Determining the Market Value of Existing Entitlements in a Defined Benefit Plan

To facilitate the transition to a new pension contract, the Dutch cabinet wants to make it possible to combine pension rights already accrued with the amounts to be accrued under the new pension contract. At the behest of the Dutch Ministry of Social Affairs and Employment (SZW), Netspar researched the possibility of adopting a uniform method for converting any presently accrued pension rights to personal pension savings. This standard method would allow a pension fund to distribute its pooled pension assets in an explainable, traceable manner and could prevent disputes between stakeholders about the valuation method used.

In the transition to a new pension contract (as envisioned in the Pension Agreement), the entirety of a pension fund’s wealth, including any positive or negative buffers, will be included in the conversion. The aggregation of present and future entitlements will be facilitated by, among other things, a transition framework. The proposed methodology would form part of that transition framework and is intended to establish the value of a claim to pooled pension assets in a defined benefit pension plan. In deriving the methodology, due consideration has been given to the fact that – in line with current political will – the distribution must not deviate too much from the existing Financial Assessment Framework (FTK) contract. It is up to the politicians and social partners themselves to evaluate the magnitude of the differences in view of other considerations and decide whether to advance the standard method or not.

The proposed standard method is a relatively simple, explainable, and traceable method for valuating existing pension entitlements and distributing pension assets in the context of transitioning to a new pension contract. It does not take the effects of new accrual into account. The advantage of the standard method compared to the alternative method, the so-called Value-Based ALM, is that its results are not dependent on all sorts of subjective presuppositions to be made by the social partners, pension funds, or pension providers, which will quickly lead to conflicts. The methodology suggested here is more targeted and better reflects what participants in the current pension contract would have been entitled to. It is up to the Dutch cabinet to weigh the advantages and disadvantages of the proposed method.