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FTK to require Dutch schemes to increase buffers by 5 percentage points [updated]

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Dutch pension funds, under the new financial assessment framework (FTK), will have to increase their financial buffers by 5 percentage points to 26.6% of assets, according to leaked details on the proposals. 

A number of industry sources close have confirmed to IPE sister publication IPNederland that the FTK proposals of Jetta Klijnsma, state secretary for Social Affairs, are to be discussed by the Cabinet today.

They also confirmed that the new proposals would focus on nominal arrangements, and said the new FTK would allow pension funds to continue to base contributions on expected returns.

The chief reason cited for this break from previous drafts of the FTK was the fact it would enable a decrease in contributions, including employer costs. The Dutch state, being the largest employer, has a significant interest in lower premiums.

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In the new FTK, according to sources, pension funds will be allowed to even out funding shortfalls over a 10-year period.

For example, a scheme with a 10% shortfall, that applies a rights cut of 1% in the first year, would be exempt from further discounts if the coverage ratio improved sufficiently.

News daily De Telegraaf reported that, in addition to tighter rules for existing nominal arrangements, the new FTK will also introduce rules for pension funds that want to place all risk with the participants.

Pensions expert Theo Kocken confirmed that the new FTK is to focus on nominal arrangements, which are more flexible towards recovery from downward shocks, but more strict on adding pension rights following a windfall.

He said he was convinced the effect of the new indexation rules would be neutral for both younger and older workers.

Another reliable source told IPN the new FTK would only allow indexation if a scheme’s funding was more than 110%, and that indexation would also depend on a pension fund’s population.

Kocken concluded that the current concept was the “best possible and maximum achievable” within the current pensions system.

However, in his opinion, an essentially different pensions contract, with clear ownership rights, would be needed for the longer term.

Initially, Klijnsma recommended an FTK consisting of two different pension contracts: a nominal one with tighter rules and a contract under real terms.

However, following widespread criticism from the sector – which warned of overly complicated arrangements and problems with merging existing nominal and new real pension rights – the state secretary said she would draw up new proposals focusing on a hybrid contract.

However, her latest thinking on the FTK suggests a continuation of nominal pension plans.

If the Cabinet approves, the concept FTK would be put to the Council of State – the highest legal authority – for advice, before it is tabled in Parliament.

The advice process could take up to six weeks, potentially leaving only six weeks for reading in Parliament before the summer recess.

The new FTK is scheduled to go into effect on 1 January 2015, but many players in the industry have questioned the feasibility of such a tight deadline.

The introduction of a new FTK has already been postponed by one year.

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