PPI, API, Pension Captive
Why are multinationals so interested?


Falco R. Valkenburg

30 September 2009




© 2009 Towers...
WARNING



     I have been asked to make provocative statements




© 2009 Towers Perrin                                 ...
WARNING




Statement 1


We, pension experts, look at pensions from a pension perspective
We should look at pensions from...
As the magnitude of pension risk has grown,
       there’s a need to understand it in an
       enterprise risk context
  ...
Alternative strategies
       from a finance perspective



                                           Annuity            ...
Emerging approach:
         Cross-border financing arrangements

                        Defined Contribution             ...
WARNING




Statement 2


Unless our neighbors, The Belgians, we, the Dutch, have not yet been
making use of the full brea...
WARNING




Statement 3


No innovative developments since we are protecting (we believe) our
own interests.
The crisis ha...
Some history

       3 June 2003: European Pension Directive
          Institution of Occupational Retirement Provision
  ...
Some history II

          Full blown API turned out to be too complicated
            Level-playing field with insurers i...
PPI: main characteristics
       An IORP based legal Dutch vehicle
       Execution of DC schemes for multiple companies
 ...
WARNING




Statement 4


There is a business case for a PPI




   © 2009 Towers Perrin              12
PPI: a business case?
       Pension field doesn’t believe in the PPI
       A Member of Parliament confirmed last week th...
PPI: a business case?
       And what about the issue of solidarity?
       Are DB schemes sustainable?
          The midd...
WARNING




Statement 5


DC becomes a sustainable alternative to DB if both nominal and price-
linked pensions can be ach...
Multi OPF – a Multiple Employer Pension Fund
       A Multi OPF is a vehicles aimed at the Dutch market
          It is no...
Case: spin-off (same pension scheme)


                Parent A                              Parent B

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


                Parent A                 ...
Case: spin-off
    (not necessarily same pension scheme) both
       in one multiple company pension fund

               ...
Case: various Business Units in NL

                                         Parent



Daughter NL A                      ...
Case: various Business Units in NL
                        together in one pension fund in NL

                           ...
Case: various Business Units in NL
      all in one Multiple Company Pension Fund in
                            NL
      ...
Case: independent companies in NL



Company NL A                Company NL B            Company NL C




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


Company NL A                      ...
Full Dutch DB-IORP
unlikely to emerge in near term

       The last stage after the PPI and the Multi OPF
       Unlikely ...
PensionCAP structure

    Pension Plan                                  Pension plan purchases a
                         ...
PensionCAP value proposition

       Addresses common issues in several countries by:
         Shifts control of the plan ...
PensionCAP advantages and considerations
 MAJOR                          ADVANTAGES                    CONSIDERATIONS
CONC...
WARNING




Statement 6


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

1.     We, pension experts, look at pensions f...
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Pensioen Forum 2009, Rotterdam, 30 September 2009

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

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Pensioen Forum 2009, Rotterdam, 30 September 2009

  1. 1. PPI, API, Pension Captive Why are multinationals so interested? Falco R. Valkenburg 30 September 2009 © 2009 Towers Perrin
  2. 2. WARNING I have been asked to make provocative statements © 2009 Towers Perrin 2
  3. 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. 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. 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. 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. 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. 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. 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. 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. 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. 12. WARNING Statement 4 There is a business case for a PPI © 2009 Towers Perrin 12
  13. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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

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