Ilonka Oudenampsen explains why recently announced pension reform plans in the Netherlands have come under fire

“A new agreement which will give the Netherlands a pension system that is ready for the 21st century”. With these words the Dutch government, alongside the employee and employer unions, presented the proposals for pension reform on 10 June. Throughout the weeks that followed, however, the criticisms began to roll in.

In summary, the Dutch government and the unions have agreed on increasing the state pension age to 66 by 2020, after which it will rise in line with longevity, which many believe will mean a rise to 67 by 2025. The state pension will also increase by an extra 0.6 per cent each year, which was demanded by the employee unions to compen-sate for the extra risk members will be taking on.

It is this extra risk which has generated the most criticism as members, it has been argued, might be inclined to take more risks, while employers’ premiums will remain at the same level, regardless of the economic climate. Mark den Hollander, head of investment solutions at ING Investment Management, says it’s a big change. “We live in a pension climate where the emphasis has always been on nominal guarantees, and to then replace it with an agreement with soft real rights is a very big step. How will this be explained to the members?”

On a more positive note, Mark Stoffels, senior manager, pension fund services at KAS BANK, is pleased that communication around pensions is finally becoming more transparent as members need to change their expectations and realise that pensions come with uncertainty. “The question is, do you create uncertainty because members no longer know what is happening, or do you create certainty by pointing out this uncertainty? People will then be aware it is uncertain and take additional steps.”

Another big change relates to the discount rate. While at the moment all Dutch pension funds use the same discount rate, under the new agreement every pension fund will have its own. Den Hollander wonders how pension funds will be compared in future. “Now we all have the same methodology, so we can compare coverage ratios. In future this will be impossible, or at least highly difficult, so the peer group risk gets another meaning.”

However, the main problems with the new agreement seem to be the fact that employees will have to bear all the risks; and the possibility for pension funds to estimate their own investment returns. The latter has resulted in fears that schemes might pay out money that they do not (yet) have, thus leaving no money for younger generations.

Stoffels agrees there is a risk of pension funds paying out their money too early. “The governance and the expertise of trustee boards still need to be better defined in the pension agreement. There should be an independent party which monitors the choices a pension fund makes with regards to their investment policy versus their risk profile. The discount rate used to be a given, but will now be adapted to the investment policy. There is a bit of space there, so that pension funds might pay out money that’s not there yet. An independent party could ensure this does not happen.”

Theo Kocken, CEO at Cardano, argues that allowing funds to estimate their investment returns for the purpose of determining the level of the funding ratio, and hence the indexation level, is a mistake which will transfer a lot of the money from young to old, especially in the more mature pension funds, as “the more mature the pension fund is, the more will be taken away from the younger generations”. Kocken says that, at first, this was denied, as the social partners believed everyone would benefit. Because of the higher discount rate, a fund would have an improved coverage ratio, as the liabilities would fall. The social partners said this extra money would be added to the pensions of both young and old.

Kocken continues: “This is of course an illusion, because the older generation will be paid out in more cash than is available in the pot. Even if the financial markets perform normally, the older generation will always have received more than they would have previously, when it was still honest. People think it will only be bad for the younger generations in bad times, and of course it will go well for them if there are good returns, but they would have been better off saving it themselves under all scenarios, good and bad, because at the end of the day they are paying for the older generation.”

Another consequence of including the expected returns in the discount rate is the incentive structure that a bad year, when the coverage ratio has dropped, can be glossed over. Kocken explains: “If you’ve had a bad year, you can either go to your members and tell them the bad news, or you can choose to raise your allocation into equities which would bring you back to the old level. The IASB has just removed all these rules, a process which has taken ten years, and now the social partners, not the pension funds, have brought it back. Every fund can now do whatever they want, and just see where they end up.”

Den Hollander also points out that both the old and new agreements assume the same investment policy, which is something he finds strange. He would also like to see different fund scenarios. “Results which we have seen now are only those of average returns. I would like to see how, under the new agreement, a fund would behave in different economical situations."

But ABP, the Netherlands’ biggest pension fund, supports the new agreement and believes it creates opportunities to realise a good and affordable pension for all members. In a statement, the scheme said that it “finds it important that the new pension agreement will also include old pension rights. Only then the risks can be optimally shared between all generations. In this context, ABP underlines that this does not create insecurities; these are already there.”

As for the rest of the industry, most other parties are still looking at the plans and are working out how this will affect different groups in society. The unions will vote for the plans at the end of the summer, while Social Affairs minister Henk Kamp has asked the Central Plan Bureau to calculate what the consequences of the new agreement would be for younger and older generations. In the meantime criticism of the new agreement continues.

Most unions are furious about the plans, according to Kocken. Older unions are furious about losing all forms of certainty based on a counter-productive incentive struct-ure, while the younger generations are furious about their retirement money being taken away from them. Kocken believes there is no generation conflict in the Netherlands.

“The older generation wants certainty, while the younger generation wants honesty. This does not clash. What clashes is promising higher amounts of money for everyone. The social partners need to redesign this feature, because many other aspects of the new pension deal add a lot of value to our pension system but are overshadowed by this single design flaw.”

Written by Ilonka Oudenampsen

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