Netherlands: Transition path to a new system
The latest agreements between stakeholders and a relaxation of rules bring pension reform closer
- The Cabinet and the Dutch National Bank have approved a new method of calculating the ultimate forward rate
- Pension funds with assets of more than €10bn are to be earmarked as organisations of public importance
- Parliament is still to debate an initiative bill aimed at increasing members’ say in their pension fund’s responsible investment policy
As part of the Dutch pensions agreement, the cabinet has temporarily eased the rules for cuts of pension rights at underfunded pension schemes. It has reduced the minimum required coverage ratio from 104.3% to 100%. This means that during the transition to a new pensions system, only pension funds with a coverage of less than 100% for the past five consecutive years will have to apply unconditional cuts in order to improve their funding level to 100%.
Both the cabinet and the pensions supervisor De Nederlandsche Bank (DNB) have endorsed a proposal for a new method for calculating the ultimate forward rate (UFR) as part of the discount rate for liabilities. The UFR is being applied to resemble long-duration risk-free interest rates as closely as possible.
A committee chaired by Jeroen Dijsselbloem, the former Dutch finance minister and former chair of the Eurogroup of finance ministers, had recommended an extension of the UFR’s first smoothing point from 20 to 30 years. It also favoured the establishment of the UFR level as the 10-years progressive average of the 30-year forward rate. The current UFR is based on the 10-years average of the 20-year forward rate.
As a consequence, the UFR discount rate is to drop from 2.3% to 2.1%. The parameter changes also reduce pension funds’ ‘spread’ of liabilities relative to market rates from 2.7% to 0.3%. According to Wouter Koolmees, the minister for social affairs, the new UFR would cause pension funds’ coverage ratio to fall by 2.5 percentage points on average.
The DNB pointed out that the new method would bring pension funds’ financial position “in line with economic reality”. The new UFR will be introduced in January 2021.
The Dijsselbloem committee had also recommended a reduction of the permissible assumption for return on listed equity by 1.2 percentage points to 5.8%, including costs of 0.2%. It decreased the parameter for other securities, including private equity, to 7.5%, including 1.9% costs.
Agreements take reform to next stages
Dutch employers, trade unions and the cabinet agreed on key elements of a pension system reform the June.
They decided on a reduction in the rate of increase of the retirement age for the state pension (AOW) and on early retirement options for workers in physically demanding jobs.
The social partners also agreed on establishing a dedicated steering group to flesh out a new pensions contract. It will also prepare a smooth transition from the current average pensions accrual to an age-related and actuarially fairer degressive one.
Parliament had already approved proposals to slow the gradual rise of the AOW age by three years, to reach 67 in 2024. The current retirement age of 66 years and four months for the state pension is to be fixed for two years. In addition, the cabinet’s initial decision to raise the retirement by one year for every year of additional longevity beyond 2024, has been changed to eight months for every year of extra life expectancy.
The tax burden for employers allowing workers in physically demanding jobs to take early retirement is to be eased temporarily. However, the social partners must elaborate the definition of physically demanding jobs.
The steering group is to develop two options for a new pensions contract. One option is to focus on individual pensions accrual combined with a collective benefits phase. The other aims for a collective defined contribution accrual method without financial buffers or nominal guarantees.
As part of the pensions agreement, workers will be allowed to take out a lump sum of up to 10% at retirement.
The new advisory body must also ensure a smooth transition from average to degressive pensions accrual, and come up with advice on how older workers, who would be most affected by the move, will be compensated.
As the government will not contribute to the transition costs, the redistribution issue must be solved by individual pension funds. Costs have been estimated to range from €25bn to €100bn, depending on the compensation.
The steering group is scheduled to meet from September. Details of the pensions accord must be completed by the end of 2020 and the legal framework must be in place in 2022.
For non-listed equity and commodities, the committee proposed to limit return assumptions to 4.8% and 3.5%, respectively. It further advised to factoring in a 1.9% inflation drawn on the consumer index as well as a salary inflation of 2.3%.
Pension funds must take the parameters into account for establishing costs-covering contributions if they are spread out over several years.
The committee said it expected that the new parameters would lead to a rise of pension contributions of at least 3%. The parameters – updated every five years – come into force in January 2020.
“The cabinet has temporarily eased the rules for cuts of pension rights at underfunded schemes”
Parliament has approved an implementation order (Algemene Maatregel van Bestuur, or AMvB) to earmark pension funds with assets of more than €10bn as organisations of public importance (Organisaties van Openbaar Belang, or OOB). The measure is meant to reinforce the schemes’ audit regime.
However, as the implementation of the IORP II directive already prescribed an improvement of pension funds’ audit function, schemes have been exempt from establishing a fully independent audit committee under the OOB rules. The measure is to come into force in January 2020.
A Dutch Stewardship Code for pension funds, insurers and asset managers was introduced in January. The code, developed by the Dutch Pensions Federation and corporate governance platform Eumedion, highlights the increasing importance of engaged and responsible share ownership, as well as institutional investors’ role in promoting long-term value creation at Dutch listed companies. It offers the players the opportunity to show their beneficiaries and clients how they have used their shareholder rights.
Parliament is still to debate an initiative bill – tabled by coalition partner D66 last year – aimed at increasing participants’ say in their pension fund’s responsible investment policy.
The initiative legislation is to provide a right of advice for responsible investment as well as a right of approval for exclusion from investment.
This would mean that pension funds can only exclude companies with the approval of their accountability body (VO).
Dutch pension assets
|Pension fund/entity||Assets (€’000s)|
|2||Pensioenfonds Zorg en Welzijn (PFZW)||225,200,000|
|3||Pensioenfonds Metaal en Techniek (PMT)||78,369,054|
|4||BPF Bouwnijverheid (bpfBOUW)||61,801,809|
|5||Pensioenfonds van de Metalektro (PME)||50,307,528|
|6||ABN AMRO Bank||28,882,997|
|9||Beroepsvervoer over de Weg||28,004,276|
|10||Stichting Pensioenfonds PGB||27,783,375|
|13||KLM Royal Dutch Airlines||21,581,634|
|17||SPW (Stichting Pensioenfonds voor de Woningcorporaties)||13,743,149|
|18||Akzo Nobel NV||13,654,000|
|23||Pensioenfonds Werk en (re)Integratie (PWRI)||9,070,549|
|24||Stichting Pensioenfonds Hoogovens||8,927,399|
|28||Schilders-, Afwerkings- en Glaszetbedrijf||7,414,807|
|33||Schoonmaak- en Glazenwassersbedrijf||5,434,903|
|45||SNS Reaal Groep||3,662,893|
|46||Mode-, Interieur-, Tapijt- en Textielindustrie||3,490,429|
|49||Meubelindustrie en Meubileringsbedrijven||3,375,781|
|52||Vlees- en Vleeswarenindustrie en de Gemaksvoedingindustrie||2,947,363|
|57||Samenwerking / Slagersbedrijf||2,474,780|
|62||Tandartsen en Tandarts-Specialisten||1,922,736|
|64||ING Bank CDC Fonds||1,781,404|
|72||Agrarische en Voedselvoorzieningshandel||1,523,673|
|85||Wolters Kluwer Nederland||1,133,437|
|97||Rijn- en Binnenvaart||970,774|
|101||Vlakglas, Verf, het Glasbewerkings- en het Glazeniersbedrijf||888,476|
|103||Kring RBS (Achmea)||836,821|
|107||Aon Groep Nederland||787,878|
|108||Banden- en Wielenbranche||734,843|
|110||Smurfit Kappa Nederland||706,818|
|114||Stichting Pensioenfonds Capgemini Nederland||663,452|
|115||Kring SVG (Stap)||655,762|
|117||British American Tobacco||641,302|
|118||Pensioenkring 2 (Stap)||626,196|
|121||Pensioenhoutindustrie en Jachtbouw||600,000|
|122||NN CDC fonds||589,054|
|132||SCA Hygiene (Essity)||412,732|
|133||Stichting Pensioenfonds VNU||180,000|