Following a process over more than a decade, the largest-ever reform of the Dutch pension system, itself the largest occupational pension system in the European Union, is finally nearing a close.
On 1 January 2025, the first free Dutch pension funds will finally ‘sail in’, as the process is called in the Dutch pension sector, to a new pension system based on defined contribution (DC).
The three pioneers are the, rather applicably, professional pension scheme for shipping pilots, the company pension scheme of APG and PWRI, a fund for disabled workers. These funds are all relatively small, with some €14bn in assets between them.
When will the other funds follow?
The bulk of pension funds, including the largest five schemes ABP, PFZW, Bpf Bouw, PME and PMT, will make the transition in 2026 or 2027. The final date for schemes to switch to DC is 1 January 2028.
Will all funds make the switch to DC arrangements?
Not all of the Netherlands’ 150-plus pension funds will make the switch. Some company pension schemes, most of which are already closed for new accrual, will remain in the current defined benefit (DB) system. The transition is also a driver for further consolidation, with some funds deciding to merge or join a pooled pension scheme (APF). Other schemes have opted for a buy-out. But all new accruals will have to be in DC arrangements by 1 January 2028.
What will change for members?
Pension funds, or rather social partners which are in charge of the design of the new pension arrangement, have a choice between the so-called solidarity arrangement and the more individual flexible arrangement. In both arrangements, investment risk is being transferred from the fund-level to individual members. But the solidarity arrangement retains, as the name suggests, some collective features: assets continue to be managed collectively in one large pot, and funds retain a mandatory ‘solidarity buffer’, which aims to protect pensions against cuts. Most funds choose to earmark about 5% of their assets for this buffer.
The flexible arrangement, which has been chosen by a minority of funds, is more individual in nature, as every participant gets their own personal pension pot. Members can typically choose between three different risk profiles. While investment risk will no longer be shared collectively, this is not the case for longevity risk and disability risk which remain shared on the fund level. Social partners also have the option to add a risk-sharing buffer, which essentially has the same function as the solidarity buffer.
Can members object to the conversion of their DB accruals to DC capitals?
Although pension funds can decide to consult members, there is no individual right of objection to the conversion of DB accruals to DC. In making this an exclusive competence of social partners, the Netherlands is rather unique. The lack of the possibility for individuals to object against the conversion of DB accruals, which are perceived as certain, to DC capitals is the most controversial aspect of the pension reform.
The fact that individual pension savers have no opportunity to object against the conversion of their ‘guaranteed DB pensions’ to, as is perceived, ‘uncertain pensions’ has been criticised fiercely, especially by pensioners’ organisations and certain political parties. So far to no avail, although the actuary turned member of parliament, Agnes Joseph, of government coalition partner NSC has not yet given up on her efforts to amend the legislation and introduce a mandatory ballot about the conversion of accruals on the pension fund level.
How will the DC transition change pension supervision?
In the current DB setting, pension fund supervision is centred on pension funds maintaining a certain funding level. To put it simply, the lower their funding ratio, the less risk they are allowed to take with their investments. Under the new system, the main requirement is that pension funds’ investment policies must be based on the risk preferences of members.
All pension funds have questioned their members about this before the transition, and will be required to repeat such surveys on a regular basis going forward. Currently, pension supervision is almost exclusively a competence of DNB, the Dutch central bank. But as members’ preferences will take centre stage now, the other financial regulator AFM will have a more prominent role in the future. It checks whether pension funds’ surveys and their communication with members meet guidelines.
How will the asset allocation change?
As pension funds will no longer have to meet strict buffer requirements, they will have more freedom to invest more in risky assets. Some funds have already announced an increase in allocation to the return portfolio and a reduction in government bond investments. The switch to a life-cycle approach also means that pension funds will in the future only hedge the interest rate risk of those close to retirement and pensioners. As a result, overall interest rate hedging will probably be lower, and shorter-duration debt will take precedence over bonds with longer maturities. There will also be more room to invest in illiquid assets, especially in the solidarity arrangement, as investment freedoms increase.
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