As inflation is expected to come down while interest rates will continue to creep up for a while, the momentum for buyouts is expected to grow stronger for the Dutch pensions market. The country’s pension reform drawing to a close should also help move the market again, according to insurance firms and independent consultants.
Expectations for the Dutch buyout market were already sky-high at the end of 2021. With funding ratios having risen sharply thanks to higher interest rates and with the upcoming defined contribution (DC) system, the momentum for buyouts is expected to be strong.
The three main buyout providers in the Netherlands all spoke of multi-billion euro pipelines and record interest from pension funds.
But results so far have been underwhelming; last year, there was just one buyout contract. The closed Dutch pension fund of A.C. Nielsen made a deal with Zwitserleven to guarantee benefit payments for its members into perpetuity.
NN Group and Lifetri, which entered the buyout market in 2020 by guaranteeing pension benefits of the former Allianz pension fund, failed to conclude any new deals in 2022.
ASR to enter buyout market
Insurance firm ASR, which acquired the Dutch operations of its competitor Aegon last year, will also enter the buyout space, chief executive officer Jos Baeten announced last week.
“We are seeing more momentum for the buyout market. The combination with Aegon Netherlands makes us well placed to serve the market in this space too,” he said.
ASR declined to comment further on its Dutch buyout plans.
Lifetri’s director Philippe Wits, who mentioned a deals pipeline worth €40-50bn back in 2021, admits he is “somewhat disappointed” by the lack of new business.
“It is going a bit slower than expected. Maybe I overestimated somewhat the number of pension funds that were looking to liquidate. On the other hand, to make a choice for the future is very complex as there are a lot of interests pension funds need to take into account. I admire how pension funds painstakingly examine the options,” Wits said.
Delays
The delays in the implementation of the new pension law, which cements a change from a defined benefit (DB) system to DC, also plays a role, according to Leon van Riet, CEO life and pensions at NN Group.
“We see an increase in requests for information from pension funds. Some are asking for non-binding offers, but they will only start moving once the pension law has passed the Senate [and is final],” he said.
Now that the law has passed the Second Chamber, the country’s main legislative body, uncertainty has been drastically reduced, according to Daan Kleinloog, partner at pension fund consultancy Sprenkels.
“However, it remains hard for a pension fund to determine the most attractive option. Detailed calculations on the impact of each option (a buyout, the transition of DB accruals to DC or a merger with another pension fund) on expected pensions have yet to be made because the new parameters (a set of expected returns published by a special commission) were only made public a couple of months ago,” Kleinloog said.
Wichert Hoekert, an actuary at WTW, also believes buyout transactions have lagged because of “the persistent uncertainty” surrounding the pension reform.
“Even though the law has now passed parliament, uncertainty can continue to play a role because the lack of progress in the legislative process has been the main reason that social partners have yet to make up their mind on the pension arrangements in the new system and the role of the pension fund in it. If social partners decide to accrue pensions outside the pension fund in DC, a buyout will be an attractive option,” Hoekert noted.
But the relaxation of solvency rules, which was implemented last year, has also lowered the immediate interest in buyouts.
“Pension funds could suddenly give more indexation if they decided to convert existing DB rights to the new DC system. It could be that some funds that were considering a buyout decided not to go ahead with it for this reason. More indexation and a buyout cannot be combined, after all,” Hoekert continued.
Higher funding ratios
The additional indexations have also dented funding ratios. And the lower the funding ratio, the fewer indexations a pension fund can buy when doing a buyout.
According to Hoekert, a fund with a relatively old membership (and low duration) needs a funding ratio of about 120% to buy fixed indexation of 2% per year.
“For an average fund, this is a bit higher, at 140%.” Buying actual inflation costs a bit more because of the current high inflation.
At the end of the third quarter of 2022, 39 pension funds had a policy funding ratio (the average funding ratio over the previous 12 months) of more than 130%. More than 30 of the pension funds were company pension schemes.
For most of these funds, it is not yet clear whether they will make the transition to the new DC system. As a result, a buyout is still on the table for all these funds.
According to Hoekert and Kleinloog, 10 to 15 mostly smaller closed schemes are considering a buyout. “These are mostly funds with guaranteed pensions or unconditional indexation requirements,” Kleinloog said.
“On the longer term, bigger schemes could also follow,” expects Hoekert. “Perhaps hybrid solutions with, for example, only a buyout for pensioners are also possible, although it is not yet clear to what extent regulation will allow for this.”
He added: “Pension funds that opt for the flexible arrangement will need to provide the option of fixed benefits. Maybe there’s a role here for buyout providers.”
Lower inflation?
Van Riet, Wits and Van Anken all see a rosy future for their buyout franchises. All three expect pension funds to emerge from standby mode as soon as the pension law will have passed the Senate. Favourable developments on the rate and inflation markets should also help.
Van Riet said: “There may be more rate hikes that will push up funding ratios further. If inflation expectations then come down, buyouts will become cheaper too.”
He also sees a “good climate for buyouts”. He added: “At the moment inflation expectations are still on the high side, and of course lower inflation will have a positive effect on pension funds’ ability to buy price inflation.”
But funds retain strong incentives to resist a buyout and make the transition to DC, noted Kleinloog.
“For example, once you go for a buyout you can’t use a fund’s buffer for other purposes anymore. And you can no longer benefit from risk-sharing between generations because there will be a hard separation between existing and new accruals. But if you can now afford full price indexation, a buyout is a very interesting option to consider,” he said.
This article appeared originally in Pensioen Pro, IPE’s Dutch sister publication.
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