Dutch debate future of DB plans
Fennell Betson reports from PGGM’s ‘Beyond the year 2000’ event
Can the defined benefit system be maintained in the Netherlands, asked Dick de Beus, chairman of PGGM, when he addressed a gathering at the ‘Beyond the Year 2000’ conference, held in Schevingen to celebrate 30 years of the Dutch health workers’ pension scheme.
He pointed to the worldwide rise of defined contribution (DC), saying “the most fundamental basis for the popularity of DC is that of individualisation as a general trend in society”. To what extent did this mean the principle of solidarity between employers and employees was outdated? “In my opinion, this statement does not apply. Solidarity within collective schemes is nothing more and nothing less than an intelligent technical method to ensure good pensions.”
History showed only collectively organised schemes had been able to protect people from financial calamities and the consequences of inflation.
The challenge facing the Dutch pensions world was to continue to stress the strengths of DB schemes, but to find the right answer to the trend towards flexibility and individualism. “We need to find creative solutions if we want our systems to connect to the modernisation of working conditions,” he said. He saw opportunities for combinations including DC on a supplemental basis.
Turning to the issue of the investment freedom of Dutch funds, he said they must use the possibilities allowed to keep things affordable. “We need to maintain this unique freedom that we share with pension funds in the UK and the US.”
Discussing the developments of pensions within the European context, the Dutch minister of finance,
Gerrit Zalm, said that pay-as-you-go arrangements accounted for 90% of pension payments, while the funded portion accounted for the balance. “But there are huge differences from country to country, as in the Netherlands, 30% comes from the funded system, but in Italy it is only 1%.”
Zalm felt that the Netherlands was very close to having the ideal system, with the balance between PAYG and the funded basis. “This system is less susceptible to the consequences of the greying population,” he said.The European Commission was drawing up guidelines for eliminating national barriers in relation to pension funds to pave the way towards a really free pension fund market in Europe. “I am in absolute favour of this and I will fight for maintaining this investment freedom in the Netherlands and increasing that freedom elsewhere.”
He went on to say that the European population is ageing, and that by 2010, the number of senior people will increase, with a really steep increase by 2030. The Netherlands and Germany face the highest pressure. “We will have to make sure we have special facilities for this extra amount of elderly, with expenditures in social fields on benefits,” he said.
In Italy, pension expenditure isset to increase from 12% of GDP to 20%, and in Finland from 10% to 18% and in Germany 7% to 19%. “But the situation in the UK, the Netherlands and Denmark can be compensated for partially by the funded system.”
In Europe, with the improvement in public finances, measures need to be taken to make sure these ‘greying pressures’ can be met. Debt reduction can help ease interest rates pressures. But would the active population, when the time comes, be willing to pay for PAYG in future, he asked. The Netherlands hoped to reduce debt by using budget surpluses, which would lower interest charges to release resources for other purposes.
Zalm added: “When there is an increased funded system in Europe, national inhibitions for investments of European pension funds should be eliminated. The EU guideline being developed should really make sure that that happens. I will fight for a liberalisation of the European market in that field.”
The question of the move to defined contribution within the Netherlands was among the topics that the moderator of the discussion panel, Professor Eduard Bomhoff, director of NYFER, put to its three members: Philip Lambert, head of corporate pensions at Unilever Pension Fund; Hans Blommestein of the OECD in Paris; and Victor Halberstadt, public economics professor at Leiden University. He asked the panel if such a trend was likely and whether, if it happened, would it be irreversible.
The panel said the move to DC was quite wide ranging, as it had happened in Australia and South Africa as well as in eastern Europe and in some of the major European countries, such as France and Italy.
Lambert said that with strongly entrenched final salary schemes, the DC approach would reach the Dutch scene later than elsewhere, but would then develop very rapidly over the next decade. Blommestein said while the OECD discussed switching from PAYG to funded schemes in a recent report, it did not give a general recommendation as it was too complex.
See also page 48