The long and winding tale of Dutch pension reform entered a new chapter in July, when the council of ministers signed off on a consultation document outlining changes to Dutch pension legislation, in particular the financial assessment framework (FTK).
The document proposes a new FTK designed to accommodate both real and nominal pension schemes. Real schemes are to provide unconditional inflation compensation matching, at minimum, price inflation; nominal contracts have no such obligation but must guarantee nominal pension rights with 97.5% certainty at more stringent buffer requirements than before.
To limit volatility, under the new regime funding rates will be calculated based on a 12-month average, while liabilities continue to be discounted against the “stable and realistic” ultimate forward rate (UFR). As a new element in the proposal, nominal schemes will be allowed to absorb financial shocks gradually over the course of up to 10 years, the same as real pension schemes.
Critics, ranging from pension behemoth ABP to the Pension Federation and beyond, complain that the proposed legislation forces pension funds to choose between two evils.
The proposed real contract lacks definition in the proposals and the requirement to strictly match or exceed price inflation limits pension schemes’ room to manoeuvre. The nominal contract, meanwhile, is subject to such strict buffer requirements that any hope of providing inflation compensation is squashed from the start.
And of course, the new pension system is so complex that it’s almost impossible to explain.
Meanwhile, Dutch pension funds have had a rough quarter. Quite a few schemes once again faced the spectre of additional benefit cuts.
Maybe schemes will manage to meet their minimum funding rate by the end of the year and maybe they won’t: the continued uncertainty makes it all the more important that the political impasse on pension reforms is finally resolved.
State secretary of pensions Jetta Klijnsma has solemnly promised a draft bill will be submitted to parliament before Christmas. In the meantime, the industry has until 6 September to provide feedback on the consultation document.
There is no shortage of inspired ideas and possible solutions, as evidenced by the lively debate and brainstorming sessions at IPNederland’s June pensions conference. Well over 80% of conference delegates indicated they’d prefer a ‘combi-contract’ combining features of the two extremes now on the table. Come September we will see whether or not the Dutch pensions sector will be able to forge a compromise.
Whether such a compromise or, indeed, any final draft of the new Pension Act will result in a pension system that can be explained in terms mere mortals can understand.