A small Dutch pension scheme is to offer its staff the option every year to switch between defined benefit (DB) and defined contribution (DC) arrangements in an innovative compromise between the employer and unions.

The change comes as tyre manufacturer Apollo Vredestein prepares to transfer its scheme’s 1,500 members to a general pension fund (APF) run by Central Beheer, a subsidiary of Achmea.

“Sticking to a DB plan would have become unaffordable, and we also wanted to remove the pension liabilities from our balance sheet,” said Frans Smidt, the company’s director for labour conditions.

“At the same time, however, a pure DC scheme would have been unacceptable to the trade unions.”

Smidt highlighted that current low interest rates made DB unattractive, and DC a more logical option.

“But if interest rates rise, DB schemes would thrive and grant indexation, so we would have the option of returning to DB arrangements,” he explained.

The tyre firm currently has an insured DB plan run by Aegon. Contributions were set to rise by 65% if the company had extended the existing contract, Smidt said.

Edwin Troost, account manager at Centraal Beheer, indicated that he expected more employers to be interested in the concept, “as this was often demanded by their works council, when they decide to switch from DB to DC”.

The option of a periodical switch was already introduced for the participants of pension plan Relx – the former pension fund of publisher Elsevier. Members – who are now part of the multi-sector scheme PGB – can change their pensions accrual between DB and DC every three years.

Regulatory uncertainty

Apollo Vredestein staff considering a switch would be given information about the expected outcome of each option, provided by the APF.

Smidt acknowledged that only a minority of participants were likely to use the complicated switch option. Apollo Vredestein and the APF planned to launch a campaign to clarify the arrangements.

However, it was unclear whether accrued pension benefits could be transferred to new arrangements with each switch, as this wasn’t covered by legislation yet, Smidt said.

The company’s plan was to enable participants to purchase DB rights using assets accrued under DC arrangements, Smidt added, and parliament would be asked to amend legislation accordingly.

Centraal Beheer’s Troost said that a transfer in the other direction would be more complicated, as answers had still to be found for how to deal with the financial buffer or a funding shortfall in a DB plan.

Alex Makkinje, trustee at the FNV union, said that, despite his members having unanimously approved the new pension arrangements, he was “not ecstatic”, because his organisation was not keen on DC at all and preferred the security and risk-sharing aspects of a DB plan.

However, he described the option of returning to DB as “an advantage”.

Gerard van Dijk, director at union CNV Vakmensen, said he was pleased with the new scheme and suggested it could ultimately become part of his union’s regular policy.

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