Apples and Oranges: A Comparison of the Key Features of the Legislative and Regulatory Framework for UK and Dutch Defined Benefit Pension Schemes (Including Dutch CDC Schemes)

Abstract

The UK and the Netherlands have different legal and regulatory regimes for defined benefit pension schemes. This paper compares and contrasts the key features of those regimes. The UK allocates all of the underfunding risk in a UK defined benefit pension scheme to the employer, backed up by the Pension Protection Fund in the event of the insolvency of the employer. In the Netherlands, the risk of an underfunding in a defined benefit scheme or CDC Scheme is shared amongst the members. There is no Pension Protection Fund. However, the funding standards in the Netherlands are prescriptive (in part because a Dutch pension fund is treated as a “regulatory own fund” for the purposes of Article 17 of the IORP I Directive (Directive 2003/41/EC)). The length of time for making good a deficit is prescribed with the benefits having to be reduced if the deficit is not made good to the required minimum funding standard within 5 years. In the UK defined benefit pension schemes are not regulatory own funds. Funding standards are based on “prudence” and account is taken of support of the employer (the “employer covenant”). Furthermore, there is considerable flexibility in the period over which a deficit in a UK defined benefit pension scheme is to be made good.