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Average contribution is 'elephant in room' for Dutch pensions

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  • Average contribution is 'elephant in room' for Dutch pensions

NETHERLANDS – Talks about overhauling the Dutch pensions system have largely ignored one of the system's most vexing problems: the fact younger plan members subsidise older members by means of an average contribution rate.

If a system overhaul is to be successful, this issue must be dealt with head-on, argued professor emeritus Jean Frijns at the summer conference of IPNederland, IPE's sister publication, held in Amsterdam last week.

"The average contribution methodology is the elephant in the room, and, so far, everybody has been giving it a wide berth," Frijns said.

"This is a relic from the past and amounts to a considerable chunk of pay-as-you-go financing hidden in our system of capital funding."

He pointed out that young plan members presently paid higher contribution premiums, which he said could be seen as pay-as-you-go subsidies to older scheme members.

"The moment a scheme is closed to new members, this creates a pension deficit for older workers," he said.

"I don't see how they can close that cap in the 10-15 years that remain for them before retirement.

"This is a tremendous risk we are depositing at the doorstep of a particular group of workers."

Government plans to limit fiscally facilitated pension savings are now bringing the problem into sharper focus, according to Frijns.

"This means 20% of pension funds are being closed off," he said.

He expects the planned transition to a new pension arrangement will bring the issue to light even more strongly.

If the new supervisory framework, the FTK, favours retirees, older active plan participants would be at a disadvantage.

That is not the right way to fix the problem, Frijns insisted.

"Pension funds have implicitly promised to treat all scheme participants equally, so the problems caused by this average contribution methodology must be solved together, with the pain borne by pensioners, older workers and younger workers alike," he said.

Frijns favours a new pension system based on a real pension arrangement that also tackles the average contribution conundrum, but he said he was "not optimistic" regarding its chances.

The adoption of such a system would require a cooperative attitude from both younger and older plan members.

If one of the member groups was "uncooperative", the others would be likely to follow suit, he said.

Frijns warned that focusing on the discount rate and the valuation of liabilities was "non-cooperative" and "a shame", as the FTK was never intended to micro-manage the discount rate but rather to "facilitate prudent financial policy".

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