NETHERLANDS - A recent evaluation of the Dutch Financial Supervisory Framework (FTK) has led government officials to conclude the framework offers false security and hampers efforts to achieve inflation-proof pensions, according to outgoing minister of social affairs and labour, Piet Hein Donner.

The evaluation was undertaken by the department of social affairs and labour and the financial supervisor, De Nederlandsche Bank. Official conclusions have yet to been published, but Donner offered a glimpse of the results last Friday, at a seminar on the future of the Dutch pensions system, organised by pension manager APG.

"The evaluation of the FTK leads to the conclusion that the current conditionally-indexed average salary schemes and the corresponding supervisory framework hamper most pension funds' ambitions to realise real pensions," said Donner.

"And because the current schemes and the current supervisory framework are based on nominal security, this offers certainty only with regard to the amount expressed in euros, but not with regard to purchasing power. As a result, there is a danger that nominal security offer false security."

He added: "As the evaluation will show that the current nominal security has not been sufficiently achieved, we're even in danger of offering a security that is false on both counts."

Donner argued the Dutch people are justified in taking pride in their pensions system, but he warned the financial sustainability of the system is a matter of acute concern. He referred to three committees of experts who have recently reported on the challenges facing the second pillar of work-related pension provision:

"The Don Committee has warned that returns on investments will turn out to be worth less than we now think. The Frijns Committee observes that we are failing to fully take the risks into account. The Goudswaard Committee warns that current pension contributions do not yet fully account for the fast rise in life expectancy and the structurally lower interest rate, while warning at the same time that contribution levels are already close to the limit of what is economically sustainable," Donner explained.

"This may seem to suggest that the pensions system is near collapse. However, nothing could be further from the truth," he continued.

In their reports, the various committees indicated that collectivity and solidarity - two cornerstones of the Dutch pensions system - still offer significant advantages and suggest professional management and strategy may offer a way out of the current problems, according to Donner. But he stressed quick action should be taken to face the challenges identified in the various reports, "otherwise these risks will eventually undermine the system".

One way to maintain the system involves taking investment risks, he suggested: "Pension funds will have to invest in risky assets to finance indexation and control the rising contribution level."
Steps must also be taken to adjust the benefit level and the certainty of the pension promise, according to Donner, while shifting risks to scheme participants will be unavoidable.

"If we want to keep this pension system of defined benefits, paradoxically we will have to accept more flexibility in both benefit levels and risks," Donner said. "We will either have to adjust the benefit level, or adjust the level of benefit certainty. If we don't, we run a serious risk of losing this system and having to switch to an inferior system of individual defined contribution pensions."

A defined benefit system can only survive if both benefits and level of definition are no longer fixed values, and can be adjusted downward. But in that case, scheme participants must be given the opportunity to offset their lower or less certain pension rights, for instance by extending their careers, Donner said.

"Hence, bolstering the second pillar also involves improving older workers' position in the labour market and bolstering their long-term employability," he claimed.

Although the collapse of the Dutch coalition government in February is widely feared to stall pension reforms, the outgoing minister urged social partners and pension fund officials not to delay taking what he called "necessary measures".

Time is running short, and second pillar pension reforms are primarily the responsibility of social partners, not the government, Donner claimed.
"The future of the pensions system is on the table, with the menu set out in the various committee reports. Those reports are not taken off the table simply because the legislator is otherwise occupied and the Cabinet is fasting all during Lent. And in any case, the parties at the table are primarily social partners and pension fund trustees. So in terms I use at dinner, I would say ‘I am running a little late; go ahead and start without me'," said Donner, adding: "But do finish your plate. Or I will come and feed you."

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