Dutch pension reform to make all occupational pension schemes defined-contribution (DC) by 2028 will provide a significant growth opportunity for Dutch life insurers, Fitch Ratings says.
The reform, passed by senators on 30 May, will lead to the end of defined-benefit (DB) accrual, with DB schemes converted to DC or put into run-off, and future pension accrual being DC only.
Even if more than half of schemes convert to DC, as suggested by a Dutch central bank survey in anticipation of the reform, Fitch expects the volume of DB liabilities put into run-off to be significant.
This is likely to lead to a boost in demand for pension risk transfer to insurers as the corporate sponsors of these schemes look to offload the associated investment and longevity risk.
The pension risk transfer market is already a growing source of high-margin business for insurers and the boost following the reform could be significant.
Fitch estimates total assets in Dutch corporate DB schemes to be about EUR300 billion.
This is already the primary market for pension risk transfers to insurers and we expect the reform to spur more transfers as schemes are forced into run-off and employers shift their focus to offering DC pension arrangements.
However, the market will be constrained by the insurance sector’s capacity to meet a potentially large increase in demand for transfers. The regulatory capital requirements associated with DB pension risks are high, and transfers can only be accepted by insurers with the necessary capital resources or the willingness and ability to raise fresh capital.
As well as corporate DB schemes, about EUR1.4 trillion of assets in industry DB schemes will be subject to the pension reform.
These could add to the demand for risk transfers to insurers as they go into run-off, but we expect the impact to be limited as they are managed at an industry level, where the pressure to offload risk is typically less than for individual corporates.
The transition to DC will also mean an increase in inflows to insurer-managed DC vehicles, such as general pension funds and premium pension institutions, boosting assets under management (AUM).
This will increase insurers’ profits from AUM-based charges, but the business, although potentially large volume, is low-margin, and the profit impact over the medium term will therefore be less significant than that from DB pension risk transfers.
by Yana Keller
