The clock is now ticking for workplace pension providers in the Netherlands to convert from a Defined Benefit to a Defined Contribution (DC) system. A country that has proven one of the most successful in the world for its outstanding second pillar now faces adaptation as the population ages and working practices become more flexible.
Many challenges present themselves in this nationwide task. For example, there are not yet all the regulations or products in place to effect change precisely. Moreover, the resolute Dutch desire for some solidarity in pension provision makes this project unique in Western Europe.
It is no wonder then that the Senate decided at the last minute to give social partners an extra year to achieve the switch. Let us start by outlining the biggest challenges:
First comes information. When a retirement benefit is defined, frequent communication is not necessary. The pension scheme member knows what she or he can expect to receive. In the Netherlands this has left only the uncertainty of whether any inflation-linking will be added.
All that changes with DC. “Occupational pension firms are going to have a much bigger responsibility for information to participants about the value of their investments,” say Peter Roos and Jeroen Elbertse of Lumera. “Today some assets might be valued just once a year. For our clients, daily valuation updates is the norm.”
To achieve this, all the links in the investment chain - asset managers, custodian and pension scheme must be aligned. At the moment, the latter will be responsible for processing benefits but might not be managing – and therefore valuing – assets. Under WTP, this changes because schemes will be relaying asset values to members.
“Here we have the opportunity for fully automated fund trading as well as passively administered and highly sophisticated portfolio solutions that guarantee a strong product offering, eg lifecycles, but also cost-effective administration,” say Roos and Elbertse.
“As the industry rethinks data requirements, business processes and IT to facilitate the new pension schemes, one of the key considerations is how to provide a fair presentation of the various assets and reserves in order for members to make informed choices and allocation decisions.”
Likewise, in adhering to its ESG policies, the pension scheme will have to accommodate adjustments in ESG scores in its communication with members. The increased frequency of these information updates represents another part of the challenge.
Lumera has experience in building policy administration systems, working with Dutch institutional investors as well as building DC platforms in the Nordic markets. But some of Lumera’s observations from savings reforms in other European countries may not be entirely comfortable reading for Dutch pension schemes on the cusp of great change. For example, Roos and Elbertse note that transparency, even where it is not a legal requirement, will mercilessly distinguish efficient from less efficient players. Winners in the Nordics in the wake of reforms have been those organisations that can provide transparency and keep costs low by means of fully digitised customer journeys and hyper-automated processes. Some have been new brands but, looking to the Netherlands, Roos notes that winners might equally be established players such as custodial banks. Lumera is working with all links in the chain to provide services fit for the new era.
Finally, we come to invaren, the translation of accrued DB rights into DC entitlements. This is a process without precedent in modern times. Most other countries have left DB rights alone and concentrated only on the future. Once pension boards and the social partners have decided on a fair conversion formula, there is an enormous communication exercise to be made to members. At stake here is nothing less than the trust of a nation – to be more precise, the vote-holding population of the Netherlands. Pension scheme members need to believe the invaren is fair or else they may be reluctant to engage properly with the new DC system thereafter.
Source: Pensioen Pro, October 10.
WTP will reward IT leaders