In the new DC arrangement of Pensioenfonds Vervoer, the €29.4bn scheme for the Dutch commercial transport sector, nearly all members will see their expected pension benefits rise while pensioners are “very unlikely” to experience any benefits cuts.
This transpires from the fund’s transition plan that was published last month on its website. Social partners want the fund to switch to the so-called solidarity DC arrangement as of 2025, with a solidarity buffer of up to 6% of assets.
Under the proposed DC arrangement, expected pension outcomes in an average scenario for financial markets are better than under the current DB arrangement, with outcomes ranging from a few percent increase in expected benefits to a maximum of over 30%, depending on age. The gains arise mainly because the need to retain a buffer is greatly reduced under the new system. Last month, €26bn Pensioenfonds ING provided a similar reason for its expectation that pension benefits will rise by up to 20% in the new DC system.
Vervoer’s solidarity buffer will be filled annually with 5% of the excess returns made by the fund until it reaches a size of 5% of assets. The buffer will be invested separately, in low-duration government bonds. Once the buffer’s value exceeds 6% of fund assets, the excess will be distributed. “It would not be functional to let it grow further. Then it would just be dead money,” according to Vervoer’s director Willem Brugman who, however, does not exclude further growth of the relative size of the buffer in the medium term. “If the number of pensioners in the fund increases, its size may have to rise to 8% of assets,” he said.
While Pensioenfonds Vervoer expects all members to benefit from the DC switch, the expected pension for young people in the ‘bad weather scenario’, which involves negative equity returns and rising interest rates, is somewhat lower than in the current system. But in a ‘good weather’ scenario with high equity returns, pension benefits can turn out to be up to three or four times higher than under the current DB system. This is because there is no upper limit on pension benefits in a contribution-based system, whereas the current scheme will never provide benefits in excess of the promised accruals of 1.788% of annual salary complemented with full wage indexation.
“The new system is based on a DC arrangement. As a result, investment risks are transferred to members,” added the pension funds’ director Willem Brugman. “On balance, you can say that the results look good,” he adds.
This article was first published on Pensioen Pro, IPE’s Dutch sister publication. It was translated and adapted for IPE by Tjibbe Hoekstra.