Employer Action Code: Act
On September 22, the Dutch government presented a package of measures to Parliament that is intended to give some relief to pension funds with funding shortfalls. The package, approved by Parliament, includes the adoption of an Ultimate Forward Rate (UFR) to value long-term pension liabilities. The measures are intended to prevent further increases in 2013 contributions, reduce the need for cuts in benefits and allow unavoidable cuts to be spread over several years.
Pension funds will now use a UFR rather than a pure market rate for valuing pension payments with times to maturity of more than 20 years. This will immediately increase funding ratios and reduce the need for contribution increases and benefit cuts.
In the longer term, it will reduce the volatility in valuing liabilities as it is less sensitive to fluctuations in financial markets. It is based on a methodology similar to one used in Solvency II, an EU initiative to better monitor capital adequacy, that insurance companies in the Netherlands have been required to apply since June 2012.
Pension funds with a funding ratio of less than 105% are required to submit a recovery plan to the Dutch pension regulator, the De Nederlandsche Bank (DNB), which must include a contribution level that helps eliminate the shortfall. Since 2010, funds have been able to apply for a contribution respite that conditionally waives contribution increases if the pension fund develops a consistent and sound financial structure within a year.
Plans that have not already been granted a respite nor been forced to cut pensions in 2013 have one last opportunity to apply for this respite. Other plans can also apply, but they will have to amend their plans before they do so.
The minimum conditions for these plans are that, effective Jan. 1, 2013, they increase the retirement age from 65 to 67 (one year earlier than required), factor increases in life expectancy into pension entitlements of pensioners and other members, and allow indexation of pensions only when the funding ratio exceeds 110% (rather than 105%).
Phasing in pension cuts
Annual evaluation of a pension fund’s recovery plan is required. If results show that the fund will not meet the minimum funding requirements within the five-year recovery period, then the fund may have to cut pensions for pensioners and benefits for other members.
The new measures allow pension funds to phase in those benefit cuts over several years, subject to a number of conditions:
- Cuts due to take effect starting in April 2013 can be limited to those already announced earlier in 2012, with the balance deferred until 2014. The funding ratios at the end of 2012 based on the new UFR method will determine the size of benefit cuts.
- Cuts due to take effect starting in April 2014 can be limited to 7%, with the balance deferred until April 2015. The size of any cuts can be based on the funding ratios at the end of 2013, rather than 2012. However, they then become unconditional and cannot be reversed, and if the cuts are phased in, the 2015 cuts also become unconditional.
The conditions for phasing in the cuts are the same as those for pension funds that apply for contribution respite.
Implications for employers
The September package creates momentum for companies with pension funds to change their plans for 2013, most importantly by increasing the retirement age. All companies will have to revise their plans for 2014, when the retirement age has to be increased to 67.