Presentation in english on (European) cross border pension solutions.

1. PPI, API, Pension Captive
Why are multinationals so interested?
Falco R. Valkenburg
30 September 2009
© 2009 Towers Perrin

2. WARNING
I have been asked to make provocative statements
© 2009 Towers Perrin 2

3. WARNING
Statement 1
We, pension experts, look at pensions from a pension perspective
We should look at pensions from a business perspective
© 2009 Towers Perrin 3

4. As the magnitude of pension risk has grown,
there’s a need to understand it in an
enterprise risk context
Enterprise Risks
Business Risks Pension Risks
Business Business Business Interest Interest
Risk 1 Risk 2 Risk 3 … … Inflation Rate Rate Inflation Equity Longevity …
Relative sizes?
Pension Risk and Business Risk
?
Pension Risk and Business Risk
?
© 2009 Towers Perrin 4

5. Alternative strategies
from a finance perspective
Annuity Costs and Risks kept
CDC
Purchase Costs and Risks shared
Guarantee Costs and Risks transferred
Contract
US GAAP proof
Corporate
Transaction
Guarantee Asset
Contract Immunization
Expected Overlay /
Dynamic Exit
Costs Long Bond Current
Strategy
Strategies State
Multi
Reduce
Employer
IORP
Tail Risk
fund
Global
Pension
Captive*
“Downside” Risk
* Towers Perrin patent pending
© 2009 Towers Perrin 5

6. Emerging approach:
Cross-border financing arrangements
Defined Contribution Defined Benefit
Country
employee A B C IME D E F G IME H
group
Local Local Local Local Local Local
IME
country country country country country country
plan
DC plan DC plan DB plan DB plan DB plan DB plan
Cross-border DC Cross-border DB
platform (e.g., cross- platform (e.g., PenCAP,
border IORP*) cross-border IORP*)
Optimizes financial,
Optimizes fiduciary, demographic and
compliance and plan plan governance
governance risks risks (in an
Cross-border asset pooling enterprise context)
vehicle (with sub-sections)
Optimizes asset
management arrangements
*Institution for Occupational Retirement Provision, under EU Directive (governance, cost, return)
© 2009 Towers Perrin 6

7. WARNING
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
© 2009 Towers Perrin 7

8. WARNING
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.
© 2009 Towers Perrin 8

9. Some history
3 June 2003: European Pension Directive
Institution 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
© 2009 Towers Perrin 9

10. Some history II
Full blown API turned out to be too complicated
Level-playing field with insurers is an obstacle
Forward in three stages
1. PPI = Premium Pension Institution (IORP for DC)
2. Multi OPF = Multiple Company Pension Fund
3. API = Full DB IORP
Amendments pension Act to Parliament:
13 March 2009: PPI
23 September 2009: Multi OPF
© 2009 Towers Perrin 10

11. PPI: main characteristics
An IORP based legal Dutch vehicle
Execution of DC schemes for multiple companies
Ringfencing allowed
Execution 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 company
Legal form is a plc, a limited or an European plc
Dutch Pension Act governs a Dutch DC scheme
But the various governance bodies are not required
Tax implications are the same as a DC plan with a pension fund or
insurance company
Biometrical risks (death, long life and disability) outside PPI
Assets per sponsor to be placed to a separate legal entity
A DC pension plan with (potentially) links to many investment managers
© 2009 Towers Perrin 11

12. WARNING
Statement 4
There is a business case for a PPI
© 2009 Towers Perrin 12

13. PPI: a business case?
Pension field doesn’t believe in the PPI
A 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 plan
Current DC assets already: 15 – 25 billion euro (rough estimate)
Current growth estimate: 15 - 20% per year
Growth likely to excellerate
Need for unbundling of administration, communication and investment
management
© 2009 Towers Perrin 13

14. 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 younger
Blue collar is subsidizing white collar
Growing 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 forward
Risk Management:
Currently all risks for individual
Only a Life Cycle approach to mitigate risks
Addition of CPI linked vehicles would make DC robust
Two lines to choose from: nominal pension target / real pension target
Full risk management implementation requires top expertise
This can be arranged via specialized, independent PPI’s
Yes, I do see a business case!
© 2009 Towers Perrin 14

15. WARNING
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
© 2009 Towers Perrin 15

16. Multi OPF – a Multiple Employer Pension Fund
A Multi OPF is a vehicles aimed at the Dutch market
It is not meant as a pan-European vehicle
Pension Fund can merge with other fund(s):
One tier board
Ringfencing enabled
No restriction in type of pension scheme
Board 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 alternative
Economies 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
© 2009 Towers Perrin 16

17. Case: spin-off (same pension scheme)
Parent A Parent B
Daughter B NL
Daughter A NL (formerly A)
Pension Fund A NL Pension Fund B NL
Inefficiently and costly
© 2009 Towers Perrin 17

18. Case: spin-off (same pension scheme) both in
one pension fund
Parent A Parent B
Daughter B NL
Daughter A NL (formerly A)
Pension Fund A NL
Pension A NL Pension B NL
Efficient, cost-savings,
but financial solidarity between A and B
© 2009 Towers Perrin 18

19. Case: spin-off
(not necessarily same pension scheme) both
in one multiple company pension fund
Parent A Parent B
Daughter B NL
Daughter A NL (formerly A)
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
© 2009 Towers Perrin 19

20. Case: various Business Units in NL
Parent
Daughter NL A Daughter NL B Daughter NL C
Pension Fund NL A Pension Fund NL B Pension Fund NL C
Inefficiently and costly
© 2009 Towers Perrin 20

21. Case: various Business Units in NL
together in one pension fund in NL
Parent
Daughter NL A Daughter NL B Daughter NL C
Pension NL A Pension NL B Pension NL C
Efficient, cost-savings,
but financial solidarity between A, B and C
© 2009 Towers Perrin 21

22. Case: various Business Units in NL
all in one Multiple Company Pension Fund in
NL
Parent
Daughter NL A Daughter NL B Daughter NL C
Multiple Company Pension Fund NL
Pension NL A Pension NL B Pension NL C
Efficient, cost-savings, and financially seperated
This will be possible under the new Multiple Company Pension Fund
© 2009 Towers Perrin 22

23. Case: independent companies in NL
Company NL A Company NL B Company NL C
Pension Fund NL A
Participating in one pension fund by non-related companies is
not allowed under Dutch law
© 2009 Towers Perrin 23

24. Case: independent companies in NL share
one Multiple Company Pension Fund
Company NL A Company NL B Company NL C
Multiple Company Pension Fund NL
Pension NL A Pension NL B Pension NL C
Efficient, cost-savings, and financially seperated
This will be possible under the new Multiple Company Pension
Fund
© 2009 Towers Perrin 24

25. Full Dutch DB-IORP
unlikely 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
© 2009 Towers Perrin 25

26. PensionCAP structure
Pension Plan Pension plan purchases a
single premium annuity at
Annuity payments the prevailing market cost
Annuity
premium Capital determination
based on Value At Risk
analysis by asset class –
Insurer Solvency II and SST
consistent
Reinsurance
Captive
© 2009 Towers Perrin 26

27. 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 allocation
Prevents 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 liabilities
Settling 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 country
Allowing for most of the risk reduction solutions outlined previously to
be implemented and applied to FAS accounting results
© 2009 Towers Perrin 27

28. PensionCAP advantages and considerations
MAJOR ADVANTAGES CONSIDERATIONS
CONCERNS
Plan may be wound-up but
Elimination of regulatory
requires agreement of Trustees
Control considerations for the
and Works Council where
settled liability
applicable
Stranded assets avoided
Simplified administration,
valuation, and corporate Trustee need to verify and assess
Governance governance support of needs
Participant protection
Cash flow cost likely to purchase
fronted annuity
IAS and FAS accounting
Financial unchanged at the Plan expected return on assets and
consolidated group level any volatility unchanged unless
pre-captive investment strategy
modified
© 2009 Towers Perrin 28

29. WARNING
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
© 2009 Towers Perrin 29

30. WARNING
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 PPI
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
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
© 2009 Towers Perrin 30