The pension overhaul itself is currently in a fairly uncertain period, following elections in mid-March that thus far have not yet resulted in the formation of a new cabinet. The current demissionary setup puts existing leaders in a caretaker role as they rework the draft and prepare to hand it over to another cabinet. But changes to the legislation are not anticipated to alter the current framework of a move to two types of defined-contribution accounts.
The first new offering, the Nieuwe Pensioen Contract (NPC), will be most similar to the current system because pensions will make investment decisions for their participants, investing premiums collectively and allocating returns to their personal accounts. The NPC plans also will have different risk profiles and a mandatory “solidarity” reserve of up to 15% of the fund’s assets to buffer steep drops in fund asset values.
The second offering, known as the Wet Verbeterde Premieregeling (WVP) plan, will more closely resemble defined-contribution plans in other countries. Participants will be asked to define their risk preferences in line with their age and other life-cycle factors, helping pension funds to define specific investment strategies for them, and whether they want a solidarity buffer at all.
The main difference is that WVP plans provide more freedom of choice, whereas NPC plans rely entirely on the fund to make the investment decisions, says Sacha van Hoogdalem, managing director at Ortec Finance, which provides technology and advisory solutions. Experience in other countries suggests the vast majority of participants end up following the default life-cycle investment strategies set by the pension-plan boards, she notes.
What both types of new plans have in common is how they provide transparency into how the assets are performing. Whereas today investors receive letters annually or quarterly that explain their rights to eventual retirement payments, the new system is a defined contribution plan, in which participants will gain insight into the development of their savings.
That may not sound like a big leap for those accustomed to 401K and IRA accounts in the U.S. or Self-Invested Personal Pension (SIPP) funds in the U.K., which provide multiple investment options and the ability to switch investment strategies. But it is a huge change for most Dutch stakeholders. Communication will be a top priority, especially early on during the transition.
“Now we tell pension participants what they can expect in retirement—their defined benefit—and in the future it will be what is happening to their personal savings accounts and the results we have delivered to that account,” said Maarten Roest, CIO of the ABN Amro Pension Fund, which oversees €34 billion in assets.
To evaluate risk appetite, pensions must first contact participants—easier said than done. Today, most Dutch pay little attention to their pension statements until they approach retirement.
“We realize that we, as pension funds, are not the most interesting channel,” Van der Feltz said. “We’re in contact with the communication and human resource departments of their employers, and we try to communicate through them, because pensions are a part of the whole benefits package.”
Pensioners nearing or in retirement are understandably more interested in how their plans are performing and engaging with them, and SBZ already communicates with them directly. But the pension fund also must find and communicate with ex-employees who now work for different companies but are still entitled to benefits.
“A lot of [defined-benefit] pension boards will have to educate themselves on life-cycle investing, since this can be quite new for [them],” explains Marijn Jansen, an investment-solutions specialist at Achmea Investment Management, a division of the Dutch insurance group Achmea. It is expected that the shift to DC plans and related complexity will force various schemes to reconsider their future, driving further consolidation in the market, like we are seeing in the U.K. and other parts of the world (see Figure 6).
For WVP and NPC plans, pension boards must divide participants according to their age and risk attitude and provide a range of appropriate investment strategies. Since the lifecycle issue is similar for both types of plans, Jansen noted, pension boards can educate themselves about life-cycle investing and make significant headway before the legislation is finalized.
Unilever has one of the oldest pension funds in the Netherlands, serving almost 20,000 participants. It has been closed since 2015, but the company has another much smaller pension fund, Forward, that was founded in 2015 for the Dutch employees who are active at Unilever. That fund must be transferred into a new plan, although it is too early to say whether it will change into a more personal WVP plan or a more collective NPC plan.
“We have to determine whether it is appropriate to operate two frameworks, since it will require extra communication, administration and cost,” said Hedda Renooij, at Unilever APF, who oversees €6 billion in assets for around 24,000 participants. She added that stakeholders, including the pension fund and social partners, have started to hold monthly roundtables to discuss the path ahead.
Another issue will be transferring illiquid assets, since they are difficult to value daily and divvy up among defined-contribution accounts, compared to listed investments whose net asset values (NAVs) are readily available. They may have to be held in flexible, balanced funds similar to defined-benefit pensions’ approach today, Jansen says, so the pension fund can make payments with incoming premiums or by selling liquid assets.
Jansen said his team is also starting to talk to pension funds about how their specific participant demographics may impact asset allocations. Those with younger participants, he noted, will likely shift away somewhat from fixed income to assets providing more risk and greater potential return.
“Under the new regime, many pension funds will probably show less demand for fixed-income assets at the longer-end of the yield curve, particularly those with a younger plan participants,” Jansen said.
Dutch fintech firm Hyfen is seeking to facilitate the interaction between pension funds, their third-party providers and pension members via a platform that aims to connect these parties, while complying with regulations for personal data processing. Currently, it is focusing on developing software to explain to individual plan participants how switching to the new system will impact them.
“It's clear that the winning model will be very digital, based on customer intimacy and low cost,” said Hidde Terpoorten, CEO of Hyfen. “Paper-based processes and statements all need to go away so that we can service pension contracts and better help pension members in the future.”
Most pension funds probably won’t begin actual changes to technology systems and policies and procedures in earnest until a more definitive version of the legislation emerges. And then the clock will begin ticking to implement and test them.
“We’re going to face different dynamics that cater to the individual pension pots,” said Hulshoff at APG AM. “This will lead to new approaches to strategic asset management and duty of care, but also more information, insights and performance measurements when people start asking why their returns aren’t better.”
The transition should thus offer third parties currently servicing Dutch pensions, as well as newcomers, significant opportunities as well as risk. BNY Mellon services more than 30% of total Dutch pension assets, including custodial and related services such as investment accounting, performance measurement and risk analytics. The bank notes that it is imperative to understand as early as possible the new pension-plan structures and the market opportunities and threats, such as new product offerings as well as competitors.
Third parties must also research which type of plan clients’ constituents will choose and the required operating models and value propositions, and they should devise marketing campaigns to promote the new offerings.
“The shift will most likely result in different operating models for pensions that need to be serviced, so service providers like us are adapting their value proposition from front to back,” says Marvin Vervaart, a client solutions specialist for pension funds at BNY Mellon.
Given the challenges pension funds face, the delay will be helpful to many, especially in terms of educating constituents about why it is necessary to transition and communicating the new plans’ benefits and participants’ new dynamic role. However, the pushback so far suggests pensions have a steep slope to climb, along with developing new data streams and digital interfaces to provide account transparency to their members.
A downside to the delay is that it will be another year before pensions can understand properly the details of how to transition the assets, overhaul systems and build portals for savers to view their retirement money.
Addressing those challenges will mean taking advantage of all possible resources and expertise.
As Dutch pension funds prepare to transition, they must work closely with partners who have relevant experience, including custodians, asset managers and other third parties such as technology firms, said Frans Weijdener, a managing partner at Equitem Groep B.V., which advises on complex changes in the asset-management business.
“Firms need to understand their desired operating model first, before leveraging the expertise of strategic partners who can identify the key implications of the regulations and all the options,” Weijdener said.
John Hintze is a freelance writer for Aerial View Magazine in New Jersey.