If none of the accrued defined benefit (DB) pensions were to be converted to defined contribution (DC) capitals under the Dutch pension reform, it would cost pension funds some €18bn to keep legacy DB systems running, according to calculations by accountancy firm PwC.

PwC’s calculations mark the first time anyone has come up with a substantiated, concrete figure regarding the total additional implementation costs involved if the Dutch pension transition were to be cancelled completely with only new accruals being in DC.

The additional costs are mainly attributable to administration of existing DB systems, in addition to those for new accruals in DC arrangements.

“There is regular debate in parliament about whether or not to make the transition. Sometimes, the claim is made that the costs of not doing so are not so high,” said Christoffel van Riet, senior director at PwC and also former deputy chief executive officer for pensions and life at software supplier Keylane.

“Our calculation shows that it is still a very large amount of money. I hope this will play a role in future debates,” he added.

The calculations follow a warning pensions minister Carola Schouten gave in a letter to parliament last week. In it, she stated that not moving DB accruals to DC would lead to higher pension contributions and, as a consequence, lower tax intakes for the state as pension contributions are deductible from income tax.

Closed arrangements

In its calculations, PwC assumes that none of the current 19 million accrued DB pensions will be moved to DC, while funds do start new DC arrangements. The DB accruals must then be administered as a closed book.

“The costs for a closed book scheme are lower, but still substantial,” Van Riet said. He estimates the cost at 55% of the costs for a scheme in which new accruals also take place.

pwc christoffel van Riet

Christoffel van Riet at PwC

He added: “Certain work needs not to be done with a closed scheme, such as enrolling new members and collecting contributions. But changes of address, divorces and deaths still have an impact even with a closed book. So there might be changes in laws and regulations. And pensions have to be paid out.”

The closed book of 19 million pensions will cost €550m in the first year, or €29 per member. This total cost falls only slowly as the number of participants decreases. This is because many of the costs for a closed scheme, 80% according to Van Riet, are fixed and therefore not dependent on the number of members.

Fixed costs include IT systems, IT maintenance and development and organisational overheads. These include salary costs as well as equipment and software.

The fixed component in a closed scheme is larger because there is less daily work to be done per participant than in an active, open arrangement, Van Riet noted.

PwC then added up all costs over a 50-year period, assuming a linear decrease in the number of participants to zero over that period. All these expenses were discounted using a discount rate of 2%.

In the next 50 years, much could change. Mergers or pension buy-outs could save costs, for example. Van Riet has not taken these kinds of possible future savings into account.

“The figure of €18bn should be seen as a baseline,” he said.

This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra