The Future Pensions Act: key elements

The Future Pensions Act significantly modernizes the current pension system by increasing transparency, tailoring investment policies more to the individual, and better aligning with the current labor market and demographics. We can distinguish five key elements within the Future Pensions Act:

1. Solidarity vs. Flexible Premium Scheme
   Within the Future Pensions Act, a distinction is made between the solidarity and flexible premium schemes. The solidarity scheme essentially has more of a collective nature with many solidarity elements, while the flexible scheme has a more individual character with more options. Although these schemes were quite distinct in the preliminary stages, they have converged during the legislative process.
   
   For example, the flexible scheme now also allows for more solidarity rules, including through the risk-sharing buffer, and within the solidarity rules, it is now possible to allocate the actual protection yield to participants. As a result, the two schemes are fundamentally not very different, although there are still some (administrative) differences behind the scenes. For instance, the solidarity scheme allows for the allocation of more than 100% of the excess return if desired.
   
   In the flexible premium scheme, the paid premium is the starting point. With that premium, an individual pot of money is filled for each person, which is invested and from which the pension is paid. In the solidarity premium scheme, the paid premium is also the starting point. In this scheme, the premium becomes part of a collectively invested fund, where all risks are shared together.
   
   The FNV strongly supports the solidarity premium scheme because it is the only scheme where all risks of both workers and retirees are shared. Investment risks are also shared. Investments are made for both retirees and workers. In good times, a small part of the investment returns goes into a solidarity reserve. In bad times, this can be used to mitigate a reduction in pension benefits. This way, it is possible to regularly increase pensions and prevent reductions in the solidarity premium scheme.
   
   
2. Lifecycle Investing
   Under the Financial Assessment Framework (FTK), part of the Pension Act, there is a joint investment policy for all participants. Surpluses and deficits affect the funding ratio and are distributed among participants through premium and indexation rules. The funding ratio risk must align with the average risk tolerance and capacity of the participants. Under the Future Pensions Act, the investment policy becomes more age-dependent. Each individual or age group is allocated the return that results from the investment allocation matching their risk tolerance.
   
   
3. Allocation Based on Actual or Theoretical Returns
   The allocation of returns is based on actual returns or theoretical returns. The actual (direct) method is always the case in the flexible premium scheme and optional in the solidarity premium scheme. The theoretical (indirect) method is based on the swap curve or DNB yield curve (RTS) and is only possible in the solidarity premium scheme. The choice between these options is particularly important for older participants, as allocating actual returns from the protection portfolio can attribute results on spread products (such as mortgages or inflation-linked investments) to this group. Only if a theoretical protection yield is chosen can a nominal yield be allocated, depending on the developments of the RTS.
   
   
4. Projection Yield
   The projection yield determines how quickly the individual pot of the retired participant can be paid out. There are basically three options: the yield curve as the basis for the projection yield, the yield curve plus a spread (expected spread), or the yield curve minus a (inflation) discount.
   
   Unlike the protection yield, this can be based on the inflation swap market. The higher the projection yield, the faster the initial payout, as the present value of the payout is low. However, this means that the individual pot will be depleted sooner, leaving less financial room for indexation in the long term. Conversely, with a low, prudent projection yield, the initial payout will be lower, but there will be more room for indexation in the long term.
   
   
5. From Average Premium to Flat Premium
   Currently, many pension funds still use an average premium: the same premium percentage is paid for each employee, and employees receive the same pension accrual for each euro paid, regardless of age. Since younger people can invest longer, a degressive pension accrual would be fairer with an equal premium percentage. This will change under the Future Pensions Act: young people will have their pension premium allocated to their own investment pot. There will no longer be 'implicit' subsidization of the relatively expensive pension accrual for older people. This makes the scheme much fairer.

All these elements have their own impact on the (re)organization and implementation of pension fund policies. This leads to various dilemmas for pension fund boards.

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[1] There is a maximum when determining the yield. DNB on the maximum height of the projection yield: the projection yield must be designed so that the median payout in nominal terms does not decrease with age, with the spread on the yield curve in the projection yield not exceeding 35% of the difference between the risk-free interest rate at the start date of the pension and the equity return parameter, as included in Article 23a, paragraph 1b, FTK Decree. The projection yield is also not higher than consistent with the investment policy and allocation rules for pensioners. Finally, the projection yield must align with the established risk tolerance.