NETHERLANDS - Increasing life expectancy and the recent financial crisis are threatening the solvency of the second-pillar pension system in the Netherlands, leading to a need for changes to the style of recovery plans, the OECD has warned.
In its latest economic survey of the Netherlands, the OECD devotes an entire chapter to making the pension system less vulnerable to financial crises.
It highlighted the recent fall in funding ratios of pension funds from an average of more than 140% to less than the minimum 105%, marking the second time in 10 years that recovery plans have had to be widely implemented.
The OECD pointed out these recovery plans mainly rely on suspending indexation of pension rights and accrued pension rights.
And while recovering equity markets have seen a number of pension funds return their nominal funding ratios to above the legal minimum of 105%, the OECD argued that in most cases the ratios were well below the 125% level for indexation or the 145% level that allows funds to make up for the past suspension of indexation.
Calculations by the OECD suggested that, with the current measures in place, and based on conservative future return assumptions, funding ratios would continue to improve within the five-year recovery period so that most funds would reach the legal minimum.
But it warned there would be little improvement beyond this level without a strong rally in equity markets.
It calculated that restoring funding rates so that pension funds can honour their pension promises of up to 80% of average wages would require members to work an extra four years, contribution rates to be increased by 4.5 percentage points or for future indexation to be paid for by reducing the real value of accrued rights by one-third.
The OECD said: "To balance intergenerational considerations while minimising potential macroeconomic costs, the recovery plans should include requiring members to work an additional two years and introducing a mix of lower indexation and higher contribution rates."
It argued the additional two years of work would align the retirement age with proposed changes to the state pension system - which would see a pension age of 67.
It also recommended a "structurally more solid solution" for a sustainable pension system and said that to reduce early retirement incentives would be to link the official retirement age to developments in life expectancy.
Other issues raised by the OECD survey included the recommendation that regulation be less sensitive to short-term developments, such as changing the discount rate to either a long-term, high-grade investment bond, or the long-term government bond rate if these are too volatile.
It suggested the temporary extension of the recovery period from three to five years should become permanent to allow greater flexibility for pension funds, while pension transfers should be made easier by allowing self-employed members to stay with their existing scheme.
Corporate governance issues should also be addressed to ensure the risk profile of the investment portfolio reflects the desired risk strategy and the members' age structure, with members being able to switch from a persistently under-funded or under-performing fund.
The full economic survey can be found on the OECD website.