The Netherlands: On the way to a new system
The Dutch cabinet is weighing up proposals for a new sustainable pension system that retains the support of younger workers and is fair to all generations
Regulation in summary
• The Cabinet is working on alternatives for a new and sustainable pensions system.
• Insurers are taking the initiative in setting up general pension funds to accommodate different pension plans with ring-fenced assets.
• New legislation allows for variable annuities in DC arrangements.
• The uniform pension statement has been modernised.
• The government has scrapped plans for a National Mortgages Institution.
Younger generations may no longer face the prospect of paying more than their older counterparts under new proposals being hammered out by the Dutch government. As the dust settles on the nationwide debate on pensions, the government has stated its preference for traditional defined benefit arrangements, together with individual pensions accrual and collective risk sharing. The aim of the proposals is to create a new and truly sustainable pensions system, in which ‘average’ contributions cease.
In July, Jetta Klijnsma, state secretary for social affairs, outlined the government’s views on the future system, assessing a number of possible alternatives. She confirmed that the Cabinet would further explore an option involving individual pensions accrual and risk sharing. This alternative – assessed by the Social and Economic Council (SER) earlier this year – enjoys the broadest support across the pensions sector, including the regulators DNB and AFM and the Dutch Pensions Federation.
Klijnsma also said pension funds would be allowed to keep existing pension arrangements in place. She made clear, however, that the transition from an average contribution (doorsneepremie) to a ‘degressive’ approach, under which younger employees accrue proportionally more pension rights than older workers, would be mandatory.
To maintain younger workers’ support for collective pensions, the government is keen to design a system that is fair to all generations. Under the current average premium – based on a fixed percentage of salary – younger workers, proportionally, pay more than older ones because the contributions of the former, over time, are expected to generate higher returns than those of the latter.
The cost of shifting to degressive pensions accrual, however, is high, ranging anywhere from €25bn to as much as €100bn, according to various industry estimates. The government is now looking at how existing pension rights might be merged into new arrangements, and the Pensions Federation, the Actuarial Society and the think-tank Netspar have been helping it to find a solution before national elections in March 2017. One alternative to an expensive transition would be to launch a new system while the existing one keeps on running in parallel for decades.
Another issue that needs resolving in a new pensions system is the collective financial buffer. Such reserves are favoured by unions and pension funds but opposed by economists, who have warned they will raise ownership problems. And even expert opinions are divided on exactly which risks should be shared. The same goes for increased choice for participants for tailor-made pension arrangements.
The feasibility of a new system of individual accrual and collective risk sharing is expected to depend on political decision-making and the support of workers and companies. But the final decision on any new system will be made by the next government.
The so-called ‘general pension fund’, or ‘Algemeen Pensioenfond’ (APF), was introduced on 1 January. The new vehicle is meant to serve as a low-cost alternative for pension funds considering liquidation but wishing to maintain their identity.
The APF allows for different pension plans to operate under a single, independent board, with ring-fenced assets. The concept was a response to consolidation in the sector, with the number of pension funds expected to drop from more than 1,100 in 1992 to fewer than 265.
APFs are not the sole province of pension funds. Indeed, insurers have taken the initiative in setting them up, usually through subsidiary asset managers and administrators. Aegon, ASR, Achmea, Nationale Nederlanden and Delta Lloyd have applied for a licence. Several have indicated that they have based their business case on large volumes of managed assets.
PGGM, the asset manager and administrator for the €172bn healthcare scheme PFZW, is the only pensions provider that has followed the insurers’ example. In June, the regulator granted Aegon the first licence for running an APF. The vehicle – named ‘Stap’ – will be operated by Aegon subsidiary TKP.
Unilever, the consumer staples giant, is the only company that has set up an APF for its own two company pension funds.
At the moment, companies seem reluctant to start an APF of their own or participate in an existing one due to the ongoing uncertainty about a number of issues, including the true level of cost-saving, governance, the ownership of financial buffers and exit strategy. The fear of losing corporate identity also plays a role.
Due to the slow licensing process, Rob Kragten, director of the Unilever schemes, has suggested the legislation might be ill-suited for converting company schemes.
The predominantly large, mandatory, industry-wide schemes are not yet allowed to take advantage of the APF. But if compulsory participation for companies in industry-wide schemes were ever dropped, the APF market would surge. The government is now gauging the level of support for mandatory pensions arrangements.
In June, Parliament adopted legislation that allows for variable benefits in defined contribution arrangements to increase the chances of high pensions.
Until 1 July, pension capital accrued under a defined contribution contract had to be converted into a fixed annuity at retirement date. The reasoning behind the new legislation is that the low interest rates of recent years would lead to very low lifelong benefits at retirement.
This age group can now convert part of their pension capital for a 10-year period, while the remaining part generates returns. They can also receive variable benefits ahead of an agreed age after retirement. The option of fixed annuities, however, remains. Providers do not have to offer both fixed and variable benefits until 1 January 2018.
The Pensions Federation is about to complete an improved uniform pensions statement, or ‘uniform pensioenoverzicht’ (UPO). The update – in the wake of new legislation on pensions communication – is to be more concise. Its data can be compared with and added to the information in UPOs issued by previous employers. The application of the icons already used in the ‘Pensioen 1-2-3’ – a layered explanation of a company’s specific pension arrangements – is meant to improve the clarity of the new UPO.
The new statement, which shows accrued rights for old age, surviving relatives and work-disability pensions, must be provided as of 1 January 2017. The new UPO no longer has to contain the expected pensions level at retirement, as this information is to be shown by the national tracking system, the Pensioenregister.
The Dutch government has scrapped plans for a National Mortgages Institution (NHI) after the parties involved failed to agree on how best to address the European Commission’s decision that the NHI would be tantamount to state aid. The institution was intended to stabilise financing in the local residential mortgages market. It was also meant to streamline access to the market and increase competition via the issuance of government-backed mortgage bonds.
At any rate, over the two years it took the Commission to determine whether the approach constituted illegal state aid, enthusiasm among investors had already begun to wane. During this period, alternative ways of financing became cheaper, while pension funds increased their focus on direct investments in mortgages.