Employees (the pension scheme members) build up pension rights in the course of their career. They and/or their employer pay contributions for this purpose. Accrued pension rights are long-term liabilities of the pension fund for which it must make technical provisions on its balance sheet. It is extremely important that these provisions are sufficient to ensure that pension liabilities to the members can be fulfilled. The pension fund should not get into financial difficulties now or in the future as a result of inadequate provisions. This is why primary and secondary legislation contains several requirements for the calculation of the provision for pension liabilities that are at the risk of the pension fund. The provisions must be fully covered by assets at all times.
Calculation of technical provisions
The technical provisions are calculated on the basis of expected outgoing cash flows, which result from the accrued unconditional pension liabilities. These are the accrued nominal entitlements and the unconditional indexation commitments of all members of the pension fund.
The calculation takes account of the time value of money. The present value of the expected cash flows is calculated. This is the value of the future pension liabilities at the moment of reporting. For this purpose the pension fund must use the current nominal term structure of interest rates published by De Nederlandsche Bank (DNB). However, until the end of 2009 at the latest a pension fund may apply a rate of interest in keeping with the structure of its liabilities.
The technical provisions must also be fixed on the basis of prudent technical insurance principles applicable to the pension fund, for example the average life expectancy of the members. These life expectancy figures play a major role in the determination of the technical provisions. The higher the average life expectancy, the greater the expected pension payments and the higher the provision needed for this purpose. The application of prudent technical insurance principles means, among other things, that account must be taken of the foreseeable trend in mortality figures.
Conditional granting of supplements
In the case of the conditional granting of supplements, such as indexation, there must be a clear connection between the expectations aroused, the funding and the realisation of the supplements. Provisions can be kept for certain forms of supplement.