Dick Kamp: Risk management and former participants

June 18, 2024

_{This column was originally written in Dutch. This is an English translation.}

By Dick Kamp, Director Pension, Investment and Risk at Milliman Pensioen

The transition to the new pension system brings with it issues that you may not initially think about. Such as the issue of former participants.

One of the objectives of the transition to the new pension system is to increase the portability of pensions. In other words, it should become easier to transfer accrued pension capital (if desired) to another pension provider.

If there is a pension capital and no longer a pension entitlement, then there is no longer any discussion about values ​​that are transferred. The value is the available capital. Special agreements about calculations are no longer necessary.

However, the issue of treatment costs remains: who pays the costs of the value transfer? Until now, this has always been both the sending and the receiving pension fund. In other words, all participants of the sending and receiving parties pay the handling costs of the value transfer. I don't expect that to be any different. There is solidarity with the new and other former participants.

As long as a former participant leaves his accrued pension capital in the pension fund where the pension capital has been accrued, he or she also participates in all risks borne by the cohort of which he or she is part. These risks can be roughly divided into three main categories:

1. Cost risks
2. Biometric or actuarial risks
3. Investment risks

Let's take a closer look at each of these risks.

Cost risks

Under the current pension system, active participants generally bear the costs of pension administration through the premium and the pensioners through the release of the ex-casso provision. This is also explainable, because there is a pension entitlement under the current pension system. A contribution to the costs by a former participant without a reservation being made for this de facto amounts to a pension reduction for the former participant. And that is the ultimate remedy. There is therefore no room for former participants to contribute to the pension administration costs.

In the new pension system there is no longer a pension entitlement. There is an ambition for the pension scheme, but this is usually articulated as an expected pension outcome with an expected margin of achievement.

The absence in the new pension system of the 'slightly tougher' pension entitlement means that quite a few pension funds are expected to allow former participants to contribute to the operational pension administration costs. This means that more savings premiums are available for active participants.

Now the operational costs (costs for pension administration and pension communication) for a former participant are considerably lower than those of an active participant or a pensioner. Undeniably, contributions to cover the operating costs of the financial year detract from the pension to be achieved at the time of retirement. That is an absolute drive to consider a value transfer in the event that the former participant has a new pension provider.

When considering collectivity and solidarity, collectivity wins over costs. In other words, the former participant shows solidarity with his former colleagues.

Actuarial risks

In the case of actuarial risks, in the new pension system the survivor's pension is (only) insured for active participants via risk insurance. Pensioners can insure the partner's pension by reserving part of the pension capital for it upon retirement. The former participant no longer has coverage for survivor's pension from the pension fund. As long as the former participant has a new employment contract where survivor's cover has been arranged, there is basically nothing much to worry about.

Upon the death of the former participant (without a partner), his pension capital is released to cover the longevity risk of the longer-living participants in the pension fund. The former participant expresses solidarity with his former colleagues.

Investment risks

In terms of investments, the former participant is part of the age cohort to which she or he belongs. No distinction is made in the status of the participant. The investment risk within the cohort is the same and the investment costs are also the same. There is collectivity and solidarity within the cohort.

To summarize

The foregoing shows that the position of a former participant changes in the new pension system. The interpretation of collectivity and solidarity is changing. This is especially visible in the way in which former participants will in many cases contribute to covering pension administration costs. This may have consequences for the way in which pension funds deal with former participants.

It is still early days and pension funds are still very busy working to make the transition to the new pension system possible at all. But it is good to realize that a new situation is emerging for former participants. It is necessary to gain clarity about this for his or her own financial planning. Pension funds play an important role in this and it is first necessary that pension funds develop a clear policy on this and also think about it during the transition phase.

Dear board member, it may still be early days, but it cannot wait too much longer. When will you further elaborate the policy regarding former participants?

This is the twenty-ninth column in a series on risk management. The series aims to encourage the reader to view risk management as an integral part of running a pension fund.

More columns by Dick Kamp