This presentation by Niels Kortleve, PGGM, was made at the OECD-Risklab-APG Workshop on pension fund regulation and long-term investment held in Amsterdam on 7 April 2014. Discussions focused on: long-term pension investment strategies under risk-based regulation; riskiness and procyclicality in pension asset allocation; and, regulatory challenges for long-term illiquid assets. For more information, please visit: http://www.oecd.org/daf/fin/private-pensions/OECD-APG-workshop-pension-fund-regulation-LTI.htm

1. Discussion on panel 1: long-term
pension investment strategies under
risk-based regulation
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OECD / APG Workshop ‘Pension fund regulation
and long-term investment’
Amsterdam, April 7th 2014
Niels Kortleve

2. Main conclusions research Risklab
(underlining by NK)
• Regulation in form of risk based solvency charges affects asset
allocation decisions of LTI
• For some asset classes, capital charges not in line with
volatility/ downside risk → different investment behavior
under economic view and regulatory view
• Standard formula provides incentive to heavily invest in
matching portfolio for liabilities
• Tighter regulation demands for de-risking of
investment portfolio
• Sensitivity analyses illustrate dependency on underlying
assumptions
• Rules could rather stifle than encourage true “long-term”
investment
• SCR specifications have significant impact on relative
attractiveness of asset classes
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3. Some lessons from risk-based supervision in the
Netherlands
3 Source: Niels Kortleve, Wilfried Mulder and Antoon Pelsser (2011), ‘European supervision of pension
funds: scope, purpose and design’, Design paper 4, Netspar, October 2011
• More focus on short-term funding requirements than long-
term ambitions →
• More focus on nominal benefits than real benefits/indexation
• But no 100% hedging of interest rate risks
• Increased nominal liability hedging increased
real/indexation risks
Conclusions
• Supervision should strike balance between securing short-
term financial position and long-term ambitions
• Focusing supervision of IORPs on nominal/hard liabilities only
altogether insufficient

4. Holistic Balance Sheet (HBS) includes adjustment
and security mechanisms IORPs
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5.  Surplus: 1.3
50/50 asset mix
Assets 117.5Liabilities 100
Sponsor Support 1.1Mixed Benefits 21.9
Ex post Benefit Reduction -16.3
100% stocks
Assets 117.5Liabilities 100
Sponsor Support 1.6Mixed Benefits 30.8
Ex post Benefit Reduction -32.3
100% bonds
Assets 117.5Liabilities 100
Sponsor Support 0.5Mixed Benefits 16.7
Ex post Benefit Reduction -5.1
 Deficit: 3.3
 Deficit: 11.7
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HBS: incentive for de-risking

6. Some conclusions
• Supervision should strike balance between securing
short-term financial position and long-term ambitions
• Focusing supervision of IORPs on nominal/hard liabilities
only altogether insufficient
• Hedging nominal liability increases real/indexation risks
• Using derivatives for liability hedging increases execution
costs (e.g. EMIR, FTT)
• Regulation should not frustrate functioning of markets
• EC should take holistic approach: by balancing risks with
adequacy and sustainability (white paper), by including
adjustment and security mechanisms IORPs (like in HBS)
and by balancing IORP III/HBS with other regulation
• Regulation could lead to changing pension deal
• In the Netherlands debate on softer benefits (Defined
Ambition)
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