The Dutch cabinet moved closer to a new agreement with employers, employees and unions that will see the country phase-out defined benefit arrangements by 2026.
Following an initial "in principle" agreement in June 2019, talks over a new retirement legislation progressed on June 12 toward a new mandatory defined contribution system. The details of the system will be outlined in new legislation, which is expected to be in place by January 2022.
The new legislation is expected to state that DB plan sponsors, which constitute over 80% of the Dutch market, will have four years to switch to a DC arrangement from DB. Consultants expect the new plans to be either pure DC or collective DC arrangements.
However, sources said the features of any existing collective DC plans in the Netherlands will also be required to change to life-cycle-like strategies. The new collective DC plans will not utilize the existing ability to risk-share between younger and older participants in the decumulation phase. Also, the new collective DC plans will not calculate a funding ratio or use a discount rate — both utilized in the Dutch collective DC model now, consultants said.
Martijn Vos, partner and managing director at Ortec Finance, said in an email: "I do expect most current defined benefit plans to be closed for new accrual and the existing pension (benefits) will stay there as there will be an opt out rule if a merger between new and old (plans) cannot be implemented in a balanced way."
Also, under current legislation, a funding ratio that falls below 104% for five consecutive years is subject to cutbacks in benefits until the fund reaches the required funded status. However, the Dutch ministers said an exemption will be made to this rule due to the impacts of the coronavirus pandemic.
Pension funds with a funding ratio above 90% do not have to reduce their pension benefits, the Dutch Ministry of Social Affairs and Employment said.
A further change relates to contribution rates. Currently for DC plans, contribution rates automatically escalate. However, the new legislation is expected to change this to a flat-rate contribution system, said Edwin van den Oever, managing director at LifeSight, the Willis Towers Watson multiemployer plan in the Netherlands.
However, ministers, employers and unions are yet to agree on whether employers may continue to use the current accrual system for existing employees in DC plans, which currently increase with age, he added.