NETHERLANDS – A leaked version of the new Dutch financial assessment framework (FTK) suggests that, for a pensions contract in real terms, the government will require schemes to increase pension rights in line with at least the consumer index.

According to the leaked draft of the framework, dated 19 June, the government also believes that inflation compensation should be financed through higher-risk investments.

In the new set-up under the FTK, pension fund participants will also have to be informed in advance about what they can expect and exactly who bears what risk during "economic headwinds".

As a consequence, pension funds will have to include a specific adjustment mechanism for financial shocks (AFS) in their contracts, according to the leaked draft.

Pension funds with a "real" pensions target must have financial buffers of at least 1%, equating with a coverage ratio of 101%.

If a rights decrease after applying the AFS is larger than the planned indexation, the real pension rights are reduced nominally.

On the other hand, a financial windfall must result in a rights increase, in addition to indexation, according to the leaked draft.

In the opinion of Jetta Klijnsma – the state secretary for social affairs, who is expected to launch the FTK proposals soon – AFS adjustments for financial shocks must be factored in straightaway at pension fund level but can be spread out for participants over a period of 3-10 years.

A pension fund with an ageing population facing economic headwinds should apply a larger cut than a scheme with younger participants, she argued, adding that this should also work out the other way round.

Klijnsma also pointed out that the contract for a real pensions target allows pension benefits to move with life expectancy and the financial markets gradually.

She said the period of spreading out the effects of financial shocks would also improve risk sharing among the generations.

According to the draft, each financial shock will trigger a new evening-out period, and every year the adjustment of pension rights will be the sum of positive and negative financial developments in the previous period of up to 10 years.

Fine-tuning the AFS mechanism should enable pension funds to achieve a more stable benefits pattern, she said.

Klijnsma said adjustments of the AFS could be used for future pensions accrual, including the pensions for future participants, to achieve adjustments for all generations.

In addition to the AFS, pension funds will also be allowed to apply a separate mechanism for life expectancy (LAM), she said.

The leaked draft also showed that Klijnsma plans to stick with the market-consistent valuation of liabilities with the application of the ultimate forward rate (UFR).

For pension funds with a real contract, she is to announce a discount curve with a uniform discount for indexation, based on the inflation predictions of the Netherlands Bureau for Economic Policy Analysis (CPB), as well as a uniform risk premium based on a pension fund's risk profile.

According to the draft, pension funds can use windfalls for the accrual of a financial buffer to counter negative shocks and improve risk sharing among the generations.

The proposals are expected to be published for consultation early next week.