Netherlands: Be liberal within reason
While the Dutch ‘ideal’ pensions model embraces change, there is increasing pressure from issues of cost, says VB and Opf
During the last couple of years the Dutch pension system has drawn the attention of many other nations as well as supra-national organisations. One example is the report ‘Averting the old age crisis’, published by the World Bank in 1995. In that report the World Bank recommends the Dutch pension system as an ideal model. What does this system stand for and why is it so popular ?
The Dutch pensions market
The first pillar consists of a PAYG state pension providing a flat rate benefit for all residents. The amount for a couple is 100% of the legal minimum wage (single: 70%). Most workers are also entitled to a job-related funded supplementary pension (the second pillar), usually according to the final pay system. These can be organised on industry-wide or at company level. The third pillar relates to the voluntary personal arrangement which every resident of the Netherlands can make on their own behalf. These individual arrangements usually take the form of private (life) insurance policies or savings agreements with commercial insurers. Within certain restrictions these personal provisions are tax deductible.
Importance of second pillar
Industry-wide pension funds and company pension funds play an important role in the second pillar. Most workers participate in a supplementary pension scheme: more than 85% of all workers in industry are members of a supplementary pension arrangement (4.8m). Approximately 3.9m are members of industry-wide funds and 0.6m are members of company funds. About 0.3m participate in collective pension schemes underwritten by life insurance companies.
The political view is that the responsibility for supplementary pension arrangements rests with the so called social partners, ie employers and employees.
Even though there is no general compulsory national supplementary pension scheme, the government can allow, at the request of social partners, the participation in an industry pension fund to be made compulsory for employers in a whole branch of industry.
Nowadays, one of the great concerns of both government and social partners of (supplementary) pension schemes, with the growing amount of pensioners and decreasing interest rates, is the question of how one can reduce costs. In December 1997, the government and social partners agreed a central Pension Covenant, concerning the modernisation and cost-control of pension schemes.
Modernisation emphasises the wish for more flexibility which includes, amongst others, the possibility of a flexible pensionable age, and the employees’ right to have the choice between a survivor’s pension or a higher old-age pension or a lower pensionable age. Other (recent) legal changes are the equal treatment of married couples of the same sex with regard to supplementary pensions and the limitation of tax-deductibility.
Cost-control has two different concerns. Firstly, pension schemes must be modified to protect themselves against all too high increases of costs as a result of the ageing process. Secondly, it is of importance that modernisation in itself does not lead to a rise of pension costs. If social partners do not comply with the requirements of the covenant by 2001, the government will possibly ‘prohibit’ the final pay system in favour of average income schemes and enforce a maximum salary limit for pension schemes. It can simply do so by excluding final pay schemes from the right of tax deductibility of the contributions.
The conditions under which an individual company has the right to opt out of a compulsory industry-wide fund have become more liberal. According to new regulations, a company has such a right if the fund returns on investment are below par, during a longer period. Likewise, if the company has its own collective labour agreement and the trade unions involved agree to establish an own company scheme. Another reason could be if the company is part of a larger concern (= group of related companies), in which a majority of the workers participate in the pension scheme of that concern. These dispensation conditions ensure that compulsory funds are subject to a higher extent of competition, instead of having a strict monopolist position.
VB (Netherlands Association of Industry-wide Pension Funds)
Chairman: H.G. Beuker
Contact name: Mr. F. Prins (secretary/director)
Address: Business Park Zuidflank, Patrijsweg 30, 2289 EX RIJSWIJK, The Netherlands
Telephone: + 31 70 398 72 01
Facsimile: + 31 70 319 11 20
Number of associated industry-wide pension funds: 77
Total number of employees covered: 3.6m
Total number of pensioners: 1.3m
Total number of people with deferred rights: 4.6m
Total of combined assets: close to NLG650bn (E325bn)
Opf (Dutch Association of Company Pension Funds)
Chairman: C.J. van Rees
Contact name: N. Obolonsky (secretary)
Address: P.O. Box 93158, 2509 AD
Telephone: + 31 70 349 01 90
Facsimile: + 31 70 349 01 88
Number of associated industry-wide pension funds: 350
Total number of employees covered: 600,000
Total number of pensioners: 300,000
Total number of people with deferred rights: 500,000
Total of combined assets: close to NLG200bn (E100bn)