NETHERLANDS - The Dutch regulator (DNB) has raised concerns about the legal pitfalls of collectively merging existing pensions rights into new pensions contracts, an option the Ministry of Social Affairs is currently exploring.

In its annual report for 2011, the DNB warned that legal action from pension fund participants could potentially disrupt the "necessary revision" of the pensions system for "a long time."

It added that, even where there was an "unequivocal and clear legal framework" in place for a "thorough consideration by all stakeholders for the justification of the measures", the merger of pensions rights could still be a challenge.

In its annual report, the regulator also expressed its support for stable "equalisation reserves" for new pensions arrangements, "as this will lead to a stable pension, as well as a prudent approach".

It argued that Dutch pension funds could pay for a financial buffer by using better-than-expected returns or additional contributions, adding that rule standardisation on this front would be necessary to ensure uniformity of supervision.

The DNB also recommended introducing a "feasibility test" for the expected real pensions contract to establish whether a pension fund's policy for premiums, investments and benefits tallied with stated goals and risks.

"The feasibility test can also provide insight into the question of whether a pension fund is taking the interests of all participants into account in a balanced way," it said.

The regulator called for an additional stress test to determine whether pension funds stray too far from stated targets during longer periods of adverse conditions.

It also said that, to prevent pension funds from producing "too favourable figures", lawmakers should issue clear guidance on the parameters for return on investment, standard deviation and correlations.