The new pension contract: experiences from Scandinavia



Scandinavian countries have embarked on the road to DC pensions earlier than the Netherlands. Those experiences offer valuable insights for Dutch pension funds in the transition to the new contribution system, says Peter Roos, pension expert at the Swedish insurtech company Lumera. “The increased competition will have the biggest impact, which is something pension funds and administrators will have to get used to.”

Lumera was founded in 2003 to help Scandinavian pension administrators transition from DB to DC schemes. The transition was fairly gradual, says Roos, unlike in the Netherlands where pension funds have to switch to a premium scheme with individual features by January 1 2027. “That is quite rigorous, funds will have to adjust to a totally different landscape, in which there is more competition.”

Employers will pay closer attention to costs, returns and administration processes. If the costs are relatively high, they may change their pension provider, says Roos. Participants, too, will expect more and will measure funds against each other. “If, for example, participants have to make investment choices, they need good and up-to-date information. You have to set up your administration process for that now.”

Participants will demand more insight

Experience from Scandinavia shows that initially 10% of the participants will ask questions and that this percentage increases as more (media) attention is paid to the differences between pension funds. They want insight, says Roos. “Participants will ask for real-time updates of the pension accrual and, for example, historical statements of returns. That leads to higher administration costs. It is important that administration processes are modern, fast and cost-efficient.”

Regulatory and compliance requirements are also going up. “You have to know your customers. Have they received advice? What is their risk-bearing capacity? Do they understand the choices they have to make? This is about income that participants have to live with for a considerable part of their lives, which requires good decisions”, says Roos. He thinks the freedom of investment for participants is still relatively limited. The flexible contract usually only has a few risk profiles. “In Sweden, people can choose from hundreds of investment funds within a pension scheme.” Roos finds the age-independent premium in the new system very positive. “This was not chosen initially in Scandinavia; older people had to pay more premium. Unfortunately, that led to age discrimination on the labour market. That mistake has now been rectified.”

Efficiency, costs and scale become decisive

Economies of scale are very important in order to cope with rising costs. Roos: “We expect a consolidation cycle in the Dutch pension sector. However, this will create new problems; it is quite a challenge to integrate two pension schemes into one administration system.”

One tricky point is what should happen with the old pension rights, usually built up under a DB regime. Accrued DB pension rights are ‘imported’ into the new premium scheme as far as possible, but this requires the consent of the social partners, and if this leads to ‘disproportionate effects’ it may be deviated from. Old pension rights will then remain in a closed pension fund.

Roos suspects that many closed pension funds will continue to exist after 2027 and warns against the disadvantages. “Norway has many of these closed funds. After a few years, you notice that the costs increase significantly. The number of participants is steadily decreasing, causing the costs per participant to increase. Premiums are not paid in, which means that the increasing costs have to be borne by the investment returns. In addition, closed pension funds have less freedom of investment and do not often receive the full attention of pension providers.

Finally, Roos has one piece of advice for Dutch pension funds regarding the financial buffers, which are used for such things as solidarity between age cohorts. “When do you draw on those buffers? You can agree on fixed rules for this, but they will not be able to cope with unexpected market conditions. Rather, consider less rigid rules where, for example, a committee including all stakeholders decides on the buffers.”

Source: Pensioen Pro, May 19

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