The new pension agreement is a hot topic in the Dutch pension world. In this blog series we go back to basics. What's new about the new pension agreement and what does it mean for the market? In the previous blog we discussed the first type of pension contract, the Wvp+ scheme. The second type of "new pension contract" will also be a premium scheme and will be discussed here.
29 Sep 2020
Focus on collectiveness
The new pension contract is one collective of actives, retirees and sleepers with extensive risk sharing. This means that the results on investments and the consequences of rising life expectancy are shared between active members, sleepers and pensioners.
The average system, in which a premium is charged regardless of age leading to a redistribution between generations, is abolished. In the new situation, assets are saved on a personal level, but are invested collectively. In the accrual phase, a portion of the collective assets is reserved and administered for each member. This is built up from premiums, returns and deposits/ withdrawals from a collective solidarity reserve. Based on the risk attitude of the age cohorts, distribution rules for the returns (matching, return and biometric) are established. These distribution rules can be determined by the pension fund itself, but must be tested for balance between age cohorts.
The life-long variable pension benefits, distributed from retirement onwards can be increased or decreased on the basis of financial windfalls and setbacks. To dampen fluctuations in pension benefits, there will be a ‘solidarity reserve’ included in the new contract. The solidarity reserve is a pool of collective, non-allocated, assets made up of premiums and excess returns, which is paid out annually in bad times and filled up during the good times. At the start of the solidarity reserve, it can be filled from the existing capital. For example, if the coverage ratio of the 'old' pension fund was above 100% at the time of collection. Windfalls and setbacks can thus be spread out over time. Annually a maximum of 10% of the premium (active members) and/or a maximum of 10% of the positive excess return (active members, deferred members and pensioners) may be added to the solidarity reserve. The solidarity reserve may ultimately amount to a maximum of 15% of the total fund assets. Distribution rules for the solidarity reserve are balanced, transparent and determined in advance for a longer period of time by the pension fund.
As with the Wvp+ contract, the rate of payment of the pension is based on a project return. The exact parameters with regard to the solidarity reserve and the project return will be worked out during the legislative process. The methodology will probably be similar to the current parameters of the Parameters Committee.
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