With the recent announcement of proposals for a “middle way”, Jetta Klijnsma, state secretary at the Ministry of Social Affairs, seemed to have turned the corner in the ongoing debate over the revised financial assessment framework (FTK). The pensions sector has now shown a broad consensus about the new direction.
Klijnsma’s initial concept proposals – launched last summer for consultation – consisted of an FTK that would accommodate two different contracts between pension funds and participants. She proposed an arrangement under real terms that would be target-driven and focus on soft pension rights subject to market performance, while indexation would be unconditional.
Pension funds would be given the option to continue, albeit under stricter rules, with their current nominal pension plans, including increased financial buffers. Indexation would remain conditional.
Under the new FTK, a fund’s coverage ratio will remain the most important criterion of measurement. The level of funding will depend on the average of the forward curve of the previous year, with the application of the ultimate forward rate (UFR), to prevent volatility.
However, the state secretary’s concept consisted of a web of rules for each option, such as the period allowed for smoothing out rights cuts, as well as for investment policy, indexation and contributions. Before the consultation ended, it was clear almost the entire pensions sector took a dim view of the plans, which were deemed too complicated.
The Pensions Federation lamented, for example, the different rules for the way schemes should set their premiums, and advocated a single FTK that covered all plans and targets. Rather than the Cabinet setting targets for inflation compensation, boards should decide on the balance between investment policy, contribution level and indexation, it argued.
This call for a hybrid contract that would match current practice was widely shared by pension experts, employers and actuaries. The communication supervisor AFM said it preferred a single contract, for reasons of simplicity and implementation. The pensions regulator, DNB, was the odd one out, supporting the consultation document.
The state secretary has now indicated she will focus on the smoothing method for financial shocks, as well as clarity on the rules for rights cuts. She also said she would look at the possibility of linking contributions to the 10-year average of interest rates, to achieve stable and costs-covering premiums.
Under her initial concept, contributions, according to civil service scheme ABP and Mercer, were likely to rise by 14%, despite the Cabinet’s plan to reduce the tax-facilitated yearly pension accrual from 2.25% to 1.75%.
Klijnsma’s change of heart should help speed up pensions reform. Having already postponed the new FTK by one year to 1 January 2015, she can’t afford further slippage.
For the pension funds, a single contract is a relief. Many dreaded the legal complexity of merging nominal pension rights into a real terms contract. Klijnsma has suggested such a process would no longer be necessary.
Her remark also gave pension funds a sense of direction for their transition and implementation plans. Recently, the DNB noticed many schemes were lagging and told them to hurry up.
Pension funds looking forward to a quieter period after the current reforms have been implemented might be disappointed. Recently, Olaf Sleijpen, supervisory director for pension funds, said that, “even if you are good, you need to continuously improve yourself”. Elsewhere, Jan Koeman, head of pensions policy at the ministry, was even more emphatic. “Pensions reform is going to be a permanent project,” he said.