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Several pension experts contend Shell’s individual DC plan could provide a good model for the wider Dutch market

Key points

  • Social partner talks on the future of Dutch pensions collapsed late last year
  • Shell’s Dutch DC plan offers a model that could bypass the need for system reform
  • It involves individual accounts for accrual and a collective investment pool for the retirement phase

An innovative pension plan offered by Shell Netherlands could be a blueprint for a new and sustainable pensions contract and the backbone of a new Dutch pensions system. This is the view of a small number of influential figures in the Dutch retirement sector.

The contention is that Shell’s model – which uses individual accounts in the accrual phase and a separate collective investment pool in the retirement phase – could enable pension funds themselves to bring about further pensions reform, notwithstanding the collapsed negotiations between the social partners and the government.

Supporters of this view highlight that Shell’s individual DC pension plan (SNPS) – introduced for new employees in 2013 – meets all the criteria set by Jetta Klijnsma, former state secretary for pensions, when she launched the nationwide dialogue for pensions reform in 2015. Any new system should be less complex than the current one. It could also offer the possibility of tailor-made pensions. 

Klijnsma also stressed that estimates of future returns on investment should not affect the ultimate pension level, and that pension cuts should be limited. Klijnsma also indicated that individual ownership should already be clear in the accrual phase and that risks must continue to be shared.

Marc Heemskerk, an actuary at Mercer in Amsterdam, highlights that legislation from 2016 – the Improved Defined Contribution Plan Act (WVP) – allows the possibility of variable benefits. This, he says, offers sufficient leeway for a new and sustainable pension plan as described by the government. 

Heemskerk says that Shell designed its new plan with the collective improved DC module (collective variable pension, or CVP) in line with these principles, and based its arrangements on the WVP. The firm introduced the CVP model in its pension plan in April last year.

How the Shell plan works

The Shell plan offers participants the ability to accrue pension rights through an aggressive, a neutral, and a defensive life cycle, for which four investment portfolios are available. During the accrual phase, participants are collectively covered against mortality risk and disability risk.

The accrued individual pension capital can be gradually transferred – over a 10-year period between the age of 58 and 68 – to a benefits pool for variable pension payments. The investments are exposed to investment risk through a 35% equity allocation and a 65% stake in fixed income. 

After retiring, participants can continue investing their accrued capital, while also sharing investment risk and both micro- and macro-level longevity risk. To avoid volatility, the impact of these risks is spread out over a five-year period

At about the age of 58, participants are given the preliminary default option of variable benefits at retirement or, alternatively, the possibility of purchasing a fixed annuity from an external provider, probably an insurer. On the actual retirement date, the participant will make the final choice between staying in the CVP module with its variable benefits, or purchasing fixed annuities elsewhere.

Shell said last year that almost all participants in its individual DC (IDC) plan had opted for variable benefits from its collective benefits pool. No more than 10% preferred nominal fixed annuities from an insurer.

Shell has been one of the advocates for continued investment in DC plans. “With the CVP option, our individual DC scheme combines the benefits of individual choices and risks, whilst generating considerable benefits from the collective approach,” says Kenan Yildirim, director of Shell’s Pensions. “Our IDC scheme with CVP is likely to yield better pension results than pure IDC schemes. In our opinion, it offers a credible alternative to most defined benefit pension arrangements.”

Heemskerk says Shell would retain benefits of scale and solidarity in risk sharing, doing away with the contentious need for financial buffers and discount rates for liabilities.

Scale and solidarity

Keith Ambachtsheer, director emeritus of the International Centre for Pensions Management in Toronto, favours a return-generating pool and a separate pool for pensions, on the grounds that such a model would be more adequate and less complex.

jacqueline lommen

Theo Kocken, founder of Cardano and professor of risk management at Amsterdam’s Free University, also supports the set-up. He says accrual in the return pool could take place “with less complexity and less discount-rate discussions, with less distrust among participants as a result”. He adds that options for tailor-made investments would also increase, and notes that pension funds could operate both pools under the current rules for mandatory participation.

Jacqueline Lommen, senior DC strategist for northern Europe at State Street Global Advisors, confirms that the WVP meets all criteria for a new and sustainable pensions contract set by Klijnsma and adopted by Shell. 

She says: “The very costly guaranteed benefits of DB will disappear, and biometric as well as financial risks will continue to be shared collectively. The WVP also offers the option of a personalised pension.”

Merging existing and new rights

However, agreement about pensions reform with a broad level of support is still required, according to Lommen. One issue of crucial importance is the merger of existing pension rights accrued under DB arrangements into a new sustainable pension plan – so-called ‘invaren’, or ‘piloting’ in Dutch. “Compensating pension fund participants for financial disadvantage as a result of changes poses the biggest challenge,” Lommen says.

Lommen notes that a transition from DB to DC would predominantly come at the expense of younger members, whereas the government’s decision to switch from average to degressive pensions accrual would financially disadvantage older workers. 

“Several organisations, including the Social and Economic Council have been working on compensation calculations for years. In addition, a decision has to be taken about who is to pay for the changes. Is it workers, employers or the tax payer, or a combination of these players?”

kenan yildirim

Lommen says merging old and new pension rights within a single pension system is crucial to ensure long-term integrity and trust. “Closing current DB plans and starting new pensions accrual under new arrangements would postpone the problems of affordability. The UK has shown that workers want to leave their pension fund because they no longer understand the arrangements and will lose trust in the system as a result,” she adds.

Yildirim says Shell held back from merging pensions rights accrued in the old DB scheme, closed in 2013, with pensions accrued in the new IDC plan. “This was not an issue, as the average salary-based DB plan was a good one. It was not logical to expect that its participants, who have continued to accrue pension rights in the closed plan, would voluntarily switch from the security of the DB plan to less certain pension arrangements in the IDC scheme.”

Shell also gave participants in the closed DB plan the option to voluntarily make additional pensions payments under tax-deductible arrangements in its IDC scheme. 

Yildirim said that a large majority have used this opportunity, which is also available to participants in the tax-deductible IDC plan. The new option is a way of additional pensions saving relative to the tax-facilitated pensions accrual.

WVP: Legislation to improve DC plans

The Dutch legislation for an improved defined contribution plan (Wet Verbeterde Premieregeling, or WVP) came into force in September 2016. It changed the legal framework for all premium and capital arrangements. A key part of the new legislation is that accrued pension capital does not have to be converted into fixed annuities at retirement date, but it could also in part remain invested in risk-baring assets to enable variable benefits.

The WVP applies to all providers of premium-based or capital accrual arrangements. Ahead of participants’ retirement date, providers must offer the options of fixed and variable benefits. They must also adjust the investment mix based on the benefit the member chooses. Participants are entitled to shop around with insurers if their pension fund only offers fixed or variable benefits.

 

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