and Social Security, visited Netspar at Tilburg University. Frank van der Duyn Schouten, chairman of Netspar’s board, and Theo Nijman, scientific director, talked with them about Netspar and the Dutch pension system. The Netspar board members made clear, what the benefits are of the pension system in Xiaoyi Hu (in the middle) discusses the Dutch pension the Netherlands. The Vice-Minister also system with Theo Nijman (left) and Frank van der Duyn met some Chinese students Economics and Schouten (right). Finance of Aging, the Netspar MSc program. The students were very enthousiastic about this opportunity and vividly talked about selected. Three of them are carried out their study. by national and one by an international research consortium. Internationalization is playing an increasingly important role in Netspar’s Next Phase the Netspar operation.” Frans de Roon adds: “We have decided Recently Netspar’s board of directors has on the new research themes in consultation changed. Frank van der Duyn Schouten, with both our Scientific Council and our who joined Netspar last April, has been partner organizations, as represented in appointed chairman of the board. Theo Netspar’s Partner Council. The progress Nijman will continue his board membership of the current themes is also surveyed by as scientific director, while Frans de Roon sounding boards with representatives from will act as director partner contacts. The Netspar’s partners. The commitment of our board is supported by Dominique de Vet partners is crucial in this process.” as managing director and secretary of the “For a bright future, it is vital that Netspar board. Lans Bovenberg, Arthur van Soest stays in close contact with both scientists and Lex Meijdam resigned from the board. and professionals in the pension and Lans en Arthur are still closely involved in finance sector”, states Frank van der Netspar as members of Netspar’s scientific Duyn Schouten. “Netspar as a networking committee. With this new board Netspar organization depends on the commitment enters a new phase in its existence. Netspar of both groups. We will therefore intensify News asked the new board members about our mutual communication and even more their ideas for the near future. strengthen the role of Netspar as a platform Theo Nijman is clear: “The future for for the exchange of findings, views and Netspar is bright. A lot of Dutch and opinions.” He emphasizes that the support non-Dutch researchers on aging and of the Dutch government through various retirement issues are keen on working with ministries will remain most essential to us. Recently, four new themes have been enable Netspar to play this crucial role.