Building up extra pension
The big Dutch pension schemes have come under increasing member and political pressure to offer more individually tailored pension plans offering greater choice and flexibility than the uniform approach demanded by the defined benefit structures.
One response was to set up an insurance subsidiary to be able to provide individual pension policies and other personal insurances to their membership, as they were not permitted to provide individual arrangements as pension funds. But this move ran smack into heavy resistance from the Dutch insurance companies on the grounds of non-level playing fields, saying that the pension sponsored insurers have an unfair advantage.
The upshot was a law in 2001, which stopped pension funds pretty well in their tracks, as they were no longer able to operate an insurance company with the same name as the fund, and more importantly were not able to use their pension membership databases to offer products. In anticipation of this change, PGGM rebranded its insurance subsidiary as Careon.
But as Kees Verhagen at the E47bn PGGM fund for health workers based in Zeist, points out there was a silver lining within the very legislation that brought in the insurance restrictions. “One of the elements of the law made it possible for us to offer individual defined contribution plans direct to our members, within the framework of the main DB scheme.”
But these plans do still have to meet certain “solidarity requirements”, he points out, which shows that they are still very much within the mould of a collectively arranged pension fund. But they can be set up as DC arrangement, allowing the individual to build up extra pension entitlement on a regular premium level set by the member, then at retirement age this is converted into additional pension, payable from the fund along with the member’s main pension. So members can augment their pension rights through these products, aptly called PGGM Extra Pension – PEP for short.
The PEP plan comes in two versions, the first ties into the early-retirement arrangements, which allows members to retire between 55 and 65. The second is pitched at maximising pension at the normal pension age of 65, when the amount accumulated in the member’s PEP account is used to buy an extra pension.
As Verhagen says: “In effect, it means that the member will be treated as if they have been a member of the main PGGM scheme for longer than they have been.”
The pension that they become entitled to will be indexed in the same way to wage inflation as the main pension. “This is something unique and not available elsewhere with DC plans,” he claims.
The member has a choice as to how the contributions will be invested, it is a simple one. “They can be invested in line with the mix of assets within the PGGM fund,” he points out. This would mean 53% in public and private equity, 30% in bonds, 13% real estate and 4% commodities. Though the fund has had its difficulties in recent years, the long term annual return over 20 years exceeds 9%.
The other choice is a conservative lower risk approach consisting of money-market instruments and short-term fixed interest securities. The anticipated returns on this PGGM Money Market Mix here will obviously be pretty low. In the last five years the return on this mix of assets has 3.79%, PGGM calculates.
So far the indications are that over 99% of those signing up for PEP opt for the higher risk option. Switching between the two approaches is possible at any time at a cost of 0.5% of the value.
Another constraint that applies, is that the overall level of emerging pension at retirement age cannot exceed 70% of the member’s final salary, when state benefits are included.
The plan can included linked life insurance and on moving to a job outside the healthcare sector, the member’s PEP rights can be transferred to a new employer’s scheme along the main scheme rights.
Verhagen says the fund was discussed with the 1,000 plus employers that are part of the PGGM plan, before being rolled out the 1m-strong membership, a process starting in May of last year. “We sent a statement showing their personal situation and how they could fill the ‘pension gap’ they faced. The monthly amount needed to close the gap is shown.”
By September some 4,000 members had opted and this has increased to 10,0000, he says. “We are very pleased with this level of response.”
In planning the product, PGGM made use of the services of Fund Partners, a new specialist consultancy, which the pension fund has backed by taking a minority stake in it. It is focused on developing investment products and is aiming its services at the pension fund sector, among others. “They were very helpful is designing a DC product that met the aspirations of our members,” says Verhagen.
PEP was the subject of PGGM’s European award winning submission in the IPE Awards last year.