In this blog I would like to share an update of where we stand in relation to the Future of Pensions Act.
Read on to find out more about what we are preparing behind the scenes.
Considering a range of different scenarios
When Philips Pensioenfonds began preparing for the new pension system back in 2021, many of the rules were still unclear. Even now, matters are uncertain. Nevertheless, we have started to map out what the consequences of the future rules might be for the pension plan – and for the pension situation of our members. Our approach is to flesh out a range of different potential solutions, or ‘scenarios’. Below, I highlight three topics that we are currently working on: the issue of ‘entitlement conversion’, the risk appetite survey, and how we are preparing our communications. Before I discuss those topics in detail, however, I must first explain the respective roles of the pension fund and the social partners.
Role of the social partners
Ultimately, the decisions about the future pension plan will be made by the ‘social partners’: the employers and the unions. They are in charge of deciding on a pension agreement, choosing between a ‘solidarity-based’ pension plan and a ‘flexible’ pension plan. They will also deal with what is currently a hot topic: whether or not to transfer previously accrued pensions to the new pension rules, a concept known as ‘entitlement conversion’.
Role of Philips Pensioenfonds
Next, the Board of Trustees of Philips Pensioenfonds will review the social partners’ decisions to see whether they are practicable: not just in administrative terms, but also matters such as affordability (are the premiums agreed between the social partners high enough to realise the ambition?), understandability (is the pension plan easy for members to understand?) and – most importantly – balance.
To expand on the matter of balance: Philips Pensioenfonds has a legal obligation to make ‘balanced’ decisions, although the law does not explain precisely what that means. What is clear, however, is that most situations will offer multiple possibilities, all of which might be balanced. At the very minimum, it is important for us to map out the consequences of every decision for all the various groups of members, and weigh the pros and cons. We need to make sure that none of the groups are placed in a much less favourable position than the others. This means that the Board will determine whether the social partners’ decisions are ‘balanced’. In practice, whatever new understanding we acquire during our preparations will be shared with the social partners. This way, whenever they make a decision, they will already know how it will affect our members.
Three examples of topics that we are currently studying
1. Opgebouwde pensioenen wel of niet ‘invaren’
The most hotly debated rule under the new legislation is that the pension rules will also apply to previously accrued pensions – a concept known as ‘entitlement conversion’ (Dutch: invaren). This includes pensions that we are already paying to our pension beneficiaries, for example. If it is decided that the pensions should be converted, when the new pension system comes into force every member will be awarded their own pension savings. Those savings, consisting of the value of the pension that the member has accrued, plus a share in the pension fund’s buffer, will then be used to pay the member’s pension. The new legislation offers two methods for sharing the pension fund’s existing assets among its members’ pension savings, and each method allows for several further options for how the assets should be divided. We are preparing for the possibility that entitlement conversion is chosen, by running calculations for the separate methods and options to map out the pros and cons.
However, we are also considering the alternative possibility: what will happen with the pensions if it is decided that the accrued pensions will not be converted? In that situation, all the accrued pensions will still fall under the current pension rules: the new rules will only apply to future accruals by members who are still working. This means that the pension fund’s buffer will be used, just as it is at present, to index the pensions every year. We are also studying this option to find out how it will impact our members, and what the pros and cons are.
2. Translating risk attitude into an investment policy
One of the factors that determines Philips Pensioenfonds’s investment policy is our members’ ‘risk attitude’. We establish that risk attitude through regular surveys to find out how much risk you are willing and able to accept with the investments for your pension. This will not change under the new pension rules, but a new obligation will be introduced: we will also need to map out the risk attitude not only at the overall level, but also for the individual age categories. We must then use that information to establish the ideal investment mix for each of those age categories, or ‘life cycles’. Our last risk appetite survey, from 2021, provided us with valuable information that we are using to determine how to establish the investment mixes for our members’ individual pension savings. If the possibility of a flexible pension plan is chosen, members might also be able to choose various investment options individually. We will conduct a new risk appetite survey before the new pension rules are actually introduced, to find out our members’ most recent thoughts and include them in translating their risk attitude into the investment mixes for the separate age categories.
3. How do we help our members to understand their future pensions?
One of the purposes of the new pension rules is to make pensions easier to explain. Under the new system, every member will be able to see how much pension capital they have. Movements in that capital will follow the situation on the financial markets according to logical patterns. However, the new plan will also include measures to protect members against major upsets on the financial markets. Those measures will bring added complexity, making that part of the pension arrangements more difficult to understand.
Philips Pensioenfonds has identified communication about the future pension plan as a key topic: we want to inform you in the clearest possible way about your pension capital and the movements in its value – and of course about what that means for your pension. We are also preparing for the options that will be available to you, and how we can help you to make the right choice. However, the only way to do this properly is by involving you in this process: only you can tell us whether our communications are easy to understand and whether it is clear what you can do with our information.
So we are very excited to invite you to share your input in our members’ panel specifically for the Future of Pensions Act. Sign up by clicking on the button below, and who knows, perhaps one of these days you will be sharing ideas with myself or one of my colleagues!
Managing Director of Philips Pensioenfonds
We would love to learn your thoughts on communication in connection with the Future of Pensions Act. Let us know if you would like to share your input.
Watch a recording of the flashwebinar
If you would like some general information about the new pension rules, watch the recording of the flash webinar and the questions that were asked.