An Evaluation of the nFTK

A new regulatory framework for Dutch pension funds came into force in 2015, replacing the earlier system that had existed since 2007. The revision, known as the new Financial Assessment Framework (abbreviated “nFTK” in Dutch), is meant to resolve some of the weaknesses of the earlier system that became apparent in the wake of the financial crisis. We carry out an analysis of the new framework based on a simulation study, focusing on economic scenarios and leaving aside the possible consequences of unanticipated changes in mortality. We use a stylized pension fund that has the same demographic structure as the Dutch population. The fund follows a fixed-mix investment policy and keeps contributions constant, except when reductions are permitted under the nFTK rules. Economic scenarios are generated by a VAR model. We find that although average funding ratios are high, fully wage-indexed pensions are still achieved in only approximately 60% of the scenarios. Under the worst scenarios, replacement ratios can drop to under 40%.