In an earlier article we talked you through why the pension agreement is there and what the changes are compared to the current system. The Future of Pensions Act (WTP) is a big change and requires immense changes and commitment from all parties involved in the pension industry. We are moving to a fixed contribution; pensions will become more individual and will adjust to the economy. This creates structural changes that affect the entire sector.
First, the article travels back in time to go through how this huge change has navigated through politics, then discusses how the sector can deal with these changes. How will this be put into practice? For introduction to completion of the WTP, 4 phases have been created, in this article we will discuss these four phases.
This is the second article regarding the Future Pensions Act (WTP). You can find the first article here.
Phase 1: Legislative process
The legislative process has been the first step in the "realisation" of the WTP, namely its creation. This is the phase where the law is actually formed and written. This is an intensive process and certainly does not happen overnight. The term political process has taken on a new connotation, because, among other things, the following took place during this (lengthy) phase:
- The agreement reached through the dutch ‘poldermodel’ was developed into a memorandum;
- A first version of the law was submitted to the internet consultation (February 2022);
- All kinds of parties (outside politics) asked questions and made proposals through the internet consultation;
- These questions were (partly) incorporated into a modified version of the law;
- Multiple parliamentary treatments have taken place in the House of Representatives;
- Four bills of amendments have been prepared for the law;
- The House of Representatives agreed to the WTP, including related amendments and motions affecting the implementation of WTP.
The legislative process has been the first step in the "realisation" of the WTP, namely its creation.
After approval by the House of Representatives, the Senate considered the WTP. The role of this body is to look at the feasibility, enforceability, implementation, fairness, and the effects of the law. After several parliamentary debates and answering more than 1,000 questions, the Senate approved the WTP on May 30, 2023. The effective date of the WTP is July 1, 2023, formally completing this phase. The initial discussion about a possible new pension system until the effective date of the WTP, has been going on since the last millennium!
Phase 2: Decision-making process
Currently, the pension landscape is in the second phase, the decision-making process. In this process, the responsibility is handed over to the Social Partners, employers, and pension funds. These parties bear the responsibility, based on the content and framework of the law, to carry out various preparatory work and make important decisions. There are several focal points such as:
- Examining and improving data quality;
- Investigating the risk appetite of participants;
- Shaping the new plan (which contract, premium amounts);
- Drafting new policies (for example, compensation policies) and updating existing policies (for example, investment or risk management policies);
- Deciding on incorporation
- The drafting of the assignment acceptance.
The decision-making phase formally concludes with the acceptance of assignment by the pension fund.
This phase formally concludes with the acceptance of assignment by the pension fund. In practice, the second phase partly runs parallel to the preparation and implementation of the third phase.
Phase 3: Implementation period
In the implementation phase, the agreements made in phase 2 are implemented and monitored. This sounds easier than it is. The pensions of 90% of Dutch households with an estimated size of 1560 billion Euros are administered in IT-systems at many different pension administration organisations (PUOs).
Before the transition to WTP can take place, these PUOs administer the pension based on the current pension plans. In addition, the IT systems are being prepared to implement the WTP and, finally, the transition from "old" to "new" takes place.
In this phase, mainly the pension funds and their outsourcing relationships are working on projects to implement the WTP. Given the importance of a controlled and well-managed implementation and the importance of trust in pensions, various regulators are closely involved in this phase. For example, pension providers have until April 1, 2025, at the latest to inform De Nederlandsche Bank (DNB) about the new pension agreement, and an implementation plan and communication plan must be received by DNB and the Netherlands Authority for the Financial Markets (AFM) by July 1, 2025, at the latest.
Given the importance of a controlled and well-managed implementation and the importance of trust in pensions, various regulators are closely involved.
The regulators have a certain period to review the decisions and plans received and indicate whether they approve. Given the relatively short period until the final implementation date (January 1, 2028), parties in the pension sector are working hard to prepare based on the implementation and communication plan.
As mentioned earlier, the Future Pensions Act will come into effect on July 1, 2023. From this date onwards, all parties involved must ensure careful implementation of the new system. This transition will take place in phases. This means that each pension fund can decide to switch to a pension plan that fits within the WTP at any date from (approximately) January 1, 2025.
Each pension fund can decide to switch to a pension plan that fits within the Future Pensions Act at any date between January 2025 and January 2028.
The end date for this transition is January 1, 2028. At that time, all implemented pension plans must conform to the WTP. Based on responses from the industry, it appears that the full implementation and transition period is more complex than expected, therefore the deadline has been postponed for 1 year to accommodate implementation of the WTP.
Phase 4: Compensation period
The final phase of the WTP is the compensation period. This period starts from January 1, 2028, after the implementation is completed. During this period, for a selected population, pension entitlements will be compensated if there are disproportionate disadvantages in pension entitlements. This will occur in particular between the ages of 40 and 55, as they have accrued a relatively large amount of pension in their younger years but see less of this in the new WTP. An important point here is that compensation concerns the pension entitlements still to be accrued, so this only applies to active participants.
Compensation can be granted per age cohort. These age groups are determined by social partners, in consultation with the pension fund.
There are 3 ways in which compensation can be financed:
- Adding premium costs
- From current pension fund assets.
- Inside or outside the employment condition pension
Funding through outside the employment condition pension is seen as undesirable, as pension assets then lose their initial goal of meeting pension needs.
Vision of ProjectiveGroup
The majority of parties operating in the pension sector are affected by the implementation of the FPA. New policies, processes, IT adjustments, compliance issues, manageability, communication, and risk management are all challenges that arise. Our consultants possess the knowledge and expertise to assist our clients through advisory or execution support in achieving or maintaining an integral and controlled business operation in the realisation and implementation of the FPA.
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