When the Dutch Pensions Federation recently called for the introduction of collective defined contribution (DC) arrangements, combined with individual pension assets and risk-sharing, it was not the first to do so. However, it is noteworthy that the industry association has highlighted how the current system of predominantly defined benefit (DB) plans has become too complicated.
Referring to the strict rules of the new financial assessment framework (nFTK) and the use of interest rates as the criterion for liabilities, Gerard Riemen, the federation’s director, said he could no longer explain to participants why rights cuts remained likely, despite an improving economy. He said the same went for the possibility that an increase in interest rates would cause a loss of assets on one hand but improve funding and indexation on the other.
He also questioned the effectiveness of communicating in terms of “conditional pension rights”. Rather than employ such a vague concept, pension funds should abandon the principle of “pension claims” and start indicating how much money is available for each participant. This, according to Riemen, would eliminate the hot topic of valuing liabilities, as well as allowing for an investment policy aimed at a balancing risk and return.
In Riemen’s opinion, the pensions sector should take the initiative and make proposals in support of individual DC with extended risk sharing. The industry should not only produce solutions for jointly held investment, inflation and interest risk but also address shared longevity risk, as well as mortality risk. Conflict among the generations can be prevented as long as financial burdens are not deferred, according to the director.
With its call, the Dutch Pensions Federation is getting ahead of government proposals. Jetta Klijnsma, state secretary for social affairs, has announced that she will present Parliament with several options for “simpler and more transparent” pension arrangements before the summer. These are likely to include a new design, focusing on individual pension assets with more or less risk sharing.
Klijnsma has suggested that such a scheme – known as a personal pension with risk sharing (PPR) – may replace all existing pension arrangements. Current research by the Social and Economic Council (SER) must establish whether a PPR would comply with the conditions set by the state secretary. The PPR must contribute to the pension outcome and be fair for all generations. If the outcome is unsatisfactory, however, Klijnsma has said she wants to develop existing pension plans further.
The Pensions Federation enjoys broad support in the sector for its proposal, initially made by the SER. Netspar, the platform for pension researchers and professionals, has already presented a model with individual and collective elements as an alternative for current pension plans, including an element of risk.
The two largest Dutch pension funds – the €345bn civil service scheme ABP and the €161bn healthcare plan PFZW – also support the concept. Both have said the solidarity component of risk sharing must remain the foundation of any system, as participants with individual accrual cannot bear all risks themselves.
The Federation has identified hurdles that might block a proposal that could be included in Klijnsma’s options. The sector must achieve a balance between simplicity and risk sharing and devise a secure means of switching arrangements.
Above all, the industry must also make clear the added value of its choice.