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Impact Investing

IPE special report May 2018

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Dutch 'polder model' in crisis

The dykes that have protected the ‘polder model’ of consensus industrial relations between social partners and the government over the decades in the Netherlands are today looking decidedly weak. The cause? Pensions.
The failure earlier this year of the so-called ‘spring meeting’ between social partners and the government, which had as one of its focuses the thorny issue of early retirement, prompted Lodewijk de Waal, chairman of the FNV Federatie Nederlandse Vakbeweging - Netherlands Trade Union Confederation (FNV) to predict a long, hot summer of political strife.
His prediction is coming true.
When the Dutch coalition government of the CDA, VVD and D66 formed last year, one of their main policy statements concerned reform of the public pensions system. As the government claimed: “The burden of contributions for future pensions will soon be unsustainable. Public sector finance is entering the danger zone defined by the EU.”
The major stumbling block for negotiations now between the social partners has been the proposal by the government to give employees the opportunity to opt out of collective pre-pension arrangements.
Pieter Omtzigt, parliamentary member of the Christian Democrats (CDA) responsible for pensions and social security, says there is no political challenge to the status quo of the state pension system: “The last time there was a perceived hint of a challenge to state pensions in 1994 from my party, we were slaughtered in the elections, so we’re not touching it.
“The state pension is fine and I wouldn’t even mind raising it and would feel comfortable about this from a financial point of view.”
Similarly, Omtzigt notes that there is no discussion about raising the state retirement age from 65.
The real problem, as he sees it is that people are retiring too early in the Netherlands.
“This is a tricky issue. We want people to work longer because we foresee a shortage of workers in about five or six years time. The generations that are retired now are so much bigger than before and many retired at 55, so we will have one person claiming a pension for one person working and that is not a position where we want to end up.
“The system of early retirement has become untenable. The PAYG basis for early retirement was in itself unsustainable because the post war generation is twice as big as the one that came before and you can pay up to 5-10% of wages into the system for this, which is a lot for your average worker.”
While there is consensus on the phasing out of pre-pensions on a PAYG basis, the crux of the debate lies in how a capitalised version will be structured and taxed. The government is seeking to introduce individual accounts administered by pension funds called ‘Levensloop’ (life accounts), which could be used for early retirement as well as for other possibilities such as study breaks or caring for relatives.
Omtzigt adds that the former fiscal advantages for early retirement were significant; tax free contributions, no capital gains and little tax on the pay-out – all factors which he claims contributed to the untenable situation.
He says: “Previously in certain industries if you took early retirement you could have higher after tax wages than if you didn’t. No-one in the Netherlands thinks that is tenable and if you want to take early retirement then there should be some kind of incentive for those people who decide to stay on working.”
The debate on the Levensloop between government, employers and employees broke down on several points. The first was the cut-off point for fiscal subsidies. The government is proposing to leave some tax advantages on the table for early retirers at age 62/63, while the unions are pushing for at least four years of tax aid.
The second issue is whether Levensloop should be made compulsory. The government has rejected this point, arguing that negotiations on wages, for example, could supersede any agreement on pensions.
Omtzigt says: “The trade unions want it to be compulsory for everyone and to retain some kind of solidarity in the system. We think individual accounts do not have less solidarity than pooled accounts because what happened in those old pooled accounts is that people who knew how to ride the system were doing very nicely because final salary pension funds were very good for directors who could award themselves a pay increase in the last few months and for parts of the civil service where you could get a scale or two higher before retirement, but you couldn’t get this if you were working in a local government office.
He acknowledges, however, that the polder model is currently in crisis.
“At the moment there is no central wage bargaining agreement. The deal is ‘bust’ and the government has threatened that if there is no agreement between employers and employees then they will not make legislation binding across sectors.
“We expect social partners to hammer this out, but it is not going to be easy.”
Staf Depla, of the Partij van der Arbeid – workers party (PvdA ), who looks after the portfolio for pensions, housing and security, and is a member of the board of the party, argues that the difference between the government and the left-wing opposition is the age-old argument of universality.
“We want everyone to be able to have the possibility of a career break or early retirement.
“The government wants to save money on an individual level and allow everyone to opt out of the system but ourselves and the unions want to retain the collective angle.
“The reason is that it is problematic for people with low incomes. It is difficult to start working at 18 and go on working until 65. The only real possibility of saving for early retirement is on a collective basis, otherwise it would be difficult to do.
“The whole polder model could be blown up because of this discussion on opting out.
“Companies have an agreement with the government, but not the unions and the government is now drawing a line saying they will stop early retirement.
“In our opinion you have to have the possibility of tax advantaged savings for four years of early retirement and the government wants this only to be for two years.”
Depla also argues that the situation has changed since the high unemployment days of the early 1980s when early retirement mushroomed in Holland.
“There are now incentives to work longer. At the beginning of the 80s only 24% of people over 55 were working and now it is 40%.”
Omtzigt says he has included some amendments to the social security law to render the Levensloop concept more palatable, including provision that contributions will not affect social security rights in the event of unemployment: “This was a major disincentive to Levensloop, with people worried that you might get lower benefits if you lost your job as a result of these savings.”
The task now, he says, is to make the Levensloop attractive enough so that workers use it, negating the need for compulsion.
From the side of the trade unions, however, the noises are that acceptance of individualised early retirement will not be made without a fight.
Margreet Schuit, policy maker at the FNV comments: “Our whole system is now being upset by this discussion on pre-pensions.
“We can’t agree with the government about the new regulation because of this question of opting-out. In the past few years we changed the pre-pension system to a capitalised basis and we believe the decision to have individualised accounts would be very expensive.”
Schuit says the unions had an agreement six months ago that they would lower wages and then talk about the fiscal issue of Levensloop.
“We want collective arrangements and to look at the pre-pensions system and see if we can have more options on study leave and things like that.
“We’re not against Levensloop, we think it should be incorporated into pre-pensions, but we don’t believe it should be individual, because if it is then only higher earners can afford it. A collective arrangement can be much cheaper and therefore a lot more people can benefit from it.
“We are now having a referendum amongst our members to see if they want to accept the compromise or accept our position.
“The government is threatening us with pressure on the polder model and now we are also saying no to the spring agreement on freezing of wages.”
With further wages/pensions discussion planned for later this year, Schuit ends on a resolute note: “This summer heat looks like going on into the autumn!”

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