The Dutch pensions industry has concluded that the ongoing debate over the discount rate for liabilities and funding ratios is a “dead end”, according to Gerard Riemen, director at the Dutch Pensions Federation.
Speaking with local financial news daily Het Financieele Dagblad (FD), he pointed out that the discount rate was used to calculate, among other things, how much cash a pension fund would need today to pay a pension in 50 years’ time.
“There is no objective truth for this, however, as nobody can look into the future,” said Riemen, who recently called on the industry to come up with an alternative to the predominantly defined benefit (DB) system in the Netherlands.
At the time, he recommended switching to a collective defined contribution (CDC) system, with individual pensions accrual and as much risk-sharing “as possible”.
Contributions should be calibrated to achieve a pension that is 70% of salary, he added.
During the FD interview, Riemen highlighted that it was not the recent performance of equity markets that worried the sector but rather the long-term prospect of low interest rates.
He said Dutch pension funds had, for all intents and purposes, abandoned their call for a higher discount rate.
He argued that last summer’s reduction of the ultimate forward rate – as part of the discount rate – had destabilised the discount rate and hurt coverage ratios.
In the opinion of the Pensions Federation, he said, all current pension claims should be converted into CDC arrangements ”as soon as possible”.
“If we don’t do this, we will keep having the same problems for decades,” he said.
“We don’t want to tell people in their 30s how much exactly their will receive in 40 years’ time because this is totally impossible.”
Riemen also took pains to emphasise the urgency for quick decision-making.
“If markets remain suppressed this year, and interest rates don’t rise either, we are facing rights cuts for large numbers of participants next year,” he said.
“As things stand at the moment, many participants won’t receive any indexation for years, and we risk losing public support for the existing pensions system.”
Riemen said he hoped the new government would make a decision on the shape of the new pensions system next year, and fully implement the system no later than 2019.