Tour of a bleak horizon
For a long time the Dutch pension landscape was characterised by stability. The design of the landscape was organised in line with standards upon which stakeholders, like employers, employees and the government, had a broad agreement. There was agreement about the funding, organisation and outcome of pensions. This agreement doesn’t exist any more. In recent months there have been many discussions, particularly between government, trade unions and pension funds.
The lack of agreement between government, employers-organizations and trade unions has its roots in the autumn of 2003. At that time government and social partners agreed to talks over the government’s proposals for new arrangements for early retirement and ‘life-span leave’ regulation (levensloop) giving workers greater scope to save and manage periods of time off during their careers.
After lengthy and difficult negotiations, no agreement was reached on the issue and talks broke down in June this year. The government subsequently announced that it intended to phase out tax incentives related to early retirement.
Instead of existing early retirement schemes, it wants to introduce a life-span leave arrangement, enabling employees to accumulate 12% of their gross annual pay towards long-term leave. The scheme should be implemented through banks and insurance companies, and not by pension funds.
The goal of the government proposals is to stimulate workers to work longer and a to take a career break if necessary for care, study or other reasons. The government aims to replace the pension system based on collective agreements with one in which individual employees must bear responsibility for protecting their own earnings and old age provisions.
The employer organisations in headlines do agree with the proposals of the government. The trade unions, however, are organising a campaign against the social policies proposals of the government. According to the trade unions “the campaign is also designed to prepare workers for what looks like being a bumpy bargaining season ahead. The new round of talks start early in the new year, when the trade unions at the negotiating table will try to repair the damage the government is doing not just to the pre-pension scheme but also to the whole social security system”.
The VB, the Dutch Association of Industry-wide Pension Funds (representing more than 75% of the Netherlands employees participating in pension schemes) opposes the proposals of the government as it states that “the cabinet’s proposals mean all forms of pensions before the age of 65 would be eradicated. They make no allowance for more than normally stressful occupations. The lifestyle savings (levensloop) scheme results in reduced benefits to the general public because the cabinet has opted for an individual-based model. A collective scheme, allowing room for individual preferences, would produce higher benefits”.
The tension between the proposals of the government and the long-term focus of pension funds is underlined by PGGM and ABP, the two largest pension funds in the Netherlands. According to these funds, quoted in the Dutch press, “the new proposals are contradictory to the need for pension funds to develop a long-term strategy. The Dutch pension funds have a real problem with the new policy proposals”. Also the Centraal Plan Bureau (Netherlands Bureau for Economic Policy Analysis) criticises the government proposals as it argues the government uses the wrong means for the right target.
As the government proposals mainly focus on the outcome of (pre-) pensions, pension funds have to deal with other developments concerning the funding and organisation of the funds. The actuarial principles for pension funds are expected to be replaced by the financial assessment framework early in 2006. This will be embedded in the new Pensions Act. More transparency will be demanded. The most fundamental change is that both assets and liabilities will be valued on a mark-to-market basis. Matching of assets and liabilities and portfolio diversification will therefor become more important. And a shift from equities to bonds might occur. Also, the search for more diversification should mean increased demand for alternative investments.
The Pension- & Verzekeringskamer (PVK) pensions and insurance supervisory authority, which is responsible for the financial assessment framework, will consult the pension funds and insurance companies. In comparison with earlier versions the PVK will slightly liberalise its judgment about the investment policy of pension funds. More room will be given to the long-term investment policy of pension funds.
Developments in society lead to higher requirements being set for transparency, accountability, supervision and control. In imitation of the Dutch corporate governance code, industry-wide pension funds will present its final code, “outlines and principles of pension fund governance policy”.
It is intended that the presentation will be at the public autumn general meeting this month. The code will be supplementary to existing legislation and regulations on the internal and external relationships of pension funds like the Pension and Savings Funds Guarantee Act and the impending Pensions Act (including the Financial Assessment Framework).
One of the latest proposals of the Dutch government is the compulsory split-up of the two largest pension funds: ABP and PGGM. According to a confidential report they will be forced to split their organisations into a pension board and an executive department.
According to the Dutch government the split is necessary to meet EU directives. According to these it is said that the execution of pensions has to be in line with a level playing field between insurance companies, other players in the market and pension funds. It is believed that increased competition will result in higher performance and cheaper pensions.
This proposal of the Dutch government is interesting against the background of one the meetings
to be held during the Dutch EU presidency. On November 4 in Amsterdam a conference will be organised about second pillar pension schemes. The Dutch Ministry of Social Affairs in cooperation with the EC and national organisations of employers, employees, insurance companies,and pension funds like ABP and PGGM, will discuss the relation between solidarity and the free market in these schemes.
It is stated by the Ministry of Social Affairs “that solidarity is incorporated in the design of many European pension schemes. Especially because of the sharing of risk it is good to ensure a good old age income on a collective arrangement. At the same time the need for more freedom of choice and a plea for further liberalised trade and free competition is growing. Transparency (IAS-standards and consumer protection) is an important issue to take into consideration”.
Those last sentences sum up the agenda for all stakeholders involved in the discussion about the organisation of Dutch pensions in coming months. It is certain that the landscape will be changed in comparison with the past. It is both a change in process (will the Dutch polder still exist?) and a change in the result: new arrangements about the funding, organisation and outcome of pensions.