The New Pension Reality: Four Challenges and One Banana Peel
The Dutch pension sector is engaged in a mega-job: the transition to the new, much-discussed pension system. The pensions of more than 10 million Dutch citizens and nearly 21 million pension policies must be converted from the old pension (accumulated collective pension entitlements) to the new one (a personal pension pot). The amount involved in the operation alone - 1,500 billion euros in pension money - will make many a person dizzy. It is therefore the biggest job in the financial sector in the past quarter century. Since the introduction of the euro, there has been no transition with such a major impact as the introduction of the Future Pensions Act (Wet Toekomst Pensioen, WTP).
As it stands now, the sector should be ‘over’ by January 1, 2027, at the latest. There is still a small disclaimer: the Upper House still needs to sit this summer. But although there are many questions about the pension law in parts of society and politics, it seems unthinkable that the new pension law will not be implemented. At most, the industry will get another few months’ or a year's grace.
Pension funds, insurers and pension administration organizations still have a mountain of work to do before the change actually happens. Meanwhile, most parties in the sector have picked up the proverbial gauntlet. They are fully committed to the new system and are already working 24/7 on the transition. That transition period has four major challenges:
Challenge 1: Choosing the new pension contract and setting it up
In the first phase, pension funds will have to make a fundamental choice between two options for their affiliated clients (in pension jargon: participants). Would they choose the solidarity-based or the flexible premium scheme? Both options have advantages and disadvantages. Each choice also has far-reaching consequences for the rest of the transition process. At this stage, ‘the new pension’ already threatens to become complicated. Whereas a transition seems to be the perfect opportunity to simplify matters, the social partners will sound the alarm early on to draw attention to their specific pension challenge. If a forest of exceptions develops at this stage, subsequent implementation will again be costly and error prone. Prevention is better than cure: pension funds, in close cooperation with their pension implementation organization, should at this stage already proactively steer towards simple, standardized and largely reusable product packages.
Challenge 2: Ensuring the quality of pension data (Employment history and pension entitlements of individual participants).
The current pension entitlements will have to be up to date to transition properly to the new contract. Funds and administrators must deal with large data lakes. Decades of history from each fund (often itself with a history of mergers and acquisitions) and decades of entitlements from literally every individual participant will have to be 'fit' and up to date for the new system. Those with contaminated data will soon face a major challenge.
Previous research by De Nederlandsche Bank (DNB) shows that good data quality cannot be assumed. Data management is an issue that several pension funds are already struggling with, even without transition. Omroep MAX, for example, regularly confronts the sector with past imperfections. Data remediation programs are unpredictable and can put serious pressure on the transition process. That data quality improvement is a labor-intensive and costly process was apparent with the surcharge issue at the Tax Administration and in the derivatives files at the major Dutch banks. Some funds will require minor or even major recovery operations. Starting quickly should also be the motto here.
Challenge 3: Renew the system landscape
The transition will force virtually all pension administration organizations to renew their automation behind the pension administration. The current systems are not - or at least not sufficiently - geared to the new reality of individual pension pots. Software developed in-house in a gray past will have to be replaced by package software based on modern technology. The impact of this, too, is enormous. Implementers will have to make risky digitization decisions. On the one hand, they will have to have an eye for adapting the part under the hood (the pension pots administration). On the other hand, the new technology must meet the demands that will be made regarding customer contact and the need for better service. After all, the sector is expected to make great strides in the area of participant communication and choice guidance. This too will have to be automated - a relatively new domain for much of the sector. Incidentally, this challenge presents great opportunities: those who choose the right system landscape now and implement it organization-wide will reap the benefits in the future (think: economies of scale, cost reduction, growth).
Challenge 4: Trouble-free 'cashing in' (converting accrued rights to individual ‘pots’ and informing participants about this in a comprehensible way).
The final part of the transition also already requires attention: the final transition to the new system, the moment when the switch can finally be made - or, as the sector calls it: the 'transfer'. The period until that moment of entry will be largely dominated by challenges 1, 2 and 3. Understandable, but also a risk. There is a danger that all of the approximately 200 pension funds in the Netherlands will want to do the final transition at the same time (it now appears to be in 2026), with all the risks that this entails. It is an operation that will make great demands on available capacity: not only for actuarial conversion and data migration, but also to answer participants' questions. The conversion operation is like eating an elephant for the industry. The secret will be to spread risk and have a realistic timeframe for induction. The current timelines seem to be a huge challenge for the large implementers with broad client portfolios.
It is self-evident that the sector will have its hands full with the above four transition challenges, especially if the challenges are addressed integrally - which of course is a prerequisite. This transition is so extensive and complex that the question is not whether there will be problems, but rather: where or when? How to prepare for this and how to respond timeously to prevent real accidents? For this reason alone, it is good for the industry to prepare for that one banana peel in addition to the mentioned four challenges.
The banana peel: Nurturing the constructive relationship between pension fund and pension administration organization
If the industry is to cross the finishing line of the transition unscathed, a good relationship between principal and administrator is vital. During a transition, problems are bound to arise somewhere. How funds and implementers relate to each other in such a crisis will be crucial. This will not happen automatically, partly because of the sometimes already strained relationship between some administrators and pension funds.
These tensions are also an (unintended) side effect of the broad directive role that the funds have been assigned by regulator De Nederlandsche Bank (DNB) in the transition, for which DNB, as it were, had good reasons. In particular, the large funds with extensive in-house know-how feel compelled to deal with the technical orchestration of the pension transition themselves. With the risk that by doing so, they are increasingly shifting to the chair of the pension administrator organization, with all the tensions this entails. At the same time, the funds should expect a professional change dialogue from the pension administrator organizations. That too can be improved. There is a danger that funds and administrators will be driven apart as a result - and that is the last thing the sector needs right now. It is precisely at this stage that funds and administrators must work together. Implementing organizations are at the limit of available change capacity. Incorporating new funds is virtually impossible at this stage.
‘You cannot start saving for your retirement early enough.’ Exactly this wisdom has been sermonized by the pension industry towards its participants. It is now a slogan that applies more than ever to the sector itself. The transition process is one of potentially endless challenges and risks and can only be accomplished if timely attention is paid.
This article was published in Management Scope 05 2023.