The Act on the Introduction of the Premium Pension Institution (Wet introductie premiepensioeninstellingen) (“PPI”) came into force on 1 January 2011. The PPI is a new type of pension scheme administrator, alongside pension funds and pension insurance companies. The PPI is appropriate for administering pure defined contribution schemes (“DC schemes”).
DC schemes are characterised by the lack of any insurance-related risk. PPIs focus on the accrual phase of the pension and invest the contributions on behalf of the pension scheme members. When a member retires, the PPI will transfer the accrued value to an insurance company or to a foreign Institution for Occupational Retirement Provisions (“IORP”), which will then arrange the regular “for life” pension benefits.
Besides administering Dutch DC schemes, PPIs are mainly relevant for administering foreign pension schemes. They are a relatively simple vehicle that can operate efficiently and transparently on the European market. PPIs are particularly interesting for multinational enterprises because they can serve all the employees from a single place of registration.
This newsletter deals with the background to the introduction of PPIs and explains the main points of how they are organised and how they operate.
Act on the Introduction of the Premium Pension Institution
The new Act amends the Financial Supervision Act (Wet op het financieel toezicht, “Wft”), the Pensions Act (Pensioenwet), and the Occupational Pension Scheme (Obligatory Membership) Act (Wet verplichte beroepspensioenregeling, “Wvb”). PPIs are classed as financial enterprises and the way they are organised and operate are subject to the provisions of the Wft. Pursuant to the Pensions Act and the Wvb, a PPI based in the Netherlands is included in the definition of a pension scheme administrator (pensioenuitvoerder).
With a view to enforcement of the provisions of the above acts, rules regarding PPIs have been added to the existing secondary legislation. The Decree on the Introduction of the Premium Pension Institution (Besluit Introductie Premiepensioeninstellingen) implements the amendments required for introduction of PPIs in the following decrees:
- •Decree on Market Access of Financial Undertakings pursuant to the Act on Financial Supervision (Besluit Markttoegang financiële ondernemingen Wft);
- •Decree on Prudential Rules pursuant to the Act on Financial Supervision (Besluit prudentiële regels Wft);
- •Decree on the Supervision of the Conduct of Financial Enterprises pursuant to the Act on Financial Supervision (Besluit Gedragstoezicht financiële ondernemingen Wft);
- •Decree on the implementation of the Pensions Act and Occupational Pension Scheme (Obligatory Membership) Act (Besluit uitvoering Pensioenwet en Wet verplichte beroepspensioenregeling);
- •Decree on the Financial Assessment Framework for Pension Funds (Besluit financieel toetsingskader pensioenfondsen); and
- •Decree on the Exemptions and Penalties pursuant to the Act on Compulsory Membership of an Industry-Wide Pension Fund 2000 (Vrijstellings- en boetebesluit Wet Bpf 2000).
Amongst other things, the Decree on the Introduction of the Premium Pension Institution includes rules regarding the PPI’s investment policy, the requirements regarding its assets, and the content of the agreement between the employer and the PPI and the PPI and the pension custodian. This decree primarily links up with the rules that apply to other financial enterprises or pension funds.
Developments in the European pensions market led in 2003 to the IORP Directive, which has been implemented in the Netherlands in the Pensions Act. The purpose of the IORP Directive is to create a level playing field for cross-border activities by pension scheme administrators.
The background to the introduction of the PPI is the Dutch government’s wish to make better use of the options provided by the IORP Directive. This is because it has turned out in practice that the current Dutch legislation and regulations comprise a number of conditions that make Dutch pension funds less attractive as administrators of foreign schemes.
Employers can conclude pension scheme administration agreements with pension funds (company pension funds or industry-wide pension funds) and insurance companies that are based in the Netherlands. These institutions qualify as pension scheme administrators within the meaning of the Pensions Act. Employers can also conclude agreements with foreign IORPs and with insurance companies with a European passport.
The only Dutch institution that qualified as an IORP prior to the introduction of the PPI was a pension fund within the meaning of the Pensions Act. However, Dutch pension funds are restricted by the following rules:
- the requirement of domain separation, i.e. that a Dutch pension fund is only permitted to work for a particular “solidarity group”. In the case of a company pension fund, for example, this comprises the relevant enterprise;
- statutory task separation (something that is not required under the IORP Directive), for example the provision that the pension fund can only administer a voluntary pension scheme if this concerns a supplement to a basic pension scheme administered by the same pension fund;
- the requirement that Dutch pension scheme administrators must maintain extra funds to cover biometric risks (i.e. risks associated with occupational incapacity, life expectancy, or death) or for guarantees of returns on investment or the level of pension benefits; and
- the prohibition on ring-fencing, which provides that if a pension fund administers more than one pension scheme, those pension schemes must form a single financial whole.
Against this background, the Dutch government decided to introduce the General Pension Institution (Algemene Pensioeninstelling, “API”) in three stages. This is a new pension scheme administrator that is supposed to be better able to take advantage of the opportunities provided by the various European developments.
The introduction of the PPI is the first stage in this process. The PPI should be seen as the precursor to the API. As we have already seen above, the PPI keys in to the developments regarding DC schemes. In the case of a DC scheme, the employee pays a fixed pension contribution amount, which is then invested. The risk as regards his pension benefits is borne by the employee. We will deal with the other features of the PPI in the next section.
The second stage will consist of amendments to the Pensions Act making it possible for company pension funds to merge (something they are not permitted to do at present).
The third stage will involve incorporating the API into the Pensions Act. Virtually all the aspects applying to the PPI will also apply to the API. The big difference is that the PPI is only permitted to concern itself with DC schemes, and the PPI does not extend any guarantee whatsoever to the members of the scheme. However, the API will itself act as the guarantor for the guarantee and/or the risk. Consideration will also be given to whether the API can also administer defined benefit schemes (“DB schemes”). A DB scheme is a pension scheme in which a member receives specifically determined pension benefits and in which the standard is not determined by a particular level of contribution.
Key features of the PPI
The PPI is a vehicle that fits entirely within the framework of the IORP Directive and that is classed as an IORP. The PPI:
- must have the object of ensuring the payment of work-related pension benefits;
- functions independently of any contributing enterprise or industrial sector, and is therefore not bound by the parity-based composition of the board that is a feature of pension funds (i.e. the requirement that half the members of the board should represent the employer and the other half the employees);
- can opt for a European passport;
- must have the legal structure of a Dutch public limited liability company (naamloze vennootschap), a Dutch private limited liability company (besloten vennootschap), a Dutch foundation (stichting), or a European public limited liability company;
- is financed on the basis of capitalisation (i.e. on the basis of the contributions paid); and
- will be classed as a pension scheme administrator within the meaning of the Pensions Act and as a financial enterprise within the meaning of the Wft. This means that the rules applying to pension scheme administrators and financial enterprises also apply to the PPI.
In order to operate, a PPI requires a permit from the Dutch central bank (De Nederlandsche Bank, “DNB”). The main requirements for allocation of a permit are listed below.
No insurance risks or guarantees
Unlike an insurance company or a pension fund, a PPI is not permitted to cover insurance-related risks, namely biometric risks (i.e. risks associated with occupational incapacity, life expectancy, or death). It can, however, act as an adviser, intermediary, or authorised representative regarding insurance if such is permitted by its PPI permit.
The PPI itself is also not permitted to guarantee a return on investment or the amount of the pension benefits paid out. A third party can, however, offer such a guarantee via the PPI. This means that foreign schemes that offer a statutory guarantee via the employer can be administered by the PPI.
The above factors offer advantages in the framework of prudential supervision because the PPI does not need to maintain any extra buffers to cover biometric risks (i.e. risks associated with occupational incapacity, life expectancy, or death) or financial setbacks.
A PPI is, however, required to maintain minimum own funds of EUR 225,000 in connection with its operational risks. It is not subject to any obligation to maintain sufficient assets to cover technical provisions or a supplementary buffer.
The IORP Directive provides that pension benefits can be paid out “for life”, “for a temporary period”, or “as a lump sum”. The social security and employment legislation means that a pension scheme administrator in the Netherlands can only pay out an old-age pension on a “for life” basis. In the Netherlands, however, a PPI cannot pay out regular “for life” pension benefits because of the associated “for life” risk, which a PPI is not permitted to cover.
The consequence of this is that the PPI can only focus on the accrual phase of the pension, investing the contributions on behalf of the pension scheme members. When a member retires, the PPI will be required to transfer the accrued value to an insurance company or to a foreign IORP, which will then arrange the regular “for life” pension benefits. If a pension scheme member dies before he reaches his retirement date, the funds that he has accrued in principle go to the other members of the PPI (this is referred to as the “mortality profit”).
Depending on the applicable social security and employment legislation, the PPI can, however, administer pension schemes in other Member States that provide not only for pension benefits “for life” but also “for a temporary period” or “as a lump sum”.
Specifically, the permissible activities of a PPI comprise the activities that a pension institution normally carries out during the accrual phase of the pension (i.e. administering and holding the pension assets on behalf of the pension scheme members). This includes:
- keeping the records for the pension scheme;
- communication vis-à-vis the members;
- complying with the PPI’s obligations vis-à-vis the supervisory authorities;
- collecting the pension contributions;
- adding the pension contributions to the pension capital, whether or not with a separate custodian (see below);
- determining the investment policy for the pension capital and deciding on the purchase and sale of investments;
- paying out the pension capital when a member has reached the conversion date or retirement date; and
- transferring the value of the pension capital before the conversion date is reached.
Requirements regarding operational management
The conditions regarding performance of the PPI’s work have been made similar to those that apply to financial enterprises (which includes insurance companies) pursuant to the Wft. This means the requirements regarding expertise, reliability, integrity, structuring, and organisation.
PPIs are also classed as institutional investors within the meaning of the Wft. This means that the provisions of the Corporate Governance Code that apply to institutional investors also apply to PPIs. The Corporate Governance Code comprises both the principles and concrete provisions which the persons involved in a company (including management board members and supervisory board members) and stakeholders (including institutional investors) must observe in relation to one another.
In addition to this, the PPI is also subject to the Principles for Pension Fund Governance in so far as these apply to insurance companies, as legally enshrined in the Pensions Act and related regulations. Amongst other things, these principles concern internal supervision and accountability, and they indicate a minimum standard that pension scheme administrators must comply with as regards administering the scheme.
Under the IORP Directive, a pension institution must pursue an investment policy that is in accordance with the “prudent person” rule when implementing European regulations. The prudent person rule has already been implemented in the Pensions Act, and has now been included in the Wft in a version adapted to the PPI. In brief, the prudent person rule means that investments by a PPI must comply with the quality principles of security, quality, and spread of risk.
Ranking arrangement and separation of assets
A PPI can administer more than one pension scheme simultaneously. In principle, it will carry out the work of administration and custody itself (see above). Under certain conditions, the PPI can also contract out this work.
Under civil law, the assets that the PPI holds for the various pension schemes constitute a single whole, unless the law provides otherwise. This principle is confirmed in the Pensions Act by the prohibition on ring-fencing, which provides that if a pension fund administers more than one pension scheme, those pension schemes must form a single financial whole. The consequence of this prohibition is that the creditors of pension fund A can also recover what is owed to them from the assets of pension fund B.
The PPI is organised in such a way as to ensure better protection of the assets of the members of the various pension schemes. That protection consists of two components:
- The imposition of a ranking system. The idea behind the ranking arrangement is that the claims of pension scheme participants and pension beneficiaries take precedence over those of other creditors. The structure is such that claims will first be recovered from the PPI that are related to the management and custody of the pension assets. The claims by the pension scheme members come next. Finally, other creditors can submit their claims, for example those entitled to the assets of other pension schemes.
- The obligation, under certain circumstances, to have the pension assets held by a legal entity independent of the PPI, i.e. the pension custodian. This obligation applies if the investment policy pursued in connection with a pension scheme means that there is a “realistic risk” that the pension assets and the PPI’s own funds will be insufficient to meet any claims (i.e. that the various different assets will “contaminate” one another). The object of the pension custodian according to its articles of association must be limited to its being the owner of the pension assets and being the debtor in respect of debts owed by a single pension scheme. This restricted specification of the object of the pension custodian means that the pension custodian cannot, practically speaking, become insolvent, so that the pension assets are therefore protected. The transfer to the pension custodian means that the pension assets for a pension scheme are legally separated from the PPI’s own funds and the pension assets that the PPI holds for other pension schemes. Moreover, it is only creditors that have a claim against the relevant pension scheme that can recover that claim. It should be noted that parties can still opt for a structure with a pension custodian even if there is no “realistic risk”.
Administration of foreign pension schemes
A Dutch-based PPI that intends administering a foreign pension scheme requires the consent of the DNB.