Living benefit riders to life insurance policies: Pricing considerations and strategy
Adding benefit riders to policies provides meaningful coverage for those who need it, and carriers usually can do so at a relatively low cost.
In the Netherlands, the Pension Agreement is a fact. The fact that all the details of the new pension contract are not yet known does not mean that pension funds can wait to arrange the transition to the new pension reality. So much is coming their way that they would do well to take action now. Our advice: Start by taking stock of what needs to change, what choices need to be made, who will be involved in the decision-making process, and how all the different components will interact.
At the latest by January 1, 2026, all pension funds must comply with the new pension contract. That may still seem a long way off, but the path that pension funds will have to follow to comply with the new pension rules is long and difficult. The new system is so comprehensive and complex that the big picture can get lost quickly. The fact that all components interact with each other doesn’t make it any easier. Pension funds need professional guidance to bring the process to a successful conclusion.
There is still some time for that. Last June there was an agreement, and the first pieces of legislation are expected by the end of this year. At that point it will become clear how the many details will be fleshed out. All pension plans must comply with the new pension legislation between 2022 and 2026. The pension agreement that has been concluded also affects government pensioners, the self-employed, and people with hazardous and physically demanding professions, but even if we limit ourselves to the second pillar, the new system is a many-headed beast. We are therefore using the motto, “You eat an elephant in pieces.”
Waiting too long to arrange the transition to the new pension reality may have unpleasant consequences. If a pension fund has not made the transition by January 1, 2026, there is a risk of excessive taxation. The accrued pension will then have to be added directly to personal taxable income and assets – a tragedy for every pension member.
What is changing? First, the average premium will be abolished. In the new system, all ages will always pay the same premium. So far this has been converted into a defined benefit pension that is the same for all ages; under the new system, this must become an increase in pension assets that is the same for all ages. This is a change that offers advantages in light of increased labor mobility. Under the old system, leaving the sector (and a company pension plan) halfway through one’s career had a relatively bad outcome.
The new system also puts an end to the current indexation and discount rules. All members will receive the pension capital they have built up and share more directly in the investment return achieved. What remains is that pension contributions will still be invested collectively, with the pension funds having to ensure clear rules on how the return is distributed fairly among all members.
Investment policy will be age-dependent. The younger the worker, the longer the investment horizon and the more risk can be taken. Closer to the retirement date, this risk is reduced. It is up to the pension fund to determine what investment policy suits different ages. Payments to pensioners becoming variable in the future is not something all members will applaud. The time for guaranteed pension benefits is definitely over.
Pension funds will have to have their (outsourced) administration adjusted. Currently, the systems are set up to calculate and keep track of the defined benefit. In the future, members will no longer be able to see what their defined benefit will be each year, but instead will have direct access to their personally accrued assets. This places different demands on the providers’ systems. All processes in the administration and communication chain will have to be adapted. In addition, pension funds will be faced with the question of whether the existing systems can be adapted to this, or whether it would be better to select a new IT environment or a (new) pension administrator.
Another new aspect is that changes in pension asset level due to (short-term) investment results may cause turmoil. Nothing is up with windfalls. If returns are disappointing, pension funds will have to communicate well. In any case, pension funds will have to adapt the way they communicate about how much pension can be expected: about the conversion of personal pension assets into pension benefits, about scenarios, choices and consequences.
Not all pension members will come out ahead with the arrival of the new contract. The abolition of the average premium system will have a negative impact for the over-40s in particular. How will compensation be handled? Lawmakers and social partners have two solutions in mind. Employers will pay extra, or the current pension buffers will be used and distributed for compensation. If the second solution is chosen, assets will shift from young to old, and young people might have reason to complain – even if they benefit like no other from the abolition of the average premium policy. In short, the transition to the new pension system is a complex balancing act.
Using the current pension buffers to compensate certain groups is possible only if previously accrued pensions are brought in. Pension funds will have to decide whether or not to “bring in.” When choosing to bring in pensions previously accrued, they will have to be transferred to the new system. The trick is to do this in such a way that no one loses out. If no pension is brought in, the new system will apply only to new premiums. Any compensation for groups who lose out will then have to be financed in full by additional contributions. Not “bringing in” seems to be an option only for pension funds mainly with older members.
In the end, the arrival of the new system has the needed foothold. For every component changed and every policy choice made, the various stakeholders (e.g., administration, social partners, stakeholder body, as well as providers and implementers) will have to give their approval or recommendation, and they will each have to make a thorough assessment. This requires good planning and good project organisation. As the interests of these stakeholders do not always run parallel, a communication plan will have to be drawn up to create sufficient support.
What can pension fund trustees do now to arrange the transition to the new pension system in a timely and proper manner? I have two concrete recommendations. First, map out all relevant components that need to be changed. Then, draw up a roadmap in which all stakeholders agree on the desired changes at the right time and in a well-founded manner. The year 2026 may still be a long way off, but this transition must be organised well and on time.
Milliman has broadly worked out the topics and impact of the Pension Agreement in terms of choice of pension contract, actuarial issues (including bringing-in), investments, risk management, organisation, IT (systems), pension administration (doing it yourself, outsourcing, APF, and communication. This forms the input for a transition plan with a phased approach to these issues for policy, implementation, execution and monitoring. We will assist with this while maintaining an overview and management of the process.