Participants‘ interests must be leading in value transfer under new pension regime

Insights

22/03/2024

Dutch pension funds fear that under the new pension system, they may have to administer two schemes: the new DC scheme and an old DB scheme with previously accrued pension rights. „Administrators want to avoid such an IT nightmare at all costs. The technological complexity, however, can be resolved; so better choose what is best for your pension participants,“ says Jeroen Elbertse, director of the Dutch branche at the European pension software provider Lumera.In the Netherlands, approximately 1.6 trillion euros have been accumulated in pension schemes, mostly in a DB structure. The intention is that with the transition to DC schemes with individual pension pots, this money will be incorporated into the new scheme. This transition must be completed by January 1, 2028, at the latest. However, the value transfer of old rights is not always possible, and more often than generally assumed, according to pension advisor and board member Stephan Linnenbank. „In half of the cases, transferring old pension rights will be difficult or even impossible. Pension funds must truly prepare for this.“ The assumption of the new pension legislation that there will be a value transfer – unless there are compelling reasons to refrain from it – is thus in question. Linnenbank: „This is separate from the political discussion about whether individual pension participants should have a say in the value transfer through a referendum. This political uncertainty can lead to delays in clarity, while the sector cannot afford to postpone decision-making.“ In any case, social partners, unions, and employers must reach an agreement on whether or not to transfer value to the new scheme, says Linnenbank. „In company pension funds, the employer has a significant voice. The pension board itself may also opt out of the transfer of old rights if participants would be unreasonably disadvantaged. Furthermore, it may be difficult to value guarantees or additional conditional pension promises in a value transfer and transfer them into a DC scheme. This is another area where the desire to do the transfer may run aground.“ 

Two schemes under one pension roof

The likelihood is high that many pension funds will have to maintain an old DB structure alongside the new DC scheme. This can indeed be complex, Elbertse acknowledges, „Since new pension premiums can only be deposited in a DC scheme, the DB scheme will be a closed book. However, pension funds still have obligations, such as compliance, supervision, duty of care, and communication towards participants. For many pension funds, this is a major nightmare because managing two separate schemes and two administrations system can be very complex and costly. You need to communicate correctly about two schemes and provide participants with the right information.“ However, according to Elbertse, complexity should not be a reason to blindly choose to do a value transfer, leaving only a DC scheme. „That is a tempting choice. But deciding whether or not to transfer value should not become a technological discussion. In recent years, too many decisions have been made based on IT considerations. It should be about what is the best solution for pension participants. If the best solution is two schemes – a DC scheme alongside the old DB scheme – then that is technologically possible.“ 

Good preparation is crucial

Both Elbertse and Linnenbank advise pension funds not to wait too long with preparations. It is important now to question the pension provider critically to check whether it can manage the new DC scheme, if necessary alongside an old DB scheme. „In the latter case, you have to spread the pension story over two schemes. That isn’t easy. Especially now that the obligations to inform participants and guide them in their choices have been tightened. That part of the pension will fall under the supervision of the AFM, and they are expected to scrutinize it very closely,“ says Elbertse. Having two schemes under one pension roof is a challenge but far from a potential disaster. Elbertse: „Lumera assisted Scandinavian pension administrators in the transition from DB to DC schemes. Managing two parallel schemes within one system is feasible. The complexity of old DB schemes and the dynamics of new DC schemes require an agile approach; think not in limitations but in possibilities. All data end up on one client portal, where participants receive clear information about their entire pension with the administrator. You don’t want participants to receive incomparable data from a DB part and a DC part and have to add up their pension themselves.“ Regarding preparation, Linnenbank has one more tip. “ Conduct scenario analyses. Check whether you are still able to perform (part of) the pension management in a DB scheme. Ask your pension administrator if he will still be able to do this and at what cost. Some administrators have put DB on hold, saying they expect to stop facilitating DB schemes or even be able to. Don’t wait too long to make that check. The longer you wait, the greater the risks and ultimate costs.“

Source: Pensioen Pro, March 19.

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