NETHERLANDS – Dutch civil service scheme Stichting Pensioenfonds ABP could face a €50bn bill if pensions indexation were to become compulsory, says Jaap Maassen, the scheme’s director of pensions.
Maassen, who is also chairman of the European Federation for Retirement Provision, was speaking a conference organised by ABN Amro Mellon in Amsterdam.
He said that for every percentage point of indexation, liabilities would accordingly grow 15% and in a 2.5% inflation environment it would lead to liability growth in the region of 30%. ABP alone would face a €50bn bill. “A fantastic amount of money.”
“Indexation is a key element,” Maassen said, arguing it made the difference between a pension and an insurance arrangement.
But he also pointed out that it should be carefully thought out, bearing in mind a pension fund’s asset-liability ratio.
“I am very much against the concept of compulsory indexation,” he said. “I am all for indexation but the moment it is made compulsory, you have to make proper reserves for it.”
Mentioning his background at oil giant Shell, he joked that the thing in common between a pension fund and an oil company was establishing and keeping adequate reserves.
He also spoke of the European Portability Directive, which is due to come in force in the next couple of years to facilitate the cross border transferral of pensions pots.
“The idea is to further labour mobility,” he observed. He added that tax harmonisation would make things easier but added that tax was a “sensitive issue”. “It is considered the terrain of individual member states.”
But he added that European Commission had recommended the EET tax system to countries reviewing their fiscal regimes. Maassen suggested that cross-border portability is a step, which should be preceded by fluid national portability.
“It is difficult to talk about cross-border portability before you have a legal base for national portability.”
He also discussed his views on defined benefit and defined contribution arrangements. He cited a US study arguing that DC schemes were “fatal” to less privileged workers, but also declined to brand one pension system better than the other.
“If I had to chose between DB and DC, I would be very much in favour of DB. It is robust but at the same time it put a lot of risk on the employer.”
“So if I had to chose between a DB that means indexation and risk to the employer and DC which is like an insurance arrangement, I come to the conclusion that a hybrid system would be more appropriate.”