Pension partnerships Dutch pension funds in a post-Pensions Act world

The Dutch Pensions Act is likely to transform the occupational pension fund system in the Netherlands. Asset servicers will have a crucial role to play.

The Dutch Pensions Act came into force on 1 July 2023 after years of preparation. The Act is set to transform the €1.5 trillion Dutch occupational pension fund system, the largest in the European Union, from a predominantly defined benefit (DB) model to a defined contribution (DC) one. While recent election results have called into question the future of the Act, several pension funds have already decided to move to the new system and this will bring significant changes to the current ecosystem.

Under current plans, the Act will replace existing pension schemes with two new DC models. Most current DB pensions – the majority of schemes – are expected to migrate to the new Solidarity Premium Scheme (‘Solidaire Premieregeling’ (SPR)), with DC schemes transitioning to the Flexible Premium Scheme (‘Flexibele Premieregeling’ (FPR)). While there is a four-year implementation period, most funds plan to transition by 2026.

Migrating to the new investment schemes will require Dutch pension funds to completely reconsider their investment models, how they communicate with members on an individual basis, and how they monitor and report on the schemes. In the Netherlands, asset servicers will have a crucial role to play in this transition by supporting the development of funds’ new investment and reporting operations.

New schemes under the Dutch Pensions Act

Existing DB and DC plans will have to roll into the new defined contribution schemes ahead of the 2027 deadline. A survey earlier this year of 146 pension funds conducted by De Nederlandsche Bank (DNB), the Dutch central bank, found almost 60% prefer the SPR, with only 16% opting for the FPR alternative. One in five respondents had not yet decided.

The main difference between the schemes will be the attribution of investment returns to participants.

Solidarity Premium Scheme

Investment returns are distributed to participants’ personal reserved capital balance within the SPR via a set of allocation rules and interaction with a ‘solidarity reserve.’ The allocation of performance is based on pre-set rules based on the risk tolerance of each age cohort. The solidarity reserve is used to fill the gap in case of underperformance and can top off high excess returns. Together, these mechanisms are designed to achieve higher, less volatile pensions for current and future members, taking into account the collective risk tolerance of participants per age cohort.

Since each participant has their own personal reserved capital account balance, and allocation rules are set per age cohort, the link and data exchange between the pension administrator (participant administration) and asset management (investment administration) will differ from the current model. This will require new connections between the asset and liability administration. The DNB survey noted, though, that almost one in three funds was not yet in discussions with a service provider about linking the investment and pension administration.

Flexible Premium Scheme

The FPR is similar to other traditional DC schemes, with the distribution of investment returns based on participants’ direct asset exposure. The investment administration can then be set up to manage and monitor the lifecycles offered in the scheme (for example, low risk/return vs. high risk/return, active vs. passive, etc.). As the FPR schemes follow the same investment, monitoring and participant distribution processes as existing DC schemes, the transition’s impact on the participant and investment administrators will be limited, allowing the current model to be applied to link the pension administration with the asset management.

A new type of asset servicing for pension funds

Servicing the new Solidarity Premium Schemes will require administration and reporting to take place at the level where the allocation rules are applied, creating a new ‘middle layer’ of additional processes and information exchange.

Asset service providers can play a vital role in providing the extra layer of transparency needed to create more customised reporting for underlying participants.

Whether this new middle layer will be performed on the pension administration side, asset management side or by a new party in between is currently unclear. Existing asset service providers may be well-positioned to pick up this monitoring and reporting role. By collecting aggregated data on the cohort level from the pension administrator, the asset service provider can independently show the effect of the allocation rules and asset performance at cohort level.

Service customisation will be increasingly important to meet pension holders’ individual needs. As pension contracts become more aligned with policy holder lifecycles and risk profiles, individual participants will likely be more vocal about their specific investment priorities. They may request more detailed insights into their personal pension investments and pension funds may be expected to provide more detailed reporting on holdings – as is the case already in other DC markets. By creating unitisation and/or lifecycle portfolio structures, asset service providers can play a vital role in providing the extra layer of transparency needed to create more customised reporting for underlying participants.

Managing the Dutch pension funds transition

The quantity of assets set to be transferred to the new schemes over a relatively short timeframe is enormous. And there is only one opportunity to get it right. Once the assets are transferred between pension plan arrangements, there is no way to reverse them. Before assets are transitioned, the pension plan and its participants should agree on the value of their pension investments and whether the underlying participant is comfortable moving their existing pension entitlements into an unknown pension plan arrangement that is based on contributions linked against the capital markets.

The transition must then be flawless. This requires an intense focus on duty of care, with strict governance around operational risk, controls, compliance, outsourcing, IT, risk and communication. Guaranteeing a successful transition will depend on impeccable preparation, multiple dry runs and watertight project management agreed among all parties in the value chain.

Asset servicers are well-placed to help, since moving assets is their primary role. Servicers like BNP Paribas have been dealing with regulatory in/outsourcing governance rules, asset transitions, project management and servicing the existing array of pension scheme structures for years. With their expertise and experience, servicers are ready to transition to and operate in the new pension environment.

Data, communication & reporting: changing expectations for Dutch funds and pension holders

The current Dutch pension fund system ranked first out of 47 worldwide in the Mercer/CFA Institute Global Pension Index 2023 based on adequacy (benefits provided), sustainability in providing benefits into the future and integrity of governance, with its influence on citizens’ confidence in their pensions. The scale of the changes to such a highly ranked system means better financial education of, and communication with, individual scheme participants will be vital.

A golden source data environment built on data resilience and control will be fundamental to successfully delivering a full-service communication and reporting capability to members

Asset servicers will be a central conduit for scheme members in this new world. The asset service providers’ role will be to furnish members with as much transparency as possible on the underlying investments and their performance, including information on key areas such as the sustainability of assets. Offering proxy voting and engagement against social and ESG themes will likely gain importance.

A golden source data environment built on data resilience and control will be fundamental to successfully delivering a full-service communication and reporting capability to members under the new pension arrangements. Agreeing data standards, quality and transparency, flawless control, risk & IT governance, along with full collaboration among parties involved in the value chain will be crucial in meeting participants’ and the regulator’s demands.

How BNP Paribas supports asset owners and pension funds globally

Globally, institutional asset owners are facing increasing demand for – but also complexity regarding – high quality insights and reporting on their investments, with a particular focus on ESG or private capital elements. Securities Services is supporting asset owners in this aim through a central layer of data management services. This seamless flow of data can support asset owners both in their day-to-day operational needs and their asset allocation team’s investment decisions. Through our deep knowledge of pension fund structures in different markets and our teams of data experts, we support asset owners’ core investment processes and underpin their transition to new or changing pension structures and their pension holders’ requirements.

SECURITIES SERVICES IN THE NETHERLANDS

The Securities Services business of BNP Paribas is actively participating in defining the impact of the Pension reforms, and the changes required to the relationship between asset and pension administrators. We do this by communicating and interacting with stakeholders in the market (pension funds, pension administrators, fiduciary managers, consultants, software providers and the Dutch regulator) and participating in consultations on data and information exchange. Through this active participation, we strive to ensure that clients have a smooth transition to the future pensions environment.