The Dutch pensions market is set to undergo a bifurcation and split into conservative and more “future-proof” pension funds that proactively address the underfunding of defined benefit schemes, according to Jacqueline Lommen, senior vice -president and director of European pensions at asset manager Robeco.
Smart defined contribution (DC) offered by Premium Pension Institutions (PPIs) will be the catalyst for change as the Dutch pensions market transitions from DB to DC, she said.
But a decisive transition will be more difficult for industry-wide schemes due to their local focus and their broad range of stakeholders.
She also pointed out that International Financial Reporting Standards (IFRS) would have less urgency for them.
Lommen told IPE: “The market is ripe, and there are lots of opportunities for PPIs.
“However, the local market does not fully recognise them yet, and it is often thought of as DC, which is competing with insurance solutions in 5-10% of the overall market.
“It presents a paradigm shift in the Netherlands because it has introduced a free-market concept, while the Dutch market – unlike the European market overall – has to date been dominated by trusts.”
PPIs, she added, had been more successful to date than could have been hoped for.
“Because the Netherlands is still a DB market, it takes time for the shift to take place,” she said.
“In addition, awareness of PPIs needs to increase – often people still think of them as a third-pillar product rather than a fully fledged second-pillar pension institution.”
She said PPIs leverage on two trends – the liquidation and unwinding of pension funds, which concerns about 90% of the Dutch pensions market, and the move to smart DC by DB schemes, driven by solvency and regulatory issues.
The new regulatory framework – the FTK – in the Netherlands is also encouraging a switch to smart DC.
Lommen said: “The new framework’s real contract resembles the DC format because poor returns resulting from bad financial markets and longevity changes can be smoothed over time.
“The risks – as in smart DC – also lie with members, although, of course, intergenerational distribution rather than individual accounts make up real contracts.”
But she acknowledged that past service still needed to be addressed.
“The real problem lies with the underfunded accrued DB service from the past,” she said.
“The bleeding will stop when DB schemes move to smart DC for future services, but their previous deficits resulting from past service will still be in need of a solution.”
The payout phase of DC schemes also needs to be reviewed, according to Lommen, who believes it ought to include more flexible options rather than just lifelong guaranteed annuities
All the efforts that previously focused on ALM and LDI solutions of DB schemes to limit solvency buffers for pension funds now go into smart DC investment solutions to protect individual member interests.
Lommen expects the current life-cycling strategy of PPIs to change to a two-component life-cycling approach with only two funds – a pension-matching fund that mitigates market, inflation and interest rate conversion risks and a return fund.
The two-component life-cycle approach facilitates more tailored investments for scheme members, higher benefits and lower frees.
Currently, target-date funds still make up the majority of DC after evolving from the initial multiple fund life-styling approach.
According to Lommen, it is large corporate pension funds in the process of being unwound – often of multinational companies – that currently look at PPIs as an alternative.
She said Robeco – which launched its PPI in January 2012, focusing on the upper-scale market, with around 35 corporate clients for the vehicle – received one request for proposal a week at the moment.