The Netherlands - Entire pensions system under scrutiny
Following a nation-wide debate, the Dutch have set out to create a new pension system that will be sustainable and fair to all generations
Regulation in summary
• The Cabinet is investigating an alternative to the ‘unfair’ average contribution regime.
• A new financial assessment framework (FTK) is intended to increase financial stability in the pensions system.
• The DNB has reduced the ultimate forward rate for liabilities to a “more sustainable and fair” level.
• Variable benefits in defined contribution arrangements have been introduced to avoid low lifelong annuities.
• The new general pension fund APF is to accommodate different pension plans with ring-fenced assets.
• Legislation on pensions communication aims to raise pension awareness.
The Dutch Cabinet is hammering out concrete proposals for a new and sustainable pensions system, following a nation-wide debate. It recently indicated that it wanted to: abolish the disputed average contribution; replace the classic defined benefit arrangements with individual pensions accrual combined with collective risk-sharing and introduce mandatory accrual for self-employed workers.
• Average contribution: The Cabinet intends to replace the average pensions contribution, or doorsneepremie, with an alternative that must be fair to all generations. The purpose is to keep the support of younger workers for a collective pensions system. Under the average premium – a fixed percentage of salary – younger workers pay proportionally more, as their contribution is to generate a bigger return over time.
The Cabinet is specifically investigating a degressive pensions accrual, under which younger employees accrue proportionally more pension rights than older workers. However, transition costs are likely to be high and are estimated at between €25bn and €100bn.
• Financial assessment framework: A new financial assessment framework, or nieuw Financieel Toetsingskader (nFTK), is being implemented. Its main aim is to increase financial stability in the pensions system.
The nFTK focuses on market valuation of investments and liabilities. An ultimate forward rate (UFR) has been factored into schemes’ market funding. However, a separate ‘policy coverage ratio’ – drawn from the average funding during the previous 12 months – is now the criterion for rights cuts and indexation.
Under the new rules, rights discounts can be smoothed over a 10-year period, but indexation rules have been tightened. Granting indexation can only start at a funding level of at least 110%. Required financial buffers have been raised, and must now equate to a coverage of 127%.
Contributions must be based on either interest rates or expected returns, and must also cover for future indexation. Parameters have been set for assumptions for future results as well as for the inflation rate.
The stricter rules of the nFTK have caused pension funds’ coverage to drop. The €356bn civil service scheme ABP has argued that the nFTK will make full indexation impossible for the next 15 years. It predicts that members will miss out on 3% of pension rights during this period.
• Ultimate forward rate: Recently, the supervisor De Nederlandsche Bank (DNB) reduced the ultimate forward rate (UFR), part of the discount rate for liabilities, from 4.2% to 3.3%. The new UFR – drawn from the 10-year average of the 20-year forward rate – is “more realistic, sustainable, balanced and fair towards all generations of participants”, the DNB argued.
The immediate effect would be a funding drop of 3% on average, according to the regulator. However, the Pensions Federation has warned of a 15% fall, on average, by 2020, “because the UFR will drop as lower interest rates are factored in into the average over time”. The federation forecast that defined benefit arrangements would no longer be sustainable if interest rates remained at current low levels.
• Variable benefits DC plans: The Dutch ministry of social affairs (SZW) is consulting the pensions sector about legislation for variable benefits in defined contribution arrangements (variable uitkeringen in een premieovereenkomst).
The aim is to increase the likelihood of a higher pension. Currently, pension capital accrued in a premieovereenkomst must be fully converted into fixed annuities at retirement date. Due to the low interest rates, this leads to low lifelong benefits.
One of the variants that SZW is assessing allows participants to continue investing part of their pensions capital after retirement, while following an individual investment strategy. Another option allows for investing in part after retirement, by joining a pensions collective which shares investment as well as longevity risk.
• General pension fund – APF: The APF (Algemeen Pensioenfonds) has already been approved by the lower house. The APF is a new pensions vehicle, meant as a low-cost alternative for pensions funds that consider liquidation, but also want to keep their identity.
The APF allows for different pension plans to operate under a single board. The individual schemes’ assets will be ring-fenced. The concept has been drawn up as a response to the consolidation in the pensions sector, with the number of pension funds dropping from more than 1,100 in 1992 to less than 350.
As setting up an APF is not limited to pension funds, pensions providers and insurers have also shown a keen interest in establishing the new vehicle. For the time being, mandatory industry-wide schemes are not yet allowed to be part of an APF.
The APF is an elaborated version of the multi-company scheme (multi-opf) with ring-fenced assets, which was only adopted by a handful of pension funds. The APF does not facilitate cross-border arrangements.
• Pensions Communication Act: Dutch pension funds are implementing new legislation on pensions communication, or Wet Pensioencommunicatie, meant to raise participants’ knowledge about pensions through a four-pronged approach.
The current uniform pensions statement, or uniform pensioenoverzicht (UPO), which provides information about participants’ individual pensions accrual at a single pension fund, is to be improved.
The current online pensions register (Pensioenregister) – showing a participant’s combined accrual at all pension funds – is to be extended with information about the achievable income from the state pension (AOW) and second-pillar plans. It is also to provide clues for additional pension saving, as well as information about the impact of important life events.
A new instrument, Pensioen 1-2-3, is to replace the start letter for new employees. It explains the key features of a company’s pension plan in a layered way, with layer 1 containing the basic information. Pensioen 1-2-3 must be part of the pensions providers’ website.
• National Mortgages Institute: The Dutch pensions sector has launched the National Mortgages Institute, or Nationale Hypotheekinstelling (NHI). It is to issue government-backed mortgage bonds, with the dual purpose of relieving banks’ balance sheets as well as creating a substitute for AAA government bonds and credit for institutional investors.
However, the European Commission has been assessing whether the approach works out as illegal state support for over two years. Enthusiasm among investors for the NHI has dropped, as alternative ways of financing have become cheaper and pension funds have increased their focus on direct investments in mortgages.