Netherlands: Pension transition drives consolidation

The number of independent pension funds in the Netherlands has come down steadily over the past two decades, from around 1,000 at the turn of the century to less than 200 now. Consolidation has been especially rampant among company pension schemes. Since 2008, more than 400 corporate pension funds have liquidated. In 2021 alone, 15 funds shut up shop and even more have been involved in mergers, according to pension regulator DNB. In the first half of 2022, another eight funds ceased operations.  

Indeed, many pension funds are at a crossroads: will they enter the transition to a DC system (see article in this report) as an independent fund, or will they liquidate or consolidate beforehand? 

“We’ve seen most consolidation with corporate pension funds that have been asking themselves the question: ‘will I go through this exercise all alone, including having to implement loads of new IT systems and other regulations, or should I shut up shop?’,” says Hamadi Zaghdoudi, head of retirement Benelux at Willis Towers Watson. 

High costs  

Most corporate pension schemes are in a healthy financial state, with funding ratios averaging 133% at the end of June 2022, making them large enough to continue independently for some time, according to Erik Beckers from consultancy First Pensions. The relatively high admin costs at many corporate pension schemes, which average about €300 per member but up to €1,000 for smaller funds, are usually not a reason for liquidation either. 

“Member surveys at corporate pension schemes tend to show strong support for keeping an independent pension fund”

Daan Kleinloog

“Companies value the opportunity to directly influence secondary labour conditions via their own pension fund,” says Janwillem Engel of pension consultancy Montae & Partners. Moreover, admin costs, which often are at least partly paid by the employer, are negligible compared with the total cost of pension, he adds. 

Members also value having their own independent pension fund, says Wouter van Eechoud, director of the €5.3bn Pensioenfonds IBM. “In particular our pensioners consider the pension fund as an integral part of the IBM culture,” he added. “They are very happy to be with us.”

This high degree of satisfaction may have something to do with Pensioenfonds IBM’s comfortable financial position too, though, as it sports a funding ratio of more than 150%.  However, according to Daan Kleinloog, another pension consultant: “Member surveys at corporate pension schemes tend to show strong support for keeping an independent pension fund.”

Regulatory pressure

So why is pension fund consolidation progressing relentlessly regardless? The reasons cited by pension schemes that closed recently may give some clues. The pension scheme of business bank NIBC liquidated this year to join De Nationale APF, a commercial pension fund, citing a combination of regulatory pressure resulting in ever-higher costs and, indeed, the upcoming pension transition. 

Another possibility is to merge with another pension fund, an option often preferred by sector schemes. The pension funds Vlakglas, the fund for window installers, glass makers and wholesalers in paint and glass, and PHJ, the scheme for the wood processing and yacht building industries, merged in April this year. Bert Oosterloo, who was president of the Vlakglas fund at the time of the merger, says: “Due to increasing regulatory pressure and associated cost increases we had been looking for a partner for some time.” According to Oosterloo, the upcoming pension transition “accelerated the merger somewhat”. 

The most common reason for a pension fund to go into liquidation is a lack of administrative capacity, according to Kleinloog. “Large companies tend to be able to find trustees and educate them, but this gets ever harder for smaller firms,” he says. Pension regulator DNB has also upped the requirements would-be trustees need to meet, which only makes this more difficult. 

Funds that struggle to sufficiently resource their boards tend to be also smaller in size. “For these funds, it’s more difficult to tailor their investment policy to the wishes of their membership. Many funds try to implement ESG investments that meet the preferences of members. But if you only manage a couple of billion, possibilities are limited,” says Engel. “This way, it will be harder for smaller funds to justify their continued existence.”

Pause in mergers

While the upcoming pension transition has served to accelerate consolidation among smaller schemes, it can also have the opposite effect, notes WTW’s Zaghdoudi. “The pension transition takes so much effort that there’s no time left to search for potential partners,” he says.

But there’s another dynamic at play, as Zaghdoudi explains: “If you liquidate your fund or join a larger scheme now, you won’t be able to impact the conditions under which you make the transition to the new system. To cede control of your pension fund at the most exciting moment of Dutch pension history seems illogical to me.”

Dutch pension fund consolidation may therefore slow down for some time, as social partners have few incentives to consolidate with the DC transition just around the corner. “The only reason to still want to consolidate right now is convenience, if you have a feeling you just don’t want the hassle of the transition process,” Zaghdoudi says.

Solidarity or flexibility?

However, once the dust of the pension transition has settled, consolidation is expected to pick up pace again. Therefore, social partners would do well to keep the long term in mind when designing their pension arrangement for the new pension system, according to Beckers of First Pensions. 

He says: “If you know you want to consolidate within a foreseeable timeframe, social partners would do well to take this into account when designing the pension arrangement for the new pension system as to make it compatible with those of possible future partners.”

 

Pension funds, or rather the social partners that determine labour conditions, will have to make a choice between two contract types: the solidarity arrangement, a uniquely Dutch construct of a DC arrangement with several collective features; and the flexible arrangement, which comes closer to individual DC but also has the option to add risk-sharing elements. 

“If social partners opt for the flexible arrangement, funds will be more likely to discuss liquidation or consolidation at an earlier stage than if they choose the solidarity arrangement,” says Kleinloog. “After all, an individual DC arrangement is less discerning than an arrangement with specific solidarity features,” he added. 

“The flexible arrangement indeed provides fewer options for employers to add specific features so, as such, the choice for either the solidarity or the flexible arrangement is a key moment for the future of a pension fund,” Montae’s Engel added.

Some pension funds and companies already decided to make an early switch to an individual DC arrangement. This can be regarded as a prelude to choosing the flexible arrangement, Kleinloog notes.