Smaller funds keep their cool
The ongoing discussion between the Dutch government and the social partners has resulted in a sector in flux. Growing social unrest, based on expectations that the abolition of the pre-pension arrangements generates, has however not yet had a direct impact on pension funds.
In contrast to the harsh remarks made by the chairman of the ABP, the biggest Dutch fund, that the current government has a secret plan to demolish the pension sector in the Netherlands, smaller Dutch pension funds are more optimistic. The impact of the proposed new system, in which employees younger than 57 are not anymore eligible for the pre-pension arrangements, seems not to be as harsh for the performance of the sector as the media reporting has suggested.
Ernst van der Velden, pension coordinator of the Reed Elsevier Pension Fund, says that there will be an impact as a result of the new government proposals but the impact will be not as severe as reported.
According to him, the situation, as has been presented until now in parliament and by the government, will be that on January 1 next, the fiscal arrangements available for the pre-pension and VUT will still be available for all employees aged 55 years and older. The last year this will be feasible, as proposed by the government, will be 2011. So the last person having rights under the old system will be leaving work in 2011.
The new decision about whether the pre-pension system will exist longer than that, is not being made by the pension fund itself and even not by the government, but by the social partners.
Even though there is a growing opposition to the ending the pre-pension system, several parties are willing to discuss a gradual change. Van der Velden indicated that “employers are not happy to pay pre-pension arrangements for an extended period”. This view is not only based on fiscal issues, but also largely on the fact that a growing part of their workforces are becoming older and the overall costs of pension arrangements will rise as a result. Most young people, as van der Velden sees it, will not be totally happy to pay for a system that they most probably will not reap the rewards of.
With growing opposition, as has been shown by the unexpected success of the trade union strikes, the government has come under increased pressure to adjust its former tough stance on the pre-pension system and even to pension schemes generally.
According to van der Velden , the continuous discussions, the
constant flow of legal and practice changes initiated by the
government, have put all Dutch pension funds on a war footing. The implementation of new
directives of the government has forced the pension funds to focus on the implementation of these changes in addition to concentrating on their core business.
Van der Velden sees the need to increase the overall pension age in the longer term as an ageing society makes this necessary.
At present, the Reed Elsevier
pension fund in the Netherlands has a career average pension
system. Even though performance has been satisfactory, the overall outlook is that pension provision is not becoming cheaper. In the
coming years, according to this year’s accounts of the pension fund, the fund expects that it will have to increase pension premiums continuously, resulting in a 17% contribution rate in 2006. The 2004 contribution rate is 9.5% of the total pay of the active members of the pension fund. Additionally, indexation has become more
provisional, as it takes place only if the funds are available. According to van der Velden, the pension fund is not discussing a move to a defined contribution system.
Other major issues to be dealt with in the coming years are the impact of accountancy rules (IFRS, IAS19) and the full implementation of the 1 January 2006 pension law.
The pension fund situation of DSM is very different from most other funds. At present, DSM Netherlands has nine different
pension arrangements due to the fact that the employees of DSM have come from different
companies that have been
bought by or merged with the
DSM parent company. Wil Beckers, spokesman of the DSM Pension
Services (DPS), stated that in
addition to these plans, the fund has another 40 which have been closed but still have members. A major activity at the moment is the integration of all activities for the Gist-Brocades pension fund into DPS. The Gist-Brocades fund will remain a separate fund but serviced by DPS.
Before the recent government proposals, the DSM pension fund, in cooperation with the social partners, has been working on a new pension age of 62. The latter should have substituted the older VUT and pre-pension arrangements. An important issue, as agreed by all parties involved at DSM, would be a necessary coverage ratio of 125%. To reach this, when taking into account the implementation costs of the new arrangements of
12-3%, a total coverage ratio of 140% would have been needed at the start.
All parties agreed, and are currently waiting for the implementation. But this will not be put on hold indefinitely. The new government proposals will not only have an effect on the fiscal arrangements for pre-pension subscriptions, but will block the deals already agreed upon within DSM. The coming weeks, especially if the new legislation becomes effective, will mean discussions between the social partners, about the totally new fiscal and legal environment, before DSM pension fund can set up a new and effective scheme.
The new accountancy rules (IAS, IFRS) will also have an impact on DSM’s plans.
When asked about the fund’s future position, Beckers stated that they are not considering at present changing the corporate pension fund into an industry-wide pension fund, nor is this expected to become as issue for discussion.
The position of former DSM employees, such as the SABIC Petrochemicals employees, is also still being discussed. According to Beckers, all employees of SABIC have moved to the SABIC Pension Fund Netherlands. The position of this fund has been scrutinised by the PVK, which has decided, in cooperation with DSM and SABIC, that there will be a transfer of funds between the DSM Chemicals Pension Fund and the SABIC Pension Fund. Still, the overall pension arrangements of the new SABIC fund are the same as within DSM. Overall services are currently being implemented by DSM Pension Services in Heerlen.
According to Beckers, the implementation of the new directives and regulations, expected to be effective in January 2006 presents the DSM fund with severe practical problems. The implementation of the last changes covering VUT, and pre-pensions, have been implemented, and the system is up to date. However, he regards the new and drastic changes being proposed currently as a major issue for the fund.
Han van den Berg, director of Pension Fund Bull Netherlands, says that the current changes will have a possible negative impact on overall pension arrangements. But with most of the poposed changes still not clear, the whole sector is currently in flux, without knowing where it will be in the weeks ahead.
Changes to the pre-pension arrangements, as proposed by the government, will have a large impact on the performance of the fund, he believes. Since the end of the 1990s, Bull has been setting up a transitional system to support the change from VUT to a pre-pension system. The transformation, however, has not yet been fully implemented, so the fund is still in a transitional state, while now being confronted by a new set of rules and legislation. At present, Bull still has a set pension age of 65. The pre-pension system has been implemented for Bull employees as an additional possibility, alongside the existing pension arrangements. Employees have been able to save extra for the pre-pension arrangements.
Van den Berg acknowledged that the IT sector does not have the work circumstances as other industries, such as the heavy industries or transport, in that employees remain productive. So the pension fund liabilities are only being threatened by the increasing ageing of society generally (and its own employees). In recent years, Bull's employment levels have gone down. This has not only resulted in a negative shift in the ratio between employees and pensioners (in relation to the fund) but also in another negative fact. Forced by economic situation of the company, more young employees have left the company, but older employees have stayed, increasing the proportion of old to young workers.
The pension fund is becoming increasingly worried about this development. Van den Berg feels that a change of the pension age may be a necessity: “If people work longer, pensions will continue to be affordable,” he says. This view does not mean that he supports an end to the current pre-pension arrangements. Van den Berg states that “pension funds are able to provide pre-pension arrangements cheaper and more effectively, than the proposed ‘levensloopregeling’ of the government. The latter will be done on a personal basis by the Dutch insurers”.
This view is in line with remarks that have been made by the Dutch opposition parties and the two largest Dutch pension funds ABP and PGGM, which have stated that private pre-pension arrangements will cost around 33% more than the current system implemented by the respective pension funds.
According to Roeland de Wolf, vice chairman Pension Fund CSM Suiker BV, the current pension situation is very diffuse. But regarding the firm’s fund, which has an investment portfolio of around E261m with a profit of E23m in 2003, the situation still has to be considered very positively. The fund has still a 130% coverage ratio, which resulted in a 70% premium deduction given to CSM as employer during 2003. CSM was able to give an indexation of around 3.2%, and was one of the only Dutch pension funds able to do so. De Wolf expects that if yields stay the same the coming years, the fund will still be able to give a contribution discount.
He also says that “the contributions are still being paid by the employer, and that the fund – one of a small group in the Netherlands – has a final salary system based on an average of the last four to five years’ of salary”. Possible career average arrangements have been discussed, but are not to be implemented in the shorter term.
However, the fund has to cope with an ageing workforce. At present, CSM’s workforce has an average age of 47-48 years, though around 50% of the employees will take their pensions within the next 10 years. This will become a major burden, when taking into account that the Pension Fund CSM Suiker has 619 active members, 315 sleepers and 1,100 pensioners.
The proposals of the government will have a major impact shortly, especially as the company has a flexible transitional system introduced in recent years to substitute pre-pension arrangement for VUT. At present, employees are allowed to take pre-pension between 60 and 64 years. If this is changed by the government ,the impact will be felt by the whole workforce. According to de Wolf, discussions are expected between the social partners if the whole system needs to be changed. Additionally, he sees new problems arising if the ‘levensloop’ arrangements have to be implemented with third-parties. The pension fund currently functions as active part in the whole constellation of arrangements, while under the new proposal pension funds will not take part.
The biggest danger de Wolf expects comes from a possible opting out clause. If subscribers are allowed to opt-out of a pre-pension arrangement with the right to withdraw their contributions, this could lead to an economic disaster. If all pension funds need to sell off bonds or shares at the same time to cover these withdrawals, the negative repercussions are obvious.
All in all, de Wolf sees the current conflict as a “conflict of generations”. Only a small number, particularly the young generation, will opt out of a new system, he expects. Another difficulty he sees looming on the horizon is the time aspect. It will be impossible for pension funds like his to implement the necessary changes in administration before the stated date in January 2006. This will be impossible, he reckons, especially as most CAO negotiations have not even have started.
When asked if he expects that the CSM pension fund will become an industry-wide pension fund, de Wolf said: “We have no intention at all to consider this move in the foreseeable future.”