Dutch pension funds that want to make the transition to the new defined contribution (DC) system can immediately increase investment risk as they will no longer be required to retain buffers, according to the latest version of the new Dutch pension law.
Pensions minister Carola Schouten presented the revised pension law, which will cement the transition from a defined benefit (DB) to a DC system, at a press conference in The Hague yesterday (Thursday).
It is not yet clear when the law, which is supposed to come into force by 1 January 2023, will be discussed in parliament.
The revised law contained a number of changes compared to the concept that had been sent for consultation last year. Perhaps the most notable of these is the decision to allow pension funds to increase their investment risk once they have decided to make the transition to the new DC system and have determined the risk appetite of their members.
This is because pension funds no longer need to retain large buffers as investment risks are transferred from pension funds to their members. As a result, pension funds will be allowed to change their asset allocation in anticipation of the situation under the new rules.
Risk-sharing reserve
It was already clear that the new DC system would retain a raft of collective features, with the most obvious one being the so-called solidarity reserve: a rainy day fund of a maximum of 15% of a fund’s assets that should serve as a collective buffer.
In the original proposal, this buffer was a preserve for pension funds that opt for the so-called “solidarity pension arrangement”. This prompted a demand from several company pension funds that prefer the more individual “flexible pension arrangement” to also be given the option of a buffer.
IPE already reported last year that the government was planning to introduce optional solidarity elements to the flexible arrangement too, but as it now turns out the government has gone even further by making a so-called “risk-sharing reserve” mandatory for sector and professional funds that choose the flexible arrangement.
Apothekers, the pension fund for pharmacists, is one of few funds with mandatory participation that have so far opted for the flexible arrangement. A survey showed the fund’s members have a preference for this.
The proposal to make the risk-sharing reserve mandatory rather than optional, is not a game-changer for the fund. Its president, Mariëtte van de Lustgraag, told IPE: “Our members signalled they want to include solidarity elements so we are happy that the flexible arrangement has retained such features.”
State Council advice
The decision to include mandatory risk-sharing in the flexible arrangement too follows an advice from the State Council, the highest advisory body to the government. It argued that pension funds could not maintain a requirement for mandatory participation without any solidarity elements in their pension arrangements.
Mandatory participation is regarded a cornerstone of the Dutch pension system by social partners, which they want to preserve at all cost in order to prevent competition on pension benefits by individual companies. As a result, only company schemes and voluntary multi-sector schemes will be able to adopt a clean, individual DC arrangement without a buffer.
The so-called risk sharing reserve is of a more limited nature than the solidarity reserve, however. It can only be filled with pension contributions (with a maximum of 10% of contributions per member per year), while for the solidarity reserve both contributions and excess returns from investments can be used to fill it.
The risk-sharing reserve cannot be used to redistribute wealth between different groups, something that is possible under the solidarity arrangement of the new pension law.
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