The Netherlands: Absolute confusion
The story about the overhaul of the Dutch financial assessment framework (FTK) started in early 2010 with the publication of two widely acclaimed reports that revealed shortcomings in the pension system.
Briefly summarised, they said that the pension system is unsustainable in the long term, that things have to change and that the FTK is one of them. One piece of advice was to aim the FTK at the real coverage ratio, rather than the nominal one.
Following the reports the social partners, united in the Labour Foundation, reached an agreement on occupational pensions in the second pillar in June 2010 and formulated guiding principles. Among other things, their Pension Accord suggested an FTK that would accommodate two pension contracts, one focused on nominal security and one on real terms and made a forecast: “Social partners will reach agreement at the national level with the government in January 2011 regarding the necessary adjustment of the FTK and the Pensions Act. Based on that agreement, the legislative process can begin and the decentralised social parties can reach final agreements regarding the new pension contracts. By 2012, the pension contracts must have been adjusted and made shockproof in accordance with the guiding principles.”
This time-line proved optimistic. Almost four years later, the FTK has not changed and the industry is still awaiting a final proposal.
Agreement with the government was reached in June 2011, shifting the start date to January 2013, or else January 2014. In June 2012, minister for social affairs, Henk Kamp, confirmed 2014 as launch date for the new FTK. Late in 2012, Jetta Klijnsma, the new state secretary at the Ministry for Social Affairs, postponed this until 1 January 2015.
“The development of the new legislation is taking more time than was anticipated. The issue is highly complex and is an important topic which I wish to approach cautiously,” she wrote in a letter to Parliament.
Kamp promised to deliver the draft legislation before the 2013 Christmas recess.
Klijnsma delayed the delivery twice, although a consultation document was published just before the 2013 summer break outlining the new FTK in detail.
At the time of writing, it is not clear what remains of the consultation document, although a few things are fixed.
Pension funds, for example, know they have to use a yield curve with UFR to calculate their liabilities under the new FTK and that the cabinet will opt for the UFR method proposed by an advisory committee.
Second, in October 2013, the state secretary announced she no longer wants to accommodate two different contracts, as initially proposed in 2010 by the Labour Foundation. The outlines of the contracts has varied over the years but the core principle remained in place until last autumn: security versus indexation. In her explanation, Klijnsma referred to the comments from the pensions industry on the consultation document.
Another recommendation she has adopted is that pension funds may link their contributions to the 10-year average of interest rates, an option not in the consultation document but included in the prior cabinet plans.
There are still thorny issues to be negotiated. One is how pension funds calculate their premiums under the new FTK. The Dutch Pensions Federation, for example, advocates that funds should decide whether they link their contributions to the 10-year average of interest rates, or link them to expected return, just as they are allowed to under the current FTK. This was not included in the consultation document.
Klijnsma has to resolve disagreement on this before she can present the draft legislation: she is committed to generate broad industry support for the plans. For the time being, she sees no reason to postpone the introduction of the new FTK for a second time if Parliament manages to conclude its assessment of the legislation before the 2014 summer break.
This time schedule is unrealistic. The Pensions Federation, among others, claims it is not, because the industry will need a year to implement changes in legislation. The federation expects the government to address its concern seriously, so another postponement is expected.
In the meantime, pension funds face a dilemma. The DNB regulator is pushing funds to prepare for the new FTK, but starting serious preparations requires clarity on the unsolved issues.
Given the circumstances, it is no surprise that a growing number of people in the industry expect the cabinet to drop the new FTK, or to deliver a stripped-down version that changes the current rules for cutting pension rights placing an emphasis on the last recovery year.