The Future Pensions Act: Opportunities and choices

Logically, the transition to a new pension system also means a reassessment of the form of implementation. Setting up a new pension scheme is labor-intensive and costly. In that case, it may be wise to opt for a different form of implementation. This could include implementation via a Pension Premium Institution (PPI) or an insurer, a General Pension Fund, or perhaps even a buyout or reinsurance of the (accrued) pension rights. A combination of the above forms is also possible. a.s.r. offers all of these forms and has bundled its knowledge in these areas. We can map out the advantages and disadvantages of these various options for pension funds, enabling them to make a well-considered choice.

Participant administration and asset management will become much closer under the Future Pensions Act. The exchange of information between both parties will increase. But how do you keep this manageable? Ensure that the implementation of the scheme at the ‘front end’ is as simple (and structured) as possible, so that there are no problems at the ‘back end’. Some examples of how to achieve this:

• Choice of frequency of recalibration of cash flow obligations;
• Choice of frequency of rebalancing;
• Limitation of the number of lifecycles.

An important argument for the transition to the new pension system was that pension funds would be able to focus on achieving their largely stable benefit ambitions and would not be hampered by the current nominal supervisory framework. Opinions are divided on whether this objective will be achieved under the Wtp, because the (nominal) RTS still plays an important role. How can you, as a pension fund, ensure that you can achieve your indexation ambition within the Future Pensions Act?

A lot will change under the Future Pensions Act. But no matter how you look at it, financially speaking, it ultimately boils down to two things: earning money and providing benefit security. If there are two objectives, two instruments are needed, according to professor and Nobel Prize winner Jan Tinbergen. With an explicit separation of the investment portfolio into a protection portfolio and a return portfolio:

• the structure will be more in line with the structure of lifecycle investing, which is based on the two objectives, whereby young people focus more on earning money and older people focus more on benefit security;
• the pension fund will be able to manage and optimize both portfolios more effectively;
• it enables the pension fund to be more transparent towards participants, both in advance (What are we going to do?) and afterwards (How did we perform?);
• the pension fund can better account for the mismatch result to the regulator, because the structure of the protection portfolio must be aligned with the protection return promised to participants.

There is no universally applicable answer to this question. Every pension fund is different in terms of its composition, so an optimal lifecycle is tailor-made. Important input factors for optimizing a lifecycle include:

• Contribution level;
• Pension fund objective;
• Risk appetite of the different age groups;
• Investment beliefs.

We have the knowledge, experience, and resources to further develop this for each pension fund.

In order to determine whether you, as a pension fund, need to make any changes to your current investment policy, you first need to have a clear picture of the future of the pension fund and/or the contribution scheme. It makes a big difference whether you opt for a solidarity-based or flexible contribution scheme (or full reinsurance) and which form of implementation is chosen. 
 
If it turns out that a certain minimum coverage ratio is needed to make the transition happen, with enough support from the participants, there are different tools available to minimize the chance of a lower coverage ratio. Both linear (such as interest rate swaps and equity futures) and non-linear instruments (such as swaptions and equity options) can be used to manage the risks. 
 
Of course, this will vary from one pension fund to another. We have extensive experience in implementing such transition strategies. That is why a.s.r. is well placed to advise pension funds on the transition and to take care of the implementation.