The Dutch General Pension Fund, a new pension vehicle

Wouda-MartinThe total of assets of Dutch pension funds is over 150% of gross national product and still growing. The number of Dutch pension funds, however, keeps falling: from 800 to less than 400 in the past 10 years.

The attention of the press on pension issues has increased from close to zero to daily reports. At the same time, the political and public debate has intensified—especially when it became clear that some pension funds had to cut benefits because the insufficient funding could not be solved over time. Until the day that the actual cuts were announced, this risk was quite underexposed. One of the last items that gets the attention of the press, politicians, and the public is the obligation to account for the cost per participant in the annual reporting.

The reaction of the supervisor is to aim for more control, more regulations, and more compliance. The Dutch Central Bank (DNB) has recently sent out a note to all small pension funds, asking them to consider their reasons for future existence and to contemplate their sustainability.

Regulations are relatively tight compared to other countries. For example, the discount rate to be used to value liabilities is prescribed and published monthly by the Dutch Central Bank. Also there are standard formulas to calculate the solvency buffer. This is in contrast to one of its neighboring countries: Belgian pension funds choose the discount rate and solvency buffer themselves and need to submit it to the supervisor (well documented).

New pension fund board members are heavily tested on capacities and integrity by the supervisor. Some of the candidates that have been rejected have shared their stories with the press, but in most cases the DNB silently advises the candidates to step down before actually refusing to let them join a board of trustees.

Many of the smaller pension funds have transferred all accrued benefits to an insurer in the past 10 years. The disadvantage of this option is clear. The security one gets from an insurer comes with a price. The pension funds are used to taking some investment risk: the indexation depends on how the investment returns turn out. In case of really poor investment returns, there is in some cases the possibility of extra contributions by the sponsor. Pension funds also have the emergency brake of cutting benefits. The insurers, on the other hand, would be bankrupt, so their pricing of annuities is more prudent. The insurers do have the advantage of cost efficiency, which is due to the larger scales of their operations. An alternative for the smaller pension funds is to join a larger sector-wide pension fund. Joining a sector fund means joining the scale and risk pooling of the pension plan in the sector and can be attractive if there is indeed a sector pension fund active and large enough in the sector of the particular employer.

For multinationals with operations in more than one European country, there is the option of a cross-border pension fund. There is a small number of successful cross-border pension funds with Dutch plans. It appears to be a time-consuming road, as many parties need to be convinced. That is not always based on rational arguments: How would the average American employee react if his or her pension moved to Canada? There are Dutch pension vehicles (PPI’s) that can execute pension plans for foreign entities, but by law they can only do defined contribution (DC) plans. The PPI’s are not allowed to carry biometric risks. The Dutch may believe their pension system is the best in the world, but there is less confidence that it is convincing enough to attract foreign plans. Becoming able to execute cross-border plans is not the driver for the latest development.

The law will be changed to allow establishing pension funds that execute more than one plan for any employer. It will be allowed to ring fence the assets for different (groups of) contracts. Up to now, having multiple employers within one pension fund is only possible either for employers that are connected (legally or historically) or without the ring fencing (e.g., the sector funds). The new vehicle will be called the General Pension Fund (GPF, or APF in Dutch). It will allow for options that can be situated between insurers and the classic pension funds. If done well, it combines the best of both worlds: economy of scale, optimizing the investment returns, good governance without being too time-consuming, and risk pooling that is acceptable to members. In our opinion, it opens the door for new and innovative pension solutions.