New Players Shake The Dutch Pension Market   Update Scenario Analysis Pensions Market In 2020
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New Players Shake The Dutch Pension Market Update Scenario Analysis Pensions Market In 2020

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New entrants forcing the current players in the pension market for renewal!...

New entrants forcing the current players in the pension market for renewal!
The main conclusion is that new players shake the Dutch pension market awake. We see that the Dutch pension market on the eve of a major shake-out. In the future, make the service cost carriers with simple and transparent pension schemes can be realized at low cost.

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New Players Shake The Dutch Pension Market Update Scenario Analysis Pensions Market In 2020 Document Transcript

  • 1. S E E I N G T H I N G S D I F F E R E N T LYNEW PLAYERS SHAKING UP THE MARKET!2011 a decisive year for the development of the Dutch pension marketIn 2009, we at Atos Consulting conducted a scenario analysis of the pension landscape in 2020. Plotted alongtwo axes (figure 1), the findings showed four possible futures. We also described how the Dutch pension marketcan prepare itself for the arrival of the futures outlined. We have given early warning indicators for each scenario,which will alert us at an early stage that the scenario is materializing. Various facets of the current retirementbenefits system are discussed under each scenario.The four scenariosThe four scenarios are plotted along two axes: individualization versus collectivization and government interventionversus the free market. Figure 1: The Pension Market in 2020 (Atos Consulting 2009, www.scenario-planning.nl) 1. Mandatory pension commitments 2. Optimal individual freedom of choice Individualization The government wants to put more of the financial risk for The pension scheme is completely tailored to the individual providing for retirement on the individual. At the same time, wants and needs of the participant both in the accrual phase the government does want to ensure that, in addition to the and in the disbursement phase. There is optimal freedom of national old age pension (AOW), employees also accrue a pension choice. The government does not impose regulations any more, via their employer. The financially illiterate should be provided but at the same time it no longer offers basic plans any more with a certain degree of protection in this. either. Pensions are the individual’s responsibility. Government Intervention Free Market 3. Government pension 4. Modernized second pillar Collectivization Studies have shown that the average Dutch person is More freedom of choice arises for employers within the “financially illiterate”. The government wants to protect these framework of the current collective pension system. people and guarantee that they actually receive adequate Retirement plans on the whole become more expensive. pensions to enjoy their retirement.
  • 2. NEW PLAYERS SHAKING UP THE MARKET!Developments Negotiations on this agreement are still in progress. TheOver one year later, and with these scenarios in the main point of discussion is the nominal guarantee ofbacks of our minds, we will now have a look at a pension entitlements. The agreement makes referencenumber of key developments in the Dutch pension to a maximum premium for employers. This would placemarket. Pension providers have come through some the risks of pension shortfalls on employees. This radicaltough times, and they are not out of the woods yet, as measure could make granted entitlements conditional,some daunting challenges lie ahead. We will discuss potentially with retroactive force.each of these challenges and finally offer a conclusionas to what all of this means for the outlined scenarios. Should the negotiations break down, the government is expected to take independent measures to raise the nationalA great deal of uncertainty still reigns in the pension retirement age in any case and perhaps to intervene in themarket. This uncertainty stems from two factors: weakened pension funds.1. Uncertainty over economic and sociodemographic trends. In addition to this, we can clearly see that the2. The direction of the Dutch government’s policy. discussions surrounding the pension agreement hingeAt this time, there are some ongoing policy in part on the issue of solidarity. There are two distinctdevelopments. This makes it a good time to have a look considerations for this issue: on the one hand we haveat what the current trends are and what they mean for age solidarity among generations and on the other handthe future of our pension landscape. education and income solidarity.Pension Certainty and Solidarity These issues will be resolved to some degree in theIn 2010, employer and employee organizations in the new pension agreement, but in order to completelyLabor Foundation (Stichting van de Arbeid) closed eliminate the disparity, more drastic measures area framework agreement on a flexible pension and needed. It is inevitable here that the current forms ofthe national old age pension (AOW). This agreement solidarity will disappear and make way for a much moreregulates discussions on the national and private individual form of retirement saving, which only usesretirement age by pegging both of them to the life collectivization to hedge major risks. With this, the trendexpectancy. is shifting increasingly towards individualization.The discussion partners have also decided that as of2012, the pension agreements and correspondinglegislation must be amended to account for financialdevelopments. Figure 2: Trend in number of OPFs, BPFs and Occupational Pension Funds – 1997-2011 1200 Company pensions and savings funds (OPF) 1000 Industrial pension funds (BPF) Occupational pension 800 funds 600 400 200 0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Q1
  • 3. The discussion on the pension agreement and solidarity The second phase consists of adjustments in the Dutchhas made one thing clear: it is no longer taboo to Pension Act (Pensioenwet), enabling mergers betweendiscuss sweeping changes to the pension system. company pension plans (OPFs). These multi-OPFs may be particularly useful to minimize costs for smallerLooking at the scenarios we can conclude that, as a funds. The Dutch Senate passed the Multi-OPF bill onresult of this discussion, the trends are shifting more 11 May 2010.towards market-thinking (stimulated by the government)and increasing individualization (scenarios 1 & 2). In the third phase, the API will be introduced into the Dutch Pension Act. Practically every conditionNumber of Company Pension Funds (OPFs) Decreasing applicable to PPIs will also apply to APIs. One majorPension funds, mostly smaller ones, are having difference though is that APIs can in fact extend theirtrouble meeting the strict requirements imposed own guarantees for benefits and/or risks. Thus, APIson management and governance by the laws and can support Defined Benefit (DB) plans. Given the speedregulations. The upcoming pension agreement will of the decision-making process, the first API in theonly reinforce this trend. In addition to this, changes Netherlands is not expected until late 2013 or early 2014.in accounting regulations (IFRS and IAS 19) are alsoan impetus for businesses to end Defined Benefit (DB) The expectation on the market is that PPIs will be aplans. great success. This is evident from the number of PPIs already established and in the process of being formedA recent study by KPMG shows that nearly 35% of the (the current count comes to more than 10 announcedOPFs are looking at liquidation of their fund. The primary PPIs). Every year, between 50,000 and 100,000intention here is to merge into an industrial pension participants have their pension plans moved to anotherplan (BPF) or switch over to an insured plan (and in the insurer. So, in our opinion, given the required scale, thefuture possibly a defined-contribution or general pension Dutch market can currently accommodate 3 to 5 PPIs.institution (PPI/API). A chart illustrating this trend is given This means that most of the PPIs currently being set upin Figure 2. will not be successful, or will have to find their successDue to the shift towards insured plans, we can say mostly in foreign markets. However, at this time no onethat as more OPFs liquidate, solidarity will come can afford to miss the boat. In other words, the choiceunder pressure and the trend will shift towards more is between potential failure and not playing at all. So far,individualization and the free market (scenarios 1 & 2). the first option has been popular.Some experts are of the opinion that this developmentwill also prompt a re-examination of the large role that Just as with the developments surrounding themandatory participation plays in European policy. pension agreement, the trend is shifting towards individualization. This comes in combination with strongPPI/Multi-OPF/API market forces, under which new parties are entering theThe government has decided to introduce the General market and existing parties are fighting for their survivalPension Institution (API) in three phases. This is a new (scenarios 1 & 2).pension provider which is supposed to take betteradvantage of the opportunities provided by European Cost Transparency and Levelsdevelopments. Pension funds and pension insurers are also hearing increased calls for transparency. The Dutch Pension ActThe introduction of the Defined-Contribution Pension imposes the transparency requirement on contributionInstitution (PPI) comprises the first phase in this agreements. This means that pension funds (as of 1process. The 2009 scenario analysis touched on the January 2008) and pension insurers (as of 1 Januaryestablishment of PPIs. In late 2010 this law was passed 2009) must communicate the costs involved in thein the Dutch Senate. This clears the way to allocate the available contribution schemes in a transparent manner.first plans under PPIs.The PPI takes advantage of the developmentsin Defined Contribution (DC) plans. The PPI itselfcannot guarantee returns on investment or specificdisbursement sums. This means the employee bearsthe pension disbursement risk.
  • 4. The report “Pension Fund Costs Deserve Closer Here as well we see a shift towards market-thinking, justAttention” (Kosten pensioenfondsen verdienen meer as with the API and PPI developments.aandacht) issued by the AFM (Dutch Financial MarketAuthority, April 2011) finds that many pension funds Economic Developmentsdo not have any insight into actual costs. One of the At the time of our first scenario analysis, a large numberrecommendations here is that the funds make costs of plans were experiencing coverage problems. Themore transparent, but also that they communicate these figures from the Dutch National Bank (DNB) indicate thatcosts to (retired) participants. the financial position of pension funds improved over the fourth quarter of 2010. The average coverage rateThe report also states that the cost structures for the rose from 99% at the end of the third quarter to 107%smaller pension funds are significantly higher than the at the end of the year.costs of the larger funds (Figure 3).Costs have a major impact on the pensions benefits This improvement in coverage rates is associated inaccrued. particular with the increase in the long-term interest rate, resulting in a sharp decline in value for pensionIf the investment and administrative costs of the plan fund liabilities. The number of participants involved inor administration are no longer viable, then alternative a pension fund with inadequate coverage (less thancost reduction measures must be considered. These 105%) fell from 4.8 million to 3.0 million. Although thealternatives may include measures such as mergers, coverage rate is increasing, this does not mean nojoining larger associations, or simplification of the plan. problems remain. Once again pensions are lagging behind increases in wages and prices according to theThe AFM states in its report that a better picture of Dutch National Bank based on its annual survey of thethe costs could even point the way to new visions for 25 biggest funds. In this way, the pension fund crisis isreforming the structure of our second-pillar pension hitting retirees in the wallet. Employees are also beingsystem, in light of the ongoing discussion on this matter. affected: lack of indexation has an impact on pension benefit accrual and pushes up contributions! As pensionThe consequence of this current trend will be a period funds increasingly have to forgo indexation and possiblyof consolidation in the pension fund market. We will even cut entitlements, this will inevitably cause a shiftalso see increased freedom of choice for employers, away from solidarity and towards individualization in thewhich will boost competition. This, in turn, will usher in a pension sector.period of professionalization. Figure 3: Administrative costs as a % of the balance sheet total by size class (2009) (“Pension Fund Costs Deserve Closer Attention” Financial Market Authority- April 2011) 1,2 1,18 By size class Administrative costs per year as % of balance sheet total Total weighted 1,0 average 0,8 0,6 0,4 0,33 0,20 0,2 0,17 0,13 0,10 0 0 - 10 million 10 - 100 million 100 million - 1 billion 1 - 10 billion > 10 billion Size class of pension funds by balance sheet total (x 1 million euro)
  • 5. Development of the Pension Landscape Conclusion: Strategic choices unavoidable forAs for the issue of collectivization vs individualization, pension insurers and providersit is clear that the current level of solidarity is not Our scenario analysis clearly shows that the future liessustainable over the long term. with simple and transparent pension plans that can be administered at low costs. All frills will ultimately come atFurther, DB plan costs are not tenable over the the expense of returns on investment or disbursements.long term either. Many pension insurers are alreadyexperiencing issues with the profitability of guaranteed Pension insurers can offer these products via aproducts. This will increasingly lead the various partners Greenfield model: a new Defined Contribution (DC)in CLA discussions to switch over to simple plans. The pension insurer that is not burdened with legacy costsplans will be stripped of their frills to lower the cost of from the past. Given that the costs of the currentwork. portfolios are too high, these must also be dismantled and migrated over to the new DC insurer as quickly asThis means that the pension system will base itself possible.more and more on individualization (scenario 2), and One alternative is for the insurer to go with the flow ofpensions will no longer necessarily have fixed values. the current market shift and set up a PPI. A pensionA larger third pillar will arise for those who can afford insurer that sets up a PPI basically has two options:it. In addition to this, other avenues, such as home you can start your own PPI, possibly in a joint ventureownership, will become a larger part of saving for (such as Delta Lloyd with BinckBank, or ASR with Brandretirement. New Day), or the pension insurer can restrict itself to the role of provider of insurance products to PPIs (suchDue to the pressure from these trends, it is inevitable as Generali, which is a provider to the Robeco PPI). Forthat the government will intervene in the pension pension insurers, what is certain is that belts will havesystem; not to take more control for itself, but rather to to be tightened in order to win the battle for the pensionadjust the system to the new realities and the demand Euros over the coming years.for individualization. OPF plan providers will have to deliberate over theirOver the long term, this will give rise to a situation in futures. The question on everyone’s mind is whetherwhich OPFs and BPFs, in their current forms, will be they will be able to transform themselves to meet theobsolete. Our expectation is that the large degree needs of the new pension world. Our expectation isof mandatory participation will disappear over the that the number of OPFs will continue to decline overcoming years and BPFs will turn into pension funds the medium term and that over the long term the OPFthat employers join voluntarily. In time, OPFs will either in its current form will cease to exist. This means thatdisappear completely or turn into PPIs or APIs. providers must first focus on consolidation, in order toThe primary objective in this will be to create economies retain market share, and on PPIs. Over the long term,of scale and volume for better returns on investment, pension providers will have to transform themselvesdiscounts and lower operating costs. into maximally effective and efficient providers of simple plans, which will give rise to a true price fighter’s market.So far, all of the above indicators point to a shift towardsthe second scenario “Optimal individual freedom of BPF plan providers are already looking at optionschoice”. for providing other types of plans. This is due in part to pressure from the watchdog for large providers to work in a multi-client manner from a governance perspective. Here as well we expect to see a period of consolidation to capitalize on economies of scale and cost advantages. Moreover, BPF providers will also join in the competition for PPIs: on the one hand to ‘practice’ for an open market, and on the other hand to offer an alternative for OPFs and BPFs looking for other pension vehicles.
  • 6. NEW PLAYERS SHAKING UP THE MARKET!To conclude, we can say that the trends anddevelopments outlined above will result in the pensionmarket changing more drastically over the next fiveto ten years than it has over the past forty years. It isnot just types of plans that will get the boot, but moresignificantly, the parties responsible for running the Dutchpension system.Just as in the Dutch life insurance market, the pensionmarket will undergo a shakeout which will result ina 2020 playing field with many new names and,most strikingly, from which many old names will havevanished.For further information, please contact StephanLinnenbank RM, partner and Richard Klaasen Bos,Executive Business Consultant.Atos ConsultingPapendorpseweg 933528 BJ UtrechtThe NetherlandsPhone +31 (0)88 265 88 88info.consulting@atosorigin.comwww.atosconsulting.nlwww.scenario-planning.nlAtos, Atos and fish symbol, Atos Origin and fish symbol, Atos Consulting, and the fish itself are registered trademarks of Atos Origin SA. June 2011