The Financial Assessment Framework (FTK)

The vast majority of pensions in the Netherlands take the form of a benefit scheme. The Pensions Act contains safeguards designed to ensure that an agreed pension can actually be paid out. These safeguards are regulated by the FTK. The FTK states how the liabilities (the future payments) of the pension funds have to be calculated, the required amounts for the buffers and the contributions for a pension fund and the risks (interest-rate risk, longevity risk, investment risk, etc.) that funds must take into account. In general, the FTK sets the “price” of a pension, and is therefore the core of the Pensions Act. The principle of the current FTK is that there should be a high degree of certainty that the promised pension can actually be paid out. Only indexation may, if allocated subject to conditions, be subject to a high degree of uncertainty. Due to this required high degree of certainty, calculations must be based on the risk-free discount rate and high buffers must be maintained.

New pension contract

This high degree of certainty makes pensions expensive, and nowadays even almost unaffordable. Accordingly, the social partners and the government have agreed to work on a new pension contract with a pension benefit that is not set in advance. The benefit can fluctuate over time. This type of pension is classified as a contribution agreement. Since the pension to be allocated is uncertain, the requirements in the FTK can be less stringent. The required buffers can be reduced and indexation is permitted sooner than under the rules in the current FTK. By definition, the contribution in the new circumstances will be cost-effective. There is still a discussion among the parties as to whether a less certain pension benefit justifies using a different discount rate.