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PGB introduces fixed 2% inflation as indexation criterion

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PGB, the €21.4bn pension fund for the Dutch printing industry, has replaced its consumer index-based indexation for a cost-of-living allowance drawn from a fixed 2% inflation. 

In a letter to its 118,000 participants, it explained that the change would enable it to grant indexation that exceeds real inflation.

The pension fund said the new financial assessment framework (nFTK), which contains stricter rules for inflation compensation, had spurred the move

Maarten Jansen, board member at PGB, said: “Under the nFTK, a sustainable indexation is only possible if a scheme’s funding is more than 110%.

“However, the amount of indexation could be no more than 10% of the surplus funding. This means the maximum cost-of-living allowance is 1% if the coverage ratio is 120%.”

According to Jansen, PGB would have granted less inflation compensation had it continued with the consumer index. 

“If the consumer index rose 1%, PGB could increase pensions rights by no more than 0.5% in case of a funding of 120%,” he said.

“However, with the indexation linked to a fixed 2% index, pensions can be increased by 1%.”

PGB said it expected inflation to stay well under 2% for the coming years as a consequence of the European Central Bank’s quantitative easing programme.

If inflation increases, the scheme could abandon the fixed indexation target.

“The link isn’t fixed forever,” Jansen said, “but it is not our plan to establish a new target every couple of years either.”

With its new indexation policy, the pension fund could compensate for the indexation in arrears over the past years.

“If this were the case, we won’t count it as a compensating indexation,” Jansen said.

PGB, rather than grant pension rights for indexation in arrears, has introduced the principle of an additional inflation compensation of 1%, which could be granted in case of a funding of 130%.

That said, at April-end, PGB’s official policy coverage ratio – the nFTK’s criterion for indexation and rights cuts – stood at 104.4%.

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