Expected Level of Investment Knowledge for Board Members - Sample Questions

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Expected Level of Investment Knowledge for Board Members Summary 4 1 Introduction to the Normative Framework for Investment Knowledge 5 2 Expected Basic Level of Investment Knowledge 9 3 Expected Advanced Level of Investment Knowledge 12 4 Expected Experience Level of Investment Knowledge 15 Contents

5 Expected Level of Investment Knowledge for Board Members 1.1 Reasons for the Normative Framework for Investment Knowledge There are three reasons for DNB to now establish a normative framework for investment knowledge for candidate board members of pension funds.¹ De Nederlandsche Bank (DNB) has been conducting on-site investment inspections at pension funds for some time. In mid-2015, we analyzed the findings from the investment inspections in the period 2009-2015. This shows that boards of pension funds regularly fall short in the area of investments. A key cause is often a lack of knowledge among board members. This lack of investment knowledge is also evident in the assessments of board members for Investment Advisory Committees (BAC). In these assessments, since the end of 2013, candidates with the field of investment are specifically tested on their knowledge of asset management.² This shows that (too) many candidate board members – when they come to the assessment interview at DNB – do not achieve the desired minimum level of investment knowledge. The pension sector indicates in its communications to DNB and the media that there is uncertainty regarding the required level of investment knowledge, which leads to uncertainty among candidates coming to the interview at DNB. Training institutions also indicate that it is not always clear whether their curriculum aligns with the requirements DNB sets for candidate board members with the field of investments. 1.2 Objective of the Normative Framework for Investment Knowledge The main objective of the normative framework is to strengthen the countervailing power of board members at pension funds. By increasing the investment knowledge of the board members, the quality of the investment process will improve, and the fund board can better steer this process. With this brochure and further communications, DNB aims to make it clear within the pension sector what DNB expects from a board member regarding investment knowledge. DNB expects pension fund boards to handle the pre-selection of candidates in a good substantive manner through a job profile, knowledge matrix, training plan, etc., based on professional governance by the pension fund. The tasks, roles, and responsibilities must also be clearly defined. 1 Under candidate board members, this normative framework also includes candidates for the Stakeholders' Body, Supervisory Board, and possible external advisors who qualify as co-policy determiners. 2 In this normative framework, the description 'investment knowledge' refers to the relevant knowledge in the field of asset management that is necessary for governing a pension fund. 1 Introduction to the Normative Framework for Investment Knowledge

13 Expected Level of Investment Knowledge for Board Members What is the relationship between strategic investment policy, investment plan, and investment mandates? What is the portfolio construction including the influence of macroeconomic variables on the following components?: ▪ Consideration regarding risk/return and investment costs (e.g., low vol, small cap effect, etc.) ▪ Investment horizon (illiquidity premium) ▪ Active versus passive (intermediate forms such as tilts, fundamental indexing) ▪ Economic cycles (Kondratieff, business cycle, recession, etc.) ▪ Role of government / business / private sector in the economic process (relationship between budgetary/fiscal policy, impact on consumer confidence and investments) ▪ Monetary policy (policy instruments and steering by central banks, relationship between money market rates and credit lending by banks) ▪ Interest rates and inflation (short versus long rates, yield curve structure, causes and consequences of inflation) ▪ Valuation and price formation on financial markets (accounting versus economic valuation, DDM, influence of interest rates and accounting rules, alternatives if no market prices are available, valuation ladder and methods to ensure quality of alternatives) How do you recognize the following risks in the portfolios?: ▪ Interest rate risk (duration and convexity) ▪ Market risk (earnings/PE, boom-bust, behavioral bias) ▪ Currency risk (influence of interest rate differentials, PPP) ▪ Credit risk (systematics, probability of loss and impact) ▪ Counterparty risk (lessons from Lehman, collateral management) ▪ Liquidity risk (cash management, influence of EMIR) ▪ Concentration risk ▪ Active risk ▪ Operational risk ▪ Risks specific to derivatives ▪ Valuation risk (especially for illiquid investments) What is in conjunction with the investments of the pension fund: ▪ The risk appetite and policy principles? ▪ The investment beliefs? ▪ The content of the ABTN in conjunction with premium policy / investment policy? ▪ The translation via ALM study to strategic policy? ▪ Risk management and mitigation? ▪ The VEV, feasibility test, and recovery plan? ▪ The role of the statement on investment principles?

15 Expected Level of Investment Knowledge for Board Members 4 Expected Experience Level of Investment Knowledge To score sufficiently in the most demanding area of knowledge, the candidate board member preferably has applied (work) experience in the field of investments. The candidate can answer the following questions and can provide concrete examples: ▪ How have you practically applied the aforementioned basic and advanced investment knowledge? ▪ How do you assess when information is relevant and applicable to the investments of the pension fund? ▪ What are the detailed consequences of accepting or excluding risks in investments? ▪ How are investment decisions made, what are the alternatives, and why was this chosen or not chosen? ▪ What are the changes in the field of macroeconomics, investments, and the changing environment of pension funds? ▪ In which cases have you signaled bottlenecks regarding the topics outlined in the Advanced Knowledge level, how were these resolved, and why was this solution chosen over the alternatives?