NETHERLANDS - The new Dutch pensions system is to become subject to a single financial assessment framework (FTK) for both the existing nominal and future real pension contracts, in order to keep the new rules simple and comprehensible, social affairs minister Henk Kamp has proposed.

Additionally, pension funds will be allowed to use the average funding of the previous 12 months for major decisions, and they may discount their liabilities against the 'ultimate forward' rate, which is "a stable and realistic assessment for the long-term interest rates", according to the minister in his long-awaited elaboration of last year's Pensions Agreement.

Until now, pension funds must discount their liabilities against the forward curve, which has resulted in significant volatility for scheme funding ratios.

Kamp stressed that the proposed new discount rate was also compliant with Solvency II, the future European framework for insurers.

Under the proposals, the coverage ratio would remain the criterion for rights cuts. However, schemes would be allowed to take a part of the expected returns on investments into account when calculating future indexation.

In the minister's opinion, merging existing nominal pension rights into a new real pensions contract was legally possible, but he said this should be implemented by the social partners and the pension funds boards.

That said, Kamp noted that pension funds also may continue their existing nominal contract, but that they must apply a complete graduated calculation - whereby the level of indexation is based on how close the scheme is to a certain funding ratio - in such cases.

The minister also announced a new standard coverage ratio, which only allows for full inflation compensation if future full indexation is likely. For the average pension fund, this norm will equate to a funding of 125% to 130%, he indicated.

Among the key points of Kamp's proposals are also mandatory agreements between the social partners and the pension funds about sharing financial risks between older and younger generations and the possible effects on their purchasing power. New legal rules must further provide for proper and uniform communication.

The minister also wanted pension funds to develop a mechanism for the automatic adjustment of pension rights, benefits and pension target age in line with life expectancy.

This mechanism (LAM) will become mandatory for real pension contracts, but according to Kamp, it could also be applied to indexation under the existing nominal contract.

In his proposal, the minister reiterated that the new FTK was not without risk, but that the new rules would force pension funds to communicate clearly about the effects on the purchasing power of participants and existing uncertainties.

He said that he intends to consult the Labour Foundation (STAR) and the Pensions Federation during the summer, in order to present the necessary legislation to parliament in 2013.

In a preliminary response, the Pensions Federation stressed that Kamp's elaboration of the real pension contract was lacking crucial elements, and that it offered pension funds insufficient clarity to switch from nominal to real arrangements.

In its opinion, the proposed accounting rules for the cost-covering contribution were not clear either, pointing out that the chosen method could have considerable consequences for participants, sponsoring companies and pension funds.

The federation also said that the LAM should be made mandatory for both nominal and real pension contracts.