Eighty-five per cent of Dutch pension funds have started to prepare for the new pension system, according to Dutch regulator De Nederlandsche Bank (DNB).

The survey of 161 pension funds by DNB and the Dutch Authority for Financial Markets (AFM), found that 70 per cent have started a project to prepare for the transition, while 15 per cent are preparing in a different way because they want to remain in the current system as a closed fund or transfer the pension rights to another pension provider.

The Dutch second-pillar pension system is transitioning from a DB-style system to a DC-like system as per the Pension Accord. Under the current system, members pay contributions into collective assets through their employer and are entitled to benefits from retirement age. The ultimate amount of these benefit payments depends on the development of the pension fund's funding ratio.

Under the new system, the focus is on the contributions rather than the funding ratio. The contributions are added to a member's personal pension assets, and ultimately determine the amount of benefits paid. The advantages of collective investment and risk-sharing among participants remain in the new system.

“The transition to these new pension schemes is a complex, comprehensive and essentially irreversible process. It involves various risks that require adequate management. First of all, the existing collective pension assets must be evenly distributed among the members of the pension fund. To this end, all data on accrued pension rights must be accurate, complete and reproducible,” DNB stated.

“In addition, the new schemes require an agile IT environment and a pension administration that is more closely linked to investments. After all, in the new system, a change in the value of investments will have a direct impact on the size of a member's personal pension assets. This is not the case in a system based on entitlements. The investment policy will also change. Under the current system, the investment policy must be in line with the combined risk appetite of all members. In the new system, a pension fund must align its investment policy to the risk appetite per age cohort.”

According to the draft legislation, it is possible to start the transition from 2023 and it must be completed by 1 January 2027. Under the Future of Pensions Act, current pension entitlements will as a rule be carried over to the new system. There may be reasons to deviate from this standard, however. Pension funds can also decide to transfer the entitlements to another pension provider and dissolve the pension fund, which is referred to as liquidation.

Approximately two-thirds of pension funds expect to carry over their current pension entitlements. A small part of them also expects to liquidate. Roughly half of the pension funds that do not intend to carry over their current pension entitlements are considering liquidation. The other half expect not to be able or willing to carry over their current pension entitlements for various reasons.
For example, in this group there are pension funds that already have a defined contribution scheme, closed funds whose (former) employer no longer exists and funds where the employer is still under an obligation to pay additional contributions.

The survey shows that some 20 per cent of pension funds expect to liquidate. Most of these funds have assets under management of less than €1bn, and many of them have incomplete liquidation plans. More than half of these pension funds do not yet know in which year the transfer will take place.

Of the pension funds that intend to carry over their pension entitlements, some 60 per cent expect to apply the transitional financial assessment framework. This is a legal framework for pension funds that expect to carry over their pension entitlements. Under this transitional framework, pension funds are less likely to have to apply curtailments and are allowed to apply index-linking earlier, in anticipation of the new pension schemes. Should their funding ratio fall below 90 per cent, pension funds will have to take measures, however, including the possibility of applying curtailments. And at the time of carrying over the current pension entitlements, their funding ratio must be sufficiently high to achieve balanced outcomes.

Furthermore, more than half of the pension funds do not yet know in what year they expect to carry over their current pension entitlements. Of those funds that do already know, this timeframe is spread fairly evenly over the years 2024-2026. None of the funds expect to carry over in 2023.

“This is probably due to the fact that the legislation will not become final until 2022 and the exact legal requirements for carrying over pension entitlements are not yet known. If the pension funds that have not yet determined a concrete carry-over year all carry over in the last few years, this will create a peak in that period. This creates a risk of capacity problems for pension fund administrators, actuaries, auditors and supervisors. We are currently assessing whether we have sufficient capacity to adequately perform our task and are asking pension funds to do the same,” DNB stated.

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