Brans Brief number 9, year 9, September 2006

In this issue of the Brans Brief:
 

	Watson Wyatt Monitoring Services: continually measuring and assessing investment policy in relation to liabilities
	Equalisation upon divorce of old-age pension rights under the VPL 15-year financing facility
	Amendment of the Regulations on the Calculation Rules for Transfers of Accrued Benefits

Watson Wyatt Monitoring Services: continually measuring and assessing investment policy in relation to liabilities

One of the effects of deteriorating financial positions and the introduction of new regulations such as the Financial Assessment Framework is that investment portfolios are becoming more and more complex. As a result, the importance of continually measuring and assessing investments and liabilities is increasing significantly.

The process of this continual measurement and assessment, also called monitoring, is the indispensable groundwork both for making timely adjustments to investment policies and for rendering careful account for the policies pursued to the members of the pension scheme and the supervisory authority. The necessary extent and frequency of this monitoring depends largely on the complexity of the investment portfolio.

Watson Wyatt has developed comprehensible monitoring reports, with a clear focus on the information that directors cannot do without. The reports are structured along modular lines and describe the movements in the pension fund’s financial position (LiabilityWatch), the investment portfolio (AssetWatch) and the financial markets (MarketWatch). We also offer to prepare the reports to be submitted to the Dutch Central Bank (RapportageWatch) for you.

The benefits of Monitoring Services
You can use the information generated by the various Watches for a range of purposes, including the following:

• examining the developments in the principal factors affecting the pension fund’s financial position;
• anticipating developments on the financial markets at an early stage, taking into account the ways in which both the investments and the liabilities develop;
• correctly judging the yield realised by an asset manager compared with the market and other asset managers;
• ensuring that your views on asset management are not based only on the results recorded in the past;
• conducting discussions with directors about relevant issues that concern the pension fund’s policy for the structural and risk characteristics of the portfolio and the degree to which those characteristics match the fund’s philosophy, processes and objectives.

For more information contact: Hugo Nieuwenhuijse.

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Equalisation upon divorce of old-age pension rights under the VPL 15-year financing facility

Under the Dutch Early Retirement, Pre-Pension (Changes to Tax Treatment) and Lifecycle Savings Scheme (Introduction) Act (Wet aanpassing fiscale behandeling VUT/prepensioen en introductie levensloopregeling, ‘the VPL Act’), it is possible to include in an employee’s employment conditions a supplementary pension commitment over past years of service for which the pension accrued was not the maximum permitted for tax purposes. The commitment (referred to here as ‘the 15-year commitment’) need not be accrued and financed until 15 years have passed, or until the retirement date, if earlier. This facility is subject to the condition that the participant must be on the employer’s payroll when the commitment is financed.

One question that is relevant in the context of this facility is how to deal with such pension rights if a member (or former member) and his or her spouse divorce. When people divorce, their old-age pensions are equalised pursuant to the Dutch Equalisation of Pension Rights in the Event of a Divorce Act (Wet verevening pensioenrechten bij scheiding, ‘WVPS’). For the purposes of the WVPS, old-age pensions are defined as old-age pensions resulting from pension commitments made by an employer. According to the explanatory notes accompanying the Social Agreement 2004 Pension Aspects (Implementation) Decree (Uitvoeringsbesluit Pensioenaspecten Sociaal Akkoord 2004), the 15-year pension commitment only qualifies as a pension commitment within the meaning of the Dutch Pension and Savings Funds Act (Pensioen- en spaarfondsenwet) in proportion to the degree to which the claims have been accrued and financed. For the 15-year commitment, therefore, this is after 15 years, or on the retirement date, if earlier.

We infer from this that the WVPS only applies if the pension rights under the 15-year commitment were granted and financed before the date of the divorce.

For equalisation pursuant to the WVPS, the old-age pension to be equalised is calculated based on the legal fiction that the years of participation are the same as the marital period of the member or former member. Neither the WVPS nor the accompanying explanatory notes states how pension rights arising from the 15-year commitment that have been fully financed before the date of the divorce should be handled in the calculation. Although those pension claims are granted at a single moment in time, they apply to possibilities under tax rules over past years of service. In our view, it is defensible to state that the aforementioned legal fiction should also be applied to the equalisation of old-age pensions arising from the 15-year commitment. This means that the pension rights arising from the 15-year commitment should be included in the years of service to which the 15-year commitment pertains in the equalisation, insofar as those years of service fall within the marital period. Half of the result accrues to the former spouse.

However, this does not alter the fact that any person entitled to equalisation could, in such a situation, adopt the position that the entire old-age pension from the 15-year commitment should be included in the equalisation, since the moment when the claims were granted and financed falls within the marital period.

A special partner’s pension is granted to the former spouse also in the case of divorce. The special partner’s pension is not based on the marital period, but rather on the participant’s years of service. In our view, the partner’s pension arising from the 15-year commitment should not be granted as a special partner’s pension (or not granted completely) unless the claims were granted and financed before the date of the divorce.

We expect that this subject matter will be clarified further in case law. As matters stand, a decision has been handed down by the District Court of The Hague (26 March 2003, LJN number AF 6964) in which the court takes the equalisation even further. The case concerned a general increase in the old-age pension after the date of divorce, which increase, the court ruled, should also be applied to the former partner’s payment rights. If the courts follow this line of reasoning in the future, it might mean that claims granted and financed under the 15-year commitment after the date of the divorce could affect old-age pensions that are already equalised. We will keep you informed of any developments.

For more information contact: Harmen Pullen.

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Amendment of the Regulations on the Calculation Rules for Transfers of Accrued Benefits

The Regulations on the Calculation Rules for Transfers of Accrued Benefits (Regeling rekenregels waardeoverdracht, ‘the Regulations’) for pure capital redemption insurance policies in which the amount of the benefits is not guaranteed but a claim is insured in euro pension capital were amended on 17 August 2006. The implications of this amendment for the policies concerned are discussed below.

As you know, the Dutch Pension and Savings Funds Act grants employees switching jobs the right to transfer the value of the pension claims they have accrued at a former employer to the new employer’s pension administrator. The calculation of the transfer value is to be based on the rates and rules as laid down in the Dutch Actuarial and Procedural Rules for Transfers of Accrued Benefits Decree (Besluit reken- en procedureregels waardeoverdracht) and in the Regulations.

For the policies referred to above, the former Regulations unintentionally resulted in the standard rate having to be applied based on the prescribed formulas, despite the fact that those formulas were not suited to those types of insurance. In some cases, this meant that the insurer could not collect the difference between the surrender value and the transfer value from the employer in the case of a transfer of the accrued benefits.

The Regulations have now been amended to rule out this effect. The amendment ensures that the standard actuarial interest rate of 4% is no longer applied to these policies in the case of transfers of accrued benefits, and that the actuarial principles applied by the pension administrator for valuing the pension commitments may instead be used.

As the amendment to the Regulations entered into effect immediately, the new calculation method applies to all transfers of accrued benefits effected on or after 17 August 2006.

For more information contact: Mark Boleij.

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Questions or Remarks?

If you have any questions or remarks concerning this issue of the BransBrief, please let us know.

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