NETHERLANDS – Dutch pensions funds are facing a new financial assessment framework (FTK) for both their existing nominal pension contracts and new contracts under real terms, according to proposals released by the Cabinet.

Although the starting points for both contracts will be the same, specific rules for the different contracts will apply.

Under the new FTK, a pension fund’s coverage ratio will be the most important criterion of measurement.

The level of funding will be the average of the forward curve of the previous 12 months, discounted against the “stable and realistic” ultimate forward rate (UFR), to prevent funding volatility, the Cabinet confirmed.

It also stressed that social partners and pension funds would need to clarify in advance how they would spread financial risk across the generations.

Last week, IPE published a leaked draft that revealed Dutch government thinking on the FTK.

In the proposals – published last Friday – the Cabinet said it would allow pension funds that prefer their nominal pensions contract to use the same option for spreading financial shocks over 3-10 years, as under the proposed real pensions contract.

However, the government also said it would leave the decision of whether to merge existing pension rights into a new real contract to the social partners and the pension funds, adding that the new FTK provided rules for a “meticulous” merger process.

The Cabinet made clear that pension contributions would increase with the new rules, in order to improve the pension system’s stability.

But it also suggested the recent decision to reduce the tax-friendly pensions accrual might, on balance, decrease the premium level.

Because the effects will depend on a scheme’s funding, its pensions promise and its participant population, each scheme must establish the specific impact on its contribution, the Cabinet said.

It indicated that it might reconsider its planned premiums system after the public consultation.

The new real pensions contract is to focus on an indexed average-salary pension plan, with indexation to be an integrated part of the conditional pensions claim, through a discount mechanism for the accounting rate.

The real contract is to come with an automatic adjustment mechanism (AFS) for both positive and negative financial shocks.

Although pension funds must report these shocks straightaway, they will be allowed to spread out the effects for participants over 3-10 years.

A separate adjustment mechanism for the financial effects of increased life expectancy could use a similar smoothing method, according to the government.

Under the new FTK, pension funds can opt for the accrual of a financial buffer – in addition to the AFS – to counter future economic headwinds.

Pension funds must further satisfy supervisor De Nederlandsche Bank that they can achieve their pensions target for both contracts through a feasibility check.

The feasibility check would replace the continuity analysis and the consistency check of the current FTK.

In the new FTK, the option of a gradual increase of premiums to a cost-covering level will no longer be available.

The €292bn civil service scheme ABP was critical of the Cabinet’s proposals, arguing that they would not deliver stability on contributions or the discount rate.

“A first analysis has shown that our premium could rise steeply and become volatile as a result,” it said.

ABP also argued that the Cabinet’s proposals had failed to fully clarify the real pensions contract, and noted that it lacked a matching discount rate.

In a first response, the Dutch Pensions Federation pointed out that, in nominal contracts, the options for long-term indexation had disappeared.

“For the real pensions contract, important elements – such as the discount rate and the costs-covering contributions – have insufficiently been fleshed out for a positive conclusion,” it said.

“In addition, the condition of an indexation of at least the consumer index for the real pensions contract is a large barrier for many schemes.”

The €135bn healthcare scheme PFZW declined to comment, indicating that it was still assessing the proposals in preparation for the consultation process.

The Labour Foundation (StAr) concluded that the proposed FTK was insufficient and criticised the likely increase of contributions.

To increase transparency, the StAr advocated one fully integrated assessment framework, which allowed different pension targets.

The social partners also urged the government to provide a legal framework for merging pension rights, arguing that pension funds should not be left to deal with existing nominal pension rights and new rights under real terms.