Not transitioning to the new pension scheme costs 18 billion euros
In the Dutch House of Representatives, the Future Pensions Act (Wet toekomst pensioenen, Wtp), adopted in July 2023, is being called into question — above all whether so-called ‘invaren’ should be the norm. If it is indeed abandoned, it will cost a great deal of money. According to Christoffel van Riet, advisor to pension administration organisations and pension funds at PwC, the operational costs of not transitioning amount to at least eighteen billion euros.
The current debate about keeping invaren in the transition to the new pension scheme could have major consequences. With invaren, accrued pension entitlements and rights are transferred into the new pension scheme. Invaren therefore means keeping the old and the new pension together at the same pension administrator. If a pension administrator starts a new scheme for all active members of a fund and there is no transition, the pension book with the old accrued rights and entitlements continues to exist in closed form. We call this a ‘closed book’.
Most pension funds and administrators are currently busy implementing new systems to properly manage the solidarity-based and flexible contribution schemes. If the closed book continues to exist, the old IT platforms and the knowledge needed to maintain them must also be retained. After all, new legislation or stricter compliance requirements can always come along, after which the old platform must be adapted as well.
The actual administrative transactions in the closed book, on the other hand, do decline. New members are only added to the new administration. Divorces, deaths, value transfers and relocations, however, affect both the new book and the closed book and — depending on automated links with the Personal Records Database (BRP) — this creates additional work.
Double interfaces drive up costs
Much more difficult is that the closed and the new administration both have interfaces to member communication platforms (the uniform pension statement, the personal online environment) and also, for example, to benefit payment systems. When changes are made, this double interface makes communication and services such as choice guidance both more expensive and more time-consuming. The same applies to the complexity of implementing new legislation. Finally, for younger members the closed book may have to continue to exist for fifty years or more.
Maintaining multiple platforms, staff and the associated IT knowledge — combined with the complexity of the interfaces and events across both administrations — drives up the costs of pension administration. These costs are ultimately paid by the members out of their contributions. And as the old portfolio runs off, the cost per policy rises sharply. Although pension funds already hold a cost provision, it must be maintained for the administration of the new scheme.
The eighteen-billion calculation
If the sector does not transition, a closed book is created of nineteen million pension entitlements that will run off over a period of more than fifty years. When the costs and cost types are worked out in detail, it turns out that fixed costs (people and systems) are dominant, in an 80/20 ratio to variable costs.
All staff who continue to work on the closed book will of course receive annual salary increases and collective labour agreement adjustments, so total variable costs initially remain the same but then — as the portfolio shrinks — move towards zero. Calculating these costs with a linear portfolio run-off over a period of fifty years results in a net present cost of at least eighteen billion euros at an interest rate of two percent. Further consolidation or the creation of a central service centre for closed books could possibly lead to lower costs.
Better pension capital in the new system
Those who like to put things into perspective will point out that eighteen billion euros is roughly one percent of the assets currently invested, or that the old administrations have to keep running for a number of years anyway because of correction calculations and commitments. At the same time, it is an amount of 1,800 euros that every member and pensioner has to pay ‘up front’. An amount that then cannot be invested for better pension capital in the new system — and that should settle the debate.
This opinion piece was originally published (in Dutch) as a blog on pwc.nl (22 May 2024).