On Friday, January 20, NRC published an article (in dutch) about DSM and PDN. The article may raise questions for you as a member. In particular, we would like to respond to the suggestion that a confidential memorandum from 2019 was withheld. This is categorically untrue. This concerned an internal analysis by the administrator, DPS, on the development of the fund’s funding level. The Board conducts ongoing investigations into the causes of funding level changes, in the same way that the Board monitors and analyzes other relevant developments. Such internal analyses by no means always culminate in a fund position or policy intention. It is also not common to distribute such internal documents externally.
Several contacts took place with the involved editors in the run-up to the publication of the article. The PDN Board is disappointed by the article’s rather one-sided approach. Much can be said about PDN’s financial position over the years: PDN also provided full disclosure and transparency and provided all factual information that was requested, included emphasizing how we weigh up the interests of all members in our decision-making. We have once again listed the relevant course of events for you below to provide an honest overview and ensure a better understanding.
PDN increases pensions again
On December 19, the PDN Board decided to increase pensions for all members again from January 1, 2023. Former employees’ payable pensions and accrued pensions will increase by 10.02%. Current employees’ accrued pensions will increase by 3.11%. PDN was able to increase pensions earlier this year for the first time in a long time, thanks to the temporary relaxation of statutory rules. After all, until 2021, it was not possible for pension funds to introduce an increase if their policy funding level was below 110%. As PDN’s policy funding level had been below 110%, PDN was unable to award an increase. This also applied to other pension funds with a policy funding level lower than 110%.
With the increase, also known as ‘indexation’, PDN balanced the interests of all stakeholders, including those of future generations. We also examined whether sufficient assets remained in the fund to manage the transition to the new pension system without requiring reductions. The impact of the indexation decision on different generations was also clarified. Each fund considers these interests, which can result in some funds awarding higher indexation than others. PDN wanted to avoid reductions in the future as much as possible and instead maximize the likelihood of an increase. This meant that the Board also took into account pensions that are to be paid in the future. A robust financial basis is essential for this. This was also always the starting point in the past.
PDN at the forefront at the time with transition to CDC
The ‘Grand Design Pensions’ took place at DSM between 2002 and 2007. This was a comprehensive process that included the merger of three DSM-affiliated pension funds (pf DSM Chemie, pf Gist Brocades, and Avecia DSM Neoresins). An amendment to the financing agreement between DSM and PDN was also implemented from 2006. To enable the merger of the DSM-related pension funds in late 2006, DSM made an additional payment during that period to equalize the funding levels of all funds.
The 2006 to 2010 funding agreement also arranged that DSM would pay a fixed CDC (collective defined contribution) of 21% of each employee’s salary from that point on. This included the additional agreement that in future a contribution discount would be given to employers if the fund’s funding level exceeded approximately 135%. The contribution discount was capped at a total of €127 million, taking into account the above-mentioned additional payment DSM made to enable the merger of the DSM pension funds.
Therefore, in 2007 and 2008, at funding levels above 145%, part of this contribution discount (together €99 million) was applied. The remaining part of the maximum contribution discount of €127 million implicitly reverted to PDN and was therefore added to the pension assets.
PDN was one of the first corporate pension funds in the Netherlands to switch to CDC financing. When the arrangements for this were made, PDN’s funding level was over 140%. The financial position at that time was such that there was no immediate reason for compensation in this respect.
In the following years, almost all major Dutch corporate pension funds switched to CDC financing. Compensation in the form of a one-off additional deposit at the time of the transition became commonplace. This was possibly stimulated by the fact that the credit crunch, which occurred in 2008, had left large holes in the funding levels of relevant funds.
2008 Credit crunch was 'game changer'
The financial crisis resulted in the funding levels of all pension funds, including PDN, falling sharply in late 2008. This put pressure on increasing pensions (indexation), and the funding level barely recovered in subsequent years through to 2021. This was mainly due to interest rates, which had declined significantly since that period, but also due to the Board’s decision to hedge interest rate risk to a limited extent. Indeed, for the pension fund Board, the declining funding level was an urgent and undesirable situation, and so the Board prioritized recovering this level (to avoid pension cuts) above awarding indexation. This is reflected in Board’s reports and explanations in the annual reports (2008 onwards), and in the published annual statements. The fund’s Board considered this point regularly and has reviewed and adjusted its policies. DSM’s social partners were also informed that the agreed indexation ambition was not possible.
The pension fund has always received cost-effective contributions from DSM since the introduction of CDC financing in 2006, as also stipulated in the Pensions Act and overseen by the certifying actuary and De Nederlandsche Bank (DNB). Nevertheless, the contribution and pension accrual did not contribute enough to the funding level’s recovery. There are more circumstances that affect the development of a funding level, such as increased life expectancy.
Balanced weighing of interests guideline
It is inherent in running a pension fund that, in some decisions, the interests of different subgroups within the fund do not align. This is the case not only between members and pensioners, but also, for example, between men and women, married and unmarried people, etc. Each individual Board member has a duty and responsibility to reach a balanced decision independently, not bound by any instructions, and in the best interests of the members and pensioners based on the facts and circumstances at the time that PDN needs to take this decision.
Such a balanced weighing of interests has always taken place over the years: both when considering contributions and pension accrual and also, for example, on several occasions when the Board extended the recovery period in the interests of pensioners in order to avoid cutting pensions.
Using today’s knowledge, previous Board decisions may have had different results than the Board anticipated at the time it made the decision. This is a result of unforeseen external developments, such as the credit crunch in 2008 or the subsequent sharp fall in interest rates, which caused the fund’s funding level to fall sharply and made further indexation impossible. The recent rise in interest rates is now giving the development of the fund’s funding level additional ‘tailwind’, allowing increases to be awarded.
Transparent governance forms sound basis for Board
PDN’s Board has a parity governance model. This means that the Board has eight members: four members appointed by DSM Nederland, two members nominated by the DSM Central Works Council, and two Board members elected by the pensioners. The employer nominates a candidate for the Chairmanship. The Vice-Chairman is elected from among the ranks of employees and pensioners. Before being appointed, each Board member is individually assessed on their knowledge, managerial skills, and trustworthiness by the internal and external regulator, i.e. the Supervisory Board and De Nederlandsche Bank (DNB). Each individual Board member has a duty and responsibility to reach a balanced decision independently, not bound by any instructions, and in the best interests of the members. Each vote by each Board member carries the same weight. PDN’s Supervisory Board oversees the functioning of the Board. As regards its policy, the Board is accountable to the Accountability Council.
PDN has knowledgeable and ethical Board members, including specialists in pension administration and asset management. Board members are vetted in advance by DNB. Many other corporate pension funds also use the parity governance model, and the Chairmen and Vice-chairmen are also appointed on a parity basis.
The figures in the annual reports of PDN or its legal predecessors align and are accompanied by an approved auditor’s report.
In the years 2006 to 2010, the contribution paid in line with the financing agreement was 21% of the salary sum. For the 2011 to 2015 period, this amounted to 22%. For the 2016 to 2020 period, this amounted to 24%. For 2021 to 2023 this amounted to 24.17%.
The fund’s annual reports do not distinguish between employee contributions and employer contributions. The fund receives the total contribution from the employer. Based on agreements with social partners, the employer deducts the employee portion from the employee’s salary.