New pension contract: a call for action for all asset managers has been saved
New pension contract: a call for action for all asset managers
More than a decade after the first talks about reforming the Dutch pension system started, the sector finally presented an outline of the way forward last month. What is going to change? Is it an actual improvement? And how will the pension reform and new pension contract affect asset managers?
Go directly to
- A choice between two schemes
- Changing perspective on investment risk, strategy and transparency
- Sizable opportunity in the institutional market
- Far more than a ripple in the pond
- More information?
The reasons for the forthcoming pension reform are unequivocal, according to Robert-Jan Hamersma (Partner, Benefits & Pension Advisory). “Over time, the solidarity between younger and older generations has eroded, employees no longer work for the same employer for their whole lives, we live longer and the number of pensioners will only increase. All of this, combined with the low interest rates, make defined benefit (DB) schemes unsustainable.” The reform means transitioning from equal accrual for all ages to an equal premium for all ages. Everybody will have his or her personal pension pot. Concepts like the coverage ratio (“dekkingsgraad”) for pension funds and the use of the technical interest rate (“rekenrente”) will disappear, affecting all kinds of pensions - not just DB schemes. Pension funds will have a choice of two contract options: the new pension contract (NPC) or the improved defined contribution plus (improved DC+) scheme. The transition should be completed by January 2026.
Mere days before the FNV voted in favor of the New Pension Contract, DUFAS and Deloitte organized a webinar on the impact it might have on asset management. Three Deloitte partners successively gave an outline on the NPC, the key changes to the pension system as we know it and the reasons for these changes. They also discussed the impact of the new system on the operating model of the asset manager, as well as on market dynamics. The webinar was led by Iris van de Looij, director DUFAS (Dutch Fund and Asset Management Association).
A choice between two schemes
Key elements in the NPC are that the premium is invested collectively, the return on assets is spread over generations, and retirement benefits will increase and decrease depending on the economic circumstances. Instead of accrued benefits, everybody will have their own personal share in the collectively invested capital. To prevent bad and good luck generations, the NPC has an obligatory solidarity reserve (“solidariteitsreserve”) with a ceiling of 15% of this collective capital. A predetermined key will make it possible to attribute positive or negative investment returns over a period of ten years . The transition challenge is formidable. Essentially, all pension accruals will transition (“invaren”) into the new pension contract. Conversion of accrued benefits to an individual capital entitlement is complex and sensitive. The transfer implications for all age cohorts will need to be reviewed. Compensating the cohort of around 45 years of age will be inevitable.
Changing perspective on investment risk, strategy and transparency
The NPC will have a profound impact on the operating model of asset managers. Throughout the nearly ten years of preparation for thepension reform, the focus has predominantly been on administration and conversion of pension rights. Only now, with clarity on the main pension themes and agreement in sight, the asset management community can start thinking about the asset management implications. One thing stands out: investing will become more important under the new pension contract, as we will shift away from a focus on coverage ratios to investment returns and from managing regulatory to economic capital, explains Marieke van Eenennaam (Partner, Deloitte Risk Advisory).
Sizable opportunity in the institutional market
“The pension reform basically forces a moment of choice on the pension funds. Funds with a DB scheme will not necessarily opt for NPC,” stresses Jan-Wouter Bloos (Partner, Deloitte Consulting). The improved DC+ scheme as well as a PPI might be attractive alternatives, especially for employers and smaller sector funds. Lower cost and (governance) complexity speak for both. In our view, the pension agreement will accelerate the current trend of fund liquidation. The liquidating funds with a coverage ratio of well above 105% might be attractive targets for buy-outs. Admittedly, few of these funds remain. We have previously (2019) estimated that approx. 4 to 6 billion euros in assets will come to the market over the next five years. “With pension reform, this number seems like a serious understatement. Employer and smaller sector funds hold approx. 50 billion euros. If we include funds holding up to 4 billion euros in assets under management, it amounts to almost 80 billion euros. A sizable addressable market for pension insurers to get their hands on.”
Far more than a ripple in the pond
To obtain a sense of the perceived impact of the pension reforms in the sector, we have conducted a survey among 29 asset managers. The anticipated impact on investments is most pronounced. Almost two-thirds of respondents, irrespective of the type of asset manager, perceive the pension contract as having a high (or very high) impact on investment risk, strategy and transparency. None of the asset managers felt the impact was low or negligible. Respondents have more diverging views of the market opportunity. A small majority regards the pension review as a commercial chance in the institutional and retail investment market . Perhaps not surprisingly, this group is almost entirely made up of insurance embedded and independent asset managers (as opposed to pension fund owned captive asset managers).
Would you like to know more about the impact of the new pension contract for Asset Managers? Download the entire PDF document at the top right. For more information or questions, please contact Marieke van Eenennaam, Jan-Wouter Bloos or Robert-Jan Hamersma via their contact details below.