In May last year The Netherlands Future of Pensions Act was approved by lawmakers and came into force on 1st July 2023. The new law heralds a step-change in the Dutch pension industry and a wholesale switch away from a defined benefit-based system.
Subject to a four-year transition period, all pension providers in the Netherlands need to switch from defined benefit (DB) model to a defined contribution (DC) one by 1st January 2027.
But November elections in the country brought in a new coalition government made-up of four parties, three of which campaigned on manifestos containing pledges to make major changes to the act.
According to IPE, Socialist Party MP Bart van Kent kicked off a recent parliamentary debate by saying that pension funds should stop preparing for the DC transition because of the change in the Dutch political landscape.
Tim Burggraaf, Rewards and Benefits Consulting Leader for EY in the Netherlands spoke to Life Risk News the day after the parliamentary debate and he is working to the assumption that the planned changes will go ahead.
“There’s a very significant change in how the current legislature thinks about the retirement plan that was put in place last year, and as a result there is a lot of political debate going on. But let’s assume that the law will remain unchanged, at least for the most significant pieces. What that means is that most of the existing compulsory industry wide DB plans will switch to a DC basis,” he says.
“And even pensioners will have variable annuities after they retire, that are aligned with changes in the economics. If the solvency rate of the fund goes down, then payments are adjusted accordingly. If the solvency ratio goes up payments increase. These changes will be made on an annual basis,” Burggraaf adds.
The resurgent bulk purchase annuity market in the UK and the US has been a by-product of the wholesale shuttering of DB pension plans.
Burggraaf says, however, that the outlook for the Dutch pension risk transfer market is unclear.
“If every fund takes the default approach as set out in the legislation then there will be very little room left for longevity swaps because there won’t be fixed payments anymore in the pension sector. This will only be a feature of the insurance industry.”
A caveat is that while the standard approach won’t leave any room for longevity swaps, and an absence of fixed benefits would also undermine the main demand driver for pension funds to strike buy-in deals with insurers, this route is not the only option.
And funds which don’t opt for the standard approach could in turn later move towards a buy-in.
“Pension funds can decide not to follow the default route in the legislation. There’s all kinds of reasons why that may not be a good idea. And then they could do a buy-out of the whole pension fund to an insurance company,” Burggraaf says.
“There could be a number of funds that opt not to make the switch and EY estimates that currently about one third of pension funds in the Netherlands will not be moving their assets into a new DC plan. These will essentially all be closed plans. For this segment I can imagine that a buy-out may be interesting.”
Burggraaf says that as these funds mature and reduce in size they could also opt for buy-out.
“It is likely that a significant group will retain the DB plan in the fund, set-up a new fund and then slowly unwind the legacy scheme. And for those where there’s not enough assets left in their DB fund it is likely they will go into buyout mode.
“If the legacy fund is significant, some funds will continue to the point where they say, ‘now it’s too small, it’s no longer viable, the cost ratio is not okay and we are spending too much money on a small group of pensioners’. That is probably the moment these schemes will look to a buy-out. Some may be at that point now and others will reach it in a few years.”
The Dutch pension fund sector is huge, containing $1.3trn of assets under management – significantly bigger than the country’s 2022 GDP which was just shy of one trillion dollars.
This means that even if only a portion of the Dutch pension sector eventually moves towards a buy-out it could be too large for the domestic market to handle. Burggraaf says at this point Dutch pension fund assets could find their way to the global reinsurance market.
“If large buy-outs come into play it could well be that the market isn’t able to swallow all of it. Then it becomes quite likely that insurance companies will be looking to reinsure part of that. It really depends on the amount of buy-out deals that come onto the market.”
While there is still a cloud of political uncertainty hanging over the Dutch pension fund sector, if the plans do go ahead in full, the Netherlands will become the first country to switch from a DB to a DC model without gaining the consent of scheme members.
Burggraaf says that Dutch lawyers have already warned that this could potentially swamp the domestic legal system with cases from unhappy pension scheme members and he has his own doubts about the plan.
“Changing a DB system to DC in this way has never been done before. So that means, either we as Dutch are brilliant and have figured out something that the whole world hasn’t yet. Or we are extremely stupid. And I don’t know which of the two it’s going to be.
“I’m hesitant. My usual starting point is if the whole world hasn’t figured something out yet then maybe it’s not a good idea.”
