Despite its slow start, levensloop, the tax-friendly life course scheme, has potential, according to Careon, the levensloop subsidiary of PGGM.
Paul Teuben and Wouter Peters, directors of Careon, believe the arrangements in the new political coalition agreement offer potential for further development of the levensloop. This will depend on the merger of the spaarloon and the levensloop.
“If the tax-friendly savings account spaarloon merges with the levensloop, and the options for the use of the levensloop get widened, then the scheme is facing a bright future,” says Teuben.
“But at this stage, it is crucial that all the players involved, and the politicians in particular, toe the same line. The main point is to create stability and clarity for workers on when they can take leave. And for when they are not allowed to take leave, their employers should be obliged to offer them an alternative period to take time off.”
Levensloop has not been the success that was predicted and in the first year of levensloop Careon experienced some stormy weather. First, it faced a disappointing uptake of the levensloop.
This was followed by the regulator’s decision that PGGM, Careon’s parent company, should not be allowed to promote Careon in any way to its two million participants in the healthcare and social work sector.
Since then, prospects have improved with some highly satisfactory investment results. The intentions of the new government parties also look promising. “The coalition agreement is very encouraging, and we are expecting a change that will make the scheme attractive to large parts of the population,” says Peters “The glass is definitely half full.”
The continuing option of the spaarloon has slowed take up of the levensloop, says Teuben . “During the set up of Careon, we were aiming at an uptake of 25%, while the market figures indicated a participation of 15%,” he says. “But when the levensloop was introduced as of 1 January 2006, most employees decided to stick with their existing ‘spaarloon’ scheme, as their default option. Half a year later, after their final chance for a change of choice had expired, it turned out that merely 5% of the workers nationally had opted for the levensloop.
“The good news, however, is that we managed to grab 50% of our potential market, although from a 50% smaller market than we had anticipated,” he notes. “The other 50% must have joined levensloop schemes with their regular banks and insurers. Although our aim is to get the whole market, a 100% share will always be an illusion.”
Currently, 25,000 workers in the healthcare sector have an active levensloop account with Careon. A total of 42,000 accounts have been opened. “Apparently quite a few people have joined, just as a precautionary measure,” Teuben says. Careon considers them as future customers, who will activate their account if their personal or financial situation changes.
Future growth will depend on whether the levensloop is merged with the spaarloon, he says. “Much depends on how the coalition agreement will be worked out. We roughly estimate an increase to an 8% participation in 2008. But if the merger of the levensloop and the spaarloon takes shape, the uptake could be much bigger next year.”
Peters says the view of the social partners - employers and workers - will be critical for how the tax-friendly scheme will be shaped. “The levensloop and the spaarloon should be merged in any case, including the allowances to take out money early for certain expenses,” he says.
The definition of the levensloop’s status, related to the new government’s plan to tax early retirement, will also be important. People who stop working before they reach the official pension age of 65 will have to contribute to the AOW state pension after they have reached the age of 65.
“We think that if people take levensloop leave for early retirement, they are still in an employment situation. As a consequence, the levensloop will provide the only way to stop working early without getting punished. This could turn out very beneficial to the scheme,” says Peters.
Almost two thirds (60%) of Careon’s clients have indicated that they intend to use their levensloop balance for early retirement. And since the healthcare sector employs many part-time workers, a number want to use the scheme for parental leave as well.
Peters says this poses questions about voluntary work. “Another issue within this context is the approach of care leave, taken under the levensloop scheme. Should people be punished for offering volunteer aid? “
The ban on PGGM from disclosing any link with Careon to its participants has seriously hit the levensloop subsidiary, says Teuben. “Since the regulator De Nederlandsche Bank has fined PGGM for mentioning us, we have severed the physical ties, including the system cables, with our parent company,” he says. “This has however doubled our marketing and organisation costs. Therefore, we won’t reach our break-even point before 2010.
“The situation has crippled PGGM by preventing it from fully implementing its task as a service provider. What’s more, a second counter at PGGM is annoying to its participants.”
At the moment, Careon is fully independent from PGGM, Teuben and Peters say, although PGGM is a 100% indirect shareholder of Careon, through its holding companies Careon Life and Careon Levensloop.
Careon’s investment results do not appear to have suffered, however. With a return of 11.4%, its 40-year lifecycle fund performed above expectations during its first year. This compares with PGGM’s overall returns of 11%.
However, most of Careon’s account holders have not benefited since 90% have opted for a savings account, which offers an interest rate of up to 4.5%. “Since we had only promoted saving at the end of 2005, we weren’t really surprised by the popularity of this option,” says Peters.
As of the first quarter, we have presented our investment options properly. Of our new clients, between 15% and 20% have already chosen to invest in one of our 18 lifecycle schemes.
“To encourage further investment, we need to have more contacts per client. Over two-thirds of Careon’s savers take part in a collective scheme. We are convinced that the further the average age of our participants decreases, and therefore their horizon will stretch, the more investment there will be in one of our schemes.”
Although some of the 18 life-cycle funds have been barely used, Careon has made no decision on their discontinuance “It is too early for conclusions,” Teuben comments. “But we will certainly keep a critical eye on the schemes’ funding, costs and returns.”
Meanwhile, Careon is not focusing entirely on levensloop. In line with many employers’ wish to keep all their arrangements under one roof, it also carries out collective spaarloon schemes.
Moreover, the company is also seriously considering new options, such as an investment scheme for savings, Peters says. “We will probably introduce such a scheme in the second half of 2007. In addition, we will start offering annuities as of 1 January 2008, based on new legislation that also allows managers of investment funds and banks to do so.”
Levensloop and spaarloon
The present ‘levensloop’, or life course, scheme allows workers to save 12% of their salary tax-free every year. Subsequently, they can use the balance to finance intermediate leave, for example parental leave, care leave and education. Although the scheme is meant to discourage early retirement, it still allows the balance to be used for this purpose as well.
Under the popular savings scheme ‘spaarloon’, employees can save a €613 tax-free each year. The balance is blocked for four years, although there are some exceptions, for example, if the account holder wants to buy a house. The funds taken out are taxed.
Under the present arrangements, workers can contribute into the
levensloop and spaarloon at the same time. Each tax year they can change their preferred option. As an exception, employees could change their mind during the levensloop’s first year.