The new Dutch ‘levensloop’, the new life course, scheme - designed to encourage later retirement - will probably have to be adjusted within five years. Too many workers want to use it for early retirement, instead of a sabbatical or care leave.
Benne van Popta, chairman of the Association of Industry-wide Pension Funds, VB, proposed widening the scheme’s base, by also allowing it to be used for unexpected events during someone’s career.
During another parallel discussion, financial director Dick Sluimers of civil service scheme ABP, reiterated his objections against the strict recovery rules of the new financial assessment framework, or FTK. He reproached regulator DNB of focussing on the short-term, especially with the one-year recovery term, in case the funding ratio drops under 105%.
“If we dive under 100%, contributions will have to rise from 20% to 60%. Even if the mandatory period is extended to five years, premiums need to increase to 28%,” Sluimers warned. “This won’t work. It will lead to social unrest. Strangely, this aspect has been absent during all political discussions. The one-year recovery term is a very blunt instrument. I hope the DNB will use it very sensibly.”
Sluimers also snubbed the present longevity risk of the FTK, which prescribes a financial reservation until 2050. “This will cost ABP 3% of its coverage ratio, or between €4bn and €5bn, and €15bn for the market as a whole,” he stated.
However, during the main session, director Dirk Witteveen of pensions regulator DNB clearly indicated that he isn’t considering a relaxation of the FTK rules. “Although criticism on the FTK is possible, I don’t want to make any changes now,” he said.
According to Witteveen the real mistakes have been made during the nineties. “By then the pension funds were offering large premium discounts, while the interest rates were already falling,” he said. The director also showed confidence in the 15-year recovery period for the prescribed funding ratio of 130%.
Guus Boender, professor of asset liability management and MD of consultant Ortec, stated that the FTK should allow strong industry-wide schemes a bigger margin than small company funds. He wondered why DNB doesn’t seem to focus on DC schemes. “The ‘virtual coverage ratio’ of these schemes could be very disappointing,” he added.
Henriette Prast, professor pensions psychology at Tilburg University/Netspar, showed that people don’t think rationally. “A lack of self-control causes a continuous postponement of saving. That’s, for example, why workers in the US don’t set aside enough money. People tend to be more patient when their reward is in the further future,” she argued.
According to Prast, 63% of the Dutch employees want to keep the defined benefit system, because they are afraid of not saving enough themselves. Only 12% is explicitly in favour of a defined contribution system, she revealed.
Referring to the increasing flexibility of schemes, Prast stressed the importance of the way choices are being formulated by schemes and insurers. “People strongly tend to choose for the middle way, and 50% would like to leave investing to the pension funds. Don’t leave the self-investors too much choice, and don’t offer them risky portfolios”, she advised.
“Leave the choice for additional private pensions only to members on a e50,000-plus salary,” added Flip de Kam, professor of economics and public finances at Groningen University.
He predicted a gradual rise of inflation within five to 10 years. “We will get tensions on the labour market, rising labour costs and growing political instability within the Euro-zone. France and Italy will probably be facing increasing political pressure to leave the Euro-zone for reasons of competition.”
The economist also forecast ‘vicious premium circles’, in which saving too much will lead to too little consumption and too high labour costs. “The effect will be half a percentage point less economic growth,” he said.
More flexibility in claims and supervision are part of De Kam’s solution. “We must think of a different and more clear way of risk-sharing, like generation accounts. And we should consider a decrease of the pension-generating salary to 60%, which will still provide a net result of 77%”, he argued.