New entrants forcing the current players in the pension market for renewal! The main conclusion is that new players shake the Dutch pension market awake. We see that the Dutch pension market on the eve of a major shake-out. In the future, make the service cost carriers with simple and transparent pension schemes can be realized at low cost.

1. S E E I N G T H I N G S D I F F E R E N T LY
NEW PLAYERS SHAKING UP THE MARKET!
2011 a decisive year for the development of the Dutch pension market
In 2009, we at Atos Consulting conducted a scenario analysis of the pension landscape in 2020. Plotted along
two axes (figure 1), the findings showed four possible futures. We also described how the Dutch pension market
can prepare itself for the arrival of the futures outlined. We have given early warning indicators for each scenario,
which will alert us at an early stage that the scenario is materializing. Various facets of the current retirement
benefits system are discussed under each scenario.
The four scenarios
The four scenarios are plotted along two axes: individualization versus collectivization and government intervention
versus the free market.
Figure 1: The Pension Market in 2020 (Atos Consulting 2009, www.scenario-planning.nl)
1. Mandatory pension commitments 2. Optimal individual freedom of choice
Individualization
The government wants to put more of the financial risk for The pension scheme is completely tailored to the individual
providing for retirement on the individual. At the same time, wants and needs of the participant both in the accrual phase
the government does want to ensure that, in addition to the and in the disbursement phase. There is optimal freedom of
national old age pension (AOW), employees also accrue a pension choice. The government does not impose regulations any more,
via their employer. The financially illiterate should be provided but at the same time it no longer offers basic plans any more
with a certain degree of protection in this. either. Pensions are the individual’s responsibility.
Government Intervention Free Market
3. Government pension 4. Modernized second pillar
Collectivization
Studies have shown that the average Dutch person is More freedom of choice arises for employers within the
“financially illiterate”. The government wants to protect these framework of the current collective pension system.
people and guarantee that they actually receive adequate Retirement plans on the whole become more expensive.
pensions to enjoy their retirement.

2. NEW PLAYERS SHAKING UP THE MARKET!
Developments Negotiations on this agreement are still in progress. The
Over one year later, and with these scenarios in the main point of discussion is the nominal guarantee of
backs of our minds, we will now have a look at a pension entitlements. The agreement makes reference
number of key developments in the Dutch pension to a maximum premium for employers. This would place
market. Pension providers have come through some the risks of pension shortfalls on employees. This radical
tough times, and they are not out of the woods yet, as measure could make granted entitlements conditional,
some daunting challenges lie ahead. We will discuss potentially with retroactive force.
each of these challenges and finally offer a conclusion
as to what all of this means for the outlined scenarios. Should the negotiations break down, the government is
expected to take independent measures to raise the national
A great deal of uncertainty still reigns in the pension retirement age in any case and perhaps to intervene in the
market. This uncertainty stems from two factors: weakened pension funds.
1. Uncertainty over economic and sociodemographic
trends. In addition to this, we can clearly see that the
2. The direction of the Dutch government’s policy. discussions surrounding the pension agreement hinge
At this time, there are some ongoing policy in part on the issue of solidarity. There are two distinct
developments. This makes it a good time to have a look considerations for this issue: on the one hand we have
at what the current trends are and what they mean for age solidarity among generations and on the other hand
the future of our pension landscape. education and income solidarity.
Pension Certainty and Solidarity These issues will be resolved to some degree in the
In 2010, employer and employee organizations in the new pension agreement, but in order to completely
Labor Foundation (Stichting van de Arbeid) closed eliminate the disparity, more drastic measures are
a framework agreement on a flexible pension and needed. It is inevitable here that the current forms of
the national old age pension (AOW). This agreement solidarity will disappear and make way for a much more
regulates discussions on the national and private individual form of retirement saving, which only uses
retirement age by pegging both of them to the life collectivization to hedge major risks. With this, the trend
expectancy. is shifting increasingly towards individualization.
The discussion partners have also decided that as of
2012, the pension agreements and corresponding
legislation must be amended to account for financial
developments.
Figure 2: Trend in number of OPFs, BPFs and Occupational Pension Funds – 1997-2011
1200
Company pensions and
savings funds (OPF)
1000 Industrial pension funds
(BPF)
Occupational pension
800 funds
600
400
200
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Q1

3. The discussion on the pension agreement and solidarity The second phase consists of adjustments in the Dutch
has made one thing clear: it is no longer taboo to Pension Act (Pensioenwet), enabling mergers between
discuss sweeping changes to the pension system. company pension plans (OPFs). These multi-OPFs
may be particularly useful to minimize costs for smaller
Looking at the scenarios we can conclude that, as a funds. The Dutch Senate passed the Multi-OPF bill on
result of this discussion, the trends are shifting more 11 May 2010.
towards market-thinking (stimulated by the government)
and increasing individualization (scenarios 1 & 2). In the third phase, the API will be introduced into
the Dutch Pension Act. Practically every condition
Number of Company Pension Funds (OPFs) Decreasing applicable to PPIs will also apply to APIs. One major
Pension funds, mostly smaller ones, are having difference though is that APIs can in fact extend their
trouble meeting the strict requirements imposed own guarantees for benefits and/or risks. Thus, APIs
on management and governance by the laws and can support Defined Benefit (DB) plans. Given the speed
regulations. The upcoming pension agreement will of the decision-making process, the first API in the
only reinforce this trend. In addition to this, changes Netherlands is not expected until late 2013 or early 2014.
in accounting regulations (IFRS and IAS 19) are also
an impetus for businesses to end Defined Benefit (DB) The expectation on the market is that PPIs will be a
plans. great success. This is evident from the number of PPIs
already established and in the process of being formed
A recent study by KPMG shows that nearly 35% of the (the current count comes to more than 10 announced
OPFs are looking at liquidation of their fund. The primary PPIs). Every year, between 50,000 and 100,000
intention here is to merge into an industrial pension participants have their pension plans moved to another
plan (BPF) or switch over to an insured plan (and in the insurer. So, in our opinion, given the required scale, the
future possibly a defined-contribution or general pension Dutch market can currently accommodate 3 to 5 PPIs.
institution (PPI/API). A chart illustrating this trend is given This means that most of the PPIs currently being set up
in Figure 2. will not be successful, or will have to find their success
Due to the shift towards insured plans, we can say mostly in foreign markets. However, at this time no one
that as more OPFs liquidate, solidarity will come can afford to miss the boat. In other words, the choice
under pressure and the trend will shift towards more is between potential failure and not playing at all. So far,
individualization and the free market (scenarios 1 & 2). the first option has been popular.
Some experts are of the opinion that this development
will also prompt a re-examination of the large role that Just as with the developments surrounding the
mandatory participation plays in European policy. pension agreement, the trend is shifting towards
individualization. This comes in combination with strong
PPI/Multi-OPF/API market forces, under which new parties are entering the
The government has decided to introduce the General market and existing parties are fighting for their survival
Pension Institution (API) in three phases. This is a new (scenarios 1 & 2).
pension provider which is supposed to take better
advantage of the opportunities provided by European Cost Transparency and Levels
developments. Pension funds and pension insurers are also hearing
increased calls for transparency. The Dutch Pension Act
The introduction of the Defined-Contribution Pension imposes the transparency requirement on contribution
Institution (PPI) comprises the first phase in this agreements. This means that pension funds (as of 1
process. The 2009 scenario analysis touched on the January 2008) and pension insurers (as of 1 January
establishment of PPIs. In late 2010 this law was passed 2009) must communicate the costs involved in the
in the Dutch Senate. This clears the way to allocate the available contribution schemes in a transparent manner.
first plans under PPIs.
The PPI takes advantage of the developments
in Defined Contribution (DC) plans. The PPI itself
cannot guarantee returns on investment or specific
disbursement sums. This means the employee bears
the pension disbursement risk.

4. The report “Pension Fund Costs Deserve Closer Here as well we see a shift towards market-thinking, just
Attention” (Kosten pensioenfondsen verdienen meer as with the API and PPI developments.
aandacht) issued by the AFM (Dutch Financial Market
Authority, April 2011) finds that many pension funds Economic Developments
do not have any insight into actual costs. One of the At the time of our first scenario analysis, a large number
recommendations here is that the funds make costs of plans were experiencing coverage problems. The
more transparent, but also that they communicate these figures from the Dutch National Bank (DNB) indicate that
costs to (retired) participants. the financial position of pension funds improved over
the fourth quarter of 2010. The average coverage rate
The report also states that the cost structures for the rose from 99% at the end of the third quarter to 107%
smaller pension funds are significantly higher than the at the end of the year.
costs of the larger funds (Figure 3).
Costs have a major impact on the pensions benefits This improvement in coverage rates is associated in
accrued. particular with the increase in the long-term interest
rate, resulting in a sharp decline in value for pension
If the investment and administrative costs of the plan fund liabilities. The number of participants involved in
or administration are no longer viable, then alternative a pension fund with inadequate coverage (less than
cost reduction measures must be considered. These 105%) fell from 4.8 million to 3.0 million. Although the
alternatives may include measures such as mergers, coverage rate is increasing, this does not mean no
joining larger associations, or simplification of the plan. problems remain. Once again pensions are lagging
behind increases in wages and prices according to the
The AFM states in its report that a better picture of Dutch National Bank based on its annual survey of the
the costs could even point the way to new visions for 25 biggest funds. In this way, the pension fund crisis is
reforming the structure of our second-pillar pension hitting retirees in the wallet. Employees are also being
system, in light of the ongoing discussion on this matter. affected: lack of indexation has an impact on pension
benefit accrual and pushes up contributions! As pension
The consequence of this current trend will be a period funds increasingly have to forgo indexation and possibly
of consolidation in the pension fund market. We will even cut entitlements, this will inevitably cause a shift
also see increased freedom of choice for employers, away from solidarity and towards individualization in the
which will boost competition. This, in turn, will usher in a pension sector.
period of professionalization.
Figure 3: Administrative costs as a % of the balance sheet total by size class (2009)
(“Pension Fund Costs Deserve Closer Attention” Financial Market Authority- April 2011)
1,2
1,18 By size class
Administrative costs per year as % of balance sheet total
Total weighted
1,0 average
0,8
0,6
0,4
0,33
0,20
0,2 0,17
0,13
0,10
0
0 - 10 million 10 - 100 million 100 million - 1 billion 1 - 10 billion > 10 billion
Size class of pension funds by balance sheet total (x 1 million euro)

5. Development of the Pension Landscape Conclusion: Strategic choices unavoidable for
As for the issue of collectivization vs individualization, pension insurers and providers
it is clear that the current level of solidarity is not Our scenario analysis clearly shows that the future lies
sustainable over the long term. with simple and transparent pension plans that can be
administered at low costs. All frills will ultimately come at
Further, DB plan costs are not tenable over the the expense of returns on investment or disbursements.
long term either. Many pension insurers are already
experiencing issues with the profitability of guaranteed Pension insurers can offer these products via a
products. This will increasingly lead the various partners Greenfield model: a new Defined Contribution (DC)
in CLA discussions to switch over to simple plans. The pension insurer that is not burdened with legacy costs
plans will be stripped of their frills to lower the cost of from the past. Given that the costs of the current
work. portfolios are too high, these must also be dismantled
and migrated over to the new DC insurer as quickly as
This means that the pension system will base itself possible.
more and more on individualization (scenario 2), and One alternative is for the insurer to go with the flow of
pensions will no longer necessarily have fixed values. the current market shift and set up a PPI. A pension
A larger third pillar will arise for those who can afford insurer that sets up a PPI basically has two options:
it. In addition to this, other avenues, such as home you can start your own PPI, possibly in a joint venture
ownership, will become a larger part of saving for (such as Delta Lloyd with BinckBank, or ASR with Brand
retirement. New Day), or the pension insurer can restrict itself to
the role of provider of insurance products to PPIs (such
Due to the pressure from these trends, it is inevitable as Generali, which is a provider to the Robeco PPI). For
that the government will intervene in the pension pension insurers, what is certain is that belts will have
system; not to take more control for itself, but rather to to be tightened in order to win the battle for the pension
adjust the system to the new realities and the demand Euros over the coming years.
for individualization.
OPF plan providers will have to deliberate over their
Over the long term, this will give rise to a situation in futures. The question on everyone’s mind is whether
which OPFs and BPFs, in their current forms, will be they will be able to transform themselves to meet the
obsolete. Our expectation is that the large degree needs of the new pension world. Our expectation is
of mandatory participation will disappear over the that the number of OPFs will continue to decline over
coming years and BPFs will turn into pension funds the medium term and that over the long term the OPF
that employers join voluntarily. In time, OPFs will either in its current form will cease to exist. This means that
disappear completely or turn into PPIs or APIs. providers must first focus on consolidation, in order to
The primary objective in this will be to create economies retain market share, and on PPIs. Over the long term,
of scale and volume for better returns on investment, pension providers will have to transform themselves
discounts and lower operating costs. into maximally effective and efficient providers of simple
plans, which will give rise to a true price fighter’s market.
So far, all of the above indicators point to a shift towards
the second scenario “Optimal individual freedom of BPF plan providers are already looking at options
choice”. for providing other types of plans. This is due in part
to pressure from the watchdog for large providers
to work in a multi-client manner from a governance
perspective. Here as well we expect to see a period of
consolidation to capitalize on economies of scale and
cost advantages. Moreover, BPF providers will also
join in the competition for PPIs: on the one hand to
‘practice’ for an open market, and on the other hand to
offer an alternative for OPFs and BPFs looking for other
pension vehicles.

6. NEW PLAYERS SHAKING UP THE MARKET!
To conclude, we can say that the trends and
developments outlined above will result in the pension
market changing more drastically over the next five
to ten years than it has over the past forty years. It is
not just types of plans that will get the boot, but more
significantly, the parties responsible for running the Dutch
pension system.
Just as in the Dutch life insurance market, the pension
market will undergo a shakeout which will result in
a 2020 playing field with many new names and,
most strikingly, from which many old names will have
vanished.
For further information, please contact Stephan
Linnenbank RM, partner and Richard Klaasen Bos,
Executive Business Consultant.
Atos Consulting
Papendorpseweg 93
3528 BJ Utrecht
The Netherlands
Phone +31 (0)88 265 88 88
info.consulting@atosorigin.com
www.atosconsulting.nl
www.scenario-planning.nl
Atos, Atos and fish symbol, Atos Origin and fish symbol, Atos Consulting, and the fish itself are registered trademarks of Atos Origin SA. June 2011