##ation instrument and makes for a different risk distribution between the parties concerned. through this development, our system seems to be shifting towards a “ defined contribution ” system, for lower than expected investment results and reduced indexation will result in lower benefits. however, it certainly still is not a dc system in all respects. in a dc system, the risks are entirely borne by the individual worker, while average pay schemes are characterised by risk sharing and intergenerational solidarity. if returns are lower than expected, the active and next generation may be resorted to in order to safeguard post - actives ’ benefits. however, the use of indexation as a steering instrument increases the risk of erosion of the future value of our pensions. this risk is directly related to the indexation ambition and the corresponding contribution reduction that pension funds will be required to formulate under the financial supervisory framework. social partners are of course free to determine the indexation ambition themselves, but everybody should bear in mind that their pension ’ s value will be considerably eroded if during the accrual phase indexation is incomplete. proceeding from 2 % indexation, one - third of the total capital accumulated at the age of 65 is made up of these indexation allowances. to the extent that full indexation is too ambitious, a stable value pension must surely be feasible? this ambition may be pegged to the ecb ’ s inflation target of 2 %, the lowest indexation percentage that a pension funds should strive to ensure. transparency the adjustments in the supervisory framework and the transition to the average pay scheme are closely related to the financial recession that pension funds have faced in recent years. this brings me to transparency. owing to the traditional actuarial and accounting techniques, the actual financial position of pension funds was insufficiently transparent. pension funds were required to value their investments at current prices, whereas liabilities were valued at a fixed actuarial interest rate of 4 %. this led to a situation that prevented timely identification of hidden surpluses and deficits. due to this lack of transparency, the higher yields realised during the stock market boom were translated too soon into contribution reductions and more generous pensions, without it being evident how lower - thanexpected yields would have to be absorbed. to many dutch pensioners it came as a complete surprise that “ lower than expected investment yields ” could mean no or lower indexation. apparently, they had failed to read the key features document, or gave up reading when they came to the small

letters section. nearly all pension regulations contain an escape clause that renders indexation only obligatory if permitted by the funds available. this makes it imperative, though, that the actual value of these funds can be verified. transparency is therefore of the utmost importance. and transparency is just what was lacking. i shall show this to you on the basis of the following two figures ( see annex ). the first figure reflects two funding ratios. the blue curve represents the traditional funding ratio, the red curve the funding ratio based on market rates. the figure shows that the funding ratio based on the fixed actuarial interest rate rose in the second half of the nineties and did not decline until after 1999, when the creeping slump had set in. if you just look at the liabilities side, thing become a lot clearer yet. the blue curve stands for the liabilities at the fixed actuarial interest rate. the red one, for the liabilities at the market rate. what may be concluded from this chart is that the room for indexation did not start to narrow until as late as 2000, but, due to the declining trend in the capital market interest, already in the early nineties. in fact, the use of a fixed actuarial interest rate has masked half of the actual increase in pension liabilities. the financial problems in recent years have made all the parties concerned more aware of the risks incurred by pension funds. implementation of the financial supervisory framework should enhance transparency and consistency between the values of investments and liabilities, making hidden reserves visible. compare this to the tower of winds by the renowned japanese architect toyo ito. the tower of winds, a ventilation tower for the subterranean space of yokohama station, is equipped with 2, 000 computer - steered light bulbs that respond to wind, sound and temperature. in daytime, the light is reflected by aluminium panels, bringing out the building ’ s cylindrical shape. in night time, the lamps transform the tower into a transparent structure. our pension system should eventually resemble that tower, looking beautiful during the day, and revealing its internal structure and robust foundation during the night. besides making visibility of reserves mandatory, the financial supervisory framework contains stricter provisions regarding cost - effective contributions, with a view to creating more clarity about the market - comparable costs of pension commitments. moreover, funds should offer more insight into the way they have distributed the risks between the parties concerned. they must communicate their indexation ambition to the participants in unambiguous terms. a