AMSTERDAM - With only weeks to go before the general election, the Dutch government has announced plans to introduce guarantees on defined contribution plans.
According to Jeroen Steenvoorden, director of the Dutch Association of Company Pensions Plans, the Hague, the government is keen to introduce a guarantee on contributions by members of defined contribution plans.
A similar guarantee on defined contribution plans was introduced in Germany earlier this year.
The move by the Dutch government is part of ongoing discussion in the Parliament to update the country's existing pension legislation, which dates to the 1950s, said Mr. Steenvoorden.
With an election looming it is unclear when new legislation may be introduced, but Parliament was set to discuss the government's latest proposal April 24.
Mr. Steenvoorden said the idea of contribution guarantees is not likely to find much support outside of pensioner lobby groups.
"We are not that in favor of these kind of constraints. You can create such products (with financial engineering), but it comes at a high cost," he said.
He was concerned that such guarantees would limit the use of mutual funds.
"You can give a guarantee, but you can't give freedom of investment with it," he added.
Populist move
The move is seen by industry sources as highly populist. It comes at a time when Dutch pension plans and their plan sponsors are attempting to limit moves to introduce new accounting standards that might trigger a shift away from defined benefit plans and could cause pension plans to increase their exposure to corporate bonds.
The new accounting rule, Directive 271, was due to be published last November and adopted next January, but it has been delayed following intense lobbying by corporate and industrywide pension plans, according to Els Van Splunter, technical secretary at the Dutch accounting standards body, Raad voor de Jaarverslaggeving, Amsterdam.
Plan executives are concerned the accounting rule might make them concede power to plan sponsors. Dutch law draws a sharp distinction between pension plans and their plan sponsors, and the proposed accounting law does not fit Dutch practices, said Mr. Steenvoorden.
The new rule, which is similar to International Accounting Standard 19, would require that all Dutch companies, both listed and privately held, report pension plan assets or liabilities on their balance sheets. Currently, Dutch companies only have to report contributions to the pension plan.
"In principle, we think it is not correct that if there is a surplus, it should be shown on the balance sheet of the sponsoring company. The company is not the only one that has a theoretical claim to the money. Pensioners and those paying premiums also have a claim," Mr. Steenvoorden said. Dutch law requires joint representation by both plan members and plan sponsors on trustee boards. But according to Mr. Steenvoorden, the direct influence of the plan sponsor is limited by laws requiring trustees to balance the interests of all parties involved in the pension plan.
The new rule also requires companies to discount their pension liabilities against AA-rated bonds. The current discount rate is 4%.
A warning
Roland Van Den Brink, chairman of Dutch metal industry pension fund, Schiphol, welcomed the accounting laws for giving greater transparency to company accounts, but warned industry regulators to look at the behavioral changes that might occur as a result.
Pension plan executives are concerned the new requirement will give plan sponsors greater control over pension surpluses.
"The current principles work reasonably well and are a reasonable reflection of the economic situation" of companies in relation to their pension liabilities, said Mr. Steenvoorden.
Joos Nijtmans, staff member for financial affairs at the Dutch Association of Industrywide Pension Funds, Rijswijk, echoed Mr. Steenvoorden, saying a direct application of IAS 19 would not suit the specifics of the Dutch pension market.
The proposed reporting requirements "could have a tremendous impact on pension plans due to the impact on the company balance sheet," he added.
Cees Dert, global head of structured asset management at ABN AMRO, Amsterdam, said the new rule would increase volatility in corporate balance sheets. Fluctuations in the reserves of a pension plan can have a greater impact on corporate balance sheets than wage costs.
"I could understand a greater shift to the use of defined contribution plans," he said.
Mr. Nijtmans said it was unlikely Dutch plans would be tempted to invest all of their assets in non-government bonds, but there might be the temptation to do so to make the sponsoring company's balance sheet less volatile.
But Mr. Dert warned that greater exposure to corporate bonds by pension plans trying to reduce volatility for plan sponsors might lead to higher contributions into pension plans as investment returns fall.
Greater transparency
Local consultant Evert Van Ling, managing director of Conact, Houten, said the proposed accounting rules would give greater transparency to company accounts and provide clarity on a plan sponsor's real pension liabilities or assets.
But he said the new rule might encourage plan sponsors to follow the current U.K. trend by closing defined benefit plans and offering defined contribution arrangements instead (Pensions & Investments, March 4).
Mr. Steenvoorden agreed that in its current form the accounting proposal could trigger a move to defined contribution plans, but he said until a final version of the rule is available, it is difficult to say what the exact implications might be.
He is concerned the law might have indirect consequences on the shape of Dutch pension plans: "It's not good that accounting rules should shape pension practice. It should be the other way around."
He said current laws and proposed changes such as the introduction of contribution guarantees do not make defined contribution plans an attractive option.
Companies facing the prospect of volatile balance sheets may disagree, however.
The majority of industrywide and corporate pension plans in the e419 billion ($373 billion) Dutch pensions market are defined benefit arrangements.
Dutch pension plan organizations are still in discussions with the Dutch accounting board over amendments to the proposed accounting rule.
A new draft will be published later this year and is likely to be implemented in January 2004 at the earliest, said Ms. Van Splunter.
