DB pension scheme (defined benefit) is a pension scheme where the pension payment (how much pension you will receive in the future) is defined in advance. These are, for example, final salary schemes and average pay schemes. Because the pensions payments are fixed, it can happen that the contribution for other participants has to be increased significantly, as happened in the past few years.
DC pension scheme (defined contribution) is a pension scheme where only the employer's contribution is determined. The amount of the pension payment is highly dependent on the returns. The amount of pension paid to someone is only decided upon retirement. The Solidary Contribution Scheme and the Flexible Contribution Scheme are DC schemes.
The Solidary Premium Scheme is one of the two contract types from which funds/social partners have to choose. This is the most solidary contract type with more collective features (such as a unified investment mix) and less freedom of choice. This contract type also has a solidarity reserve included by default. Previously, this contract type was called NPC (New Pension Contract).
The Flexible Premium Scheme is the second contract type from which funds/social partners can choose. In this scheme, participants enjoy greater freedom of choice – for instance, by choosing their own investment profile – by which they can create increased personalization. There is less room for solidarity and risk-sharing. This contract type calls for a bigger duty of care and transparency from pension funds and –service providers towards participants.
The average salary scheme is a pension scheme in which the pension amount depends on the average wage earned. An average pay system is a form of a defined benefit scheme. The difference with a final pay system is most significant if the beneficiary has made a substantial rise in income late in one’s career.
The policy coverage ratio of a pension fund indicates how much the assets the fund manages in relation to the pension benefits it must provide. The funding ratio indicates whether a pension fund can pay the pensions now and in the future. The funding ratio is calculated by adding up all the fund's assets and dividing it by the pension liabilities (the pension entitlements of all participants). The funding ratio is expressed as a percentage.
The idea behind the average system ‘doorsneesystematiek’ is that all participants in a pension fund pay the same percentage of the pension contribution, the average contribution. And they all accrue the same share of the pension, the average accrual. No distinction is made in age, gender, or income level. The system is mandatory for industry pension funds, such as ABP. The system worked well when most participants worked at the same company in the same residence for a long time. But that is not always the case these days. When employees become self-employed in their mid-career, they (with their employer) are paid too much for their accrued pension in their 'young years.' In the new system, this average system is abolished. All participants continue to pay the same age-independent premium. In the new contract, however, this premium is credited directly to personal assets (the share in the collective pension assets of a specific participant is reserved). There is, therefore, no longer any redistribution via pension accrual.
Indexation is often used when talking about increasing pensions. It means that the accrued pension and the pension benefit increase in line with the price increases or the development of wages.
Conversion is the transfer of all pension entitlements accrued in the old scheme to the new plan. The old scheme will then cease to exist. In principle, entering the new contract is the standard for pension funds upon transitioning to the new pension system. It is, of course, possible for them to deviate, but only if they have sound reasons.
Pension funds use actuarial interest rates to determine how much money they need in cash to pay out all pensions now and in the future. This actuarial interest is risk-free and is determined by De Nederlandsche Bank (DNB) based on the interest rates on the financial market.
The solidarity reserve is a type of collective buffer a fund can utilize to compensate for significant shocks for a participant or group of participants. That's a way to distribute the risks evenly between current and future generations. The money for this 'reserve pot' is derived from the premium and/or the excess return. The addition to the reserve can amount to a maximum of 10% of the premium amount and/or 10% of the excess return. The current scheme does not include a solidarity reserve but is included in the Solidary Contribution Scheme, one of the possible new contracts. And in the Flexible Contribution Scheme (the other potential contract), the inclusion of a risk reserve is offered as a choice (in this contract, there is a more individual choice and less space for risk sharing). The social partners make that decision. A pension fund must establish the rules for the accrual and distribution of the reserve in advance, and for an extended period.
The transition financial assessment framework is composed of rules ensuring the financial health of pension funds. The transition financial assessment framework is a set of rules applicable to the transition period. These rules enable a fund to postpone reductions and allow for sooner indexation. The requirement continues to apply that a fund has to be healthy when transitioning to the new scheme. Management Boards of funds decide whether or not to use the transition financial assessment framework. A fund can only utilize this option if it intends to enter into the new scheme. The idea of this economic assessment framework is to create peace of mind and ensure that funds can focus on the switch to the new system.