Needless alarmism around value transfer under the new pension regime

Insights

14/06/2024

For a growing number of Dutch pension funds, opting for value transfer under the new pension system is (partly) not feasible or not the optimal choice. These funds would prefer to keep existing pension rights under FTK. However, many pension administrators are now not able or willing to offer this option. "Waiving value transfer would purportedly entail higher costs and increased complexity. But that doesn’t have to be the case, it is scaremongering," asserts Jeroen Elbertse, director of the Dutch branch of the European pension software provider Lumera.

There has been considerable discussion regarding the transfer of approximately 1.6 trillion euros in existing DB pension schemes. The new pension legislation presupposes that this capital will transition to a new DC scheme. Reality, however, is a little bit more complex. Value transfer – partly or whole - is not always feasible or positive for participants, states Elbertse. "It is imperative that pension funds have complete and accurate information to make informed decisions." 

Currently, the availability of information seems somewhat restricted. "The prevailing narrative in the market is that retaining an old DB administration is unfeasible due to exorbitant costs, complexity, and risks. We are hearing extreme estimates, suggesting that the sector would incur up to an 18 billion euro cost if funds opt against the transfer. Simultaneously, pension funds are being informed that no pension administrator is still open for new clients or willing to support a DB scheme," explains pension advisor and board member, Stephan Linnenbank. 

Linnenbank urges funds to dismiss scaremongering and put the interests of participants first. "If a pension fund chooses to forego the transfer, based on valid reasons, it won't necessarily entail significantly higher costs, complexity, or risks. It is entirely feasible to maintain a DB system alongside the new mandatory DC system for new pension premiums. Cost-effective IT solutions are available, and, perhaps more importantly, there are still pension administrators willing to provide this option."

Is it time for a new pension administrator?

Elbertse offers an explanation for the reluctance of some pension administrators to maintain FTK schemes. "Five years ago, the prevailing expectation was a transition away from DB schemes under the FTK system towards an exclusively DC environment. . The current DB systems are end-of-life, and the plan was to phase them out. Many larger pension administrators have built a new administration system based on this assumption, tailored to DC schemes. Consequently, they cannot assure pension funds of continued DB services in the future."

Elbertse advises pension funds not to succumb to doomsday scenarios and to initiate an open discussion with their pension administrator or talk with another administrator. He highlights that 25 percent of pension funds have already stated not to execute a value transfer, mainly due to the lack of (permission from) social partners. Elbertse emphasizes: "If a pension administrator cannot guarantee continued administration of an FTK scheme in the coming years, it might be prudent to consider changing the pension administrator. There are still administrators willing and capable of supporting an FTK scheme alongside the new DC scheme. Examples of these are Appel Pensioenuitvoering, Dion Pensioen Services, and Capgemini. Also, at Pensioenfonds PGB, the placement of closed FTK arrangements is possible."

Linnenbank acknowledges that choosing a new pension administrator is a significant decision. "It's a process that involves data migration and considerable effort. However, with the implementation of the new pension regime, a similar data transition will be needed anyway. If the current pension administrator cannot guarantee that they can facilitate an FTK scheme for say, the next five to ten years, then my advice would be to switch now. Some pension funds have already executed a change. If a switch is indeed necessary, delaying it will only compound the challenges.”

The primary challenge lies in communication

Linnenbank points to another reason why pension funds might need to partly retain an FTK scheme: the payout phase in the ‘Flexibele Premieregeling’ (FPR). "The standard for payouts entails guaranteed monthly payments, a feature inherent to DB models. The alternative would require social partners to agree to variable payouts, a choice unlikely to be popular with participants."

The pension advisor reiterates that a combination of FTK and WTP administration systems is not only viable but can also be cost-effective. Linnenbank: "While there are of course costs and risks involved, these are not the primary challenges. Communication will be the key challenge from the perspective of pension fund board members. Managing two schemes necessitates distinct communication strategies tailored to each, requiring specific capabilities and knowledge from pension boards. Thus, governance may also become more complex."

Source: Pensioen Pro Magazine, June 12.

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