The situation with
the coverage ratios of the Dutch pension funds remains dire. Where the coverage
ratio of the pension funds should at least be 105% (current invested capital
assets can cover 105% of future expenses), it is now somewhere between 90 and
100% at most pension funds.
On Saturday January
21, I already wrote that DNB allowed the pension funds to calculate the
coverage ratio with the average interest rate over three months, instead of the
interest rate on the last day of the month. As this average interest rate was
much higher than the rate of December 31, it sugar-coated the coverage ratio of the pension
funds. Here is a snip of last
month’s article:
The current coverage ratio of the ABP is only 94%,
AFTER the DNB ´pimped´(i.e. artificially increased) the calculation interest
and thus the coverage ratio by mediating the interest over a three month
period, instead of using the actual interest . Otherwise, it
would have been a very poor 91%. That is bad.
This month the DNB
again allowed the pension funds to sugar-coat the coverage ratio, by using an
average interest ratio over the last three months. Het Financieele Dagblad
(www.fd.nl) wrote about it last Saturday (article only on paper; no link
available). Here are the pertinent snips of this article:
DNB again allows a different calculated interest rate
Just like at the end of 2011, pension funds and
insurance companies were not forced to calculate their January commitments based
on the interest rate of the last day of the month.
Supervisor De Nederlandsche Bank (DNB) allows the pension
funds to calculate their coverage ratio for January 31 using a calculation rate
based on the average interest of the months November, December and January.
That 3-month average was higher than the interest rate at the last day of last
month. Therefore the coverage ratios looked much healthier than they would have,
using January 31st interest rate.
DNB allows the 3-month average interest, as there is
currently ´a distorted market´. ´We monitor the interest over a longer period
and we find that the interest rates are fluctuating so much lately, that we
cannot fix the calculation interest on one day´, according to a DNB spokesman.
This is also caused by the unrest at the financial markets, due to the
euro-crisis.
That DNB adjusted the calculation interest in
December, as well as January, doesn´t mean that ´this policy will be continued
in years to come´, according to the spokesman. ´We will check from month to
month whether the pension funds and insurers are allowed to deviate from the
common practice´.
In December it became clear that, as a consequence of the
indulgence of DNB, the coverage ratios in average increased by 4% to 98%, from
94%. According to specialized consultancy firm Mercer the coverage ratio was
98% in January, but it should have been 95% when using January 31st interest
rate. Both figures are well under the required 105%.
Last month I
already wrote that I don´t like this phenomena. Again a few snips from last
month´s article:
It´s a mess. The pension funds are in the center of a
perfect storm:
· The people get older and older, thus needing more
pension payments;
· The Euribor interest rate is about as low as ever;
· The yields at the stock market and at the fixed income
markets are poor at the moment;
· The high-yield sovereigns (PIIGS) offer much too much
risk, while the low-risk sovereigns (Germany, The Netherlands) don´t yield
money at all;
· In the meantime, the pension funds are facing a
haircut on Greek debt of no less than 68%.
It is almost a miracle that the pension funds still
managed to achieve decent returns, like 6%-9.5% return on investment in 2011.
So people could say: ´What is the fuzz about, if the
DNB artificially raised the interest rates a tiny bit. The interest rate is
indeed historically low at the moment and it will definitely rise in the
future´. Then I would say to them: ´Ask the Japanese please, if this is such a
definite thing to happen.
Now I can add: ask Eric
Staal, the former chairman of building cooperative Vestia.
It is my strong opinion that the coverage ratio should be calculated, based on an objective figure like the Euribor interest rate and not based on the mood of some DNB representative or any other subjective and flawed measure. We should not gamble with the pensions of our current youngsters!
And I'm also convinced that 2011's positive returns of 6%-9.5% for the pension funds are partly based on asset valuation that is way too optimistic, although I can't prove this of course. Please read the following:
On Januari 21st, I
missed an important bullet in the aforementioned list showing why the pension
funds are in the center of a perfect storm. Luckily the same DNB didn´t miss
it; the housing market!
Last Friday, the
Director Supervision of DNB dropped a brick on the Dutch housing market in an
interview with Het Financieele Dagblad (www.fd.nl), by stating that real estate
will become the third crisis. Here are the most important snips from this
interview.
The financial industry awaits a new crisis. After the
credit crisis and the European debt problem, the real estate industry threatens
to destabilize this line of business,
This was stated by Jan Sijbrand in his first interview
as Director Supervision at DNB. ´Real estate is a problem for the industry, due
to the structural excess supply of office buildings and shopping space. There
is a diminished need, due to people working at home and internet shopping´.
Besides banks, insurers and pension funds have billions in euro´s invested in
commercial real estate (CRE)
Sijbrand calls it his foremost concern that there will
be a correct valuation of CRE as soon as possible and there will be transparency
on who owns what. ´As long as there will remain doubts on the valuation, there will
be no trust in the market. This stops financiers or investors from investing in
banks. This causes problems to unnecessarily continue for a long time´, Sijbrand states, with
regards to lessons learnt from the credit and debt crisis. When there is full
disclosure on real estate valuations, more specialized buyers will appear,
willing to take over the real estate. As there is hardly any trade at the moment, the prices for
CRE have not been negatively adjusted yet.
Regular readers of
my blog can imagine that Sijbrand immediately turned into a ´persona non grata´
in the real estate and banking business:
·
He
was way too negative on CRE
·
He had only looked at one failed
auction of bad real estate owned by Uni-invest, while the prospects for the rest
of the CRE market were much, much better. The Uni-invest CRE portfolio was of poor quality, while the CRE portfolios of the banks, pension funds and insurers are much more promising.
·
He
was a fear mongerer only trying to cause a panic for nothing.
In the meantime
the banks, the insurers and the pension funds are trying to convince everybody
and their sister that their balance sheet valuations of CRE and RRE are correct
at this moment and that they already have written off substantial amounts on their
CRE and RRE assets.
Except for SNS Bank
that has indeed written off millions of Euro´s last year, I don´t believe one
word from this. And even SNS is probably not finished with writing off its CRE-portfolio to
marked-to-market value. Everybody is desperately trying
to convince each other that the ´emperor is indeed wearing his new clothes´ and
that everything is fine in the CRE and RRE business. Well, it isn´t.
It is my prediction, that when the banks are forced to value their CRE and RRE-portfolios against real
marked-to-market value, all banks (except maybe Rabobank), most large insurers
and most of the large pension funds are technically insolvent.
It is a bold
statement, but I´m convinced there is still much air left in the balance sheets of
the banks and other parties in the financial industry. And that is not a pretty thought.
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