The shift towards individual pension accrual is irreversible, according to advisory firm Deloitte, and pension funds and their providers must prepare for this.
In a report assessing what would be needed for an individualised defined contribution (DC) pensions system in the Netherlands, the consultancy said that providers should focus on increasing their distribution power, improving their brands and administration facilities, as well as developing ‘robo-advice’ capabilities.
According to the report, pension funds and providers had the most to lose, as they were lagging behind on the key competences of brand, distribution, customer service and administration.
Authors Jan-Wouter Bloos, Evert van der Steen and Robert-Jan Hamersma argued that schemes’ only advantage relative to insurers and banks was asset management.
They described the current defined benefit (DB) arrangements as a “fairy tale”: “Many players keep on believing in it, but it can’t last forever.”
Employers and trade unions are debating the future structure of the Dutch pension system and are seemingly focused on keeping and adjusting current benefit plans.
The Deloitte report said that limiting the Netherlands’ mandatory second pillar was the most probable route to individualisation. This would mean lowering the income limit for tax-facilitated pensions accrual from the current level of €105,075.
The authors observed a difference in asset management costs for individual pensions accrual, as participants often opted for cheaper passive investments, whereas collective pension funds invested more actively. They also typically allocated more to illiquid assets.
As a consequence, costs for individual pension products were often approximately 0.3%, Deloitte said, whereas costs for collective pensions accrual was between 0.45% and 0.55%.
“The question is what preference individuals would have in a more [individualised] pensions system,” the authors wrote.
The report also suggested enabling savers to take a lump sum before retirement, as well as a right to shop around for the best deal for retiring participants in DB arrangements, similar to the current option for defined contribution plans.
In all cases, billions of euros in contributions or assets would become available to other market players, which would pose opportunities for banks and insurers.
However, this would mean lower pensions accrual, the authors acknowledged, adding that the responsibility for saving a sufficient amount for retirement would shift further towards individual members and away from employers.
Were these suggested measures to become reality, the report said it would create additional pressures on defined benefit plans, while net pension arrangements – for the salary part excluded from tax-friendly accrual – could become more attractive.
The Deloitte report added that customer service would be another challenge for the pensions sector as data would have to be updated daily.
In order to be able to provide participants with tailored guidance, pension funds and providers would have to collect different types of data including details about participants’ mortgages, additional savings and information about their dependants.
According to Deloitte, most pension providers still had complex, home-built administration systems with separate sections for individual pension funds and limited flexibility.
Existing systems would remain expensive, the report said, despite further standardisation having the potential to drive down costs by 30%.
Unit-linked capital administration systems for individual pension accounts were more simple and offered many standard solutions, it said.
Administration was expected to become a “low-margin commodity market”, Deloitte said, with providers becoming increasingly reliant on asset management as an income source.
It noted that, because of their scale, pension providers were better positioned in this space than some smaller insurers.