A number of corporate pension funds with a US sponsor are unlikely to make the transition to the new defined contribution (DC) pension system in the Netherlands.

Actuaries and pension fund trustees with close knowledge of the matter say American firms are hesitant to take pension assets off their balance sheets, which they would be required to do under US accounting rules (Generally Accepted Accounting Principles, US GAAP).

According to a recent survey by pension regulator DNB, one in five Dutch pension funds are planning to remain in a defined benefit (DB) setting. A number of these funds specifically cited issues around US GAAP, the accounting framework that applies to firms listed in the US, as a reason for not wanting to make the transition to DC, DNB said.

Under US GAAP, the assets and liabilities of a company pension fund that has a DB or a collective defined contribution (CDC) plan, appear in their entirety on the balance sheet of the sponsor.

For European listed companies, a different accounting standard applies: international financial reporting standards (IFRS). Under these rules, firms put a pension fund’s assets and liabilities on their balance sheets only if there is still a payment obligation on accrued pensions, such as an obligation to top up pensions if the fund in question is in deficit.

The statue of liberty in New York

A number of corporate pension funds with a US sponsor are unlikely to make the transition to the new DC pension system in the Netherlands

Most Dutch and other European companies with their own pension funds have bought off that obligation in recent years.

Balance sheet surpluses

Most ‘American’ Dutch pension funds have relatively high funding ratios, which translate into substantial surpluses on the balance sheets of their sponsors. If these pension funds were to make the transition to DC arrangements, these surpluses would be distributed to members or used for other purposes, such as creating risk-sharing buffers. Hence, they would disappear from the balance sheets.

Eventually, this would lead to paper losses for the company. Financial stakes can be substantial, as for example would be the case for the richest funds with a funding ratio of more than 140%, such as IBM and Mars.

There are currently over a dozen US companies with a Dutch pension fund, with a total of over €15 bn in assets. A number of these funds, including MSD and Pepsico, have already indicated they will not make the transition to DC.

“Our employer has a substantial amount of Dutch pension capital on its balance sheet. If it were to make the transition to DC, this money would disappear. This could eventually even affect the company’s creditworthiness,” said a director of a pension fund with an American sponsor on condition of anonymity.

“Therefore, the employer has indicated that it would prefer not to make the transition to DC. This is one of the topics under discussion among social partners,” the trustee added.

“If it can be thoroughly substantiated that a balance sheet obligation under US GAAP leads to a disproportionate disadvantage for the employer if the fund makes the transition to DC, this may be a reason to refrain from it,” a spokesperson for regulator DNB commented.

A “good substantiation” is important, the spokesperson added, because the new pension law which cements the switch to DC stipulates that pension funds that are not closed must, in principle, move to a DC-setting.

Big four

Michiel Lohman pwc

Michiel Lohman at PwC

However, according to actuary Michiel Lohman of PwC, US companies sometimes overestimate the impact of the pension transition.

Indeed, in October, the ‘Big four’ auditors (Deloitte, PwC, KMPG and EY) in the US jointly agreed that DC plans with a risk-sharing buffer will continue to be treated as DB pension plans under US GAAP.

As a result, Dutch pension assets are not immediately removed from the balance sheet after the switch to DC.

“Employers only have to take the pension money off the balance sheet at once if they switch to a purely individual DC scheme without risk sharing,” according to Lohman.

He added: “In this case, the pension fund’s surplus may be taken off the balance sheet in steps over a period of 15 to 20 years. This is in contrast to IFRS, where the loss needs to be taken at once.”

Different actuarial interest rate for buffer 

The Dutch pension assets that US companies have on their balance sheets do not equal these funds’ surpluses under Dutch accounting rules.

“The discount rate under US GAAP is generally higher: it is based on the expected return on high-quality corporate bonds,” said PwC’s Lohman.

As a result, the reserved assets on the company’s balance sheet tend to be higher than the pension fund’s Dutch buffer.

Lohman believes that some funds may not yet be aware that under US GAAP pension assets are incrementally removed from the balance sheet, and therefore may have unnecessarily resisted the transition to DC. “I think they overestimate the impact,” he said.

“The fact that when a pension fund is liquidated, the pension assets have to be immediately taken off the balance sheet in full has indeed been a reason in the past for US sponsors not to liquidate a pension fund,” argued Sebastiaan de Leeuw den Bouter at Deloitte. “If you don’t have to take that loss immediately, it does indeed make quite a difference.”

But this does not mean that pension funds can then seamlessly make the switch to DC, he added. After all, eventually the actuarial losses have to be processed, even though it is over a much longer period of time.

“I know that this topic plays a role in the discussions between social partners, but to what extent it will really influence decision-making is difficult to say. There are, of course, more issues that play a role in the question of whether or not to switch to the new DC pension contract,” De Leeuw den Bouter concluded.

This article was first published on Pensioen Pro, IPE’s Dutch sister publication