Fitch Ratings has highlighted the significant growth prospects that await Dutch life insurers as a result of the country’s pension reform.
The reform, which was passed by senators on May 30th, mandates the transition of all occupational pension schemes in the Netherlands to defined-contribution (DC) schemes by 2028, effectively bringing an end to defined-benefit (DB) accrual.
Under the new legislation, DB schemes will either be converted to DC or put into run-off, with future pension accrual being exclusively DC.
Fitch anticipates that even if more than half of the existing schemes convert to DC, there will be a substantial volume of DB liabilities put into run-off. This is expected to create a surge in demand for pension risk transfer services from insurers, as corporate sponsors seek to offload the associated investment and longevity risks.
The pension risk transfer market is already a lucrative source of high-margin business for insurers, and the reform is predicted to generate a significant boost in this sector.
Fitch estimates that Dutch corporate DB schemes currently hold approximately EUR 300 billion in assets, making it the primary market for pension risk transfers.
With the reform forcing schemes into run-off and employers shifting their focus to DC arrangements, the demand for transfers is expected to rise.
However, the capacity of the insurance sector to meet this potentially large increase in demand may present some constraints. The high regulatory capital requirements associated with DB pension risks mean that only insurers with the necessary capital resources or the ability to raise fresh capital will be able to accept these transfers.
In addition to corporate DB schemes, the pension reform will also impact around EUR 1.4 trillion of assets in industry DB schemes.
While these schemes may contribute to the demand for risk transfers to insurers as they enter run-off, Fitch believes that the impact will be limited since industry-level schemes typically face less pressure to offload risks compared to individual corporates.
The transition to DC schemes will also lead to a rise in inflows to insurer-managed DC vehicles, including general pension funds and premium pension institutions. This influx of assets under management (AUM) is expected to bolster insurers’ profits through AUM-based charges.
However, the report notes that although this business could potentially generate significant volume, it is characterised by lower profit margins.
As a result, the medium-term impact on insurers’ profitability from AUM-based charges is anticipated to be less significant than that from DB pension risk transfers.
