The College of Appeal for Commerce ("CBb") recently held that the Dutch Central Bank ("DNB") was wrong when it issued an instruction to a pension fund.
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This judgment emphasises the freedom of pension funds, within statutory boundaries, to form their own investment policy, while limiting the power of DNB to interpret the "prudent person rule".
DNB had instructed the pension fund to substantially reduce its investment in gold bullion from approximately 13% of pension assets at the time of the instruction to a maximum of 3% of funds. DNB based this instruction on its opinion that the fund did not adequately diversify its portfolio, and that the assets chosen did not provide an adequate match with pension obligations as required by Dutch pension law. The CBb dismissed DNB's viewpoint on both points.
In the proceedings, DNB asserted that the regulator is responsible for explaining the specific requirements based on the open norm of the "prudent person rule" as provided by the Dutch Pension Act. The CBb disagreed with this view because this rule is addressed directly to pension funds. As a result, pension funds have a certain degree of freedom in forming their investment policy as long as the policy complies with legal requirements. The CBb's ruling is likely to affect the way DNB conducts pension fund supervision.
According to the CBb, DNB must consider a pension fund's entire investment portfolio and its specific circumstances when deciding on an investment policy's validity. The CBb also claimed that DNB failed to explain why a 13% investment in gold bullion would have violated the "prudent person rule", whereas a 3% investment would be considered adequately diversified. In addition, DNB was unable to demonstrate why the entire investment portfolio would not have been an adequate match for pension liabilities. The pension fund involved, the 'Pensioenfonds Vereenigde Glasfabrieken', has filed a claim against DNB for the damage that was caused by the wrongly issued instruction. The court will rule on this claim at a later date.
For pension funds the judgment means a somewhat more autonomous position towards the supervisor in the formation of their investment policy and the application of the prudent person rule. Caution is, however, well advised.
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