Defined ambition should replace defined benefit – PGGM
NETHERLANDS - A new ‘defined ambition' concept should replace defined benefit (DB) arrangements, according to a leading Dutch pensions actuary.
Jan Tamerus, actuary director at PGGM, the provider of the large healthcare scheme PFZW, said an approach that aimed at the accrual of inflation-proof pension rights, while still including risks, should be introduced as part of the necessary review of the pension contract.
Defined ambition should replace DB, because the latter had been introduced when a large body of mainly young employees contributed to the pensions of a smaller number of older colleagues, Tamerus asserted during a meeting of Netspar, the academic network for pensions, retirement and ageing.
"As certainty is becoming increasing expensive, it comes at the expense of pensions and therefore is a cul-de-sac," he said.
Tamerus argued that pension funds should use forecasted longevity, structurally decreased returns and interest, as well as moving markets, as steering instruments for contributions, indexation and benefits. "If the real cover ratio of pension funds has been less than 70% during two years, pension funds should start discounting pension rights," he said.
He added that no indexation should be granted if the real cover ratio has been less than 90% during five years or less than 80% during three years. If these rules had been applied during the past years, it would not have been necessary for pension funds to make recovery plans, according to Tamerus.
During the meeting, experts argued that legislation was also necessary to allow for care annuities and lump sum payments, as well as risk-bearing annuities, in order to update the present pension contracts.
In addition, inflation-proof annuities, rather than nominal ones, should become the standard, argued Carel Hooghiemstra, director of pensions at ABN AMRO.
Hooghiemstra highlighted conclusions from a paper co-authored by Theo Nijman of Netspar and Tilburg University, Gerrie Dietvorst of insurer Achmea, and Alwin Oerlemans of pensions provider APG. In their opinion, discussions should also be started over ending the strict separation between the accrual period of a pension and the benefits phase.
"Legislation should be adjusted to allow the payment of benefits from a part of the pension capital, while the remaining capital can be kept as an interest-bearing reserve," Hooghiemstra said.
He further advocated a significant improvement of the product information about annuities. "Explaining the risks to consumers is crucial," Nijman added.
According to Professor Lans Bovenberg, also of Netspar, a degressive accrual of pensions, through granting young workers more pension rights at the expense of older workers, could decrease the combined amount of pension contributions by 13%.
Such a change will increase pensions of lower educated employees, who usually start working earlier and also retire earlier, by 20%, while decreasing pensions of higher educated workers by 10%, he said.
The transition problem can be solved through making the state pension AOW dependent on life-expectancy, Bovenberg added.
Dietvorst pleaded in favour of an equal fiscal and legal treatment of both second and third pillar pension arrangements, "as this will serve efficiency and simplicity".