The new Dutch financial assessment framework (FTK) is to provide “clear rules” for dividing up indexation of pensions between younger and older workers to prevent disproportionate redistribution between the generations, the Dutch ministry of Social Affairs has announced. 

As a consequence, any potential windfall would not be able to redistributed immediately, the ministry said in a clarification of the FTK proposals. The proposals have now been put to the Council of State (RvS) for a legal assessment, before being presented to Parliament and fully published.

According to Jetta Klijnsma, the secretary of state for Social Affairs, financial shocks or rising life expectancy, must trigger immediate rights cuts, but these may be spread out over a 10-year period, to avoid sudden discounts.

She said that under the new rules, pension funds must also clarify in advance any measures to be taken in case of a big funding drop.

To keep salary costs stable for employers, and maintain purchasing power of participants, the new FTK would provide for a steady cost-covering contribution, based on the 10-year average of interest rates, or on estimated returns, Klijnsma said.

However, a pension fund which picked the latter option would be required to include the costs of indexation in their premiums.

The new FTK will also include steering instruments to limit pension funds’ exposure to daily changing discount rates, said the state secretary. For example, schemes would be allowed to use 12-month average rate to calculate of their coverage ratio.

In addition, the Cabinet would discuss with the pensions sector how defined contribution plans could also be enabled to share risks collectively, she made clear. 

Klijnsma added that that Cabinet would start a broad dialogue with society about the long-term future of the pensions system. As part of the process, the Social and Economic Council (SER) would be requested to advise on the future of additional pensions. 

The Pensions Federation welcomed the FTK proposals, as it would decrease volatility of funding and would allow to more evenly distribute the impact of market shocks on pension benefits.

However, it voiced concerns about the way the FTK is to balance the approach across generations.

The envisaged rules, based on macro calculations, could turn out to be unbalanced for individual pension funds, it argued, underlining that a balance between the generations must be based on an overall solution, rather than on a single element in a pension plan.

In its opinion, individual pension funds should be allowed to take their own decisions, based on their specific characteristics.

The Federation further called for solutions to limit the volatility of the current risk-free discount rate, a source of instability to the pension system over the course of the last few years.

In a joint statement, supervisors DNB and AFM cited increased shock resistance, stability, transparency and balance of the pension system, as the most important improvements in the proposed new FTK rules.

However, they expressed disappointment that the option of cushioning premium levels based on estimated returns remained. They noted the uncertainly of achieving expected returns and argued that this could affect pension benefits.

In their opinion, the approach was at odds with the benefit-based contract of the defined benefit schemes that still dominated in the Netherlands.

Both supervisors urged Klijnsma to focus on a quick introduction of the new FTK, and indicated that they were confident that pension funds would be able to cope with a short implementation period. The new rules are scheduled to come into force as on 1 January 2015.

In a preliminary response, the €300bn civil service scheme ABP noted that the new FTK proposals hardly offered opportunities to achieve its indexation target. “The new contract looks like a stricter version of the current nominal one,” it said.

Peter Borgdorff, director of the €137bn healthcare scheme PFZW added: “Compared with previous proposals, the current ones are an improvement, but they are not sufficient yet.”

“For example, it is stil unclear whether we will be allowed to invest as we think is necessary for the pensions we want to provide,”  he said.

Also in a joint statement, the lobbying organisations for the elderly associations (CSO) and pensioners’ associations (KNVG) said they were afraid that the new rules would limit indexation.

They called for an additional pension contract, that would allow pension funds to invest actively in order to increase the chances of indexation, while offering less certainty for future pensions.

CSO and KNVG also underlined the importance of the same discount rate being applied for both pension contributions and liabilities.