What is happening in the Netherlands; a real shake up in the Dutch pension landscape
In the past few years, the pension environment has changed dramatically.
Not only have many companies made changes to their own pension provision, wider economic, demographic and regulatory change has also altered the landscape for pension provision – so much so that many companies’ pension plans require some level of redesign.
As well as needing to respond to external factors, any organisation making changes to its pension plan needs to consider its company philosophy and stakeholders to ensure the pension plan remains relevant and appropriate..
Trend from Defined Benefit to Defined Contribution in the direct insured pension market, (partly) due to the market developments.
This shift from DB to DC is specifically seen in the 'free market'
The Trade Unions have (traditionally seen) a strong position influencing employment conditions. In case of pension schemes this results in the fast majority of employee's participating in mandatory Industry Wide Pension Funds.
This article provides the general information we believe to be of importance in order to make a thorough decision on these important matters. First, we provide a brief outline of the current pension landscape in the Netherlands and thereafter set out the options available in the market going forward.
Current Dutch Pension Environment Traditionally, the Trade Unions have played an important role in influencing employment conditions. In terms of pension schemes, the impact of this is that the vast majority of employees participate in mandatory Industry Wide Pension Funds (BPFs). Up until 2014, this resulted in the distribution of pension providers in the Dutch market as shown below.
Over recent years, the impact of new funding rules and the introduction of more stringent governance requirements have resulted in a strong increase in the number of Company Pension Funds being terminated. Both accrued benefits and future accrual are transferred to another provider after the termination of the pension fund. Traditionally, the target providers of this transfer have predominantly been insurance companies. Alternatively some funds have chosen to (voluntarily) join multi-employer pension funds (BPFs).
Recently, multinational companies have started to explore the possibility of a European cross- border pension fund – often referred to as an IORP – in more detail. Several companies have already decided to transfer their pension plans (mostly including the past service liabilities) to such an IORP. These pension vehicles are usually situated either in Belgium or in Luxemburg. In our opinion Belgium is to be preferred as Luxemburg does not have the same history with pension funds. However, depending on the plan sponsor’s presence, Luxemburg is also a good location for a cross-border pension fund. As of January 1 2016, a new pension vehicle has been introduced: the APF (‘Algemeen Pensioenfonds’, Dutch General Pension Fund). It will have the characteristics of a multi-employer pension fund, with strict ring-fencing of both assets and liabilities.
The general trend shows clearly that final pay plans are disappearing. Defined contribution plans are slowly but surely starting to dominate the market, while average pay plans still have a considerable market share. In line with the strong demand for cost control, renewed defined benefits plans often have lower accrual rates or CDC type clauses in the plan. In essence, the choices that are made are often between lower guaranteed pensions versus uncertain pensions with an upward potential based on future investment results.
Future execution options
In future, we anticipate that companies seeking a suitable pension plan will have following options:
1. Insured plan
2. Voluntary affiliation with an Industry Wide Pension Fund
3. Transfer to a cross-border pension fund (IORP)
4. Join an APF (General Pension Fund)
There is no ‘one size fits all’ solution. Many factors influence companies looking to build a sustainable pension strategy which fits best with their own Financial Management and Human Resources strategy. It is important for each individual company to consider all aspects with all parties before taking a decision. A feasibility study, including calculations of benefits and costs can create a greater insight for the company as well as its employees, so final decisions can also be made on accurate figures. Here, we have tried to provide you with an overview of the pros and cons of the above options.
1. Insured plan
Insurance companies are increasingly driven by cost effectiveness. Tailor-made solutions are no longer offered by most companies, or only at high costs. They have suffered enormous losses guaranteeing accrued benefits while losing significant amounts on the investments held for profit sharing systems. Continuing some form of profit sharing will probably not be possible. As longevity keeps increasing and market interest continues to be low, the actuarial premiums and the cost of guaranteeing the accrued benefits (which is a legal obligation for DB schemes executed by an insurer) for the current plan may increase to 140-160% of the current level.
2. A change to an Individual Defined Contribution scheme may be considered.
Most insurance companies nowadays have specialized low-cost pension vehicles (PPIs) in the market to provide for such schemes. Such a change would mean a transfer of risks from the insurance company to the participants. But it will come at considerable lower premium levels and with the potential for higher benefit levels resulting from future investment returns.
3. Voluntary affiliation with an Industry Wide Pension Fund
An alternative could be to join an industry-wide pension fund, if the company is not subject to any CLA and therefore does not have to participate in a mandatory industry-wide pension fund.
Nevertheless there is a multi-employer pension fund in the Netherlands that might be willing to execute the pension plan: the pension fund for the graphic industry (PGB). This pension fund has from a commercial point of view extended the sectors it covers and now includes, for instance, the pharmaceutical, chemical and other industries. Participation is not mandatory, but voluntary. In contrast with other industry-wide pension funds the pension plan is not prescribed in advance. Companies can decide on their own plan (as long as it is DB) and the average premium is adjusted accordingly based upon rules of thumb. The assets are pooled together, so companies can benefit from economies of scale. However, in case of deficit, the accrued benefits can be reduced. In that case, the benefits of all companies participating in the fund will be reduced accordingly. A company could decide to prevent this by providing recovery payments. More positively, all accrued benefits profit from indexation. It is worth remembering, though, that if joining this large multi-employer pension fund, each company does lose much of its say on premium levels, indexations or reductions of benefits. In addition to the possibility of joining PGB, it might be possible to join other industry-wide pension funds on a voluntary basis.
3.Transfer to a cross-border pension fund (IORP)
As stated before, multinational companies have recently started to explore the possibility of a European cross-border pension funds – often referred to as an IORP – in more detail. Several companies have already decided to transfer their pension plans (mostly including the past service liabilities) to such an IORP, usually situated in Belgium. Labour and social legislation of the Netherlands will remain applicable if the pension plan is promised to employees of the Dutch legal entity. So the plan has to be aligned with Dutch legislation (tax as well as pensions legislation). In terms of funding rules and governance/compliance regulations, however, the Belgian regulations apply. This means that the changing and strict Dutch funding rules that apply to Dutch pension funds are not applicable.
However, in contrast with statements in the media earlier this year, the Belgian funding framework is not ‘a free lunch’. Companies will have more flexibility in comparison to the Dutch situation. The basics of the Belgium funding framework in are that the company and the pension fund need to convince the Belgian supervisor (FSMA) that the financing agreement is in line with the benefit promise to the employees. The funding framework consists of two funding levels: the short-term provision (STP) and the long-term provision (LTP).
The STP needs to be financed at all times. Primarily, the employer has to provide additional funding in case there is a deficit. For active and deferred participants, the STP is calculated taking into account the legal transfer value for individual transfers in the Netherlands. For retirees, the STP is equal to the LTP. As the legal transfer value in the Netherlands is calculated upon a fixed interest rate during the year, the interest risk in such a pension fund is much less.
International companies could consider starting a cross-border pension fund on their own. An alternative would be to join a multi-employer cross-border pension fund that already exists in Belgium. Aon Hewitt facilitates such a solution, United Pensions.
4. Join an APF
The law that will introduce the APF as a new pension provider in the Netherlands has been approved by the Senate, effective January 1 2016. In essence, the APF will provide for a Dutch version of the IORP, as described in the previous option. Different market parties are now requesting licenses to operate as an APF vehicle and offer their services. The first parties eligible to receive a license as an APF present standard solution ‘rings’ which a company can join. If a company has enough economic scale, some parties say they will allow for a company specific ‘ring’ within the APF. A more bespoke solution would then be possible. Currently, several insurance companies and administrative platforms are positioning themselves in the market. As this is a fast changing landscape, good expert advice is needed.
Now is a good time to review your pension plan and identify the best solution for your company and your employees. Important choices like moving from Defined Benefit to Defined Contribution pensions, or opting for an insured or a fund solution should not be taken lightly as they are in most cases irreversible.
Stakeholder management and duty of care play an important role in the Netherlands, and the fast- changing market complicates the decision making process. A good quantitative and qualitative study is an excellent basis for making the right choice.