IPE’s 18-year history has been one of the expansion of funded pension systems. While countries like France have held out in favour of répartition, notwithstanding a half-hearted attempt to boost workplace pensions savings in the 2000s, others have expanded the development of funded pension systems more or less successfully. These have included Denmark from the 1990s, Germany following the 2002 Riester reforms, and Italy’s TFR reforms later in the same decade, among others.
Back in the 1990s, before it was privatised, the Algemeen Burgerlijk Pensioenfonds (better known now as ABP) was effectively little more than a silo for Dutch government bonds, even though it was technically a funded scheme.
As CIO until 2006, the great triumph of Jean Frijns was to steer a privatised ABP towards a new role as a diversified, global institutional investor. Now, Frijns is seeking a rethink about the balance of capitalisation versus pay-as-you go funding in Dutch pensions and has called for a review of what he terms the “glorification” of capital funding.
Economic orthodoxy in recent decades has dictated that individuals (and by extension employers) should take on a greater share of responsibility for retirement. Advocating a return to a higher level of taxpayer funding for government pension schemes seems to fly in the face of rational policy given record levels of sovereign debt in Western countries. Frijn’s call seems counterintuitive.
Yet, as Frijns seems to think, there is a case to look at the other side of the national balance sheet. It is worth noting that he has previously described Dutch pension funds as “fragile giants”; in the Netherlands just five institutions account for more than half of the over €1.2trn in pension assets and regulation is driving consolidation. Such large-scale institutions can be less nimble in markets and have less room to diversify effectively because of their size.
Record and persistent low yields make life hard for pension funds. Yet, on the other side of the national balance sheet, if it were prudent to increase borrowing to cautiously grow the proportion of state retirement benefits, now would be the time to do it. This would have to go in tandem with a reduction in contributions (for ABP the annual contribution is 19.6% – 13.33% from the employer and 6.27% from the employee. Others, including in the private sector, have total contributions of over 20%).
The Dutch pension system still assumes stable lifetime employment in the same sector with unified average contributions for all. A reduction in contributions could also go hand in hand with a loosening of the average contribution requirement, which would boost employment, while simultaneously making occupational pension savings more attractive and boosting confidence in the system.
As Frijns also points out, the growing ranks of the self employed (known in Dutch as zzp-ers) are serial under-savers and are under-served by the current set-up. This group could, in any case, make a higher legitimate claim on the welfare state in decades to come, passing the bill to the younger generation.
In the US, BlackRock has pioneered the concept of ‘retirement debt’, which is the amount working individuals ‘owe’ themselves to fund retirement income over a lifetime.
Perhaps a broader question should be, how much more does a country need to save for its collective requirement when it has already saved 166% of its GDP on pensions, including FTK buffers that are not productively invested in the ‘real’ economy.
If the Netherlands really can afford to decant some of its savings to the unfunded first pillar, increasing the current and future tax burden of pensions, other countries obviously still need to boost their funded pension savings. A holistic view is needed.