Dutch DC pension reform to provide growth for life insurers

Written by Dan McGrath

12/06/2023

Dutch pension reform, which sees all occupational pension schemes become defined contribution (DC) by 2028, will provide a significant growth opportunity for the country’s life insurers, according to Fitch Ratings.

The move away from defined benefit (DB) accrual, which was passed by the Dutch senate on 30 May, means that DB pensions will now be converted to DC or put into run-off. Future pension accrual will now be DC only.

If more than half of schemes convert to DC, as suggested by a Dutch central bank survey in 2021 in anticipation of the reform, Fitch expects the volume of DB liabilities put into run-off to be significant, leading to a boost in demand for pension risk transfer to insurers as corporate sponsors look to offload the associated investment and longevity risk.

Fitch has estimated that the total value of assets in Dutch corporate DB schemes is around €300bn. The global capital markets researcher expects the reform to spur more transfers to insurers in the primary market, as schemes are forced into run-off and employers shift their focus to offering DC pension arrangements.

However, this increase in demand for transfers is expected to lead to a constraint on the market as a result of the insurance sector’s capacity. The regulatory capital requirements associated with DB pension risk are high, and transfers can only be accepted by insurers with the necessary capital resources or the willingness and ability to raise fresh capital.

Alongside corporate DB schemes, approximately €1.4trn of assets in industry DB schemes will be subject to the pension reform. Fitch expects this to add to the demand for risk transfers to insurers as they go into run-off, but they believe the impact will be limited as they are managed at an industry level, with the pressure to offload risk typically less for individual corporates.

Furthermore, Fitch has said that the transition to DC will also lead to an increase in inflows to insurer-managed DC vehicles, such as general pension funds and premium pension institutions, leading to a boost in assets under management (AuM). This is expected to increase insurers’ profits from AuM-based charges, but the business, although potentially a large volume, is low-margin, and the profit impact over a medium-term will, therefore, be less significant than that from DB pension risk transfers.

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