Hot Topics for Global Pensions Managers

So with that, we'll go to the next slide. So what are we going to be covering today? Quickly, I will show you our speakers. Each of them will introduce themselves. And then we are going to quickly get into very, very timely topic around inflation and how that is impacting pensions. Inflation, again, has a broad reach. In terms of the implications, we'll touch on those briefly but really focus on the impact on pensions.

There's been some recent updates on the sweeping pension legislation changes in the Netherlands, so we'll talk about that and what we're hearing from clients today. And then finally, we will talk about changes that are impacting Ireland. And even if you don't have a headquartered or if you don't have employees in Ireland, we are going to be talking about auto-enrollment, which is a hot topic across the globe. So I would encourage you to stay on.

Just a few housekeeping tips. The session will be recorded. We will be sending the recording and the slides after the session for all of you. In addition, given that we have a large number of participants, we do encourage you to ask questions. However, we are asking you to just enter those questions into the chat feature. We are going to pause at the end of each section to look at those questions and the panelists will answer those for you.

But again, we do encourage you to ask those. We're also going to leave time at the end. So if there were any questions that maybe you think of from a prior section, please continue to put those questions into the chat. Yeah, so just on the next slide, so I will be hosting the call today. My name is Anna Budnik. I lead the retirement area for our Integrated and Global Solutions team. I am going to have all the other speakers introduce themselves as they are presenting their topic. So without further ado, I think it's important for us to go ahead and get started. So I'm going to turn it over to David to get us started on the inflation topic.

DAVID HOILE: Thanks, Anna, and good morning, good afternoon, everybody. I'm David Hoile, and I run the economics and capital markets research for our investments business. And I was going to talk for about five minutes on the macro big picture, especially the outlook for inflation. There's a bit of a scene setter for the more deep dive into its implications in terms of the pensions arrangements that you manage. So if we can just move on to slide 5, please. Thank you.

Now, like most investment institutions, at the start of the year, we wrote our annual outlook which looked ahead to 2022 and the few years beyond that in terms of what we were expecting in terms of both economic conditions and financial market performance. And it's worth just taking a look back at the key drivers we highlighted then.

And the common theme across those drivers was one of moving into an environment of inflection points or pivots. And so from an economic policy perspective, already very clear as we move through the second half of last year that policy makers, both central banks and governments, are going to need to start to tighten policy in response to strong growth and high inflation.

And so clearly seen evidence, significant evidence of that already in terms of central bank starting to push up interest rates, slow asset purchases, governments slowing their rate of spending. At the same time, also saw very significant inflationary pressures towards the end of last year that we expected to continue throughout this year.

And that was really coming from a variety of sources whether it's the commodity, both the energy and the food channel, very significant demand particularly out of the US for global goods and pushing up prices there, and significant strains across multiple industries around the world in terms of supply chains, again, creating inflationary pressures.

Now, as I'll come to our outlook is for inflation to fall but only gradually. And we think it will be the end of next year before, particularly in the US and the Euro zone, inflation starts to get back towards central bank targets. Now, if that's the policy and the inflation settings, what do we think about the growth side?

Well, the starting point is that both households and businesses across the US and Europe, North America and Europe have very significant cash balances. And we think households will gradually spend down some of these excess savings. Businesses will spend in their excess cash on balance sheet in terms of cap ex to try and boost production, to meet demand, address inventories, and some of these supply chain bottlenecks.

Now, importantly, again, as I'll highlight on the next slide, I think that while growth in the main is going to be good across advanced economies this year, the growth risks are definitely rising for next year and the year after. So really quite important differences by country. And finally, just before I move on to our specific forecasts, the obvious question is, are these key drivers still relevant in the context of the Ukraine-Russia conflict?

We would argue they are in as much as the Russia-Ukraine conflict from an economic perspective is adding to the inflationary pressures we've highlighted here in terms of further increases or upward pressure on commodity prices, further constraints on supply chains and inflationary pressures there. So we don't think Ukraine-Russian conflict creates a new set of drivers, but it is reinforcing these already evident ones. So just move on to the slide, next slide, please.

And so in terms of our overall inflation outlook for this year and next, we think that inflation on average will remain high across US, North America, and Europe. So 7% to 7 and 1/2% in the US and the Euro zone up more towards 8% in the UK. But we do think it will gradually fade over towards the end of this year and throughout next year.

But more prominently in the US and Eurozone, less so in the UK for various structural reasons. And that's in the context of particularly in the US and also in the UK, meaningful central bank tightening where in the US we expect the Federal Reserve to get to a policy rate of at least 3% by the end of next year.

In terms of-- just before I finish up and before I hand over, it's worth just highlighting probably the most important driver or economic linkage as to why in this case for the US we expect inflation to fade. And that is that ultimately, the Federal Reserve is seeking to bring down inflation. To do that, it needs to bring down wage growth. And to do that, it needs to bring down the gap between job openings and job seekers. And to do that, it needs to slow real growth.

By how much? Well, we think that growth would need to slow to between 1% to 1 and 1/2% in the US next year to try and start to get wage growth down consistent with that sort of inflation forecast that we have. And so you can immediately see that that's where the recession risks come in. Real growth in the US, say of 1% to 1 and 1/2% as opposed to trend of 2%. That gives much less wiggle room policy wise or in terms of other shocks before you start running the risk of either zero growth or a more material recession.

And then final point in terms of these are our central forecasts, whether the risks around this lie. Well, the risks are for higher inflation. A number of the drivers may last for longer, which would require higher policy rates and place more downward pressures on growth. So if that's the overall context, now I'll hand over to Eric to talk through the more direct implications for the pensions.

ERIC STEEDMAN: Thank you, David. So I'm Eric Steedman. I help multinationals understand and manage their employee benefits in all countries, but with particular focus on retirement plans. And those of us from, let's say, a certain generation can remember just how pervasive inflation used to be and how it used to affect almost every aspect of life.

And I think given David's comments about inflationary risk being weighted to the upside, we believe it's important to plan not just for short term inflation impacts, but also for the risk of more sustained inflation. Inflation affects many aspects of people's strategy. Pay is the most obviously and immediately prominent one but impacts on wider rewards, benefits, career patterns, employee experience, they are all important.

But today, we're focused on retirement plans. And I'll unpack some of the impacts on cash costs, company financials, retirement patterns, and retirement security. I think important to stress everything I talk about today will be general tendencies. It's going to play out very differently in different countries, and indeed, it can play out very differently in two different retirement plans in the same country.

So moving on the slides, and I'm going to first of all, look at DC retirement plans and look at it from the lens of the employee or the plan member. So inflation can deplete the real term value of members pension pots as those pots accumulate. It can deplete the real value, real terms value of the contributions made. And higher inflation expectations push up the cost of buying an indexed annuity at retirement. So all in all, inflation is going to infect when people can afford to retire.

People who've already retired from DC plans and who are given or who chose annuities that don't have inflation protection potentially face a significant loss of real terms value. And there's no obvious way to mitigate that. For those yet to retire ensuring you have a good range of options and the availability of drawdown structures can, to a degree, mitigate this risk for future retirees.

Sponsored DC plans-- the employers are insulated from financial risk but not entirely. So depending on the contribution structure, you may find effects such as pension costs relative to salaries don't move in quite the same way as they used to when inflation is higher. And there's certainly more scope for a pension plan to drift away from the market norm faster than perhaps we've been used to in the past.

So I think it's important to understand and review a few things about your plans. And I group these loosely as follows. So first of all, what's going to be the impact on your Employees Retirement Readiness and what does it mean for your workforce planning? Are they DC plan investment options still appropriate? Especially those default funds but all the funds.

Is the range of options at retirement? The annuities people can buy. The drawdown option's still appropriate. Very important, our communications and modeling tools are up to date. And in particular, our members are made sufficiently aware of the implications of choosing non-indexed annuities at retirement. And are the pension plans being modeled accurately in your compensation and financial budgeting processes?

If I turn to DB plans-- if we could just move over, thank you. Some of the points that are made for DC plans are echoed, but there are further considerations as well. I think there is a historic belief that members of financial of final salary plans have significant inflation protection while their benefits are accumulating. But that's a best approximate.

And I think it's important to recognize that not all DB plans are final salary. So for example, however, a cash balance plan is indexed that may or may not have a good and close tie to inflation. In the payout phase, DB plans are subject to the same loss of value to the members as the DC plan depending on whether the index benefits fully, partially, or not at all.

But I think more in a DB plan than a DC plan you can foresee a greater pressure on the plan sponsor or a fiduciary body such as the trustees to insulate pensioners from the loss of real value by making discretionary increases. This was a common practice in some countries in the past. And I think you should be preparing for such discussions to re-emerge.

I think it's important to ensure also member options remain appropriate and up-to-date in terms of their terms. Things like swapping a lump sum for pension or surrendering members pension for additional dependents pension. Huge sweeping generalization but inflation tends to be good for pension plan finances.

It wouldn't be at all surprising if we see improved financing ratios and plans that don't index pensions in payment, but still are invested in assets that tend to hold their value in real terms. So just like for DC plans, I think it's important to understand impact on employee retirement readiness, ensure your cost modeling is appropriate, but also, I would be wanting to get ahead of any discussions on discretionary pension increases.

Have an objective. Have a policy to hold on. Don't find yourself in a year or two's time reacting to different pressure points and different countries in ad hoc and ways in the back foot. I think it's important to look at your investment strategies. You remember options, make sure that those remain current and appropriate.

And if there is a likelihood of a planned surplus emerging or getting bigger, well, nice problem to have, but important to understand who owns that surplus. Can the company get value from it? If so, how? So a lot to think about there. And as I indicated earlier, it does all depend on the country and the plan.

And we're going to turn to a couple of sample countries now, Canada and Germany, just to get a flavor of the differences in how these things can play out in a couple of different countries. But if I was to make one single general recommendation, it's make a sweep of your plans. Go and understand how inflation is going to affect each of them, and then you'll be able to focus your attention on this question appropriately. Ken.

KEN CHOI: Thanks, sir. I'm Ken Choi, I'm a pension actuary in our Toronto office, and I lead the investment strategy consulting team here in Canada. Now, firstly, I should note that only a minority of our plans here have inflation indexed benefits and many of those are government-sponsored. But there are some corporate plans that have inflation linkages.

I think Eric mentioned this earlier, we haven't seen ad hoc pension increases in probably 15 years, but there was a time when these were pretty common. We're starting to hear from retirees again. So if you used to provide ad hoc increases in the past, you may want to estimate those costs and prepare for the communications effort to manage expectations.

Now, I wouldn't expect that many employers are going to be providing 6.7% adjustments this year. But that's the headline number that many of your retirees will have in mind. On funding in Canada, we've already seen a shift in yields. The Bank of Canada's recent move was plus 50 basis points. And as David noted, we're expecting more through the rest of the year.

At the long end, we've already seen hundreds basis points increase in yields since just late December. As I mentioned before, many plans don't have inflation indexing and will benefit from rising rates and rising inflation. And this could mean a greater opportunity to de-risk, hibernate, or even exit DB altogether.

Now, just to expand on what I mean by hibernation, this is a strategy that some plan sponsors here in Canada are exploring. It's simply to de-risk but maintain the plan rather than buy annuities or wind up. And this is a really interesting idea if your Canadian plan is in surplus because it's actually easier to monetize surplus in Canada compared to other jurisdictions like the US, for example.

Now, if you do have inflation index benefits, there's still some good news. Most of our Canadian clients are early into their three year valuation cycle. And there's flexibility in setting the date of the next valuation, which would reset the clock and lock in funding for the following three years. So I do encourage all of you, whether your plans are indexed or not, to review your Canadian plan funded positions and take advantage of the flexibility you might have given all the uncertainty we're seeing in the market.

Now, about that uncertainty, there are a few things we're encouraging our clients to think about. On the investment side, real estate and infrastructure can help diversify away from volatile stock markets. They offer a degree of inflation hedging as well. And these asset classes are more accessible and cheaper than before. So even if you have a smaller plan in Canada, these are absolutely doable.

We also think that diversity in your equities portfolio is important. For 12 years now, growth stocks have dominated, but we do know that stock preferences ebb and flow. And it's best to have a diversity of approaches in your equities. And we're already seeing the market shift over the last couple of months.

On the fixed income side, we still need long duration to hedge liabilities. Unfortunately, inflation-linked bonds are expensive here in Canada. That's not a practical solution for most plans, but reducing duration a bit, adding a broader range of credit strategies, two ways to build resilience in your bonds.

Lastly, a few thoughts on defined contribution. Decumulation is what happens to participants' accounts after they retire. And historically, in Canada, employers have basically cut ties with plan members at retirement. But that's really not the case anymore. Legislation has changed. The DC market has introduced new products that allows the employee to stay in the DC plan right past retirement. And that's a good thing for retirees who would otherwise be on their own.

With inflation on the rise, it'll be important to review your investment option lineup. For example, does it work well for retirees with income needs and lower risk tolerance? Does your default work in the decumulation stage? This is an opportune time to revisit the funds that you're offering. So lots of things to think about in Canada. But at this point, I'll pass the mic to Wilhelm to speak about the German market.

WILHELM-FRIEDRICH PUSCHINSKI: Thank you very much, Ken. My name is Wilhelm Puschinski, I'm a Pension Consultant with WTW in Germany and Chief Actuary for the retirement part in Germany. Germany's pensions landscape is still very much a defined benefit landscape and it's still very much an annuity's landscape.

So the effect of inflation to corporate pensions is heavily dominated by pension indexation. And different to Canada, by law, annuities in Germany have to be checked for indexation at least every three years. And in many cases, they have to be adjusted according to the CPA. So many pension plans in Germany are paid out directly by the company.

And so the topic is immediately flow-relevant with regard to the pensioners' populations. And can you mention the 7% increase? That means for a lot of companies in Germany, their pensioners population might get a 7% pension increase this year. For plans introduced after 1999, companies can avoid a CPI indexation by promising a guaranteed annual 1% increase. Many newer plans are designed this way and therefore not affected by rising inflation. But the current pensioner population in January still has CPI.

There's also the alternative to do indexation according to the increase of the company-specific net salary instead of CPI. But switching to this method cannot be done on a year by year basis. But the comparison needs to be done over the full period since the first pension payment. So it has to be checked if this really is helpful with regard to specific population and company.

While indexation for direct pension plans is very much on everybody's mind in Germany, it is also a relevant topic for externally-funded contribution-based plans. Many of those plans must meet an inflation-linked indexing. And if inflation is rising, there is a contingent risk that the company has to step in if this cannot be financed by the assets of the external funding vehicle. And so from something you had off your mind and treat it as a DC vehicle, there might be a bad surprise. So assessing the risk position of your externally-funded plans can help you avoid those surprises.

In Germany, many plans are financed by book reserves. So inflation is a big topic. Also with regard to the assumption setting for calculating those liabilities and with rising prices, there's pressure to increase assumptions for pension indexation, salary increase, and social security ceiling increases.

The net effect of rising interest rates, which we see at the moment-- and inflation is highly plan-specific. And sensitive calculations can help assess you to assess the risk for you. The last topic inflation hatching to hatch balance sheet volatility is discussed in Germany quite for some time now, but still not very common especially since many plans are not or poorly funded. So there are simply no assets to do any inflation hedging on the asset side.

Furthermore, if not managed perfectly, those inflation hedging systems might create more volatility. So it's a sensitive instrument to use in Germany and still not very common. So that's about Germany and the landscape we see here. And I kind of hand over to you to find some more information and see if there are any questions so far.

ANNA BUDNIK: Thank you. So just a reminder, the session, as I mentioned at the beginning, is recorded. You will get a copy of the materials and the recording after the session. There is further reading on inflation and people strategies. These will be links that will be in the presentation that we'll be sending out so much, much more to do.

So we do encourage you to ask questions now. So if you have any specific questions, please enter them into the chat. So Bridget, if you want to go to the next slide for the questions. And definitely, if you think of any questions as we're going through the next couple of topics, we can certainly come back to this. One question that I had for the panelists as I was listening to this is, any thoughts you have in terms of being proactive on employee communications in this regard? Just thoughts on that?

ERIC STEEDMAN: I'm happy to take that. Yeah, I mean, I'm not sure about the generality of employees. I haven't particularly thought about that, but those, particularly those employees who are coming up towards retirement in DC plans and may have a choice of pension to buy, so to speak, depending on the country, depending on the plan.

And it can be a pretty unpalatable choice. The non-index linked annuity, the obvious problems, the index linked annuity may look very, very expensive. They may want to tread some middle road between those things. But I certainly would want to be looking at the communication and modeling material for those members and just make sure if nothing else, they're adequately informed about those things so that they can make an informed decision and you can help them as best you can within the confines of a DC plan.

ANNA BUDNIK: OK, great. Thank you, Eric. We did have one question that just came in. So can we expect risk premiums for fully insured solutions across EMEA to increase given higher inflation? If so, how can we best negotiate, discuss this with the provider?

ERIC STEEDMAN: Gosh, it's a question to what extent. And that is already baked in. I'm not sure I have a ready and precise answer to that question, I'll be honest about that. I don't know if any of the other panelists want to answer that one.

WILHELM-FRIEDRICH PUSCHINSKI: Well, I can at least give a German perspective. In Germany, most insurance contracts you buy here are not inflation-linked directly. Rather, the insurer guarantees a certain amount and then gives surpluses as in a pension increase. So I don't think we see anything on the risk premium side, but the risk, depending on the plan you have for stepping in, if you have a contingent risk, might rise here. So different world in Germany.

ANNA BUDNIK: All right, another question that came in. So on the DC front, has there been much activity to introduce inflation sensitive investment options? And correspondingly, how to communicate that without giving up employee concerns.

ERIC STEEDMAN: Yeah, I'm not aware of a sort of rush to introduce new options that weren't there before. And I guess possibly part of what I'm saying is maybe companies should be considering if they don't have such options, maybe it is time to introduce them. I mean, what I could say is in a number of countries, there has been introduction of so-called draw down options in DC plans where you do not have to buy an annuity. You can stay invested and draw on the pot of money.

And I don't think those were introduced because people saw inflation picking up. They were introduced as a way of avoiding people locking into bonds at potentially a relatively early age. But I think they might be quite helpful in an inflationary environment as people will be able to stay invested in assets that one at least would hope would have some sort of inflation protection within them.

ANNA BUDNIK: OK.

KEN CHOI: Ken here, maybe I can jump in on that question. I know that target date funds are fairly commonly used as the default fund in Canada as well as in the United States. And many of the target date fund providers are actively looking at how to adjust their investment strategies and asset mixes and glide paths to address inflation concerns. You're not going to see revolutionary changes in those products, but I do believe that over the next year or so that you're going to see some tweaks in the strategies embedded in those funds.

ANNA BUDNIK: Great, thank you. Another question that came in. So low interest rate hedge is a tool to protect the funds in the Netherlands, as far as I know. How does this compare to approaches in other countries?

ERIC STEEDMAN: David, is that one you could take?

DAVID HOILE: Yes, of course. I mean, I think that-- so the UK side is the geography I know best, and they're in terms of hedge ratios, the typical hedge ratio. We've largely maintained our advice to keep those hedge ratios relatively high as a proportion of assets.

That the reason being is that essentially trying to extract value from a view on the future path of rates versus liabilities is incredibly difficult to add value to over time. And so we just see other areas in portfolios, opportunities to add more value. Having said that, in a very risk-budgeted or risk controlled way, slightly reducing the interest rate hedge against liabilities, it certainly is absolutely one way that investors can protect against that sort of rising inflation environment.

ANNA BUDNIK: OK. Got a couple more questions and then I think we will move on. Eric, this is one maybe for you to start. So any thought on medical inflation impact on medical plans?

ERIC STEEDMAN: I think it may sound a little trite, but I suspect the medical services are going to be indirectly just as susceptible to inflation as many other things. I mean, OK, the rising food prices, rising energy costs perhaps don't impact so directly. But if we do find ourselves in some sort of wage price spiral, I'm sure that's going to spill over right across the board, including to medical plans. So I think it's kind of reasonable to assume that there is a risk of medical inflation rates, which are, typically already higher than regular CPI increasing further.

ANNA BUDNIK: Yeah, and definitely, in many countries like in the US, I think there's still quite a bit of retiree medical liability on the balance sheet. And so it is something to definitely get in front of. OK, and then just one last question and then we will move on. This one's probably a difficult one to answer, but what lessons can be learned from countries that regularly experience high inflation such as Argentina?

ERIC STEEDMAN: Yeah, well--

ANNA BUDNIK: I don't know if you have thoughts on that one.

ERIC STEEDMAN: I suppose it's maybe a counselor perfection, but try to design your plans in a way that will suit the environment. So those countries do not have this-- again, massive sweeping generalization don't tend to have necessarily the same sort of pension environment as we might find in say, North America or Western Europe. And there are many, many reasons for that. Inflation will be one of them.

But I think as I've probably alluded to earlier, it's quite difficult to design plans that are super resilient across the board to both low inflation and high inflation, or at least, if they're going to do that, they're kind of going to be expensive in some form or another in terms of the ratio of output to input.

So I think it is-- it's difficult to generalize too much, but I think just trying to make sure your plan isn't betting too hard on any particular level of inflation, i.e. that it will stay low, or it will stay high, or it will stay at 5% is probably the best sweeping generalization I could make today.

ANNA BUDNIK: Great, great. Well, thank you to all of our panelists on this topic. We are now going to move on to talk about the legislation in the Netherlands. So I'm going to turn it over to Willem.

WILLEM EIKELBOOM: Thank you, Anna. As the Netherlands is one of the smallest countries on the globe, but if we look in the world of pensions, then the pensions in the Netherlands are one of the main topics for a lot of the global pension managers. My name is Willem Eikelboom, I'm one of the corporate consultants in the Netherlands helping companies in making the change.

It's an exciting job because there's a lot of change going on in the Netherlands regarding to pensions. So what I will do in the next 20 minutes is talk a little bit about the timing of change, the content of change, and a couple of recommendations. On the next slide, we see the timing. In the Netherlands, the government, unions, and employer representatives have been talking about pension changes for a couple of years now. So we have seen a lot of position papers, a lot of principle documents, a lot of consultations in the last years.

And finally, in March this year, the government has sent the proposal for the new pension legislation to the second chamber in the Netherlands, and the second chamber will have to decide about that new legislation in this summer. And we're also the lower regulations have been sent for consultation and the lower regulations are more detailed descriptions that companies and pension funds have to use in making the change.

The only thing that we are still waiting for is the publication of the new parameters. And the parameters are the assumptions that companies will have to use in making the calculations of change. So and the pension situation will change. Each company will have to adjust the pension plan and they will have to make a calculation of the expected pension outcome in the new pension situation versus the current situation. And that is legally required to be done on the parameters that are to be published.

The new legislation will be applicable from the 1st of January 2023 onwards. And if you look at the type of pension providers in the Netherlands, then there is a difference between pension funds and non-pension funds. The majority of employees in the Netherlands and a majority of companies have a pension plan executed by a pension fund since more than 80% of the Dutch employees participate in a pension fund.

But there are also companies not having a pension fund but having a pension plan executed by an insurance company or a PPI. For companies having a pension plan, that the pension fund, the most important deadline after the 1st of January 2023 is 2025. So there will be a time frame of two years in which these company will need to have an agreement with unions or works councils about the content of the new pension plan. That is to be drafted in a formal transition plan.

So all companies having a pension fund for all these companies, the 1st of January 2025 is the deadline for having an agreement about a new plan. And then there is another two years in which the pension funds have the time to implement the agreed plan. So the new pension plan has to start at last at the 1st of January 2027 four years after 2023. We did it four years-- four years same time frame. The two first years are for the employer to agree about the type of the plan, and the last two years are for the pension fund to implement the new plan.

For companies not having a pension fund, the legal deadline is the 1st of October 2026. So these companies do have a lot more time to think about the new design. And then there's only a three month time frame for implementing the plan. And that's because what type of plan will depend on the proposal that an insurance company will do, which is much later in time.

So what we did ask, we asked companies about what is the preferred moment of making the change? Which is on the next slide. So all companies have the possibility to make the change to the new plan between 2023 and 2027. But the majority of companies prefers to make the change earlier.

We asked 100 companies about, What do you prefer? If you look at companies having a career average pay plan, mostly DB or CDC, then the majority prefers to make the change in the middle, so at the 1st of January 2025. And if you look at companies already having a DC plan, then we see it's more spread over time. And the reason for that is that most of these companies have a contract with an insurance company, and the most logical moment of making the change for these companies is if the contract expires.

So relevant for you, most of them, most of the companies are not waiting till the last possible moment but prefer to make the change earlier in time. If you look at the next slide, there we see a little bit more about the content. This can be said a lot about the content of pension change. So there are more than a couple of hundreds of pages in the new legislation. And here it's only summarized in only one slide.

The most important change is that all new pension plans need to be some form of individual DC which is different from today because today, about 90% of the plans in the Netherlands is not DC, but is defined benefit or collective DC. So all companies will have to make the change to a DC plan.

And another important change is that within that new individual DC plan, the contribution rate will be a flat rate DC. Which means one and the same percentage for all participants in the plan irrespective of age. This is completely different from what it is today in the Netherlands because today in the Netherlands, the cost price for pension is age related in DB plan. But also in already existing DC plans, the contribution in the Netherlands is age-related. A low contribution rate for young employees, a high contribution rate for all employees.

There will be a fiscal maximum to the new flat rate DC. It cannot be higher than 30%. And on top of that, there will be also the possibility to have administration cost loading and risk premiums. So the total contribution can be even higher than 30%. Maybe that seems a little bit high, 30%. But note that the pension base or the pensionable salary is fiscally capped, cannot be higher than 150%. And also, there is a social security offset to be deducted from the pensionable salary. So this 30% is not a percentage of salary, but it is a percentage of pension base which is lower than total salary.

So the new contribution in the Netherlands needs to be one and the same percentage irrespective of age. And a consequence is that if a company makes a budget neutral change from the current situation to the new situation that for older employees, the new rate will result in a lower pension than employees have today.

And there will be a legal requirement that these consequences are to be compensated. This is a legally prescribed and prescription is that the compensation shall be adequate, which means not a full compensation, but an adequate and a level of adequacy is to be discussed between employer and employee representatives.

For companies having already an age-related contribution, grandfathering is also allowed. So for these companies, it is allowed to continue with the age-related DC for existing employees only. But for all new employees, even these companies will need to have-- need to go to a flat rate DC. The fort elements of the new pension legislation is that all pensions that have been built up in the past can be converted into the new plan.

So this is a very relevant one because most of the pension funds do have high funding ratios. The coverage ratio of most pension funds is higher than 100%. And if you convert the existing DC plan pensions into new DC capital, then employees will directly benefit from the surpluses which are in the fund.

And these conversion of surpluses will have a positive effect for employees. And for a lot of companies, this positive effect will mitigate the negative effect of moving to a flat rate DC for older employees. So the move to a flat rate DC combined with a conversion of past pension services is expected to have on total a neutral effect.

Also, the survivor's pension will have to change. In the current situation, the survivor's pension in the Netherlands is related to the number of years in service. In the new situation, it will be a fixed percentage of salary irrespective of age and irrespective of the number of years of service. And as a consequence for employees, there will be less negative effects if an employees move from one employer to another because the new situation will be a full survivor's pension insured again.

So there's a lot can be said a lot about the content of new pension legislation. But in summary, these are the main subjects. An interesting question is, what will be the level of the flat rate DC in the new situation? So in the next slide, you see the result of that question. So we ask companies what they expect about the level of the pension contribution in the new situation compared to the current situation.

And what you see here is that the majority of employees is in the gray area in the middle. So most of the employees expect that the pension budget in the new DC pension plan will be the same as it is today. However, if you look at the bigger companies, so companies having 2,000 employees or more, you see that they're one out of four expects that the pension contribution will decrease.

And the reason for that is that these are companies mostly having a DB plan with very high contributions in the current situation, sometimes because there is still a funding guarantee of the company. And these companies will use the change in legislation as a trigger for taking out pension money and use it for other benefits.

So they use this new pension legislation as a trigger for looking at the total benefits package and looking if they can use pension money in another way, in a more optimal way for other types of benefits. In particular, the bigger companies are looking at these opportunities. If you look at the smaller companies, for instance, the companies having less than 500 employees, there you see that one out of three of the companies expects that the contribution will increase.

And the reason for that is that a lot of these companies already have a defined contribution plan. And in particular, if these are defined contribution plans that have been set up that say, 10 or more than 10 years ago, then the contribution level is rather low for these companies. These contributions have not been adjusted upwards in the last years. While in other companies, the contributions have gone up. So a lot of these companies use this new legislation as a trigger for moving to market median, which for these companies will be an increase in the contribution.

So that, in short, is a little bit about the content, what the market is doing and about the timing. The recommendations we have is if you look at this change, then we suggest to use a four step approach in making the change. The first step of the change is set up a project plan, a project group with a good representations of the different stakeholders.

The second phase is to define a strategy. The third phase is after you have defined a strategy to start the negotiations with employee representatives. And the fourth step is the implementation. We see that almost all companies have already started the project group, and a lot of companies also already have defined the strategy.

If you have not, then in my view, it's very important to start that early because if you-- yeah, if you have the strategy, you know what to do. And three elements are important in defining that strategy. One is benchmarking. So what we have done last year is a lot is helping companies in defining, What is your peer group? What is your peer group doing? What is the position of your company compared to the peer group? If you look at the pension plan, and also other benefits.

And what's also relevant is to know what are the employee preferences? So what we can help you with is focus groups, surveys, and things like that to have a clear view about what your employees prefer in the current situation. But maybe more important is what are the objectives of the company themselves?

So in workshops or in leadership interviews, we help companies in defining the strategy, defining the objective and conditions. And if that's clear, then it will help you in setting the path for negotiation. So that's, in short, the recommended steps in general. And of course, for each company it's individual and we can help you with that. So online, sure, that's all about the Netherlands for this moment.

ANNA BUDNIK: OK, great. We have had quite a few questions that have come in. But in the interest of time, I'll probably only ask you a couple of these, and then we will follow up with all the participants regarding the other questions that came in. So a few people asked-- and just to clarify, so would a frozen DB be allowed after 2027 if the fund cannot be cashed out? So similarly, someone asked, is it not possible to just leave existing employees in the legacy regime but close it to new joiners? So can you talk about that?

WILLEM EIKELBOOM: Yes, that is allowed. So if there is a plan in place, it's allowed to continue that. But of course, then you will not benefit at all from-- and the positive effects of making the conversion, but that is allowed. All new accrual will have to take place in DC. So it's a hard, close plan, not a soft, close plan.

ANNA BUDNIK: OK, great, great. And then a couple people asked about industry-wide pension plans. So what should the company be thinking about if they participate in such a plan? And then another question came in, what is going to be the demise potentially of those industry-wide plans?

WILLEM EIKELBOOM: Yeah, good question, Three quarter of all employees in the Netherlands participates in an industry-wide pension plan mostly on mandatory basis. That will not change. So yeah, there still will be big industry-wide pension fund funds. If you participate in such an industry-wide pension fund on a mandatory basis, then it's easy for you because the content of change will be done by the industry-wide pension fund itself you will have to follow.

Note, however, that most of these industry-wide pension funds have a sort of threshold, a ceiling on the pensionable sellable salary, which is a lot lower than the fiscal maximum, sometimes about 50,000 euros on an annual basis. And a lot of companies have an accident plan on top of that, sometimes executed by the industry-wide fund itself. But that's not a mandatory plan. So it's a voluntary plan and therefore you are responsible for that plan. The new legislation will be applicable for those plans as well. So it's important to not forget that you sometimes have excess plans, accident plans on top of the industry-wide plans.

ANNA BUDNIK: OK, great, great. Would there-- as I mentioned, there are a lot of questions. We will follow up after to get to all of the rest of the questions. So with that, I would like to turn it over to Maria so we can start to talk about the changes in Ireland.

MARIA QUINLAN: Thanks, Anna. My name is Maria Quinlan, and I head up the DC team in Ireland. So if we move on slides, IORPS II was a comprehensive and really wide ranging EU directive. It was transposed into Irish law in 2021. And also in the last year, our regulator, the pensions authority, released a related code of practice. And these two combined will impact pension schemes in Ireland, potentially more than any other regulations have done in the past.

The requirements to be compliant are really onerous and will require a huge amount of time and expense for companies who wish to retain their own single trust pension arrangements. So I will look at the impact to defined contribution DC clients where they're looking increasingly to master trusts to ensure immediate and ongoing compliance with IORPS. Brian will cover how it is impacting defined benefit arrangements.

In March 2022 also, the Irish government made an announcement on the design principles for the auto-enrollment scheme. It's due to be in place from 1st of January 2024, and we will outline what we know and also a lot of the detail that is needed to really fully understand the implications for employers.

And then finally, we'll outline the key actions employers should take arising from these two, these fundamental changes to the Irish pension landscape. So moving on slides, regardless of size, Irish pension schemes have now moved to a compliance regime more akin to a financial services company.

The regulator has announced that it will adopt a forward-looking risk-based supervision approach. And these increased governance requirements that we've summarized on the slide will inevitably lead to increased costs for pension schemes relative to their existing charges. And that's really both for the initial implementation and also for ongoing compliance. There was no proportionality, actually, applied in the IORPS and its implementation, and therefore all schemes, regardless of size, will have to be compliant by the end of 2022.

So how will sponsors respond to these new IORPS requirements and really, what are their options? While DC schemes they don't face the same funding risks as DB schemes, they will nonetheless be huge increased demands on trustee boards under the new regime including the requirements to appoint the new key function holders, monitor all risks, and respond to increased member disclosure requirements.

Many employers have not looked at their DC pension schemes for some time. And the market and solution available will have changed significantly since they put them in place maybe 10 years ago. Of particular interest are master trusts. And these are relatively new to the Irish market and the working framework for which has only recently been developed.

The regulator or pension authority has been very open in saying they expect the number of pension schemes, which is thousands, will reduce significantly over the medium term to about 150. So definitely they're signaling that master trust will be a permanent feature of the Irish pension landscape in the future.

We've already in 2022 seen a number of employees or employers move towards master trust for their pension provision. It's a high governance, low maintenance solution. It means immediately compliant and future proofs. We've seen that already. And it's demonstrated in the growth of our own life site master trust both now and in the UK.

So master trust it's a multi-employer occupational pension arrangement. Each employer has its own section within the master trust. There is one single legal entity with a single trustee board looking after all of the employers providing the best aspects of an individual trust but without that governance burden in terms of cost and time for employers.

Master trusts are in a strong and in a better position than a single trust, single employer position to know they are in a better position as say, to negotiate better deals with their providers and provide services cost efficiently in important areas like investment, communication, and ultimately, that will lead to better value and lower costs for members.

These-- and also lead to better outcomes and better experience for employees, including more user friendly investment options, regular engagement, better targeted communications, including getting independent financial advice at key stages. All of these are essential to improving member outcomes at retirement.

A pension plan that meets all of those requirements should be well able to tick-- or the increased requirements under IORPS should definitely be able to tick these key boxes and an awful lot more. And from what I'm seeing in the market and even in 2022, it can lead to huge cost efficiencies. And that's both from a member and from an employer perspective if it's done correctly. So now Brian will discuss how IORPS is impacting employer considerations around DB arrangements.

BRIAN MULCAIR: Thanks, Maria. And hello, everyone. I'm Brian Mulcair, I head WTW corporate consulting practice in Ireland. So I'm going to talk to you about consolidation. Many clients may have more than one defined benefit plan arising from past acquisitions or, for example, having separate schemes for staff and executive employees.

Merging these plans now can have significant benefits, including the pooling of resources and reduction of professional fees, particularly with the new IORPS requirements simplifying governance, oversight with the employer having to deal with only one trustee board, and creating efficiencies with one actuarial valuation process and simplified financial reporting.

The barriers to implementing DB plan merger might include plans having different funding levels or there being a different balance of power under the schemes, [? trusteed, ?] and rules are, for example, the existence of discretionary benefit practices in only one of the plans. All of these barriers have potential solutions. And while in the past, sponsors may have seen these as issues or as obstacles to merger. Now, with the greater business case on cost savings, we do see clients looking to merge DB plans.

The next area where we're seeing activity is in the area of DB journey planning and consolidation on the next slide. Ireland is a small country, but we do have circa 700 defined benefit pension plans in operation. It's estimated that over 200 of these have less than 50 active members now.

Funding levels in DB plans have improved over recent years. And in some cases, that provides the opportunity to discontinue or wind up DB plans and fairly settle member benefits. Where this is not feasible in the short term, we also see clients develop journey plans towards settlement at a future point in time. This might also involve implementing liability management options during that time period.

The last area I'll cover is the area of auto-enrollment and the recent announcement by the Irish government in relation to its plans to implement auto-enrollment. The background to this is that only 40% of private sector employees in Ireland are covered by employer occupational schemes. And auto-enrollment has been on the policy agenda of various governments for a number of years.

The announcement in March 2022 gives us greater clarity in terms of what the government is seeking to implement in terms of auto-enrollment. So the Go Live for the new plan is 1st January 2024 with the level of contributions being phased in over a 10-year period to 1st January 2034.

Employees not already in occupational schemes that are aged between 23 and 60 and over earning over 20,000 euros will be eligible to be enrolled in this auto-enrollment plan. New employees will be enrolled immediately from the date of joining employment and they can opt out after six months.

Employees will initially be required to contribute 1.5% of their earnings, and this will increase over that 10-year period to a 6% employee contribution. The employer will match employee contributions, but importantly, the required contribution percentages apply to earnings capped at 80,000 euros.

Finally, the state will add an incentive topping up contributions by 33% of the employees contributions. So with all of that, you'll eventually get to a system of employees paying 6%, the employer paying 6%, and the state topping up by a further 2% to give a total contribution of 14% of pay.

The mechanism or the delivery vehicle will be a new central processing authority set up by the government to run this auto-enrollment scheme. It will organize and procure investment managers and ensure that there is economies of scale with investment management fees not being higher than 0.5% of assets.

So there's a lot there in terms of the auto-enrollment information. While the government says that this will go live on 1 January 2024, I see there being an awful lot to do. And so it may be delayed some bit, but we'll now just look at the various actions that clients should take in Ireland in light of everything we've just covered.

So with regard to IORPS II, as Maria has outlined, there's very significant new requirements there in terms of governance of plans, trusteeship, and appointment of key function holders. The key date to be conscious of there is 31 December this year. That's when plans have to be compliant. If you're considering changing your strategy, for example, in moving to a DC master trust or consolidating plans and to save governance costs, then, of course, the right time to try and do that is during the course of 2022 or shortly thereafter.

Finally, in the preparation for auto-enrollment, it's something to consider if you are reviewing DC plan design now. And look at cost implications if your workforce in Ireland has low participation in your existing DC arrangements. However, we do see there being more lead time in that area. So thank you for your time.

ANNA BUDNIK: OK, great. All right, so please, if you have any questions, please enter them into the chat. Maria, we do have a question here regarding Ireland. So Ireland, relatively a small country, how many master trust providers are there? And is it sufficiently dynamic enough?

MARIA QUINLAN: Absolutely. As I said, master of relatively new to the Irish market, but currently there's about eight master trust providers in the market. In the medium to long term, I would actually probably expect that really, they're likely to be only four probably significant master trusts in the Irish market.

And the master trusts will be required to have certain scale and there's also going to be significant oversight. And that's going to increase from the pensions authority perspective in terms of the risks within master trusts. So I would expect in the longer term you're going to have something like four or so master trusts. But absolutely, there's plenty of choice in the Irish market.

ANNA BUDNIK: OK, great. And then one more. Will master trusts or other third party consolidation vehicles also be operational in the DB space?

BRIAN MULCAIR: Yeah, I'll take that one. In short, I don't think so. The barrier there will be the size of the Irish DB market and the total assets under management within DB schemes. I know that there is a movement in that space within the UK, but I just don't think there will be the scale for organizations to set up and look at DB master trusts.

ANNA BUDNIK: All right, any other questions from anyone? Goes into the chat. We did allow a little bit of extra time for some questions that maybe we didn't get to. So as I mentioned, there were quite a few questions on the Netherlands, so maybe we can ask a couple of those before we wrap up the call. So, Willem, I'll ask you to come back on. And let me look at some of these questions here. So on slide 18, can you qualify your comments about what the contribution percentages are referring to higher or lower is rather ambiguous?

WILLEM EIKELBOOM: I think it was on slide 18.

ANNA BUDNIK: I think so. Bridget, if you want to move back to that. So they're asking about the contribution percentages.

WILLEM EIKELBOOM: Yeah, so the percentages you see here is not the level of the contributions. So we simply ask the question, do you expect that the pension contribution will increase or stay the same or decrease? So the majority of the employers responded that the intention is to not change the pension budget at all. So the intention is to stay the contribution level at the same level as it is today.

For a couple of smaller companies, they expect that the pension contribution will increase. And the reason for that is that a lot of the smaller companies already have a defined contribution plan in place. And that defined contribution plan, a lot of these defined contribution plans have been set up more than 10 years ago.

And in that situation, the pension contributions were rather low in the Netherlands because of high interest rates. Since then, the interest rates have decreased, therefore, pension contributions have increased. But by definition, that was not the case for existing DC plans. The contribution was defined and was not adjusted.

So if they benchmark their plans today, they consider that the pension level is low or below market and sometimes far below market. And mostly, these companies use these pension changes as a trigger for increasing the contribution. So mostly, the smaller companies are already having a plan.

ANNA BUDNIK: OK, so it really depends on where you're coming from?

WILLEM EIKELBOOM: Yes, yes.

ANNA BUDNIK: OK, very good. A very good question came in regarding-- you mentioned as one of the next steps is really looking at that benchmark data. So of course, you mentioned maybe looking at what contribution rates might be today. But the question came in is, how is that helpful now when most companies won't even have a clear strategy or an agreed strategy on how they're going to move to the new arrangement?

WILLEM EIKELBOOM: Yeah, two things. The first one is it's good to know if you are already below or above market. So at least it helps you in setting the direction. Also knowing that the majority of the market has the intention to maintain at the current level. So if you are above market level, yeah, you know that direction will be if you would move to the median that you will have to reduce. That's one.

And the other is that we are not only benchmarking to the past, but we are also what we call trend watching. So we are constantly asking companies about, What is the intended direction of change? What are you intending to do? And helping clients in updating them about market developments. So it's not only benchmarking, it's also what we call trend watching.

ANNA BUDNIK: OK, very good. Very good. OK, another question that had come in before was, would the past service accrual need to be transferred to DC in one settlement? Would the DB plans PBO vanish right after the plan change?

WILLEM EIKELBOOM: That will be a settlement. So if you have a DB plan and if you transfer it into the new DC plan, yeah, it will be a settlement at that moment. And in a lot of situations there's a pension surplus because of the highly funded pension plans in the Netherlands. So there will be a settlement loss if you make the change.

And that might be a reason for companies for not making the change. Even from cash perspective, it can be beneficial. But some companies are considering of not transferring DB pensions because of the ones only settlement loss and they accept that they will be confronted with higher cash compensation costs because of that.

ANNA BUDNIK: Very good, very good. So taking the implementation process into consideration, when do you need to ask the agreement of the DNB?

WILLEM EIKELBOOM: As a company, you do not need to have to submit it to DNB. So as a company, you will need to set up a transition plan. That transition plan you have to submit with your pension provider. And then the pension provider, which is a pension fund or an insurance company, will have to draft an implementation plan within a couple of months. And the pension fund will have to submit that implementation plan to DNB, the Dutch National Bank, the supervisor authority. And for pension funds, that need to be before the 1st of July 2026.

ANNA BUDNIK: OK, great. OK, next one is somewhat detailed question. Well, so for companies who have their pension insured at an insurer/PPI, will the spouse pension still be insured at the PPI but just calculated differently? And changes in coverage and costs or will this coverage be insured at a separate company and not related to the pension percentage as it is now?

WILLEM EIKELBOOM: Yes, that's indeed a very, detailed--

ANNA BUDNIK: It's a very, very detailed question, yes.

WILLEM EIKELBOOM: It depends on the type of provider. So an insurance company is allowed to include the spouse pension insurance within the DC pension plan for companies having a PPI, a Premium Pension Institution, which is a typical Dutch DC pension vehicle. That PPI can only do the, let's say, the saving component in pension and not the insurance. So even in the new situation, if you do have a survivor pension or disability pension that need to be insured with a specific insurance company apart from the PPI, that's the current situation and it will be the new situation as well.

ANNA BUDNIK: Very good, very good. Well, I want to wrap up our session today. Again, we will be sending out the recording and all the materials. We will ensure that if your question was asked and we didn't answer it, we will also do that. So thank you so much to everyone that joined us today.

And a special thank you to all of our speakers. A lot of hard work has gone into putting this presentation. And I will also say thank you to someone behind the scenes who has helped us, Bridget Harres, who's amazing, who's helped us put this all together. So thank you, everyone, and have a good rest of your day. And feel free to reach out to any one of us if you have any additional questions or would like to engage in a discussion on any of these topics. Thank you, everyone. OK, the meeting is now ended.