The Dutch multi-sector pension fund PGB has suggested people who refuse the transition of their pensions from a defined benefit (DB) to a defined contribution (DC) arrangement under the new pension system should have their pensions pooled in one or several large DB funds.
The pension fund has proposed the concept as a fall-back option in case the individual right to object to a transition of pension rights from DB to DC will be continued under the new pension system. The Dutch government wants to scrap this right for individuals under the new pension law. This could, however, fall foul of European law, some lawyers have warned.
PGB’s proposal was introduced in its response to the consultation on the new Dutch pension law, which cements a transition from DB to DC arrangements. The pension fund sees pooling grandfathered pension rights as the only way to reach sufficient scale to keep costs in check.
PGB, however, maintains a “strong preference” for the individual right to object to the transition of pension rights to be scrapped altogether.
“However, in case it turns out this right will be preserved, we propose that not necessarily every single pension fund will have to retain a probably relatively small group of members that refuse to make the transition to DC,” the fund wrote.
“In this case, it would be better to pool these rights in one or several funds that have decided not to make the transition to DC anyway.”
In practice, however, most likely only a select number of already closed corporate pension schemes will chose not to make the transition.
Pension lawyer Hans van Meerten has come up with a somewhat different solution to reach sufficient scale for grandfathered pension rights. He advocates the establishment of IORP custodians: pension funds can jointly establish such a custodian to ringfence existing DB rights and separate it legally from new DC accumulation.
“Such a structure can be used to park the assets of those who refuse the transition of their pension rights from DB to DC,” said Van Meerten. Pension funds do not necessarily need to establish their own custodian, however. Instead, they can also use the services of existing commercial custodian such as BNY Mellon, the lawyer adds.
A carve-out via a custodian is much cheaper than simply grandfathering existing funds, notes Van Meerten, because of the efficiencies of scale than can be reached. “Pension funds that pool their existing pension rights can share their fiduciary manager, their administration, asset management and the costs of accountancy and actuary services.” He estimated pension funds can save around 5% on costs this way.
According to Van Meerten, pension funds can also claim an exemption from their obligation to pay VAT if they go the custodian route. “This would provide an additional cost reduction of around 15%.”
And establishing a IORP custodian is relatively cheap, the lawyer said. “A pension fund only needs to provide €125,000 in equity to establish one.”
Van Meerten believes his idea of a carve-out of existing pension rights to a IORP custodian is legally possible. “We have plugged the idea with the Social Affairs ministry, and informally they have shown no objections.”