first_imgEarlier this month, Social Affairs minister Wouter Koolmees had already confirmed pensions would no longer be guaranteed under the new contract, but they would rise and fall in line with markets, shifting risk to participants.The switch to DC includes the introduction of personal pension pots for all participants to facilitate a projection of members’ “expected pension”, the document said. However, all investments will continue to be managed collectively.In principle, all 200+ pension funds are required to have moved both existing DB pensions and new pension contributions to the new DC structure by 2026. All pension funds will need to finalise their transition plans by 1 January 2024.ExceptionsAccording to research commissioned by the government, converting existing pensions from DB to DC is “in principle” legally possible. This option was chosen because all stakeholders, including pension funds, prefer to keep existing pensions and new accruals together in the same structure.Exceptions can be made for pension funds if a mandatory switch to DC “would lead to a disproportionate disadvantage for a part of the stakeholders” – according to the published outline –  but only if the government, trade unions and employers agree.This also refers to the introduction of equal pension contributions for all scheme members.It is not yet clear which funds will eventually be granted exemptions, but a source close to the negotiations said this would likely be the case for closed funds without new accruals.Uncertainty also remains on the implementation of flat premiums. Currently, employers’ pension contributions increase as workers grow older to compensate for the shorter investment horizon of their new contributions.In the new system, pension contributions will be the same for all scheme members. In practice, this means middle-aged workers who subsidised older workers when they were young will not profit from the same subsidy.It was agreed these workers will be compensated “adequately” by pension funds, but it is not clear how this will exactly happen. For this reason, the small trade union VCP has declined to endorse the new pensions deal.Projected returnIn the new contract, a so-called ‘projected return’ will replace the current discount rate for liabilities which has significantly declined in the past years due to continuously falling interest rates.As a result most of the largest pension funds, such as ABP for civil servants and PFZW for healthcare personnel, have coverage ratios far below 100%.The new concept of projected returns has several goals:to show scheme members their expected pension at retirement in a good, average and bad scenario;to determine the level of the pension after retirement; andto determine the necessary monthly pension contributions for members to achieve a pension of roughly 75% of the average salary after 40 years of service.The new contract involves a maximum tax-facilitated contribution of 33% of pensionable salary.Pension funds will in principle will be allowed to determine their own ‘projected return’, and adjust it periodically depending on the investment results achieved, within certain boundaries to be set by pensions regulator De Nederlandsche Bank (DNB).LifecyclesCurrently, pension cuts and indexation are applied equally across scheme members irrespective of their age. In practice, this leads to older scheme members being more exposed to movements on financial markets than their younger counterparts.As a consequence, many pension funds opt for a conservative investment strategy, including a large proportion of investments in fixed income. This, however, is not necessarily in the interest of younger scheme members, who would be better served with a higher proportion of investments in higher-risk assets. All Dutch pension funds will have to make the switch to a new defined contribution (DC) contract which includes a lifecycle system and personal pension pots, following a new pensions agreement between the Dutch cabinet and social partners earlier this month.The change is “in principle” mandatory for both existing defined benefit (DB) pensions and new accruals, with some exceptions allowed.New details on the new pensions contract for The Netherlands emerged this week, after the ministry of Social Affairs published an outline of the new pensions system.Agreement by the country’s largest trade union FNV is expected on 4 July, after which parliament will debate the proposal and will design a new pensions law which is to come into effect by 1 January 2022. Erik Beckers, First PensionsThe maximum risk pension funds will be allowed to take will be determined by their age make-up.Solidarity bufferThe final element of the new pensions contract is the so-called solidarity buffer. It is introduced as a means to share risk between generations.The maximum allowed size of the solidarity buffer will be 15% of a pension fund’s assets. It will be filled using excess returns and a maximum of 10% of annual contributions.Pension funds will be required to adopt “clear rules” how to fill the solidarity buffer and how to use it during the transition phase to the new contract. Ad hoc changes to this won’t be allowed.To read the digital edition of IPE’s latest magazine click here.center_img Bas Werker, NetsparThe new pensions contract proposes a solution to this dilemma by introducing a lifecycle element.“Pensions will not become more or less dependent on movements on financial markets, but risks and returns will be attributed according to age,” said Bas Werker, a member of pensions thinktank Netspar and a finance professor at Tilburg University.“In practice this means that a higher proportion of [negative and positive] returns will be attributed to younger scheme members than to pensioners, so the effects on the final expected pension of all scheme members are equal.”This change could lead to some pension funds, that now have more conservative investment strategies, to reduce their interest rate hedging and increase exposure to risk assets somewhat, said Erik Beckers, a pension fund consultant at First Pensions.“I can imagine some funds that have hedged 100% of their interest rate risk will shorten the duration of their portfolio because the new system means they can chase returns for younger members while still fully protecting risk for pensioners,” he added.last_img