Defined Contribution Scheme Improvement Act introduces variable pension benefits
The Dutch Defined Contribution Scheme Improvement Act came into effect on 1 September 2016. This act imposes new obligations on all providers of defined contribution schemes, including providers that do not offer variable pension benefits. For instance, all providers have to facilitate that the investment horizon is extended for all participants who prefer receiving a variable pension. All providers have to set up adequate processes enabling them to retrieve sufficient information from their participants. This includes information allowing them to identify the participant’s preference for fixed or variable payment. Variable payment schemes must also meet certain formalities, such as the collective sharing of the investment risk between participants. All this requires a significant adjustment to business operations. Pension providers may need to design a “choice architecture” for their participants that promotes sensible decision-making. A number of statutory requirements that deal with this aspect will not come into effect until 1 January 2018.
The legal requirement to convert accrued pension benefits into a lifelong fixed-rate annuity on the pension commencement date, will come to an end under the new law. Pension benefits can accrue for a longer period if the participant decides to postpone conversion. The pension provider will continue to invest the participant’s pension capital after the pension commencement date, and the pension benefits will be adjusted according to investment results, life expectancy and mortality rates. Because the pension no longer has to be converted at the pension date, the pension benefits under the new law depend less on the “accidental” interest rate at the pension commencement date. The variable pension benefits are expected to result in higher pension benefits being realised compared to the current defined contribution scheme, especially if capital market interest rates remain low in the longer term.