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Weak funding levels are a threat to reform, says Dutch Pensions Federation

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Pensions reform in the Netherlands is in danger of stalling as pension funds cannot afford the costs of transitioning to a proposed new system, according to the country’s pension fund trade body.

Schemes lack the cash to compensate older workers who would be financially affected by the planned change from average to degressive pensions accrual, the Pensions Federation has suggested.

Speaking at a meeting about the legal aspects of the new pensions system at Amsterdam’s Free University on Tuesday, Emile Soetendal, the industry organisation’s deputy director, said that low coverage ratios “might make the transition impossible”.

The Dutch government has decided that, in the envisaged new pensions system, the current system of average-salary pensions accrual must be replaced with an age-dependent accrual, which has been deemed to be actuarially fairer.

However, the government has also indicated that pension funds must financially compensate older workers who stand to lose out from the change.

Transition costs have been estimated to range from €25bn to €100bn, depending on the degree of compensation.

Responding to other presentations highlighting the lack of financial leeway at pension funds, Soetendal said that the current situation was very different from in June, when the social partners and the government concluded the pensions agreement.

“At the time, pension funds were in much better shape, and most still had financial buffers,” he said. “Meanwhile, funding of many large sector schemes has dropped below 100% as a result of falling interest rates.”

Soetendal added that he wasn’t convinced that the condition of a “costs-neutral” transition, as laid down in the pensions agreement, would be achievable.

The government had suggested that pension funds could generate assets for compensation from financial buffers, from contributions no longer needed for early retirement schemes, or from raising the retirement age to 68.

“This sounds very much as if it needs to come out of the pension funds’ own pockets,” said Soetendal, adding that many pension funds lacked these options.

The pensions agreement said that the new degressive accrual model would come with a flat contribution rate, in order to prevent an age-dependent premium from making older workers too expensive on the labour market.

However, Harold Herbert, director of the Dutch Association of Insurers, argued that such a system would put all existing pension fund participants at a disadvantage, as all would have accrued too little from the start.

He suggested that the government and social partners should examine a transition to an age-dependent contribution rate, as applied in defined contribution plans, as an alternative.

In his opinion, it was not a foregone conclusion that older workers would become less attractive as a result of an age-dependent contribution rate.

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