The Dutch government has given pension funds extra possibilities to prevent huge pension cuts and to improve future sustainability of pension arrangements. The pension package presented will help funds to “improve their financial position responsibly and quicker than anticipated”.

The effects of the announced package are not favourably or unfavourably biased towards one generation and the macro-economic effects are positive, the government said.

Under the new measures, contributions will not have to rise unnecessarily and, under strict conditions, pension funds will be able to spread out pension cuts over several years and cap them at a maximum of 7 per cent per annum.

In a letter to parliament, State Secretary of Social Affairs Paul de Krom wrote: “The package will mean that benefit cuts in 2013 can be restricted to what has been announced earlier this year.”

Dutch regulator De Nederlandsche Bank (DNB) will adjust the discount rate for pension funds. From 30 September 2012, pension funds’ long-term liabilities will be calculated by using an ultimate forward rate, which will make the interest rate less volatile.

Furthermore, funds in underfunding will get a one-off possibility to deviate from the requirement that pension contributions need to contribute to recovery. Pension funds which do not meet the requirements for this option can request DNB for customisation.

Schemes which would like to use the possibility to spread out pension cuts and/or request customisation, will have to adjust their pension arrangement on three points to ensure more robustness and to already bring it in line with the upcoming rise in pension age and further life expectancy increases.

Those schemes will have to increase the target age for pension accrual from 65 to 67 years in 2013, rather than in 2014; existing pension benefits already need to include a further increase of life expectancy; and pension funds who can now increase benefits if their coverage ratio exceeds 105 percent will from next year onwards only be allowed to give indexation with a coverage ratio above 110 per cent.

De Krom added that the government can help out pension funds, but that the solution for their structural financial problems cannot be expected from the government, as it is the responsibility of the social partners and pension funds themselves.

“It is important that pension funds and social partners take responsibility for solving the financial problems. The current pensions and pension promises are underfunded due to the constant increase of life expectancy and the persistent low interest rate. For many underfunded funds, the recovery has stagnated or disappeared in 2012. The government cannot solve these problems. Most funds will have to eliminate their underfunding by the end of 2013, also to maintain public confidence in the pension system. Cuts are therefore inevitable. But it is essential to prevent cutting more than is necessary.”

The Dutch Pension Federation has welcomed the pensions package but also spoke of missed opportunities. It called for a “fundamental discussion about which discount rate is suitable as a credible indicator for the current financial situation of pension funds”.

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