Case study: Dutch synergy
2009 was a very busy year for Jeroen Hilbrands and Pieter van Schijndel, cofounders of Amsterdam-based HV &P Adviseurs en actuarissen. Not only did their employee benefits consulting firm merge with Milliman's Dutch practice—but they were also engaged in helping pension fund clients to construct recovery plans after global markets lurched downward in 2008.
A big market in a small country
As a nation with a defined-benefit-dominated retirement system, the Netherlands takes its pension funding requirements seriously. "Our pensions are a big market in a small country," Jeroen explains. With a population of about 16 million and more than 500 pension funds, there's a significant amount of capital invested in pension pools. Total assets are just under $1 trillion, making the Netherlands one of the world’s largest pools. ABP, the Dutch government employee pension fund, typically ranks in the top three in the world, with approximately $300 billion in assets.
"The merger with Milliman was a natural fit," says Jeroen. HV&P Adviseurs en actuarissen had been earning accolades as an Amsterdam-based employee benefits consultant for almost a decade. It was looking to expand its services to existing clients and to broaden its reach outside the Netherlands. For its part, Milliman had previously established a strong Dutch presence in the insurance and healthcare consulting arenas and wanted to serve a growing employee benefits sector in the Netherlands. The two firms merged in August 2009, to become Milliman Pensioenen vof. "We are the first Milliman EB practice in Europe," notes Pieter.
Focus on solvency
Not surprisingly, much of the focus last year was dealing with the repercussions of the global market downturn. In most regards, Dutch governing rules are considerably more stringent than those dictated by the U.S.'s Pension Protection Act. In 2006, the Dutch government tightened its pension funding requirements. Since that time, the "low" level for funding is 105% of obligations, with a mandated three-year period to regain solvency when markets slide or obligations soar. Certain pensions are tasked with achieving 120% of obligations, but with a period of 15 years to achieve that number. Compare this to the U.S., where pensions have been mired below 80% funding status for most of the last year.
By the beginning of 2009, says Pieter, "Almost every pension fund in the country had to make recovery plans to show the Dutch regulator that they would be in good shape again within that three- or 15-year period. We had helped these pension funds and their boards to create their plans. Now we are helping them with financial structures—working with the sponsors to level up the premiums. It was a difficult time for these pension funds, but a good time for us to demonstrate our consultancy skills."
Quickly gaining ground
And demonstrate they did. For Dutch plan providers and their consultants, a pension fund that's even marginally below 100% funded is in "really bad shape," Pieter emphasizes. "You have to work within a very short time frame to recover as soon as possible."
Their Dutch fund clients were experiencing, on average, about 95% solvency after the market downturn. By early 2010, most of them were comfortably back up to 105% to 110%. It helped enormously that the stock market recovered and that the Dutch discount rate rose—keeping liabilities from rising faster than assets, which has been one of the biggest problems for U.S. pension funds (in 2009, the pension liabilities for the largest 100 pensions declined a total of $105 billion).
The synergies are real
Looking beyond the current crisis, Jeroen and Pieter’s work focuses primarily on what the Dutch call "the second retirement pillar." The first pillar is the Dutch government pension. At age 65, all Hollanders get a retirement pension of about €15,000 per year. "Above that, second-pillar pension plans are provided by the employer—sometimes, but not always, with an employee contribution," says Jeroen. That defined benefit is up to 60% to 70% of the salary earned by employees at age 65. The third pillar is similar to a U.S. defined contribution plan or IRA.
Jeroen and Pieter plan to leverage Milliman's extensive capabilities in risk management and investment consulting to help their clients make sure the "second pillar" stays stable. Currently, he says, they're working on transforming existing Milliman financial models to reflect the complexities of Dutch pension funds, "to help us create more breadth in what we can do strategically for our pension fund clients." They’re also working on a hybrid defined benefit/defined contribution model that "provides DC flexibility for the employer, but DB benefits for the employee." This model could be adapted for the U.S. market, demonstrating that the planned synergies are already starting to materialize.