“This transition is unavoidably affected by future developments on financial markets”
The transition from the current Dutch pension system to the new pension contract means a switch from a benefit scheme to a premium scheme. Pension funds will therefore need to convert collective capital into personal pension wealth and a solidarity reserve. That conversion is sensitive to fund-specific assumptions (such as initial coverage and age structure of the participant population), economic circumstances (interest rate term structure), and policy-related assumptions (such as ultimate forward rate (UFR)). So how should these sensitivities be dealt with in the transition period for the new pension system?
Key Takeaways for the Industry
- The so-called `standard method’ values pension entitlements and converts the funds’ collective capital into individual pension wealth based on a smoothing technique resembling the recovery rules when a fund is under- or overfunded in the current system.
- The sensitivity to future interest rates depends primarily on the amount of interest rate hedging.