Dutch pension funds and providers will have to pay a lot of attention to costs in the years to come. The new pension system not only makes costs more visible to participants and employers, but they also largely determine the level of pensions. “The transition will lead to a magnitude of changes. By embracing change and learning from experience in other places, decision makers can prepare themselves well for doing that” argue Peter Roos and Jeroen Elbertse of the European pension software provider Lumera.
The new Dutch pension regulation WTP differs in some ways from what has happened elsewhere in the world when transitioning from Defined Benefit to Defined Contribution, but there are lessons that can be learned. Firstly, communication around pension is no longer about an abstract benefit in the future. It shifts to premiums paid, costs directly deducted from the premiums, investment returns and the (expected) value of the individual pension wallet.
Clients will require insight, choice, and transaction perspective. The Danish pension reform demonstrates this. Specifically, attention is drawn to costs, which previously have not been disclosed to the participant. “This will increase pressure to reduce cost, while simultaneously requiring suitable investment solutions for clients”, states Elbertse.
Transparency forces pension funds to be more competitive
Another factor is that as transparency grows, funds will be compared on several aspects, cost being the most objective and clear. Ranking will become common and will have profound effects. This has been and is the case in Sweden where both DB and DC funds are rated in the media and by advisors.
Pension fund will need to become competitive – which is a new capability for them. Much can be learnt here from insurance companies as well as examples from outside the Netherlands.
When pension funds fail to change quick enough…
In the UK authorities were unsatisfied with the speed of change and performance of funds. They have put pressure on them to improve their performance and made clear that they will shut down the fund if change was not delivered swiftly. “Schemes underperforming need to improve, consolidate or exit”, stated Laura Trott, pensions minister in the UK, recently.
The trend is the same in many European countries. “Regulators, governments, and sometimes social partners are prepared to really engage – with exponential regulation when increased transparency and added competition is not realised quickly enough”, says Roos.
The need to guide participants to informed decisions needs to be digital
A quite different lesson from Scandinavia is that there will be a silent majority who do not actively engage in the pension transition. However, experience learns that there will be people that principally object to the new pension scheme or transferred (ingevaren) value. Another group will pick up the message of change and will ask for a lot of attention.
Roos: “If this cannot be handled in an efficient (read: digital) manner, funds will face a major peak in capacity needed to serve these people well. Both groups will have a profound cost impact on the short run. Also, given the Duty of Care (Zorgplicht) providing the service itself is a risky and costly business. Funds need to provide guidance – not advice – and build an audit trail for each participant.”
The last lesson learned is that clients will require life planning, not just pensions. The sector will need to put the participants (clients’) needs first and find ways to provide a solution. Pension funds need to reinvent themselves manage costs in every way possible. Elbertse: “Much can be learnt from the experiences and solutions elsewhere. Obviously, these solutions will need adaptation to local conditions, but it is a good starting point that will help accelerating development and avoid having to pay the full price of inventing the wheel.”
Source: Pensioen Pro, March 16.
