Probability & Partners: Future of pension funds: liquidate or continue?
This column was originally written in Dutch. This is an English translation.
By Ronald Sijsenaar, Sector Lead Pensioenen, and Dirk Buijs, Senior Risk Management Consultant, both working at Probability & Partners
2024 was regularly written about the expected further consolidation in the pension sector. In the vast majority of cases, this concerned relatively small (company) pension funds. It was even stated that one in five pension funds will quit.
Arguments for considering liquidation are that schemes are becoming more uniform, pension funds are less distinctive, the complexity related to laws and regulations is too great, implementation costs are too high, and there is no use and necessity to maintain a pension fund under the FTK.
So a key governance question is whether a fund is still future-proof. To answer this question, the costs of governance and board support are relevant, among other things, but also aspects such as administrative pressure, the qualitative and quantitative capacity of the board and of board support. When a board comes to the conclusion that liquidation is the best option, there are a number of options, which are shown schematically below (in Dutch):
Source: Probability & Partners
When, in addition to all the pros and cons of the various options, the balance for the various groups of participants has been mapped, it is important to include all stakeholders in a timely manner. To map the balance for all groups of participants, DNB has provided an accessible self-assessment.
A ‘change’ working group with a focus on liquidation is useful in addition to all ‘run’ activities. A good risk analysis of the change programme as well as the run during transition is important. Then, be sure not to forget to consider the risk that directors and board office staff may leave the fund early. A contingency plan can be useful here.
Ideally, the risk analysis should be carried out by the change working group. The Key Risk Management Officer can then give an independent opinion on this.
When a board decides to continue the fund, take into account the preferences of the social partners and/or members for the various pension schemes. A relevant question here is whether to embark on a new scheme under Wtp or to keep the existing accrual as a closed fund in the FTK. If the social partners have indicated in the transition plan that a transition to a new scheme is to take place and that reefing is preferable, it is up to the fund board to decide whether they realise this themselves or whether it is carried out by the receiving party.
Finally, a transition to a new scheme under the WTP has a number of similarities with a liquidation. For instance, the data quality needs to be in order and it needs to be determined how the investment portfolio should be set up, taking into account the terms of the existing risk posture, the financial risks during the transition phase, and so on.
All in all, a complex process in which decision-making does not happen overnight