On 6 March 2019 the Dutch Pension Funds Code Monitoring Committee published its fourth report, under the title 'Hop, Skip, Jump', on pension funds' compliance with the Dutch Pension Funds Code (2017/2018).

The Dutch Pension Funds Code operates on the basis of the "apply or explain" principle: the point of departure is that pension funds should apply the Code's provisions (referred to as "standards"). Where a standard is not applied (or applied only in part), the pension fund should explain in its annual report why this is the case. With respect to some of the standards, however, an explanation should always be given in the annual report. In its report, the Monitoring Committee states that 83% of pension funds comply with the Code (compared to 77% in 2016), but that not all of the reporting standards are observed. The Monitoring Committee expects improvements in this regard to result in a 100% compliance rate.

As the Code has been in place since 2014, the Monitoring Committee now expects more from the sector and has therefore formulated a number of points more sharply in the report.

In this newsletter, we outline the most important findings and recommendations in the report.

Reporting standards – what has improved?

  • Mission, vision and strategy: 80% of pension funds provide a clear and explicit description of their mission, vision and strategy in their annual report (the figure in 2016 was 71%). 93% of annual reports contain a description of whether and if so, to what extent, the pension fund has achieved the stated goals (in 2016, the figure was 74%).

Reporting standards – where is there still room (or much room) for improvement?

  • Accountability regarding stakeholder risks: with regard to the provision by the pension board of comprehensive insight into the long- and short-term risks confronting stakeholders in relation to the agreed level of ambition, compliance dropped from 92% in 2016 to 82% in 2017. The Monitoring Committee explicitly states that it is insufficient to just list the risks. The Monitoring Committee does not state what has to be done, but it is conceivable that an explanation should be given as to how the pension board deals with the risks, what measures are taken and the relationship between each risk and the pension fund's strategic goals. A separate chapter dealing specifically with ambition and risk can be included in the annual report;

  • Pension board self-evaluations: there is still a long way to go on this front, as only 59% of pension boards systematically carry out a self-evaluation of their performance under the guidance of a third party every three years. Moreover, the findings do not always lead to follow-up action. When reporting on a self-evaluation, insight should be given into the degree of self-reflection on the part of the pension board and into the possibilities (if any) for improvement. It is therefore necessary to do more than just report that an evaluation has taken place;

  • Outsourcing: where the pension fund outsources core activities, further improvement is possible in the reporting on the manner of outsourcing chosen and the reason for that choice (compliance in 2017 was 43.7% compared to 29.3% in 2016). Clarification should be given not only on these points, but also on why and for which activities a third party has been chosen, how the third party's performance has been evaluated and – if applicable – a finding by the pension board that the third party has performed its work satisfactorily;

  • Whistleblower policies: although there has been an increase in the level of compliance (79% in 2017 compared to 62.9% in 2016), there is still room for improvement in the reporting on the implementation of such policies. It should be shown that individuals who report irregularities are able to rely on the legal protection offered by the whistleblower policy.

Diversity: a significant bottleneck

A major concern for the Monitoring Committee that continues to require attention and action is the persistent lack of diversity on pension boards. The members of a pension board should include at least one female and at least one individual below the age of 40. 28% of pension funds do not meet either of these criteria. According to the Monitoring Committee, in the course of new appointments pension funds fail to eliminate obstacles to the achievement of diversity in the composition of pension boards. Such pension funds consequently miss out on the benefits of a diverse pension board. The Monitoring Committee emphasises that social partners and pension boards must all put maximum effort into the actual achievement of board diversity.

Examples of good practice

In its report, the Monitoring Committee gives a number of examples of good practice:

1. Promote integrity by:

  • conducting a dialogue;
  • being transparent;
  • creating an open culture;
  • discussing the subject of integrity and a healthy business culture at a meeting attended by an external party;
  • clarifying the procedure regarding ancillary positions and invitations to take up such positions;
  • using the pension board self-evaluation as a means for the board to initiate discussion of its own performance and to adopt a structured approach to the follow-up of findings.

3. Lastly, the Monitoring Committee recommends that the sector consider a shorter standard maximum term of office of eight years (two four-year terms) for pension board members, with subsequent extensions of no more than four years (two two-year terms) being possible in exceptional circumstances. The Monitoring Committee states that this is in line with the Dutch Corporate Governance Code.

The title of the Monitoring Committee's report seems to indicate that big steps will have to be taken by pension funds, particularly with regard to diversity policies. According to the Monitoring Committee, after making the hop, many pension funds will still have to make the skip and then the jump. It is possible that more far-reaching measures will be imposed in the near future, perhaps in the form of statutory quotas or individual targets for specific pension funds.

At a conference, Gisella van Vollenhoven, Division Director for Pension Funds Supervision at the DNB, stated that the DNB is of the opinion that pension funds are too casual in their compliance with the Code, including in the area of self-evaluation, and will seek legal tools by which to improve enforcement. It is in any event clear that pension funds will have to take more steps towards better compliance with the Code.