Netherlands: Facing tomorrow’s risks today
Change is not an extravagant luxury, Piet Hein Donner, the Netherlands' minister for social affairs and labour, told Mariska van der Westen
The impact of the most recent crisis has yet to play out in full, while population ageing and rising life expectancy are eroding the very foundations of the Dutch pensions system. Against this background, Piet Hein Donner, the Dutch minister for social affairs and labour, last year ordered studies to investigate whether - and how - the pensions sector can be strengthened to remain future-proof (see preceding pages).
Donner is proud of the Dutch pensions system, primarily because "despite everything, we have succeeded in keeping afloat a very widespread defined benefit pension system," he explains. But he has his concerns: "Whether we can keep this system going with the same risk sharing arrangement is one of the issues we have to discuss."
Demographic developments, such as rising life expectancy, are pushing the system's costs up, the minister observes: "A key question is whether we can keep the current defined benefit system in business as it stands, or must we talk about possible changes?"
Of course, the pension sector has not undergone the same turmoil during the financial crisis as the banking and insurance sectors. This might make it seem all the more surprising that the pension industry has immediately been subjected to inquiries by three separate commissions, in contrast to other financial institutions.
"That's because of the differing financial and social roles of banks and pensions institutions. Banks are the basis of the financial system, and we rely on that system every day. But pension institutions are about pensions, which we will need to rely on in the future. That means that the pension system is not in immediate difficulties, but this is all the more reason to look closely at how we should deal with the risks and the problems for the long term."
Donner set up two committees for this purpose. "The Frijns committee has looked at what conclusions we must draw from the current problems about the investment policies of the future. At the same time, the Goudswaard committee has looked at the system's sustainability." He doesn't regard this as overkill: "Both committees of inquiry are logical reactions to the consequences of the crisis. Not least because, in contrast to the banks, this is the second time in 10 years that we've had to worry about the pension system."
While the investigations have not yet been crystallised into concrete proposals, there is a feeling that the pensions sector can expect a more sober and constrained future. Many expect the regulators to impose stricter solvency requirements, which would mean that the same amount of money would yield a less generous pension.
Donner does not want to say whether this is in the future but comments : "There is a relationship between security and risk, and a system offering complete security entails higher costs - this much is clear."
All the same, the minister is not pushing simply for more security. "We need to aim for a system that deals adequately with risks, not a sector that fully covers risks," he insists. "Risks have a legitimate role to play in the system, but we also have to communicate them as honestly and as clearly as possible, so they can be incorporated into the expectations of people."
Donner cannot say if the findings will lead to fundamental changes in the system: "It seems premature to discuss fundamental changes before we have even determined what precisely needs to be changed - and that's what we're in the middle of doing right now." He does concede, however, that he is reluctant to contemplate excessively far-reaching changes: "The financial crisis had serious consequences, but we're already seeing coverage ratios rising again. So we have to be careful not to continue to cause shocks to the system".
"On the other hand, it is still important that the Goudswaard committee looks at the long-term risks. We should face the risks now. That way perhaps we can avoid problems arising in the future."
One of the themes that will play a role in the future of the pension system is the structure of pension fund governance and trustee performance. Considering the increasing complexity of asset management and the heavy responsibility born by trustees, qualification requirements in terms of expertise and professionalism have become increasingly demanding .
The minister is wary of overbearing regulation. "There is no doubt that the management of pension assets places ever higher demands in terms of expertise. But in principle it is still the case that the pensions system is based on arrangements between private parties. Consequently, the responsibility to determine the best way to manage the funds resides with the board of trustees," he says. "Furthermore, we cannot say that we have been badly served up until now. Despite the shortcomings, the system has weathered even these recent challenges."
By the same token, when it comes to governing pension funds he does not think it is a good idea to hand over the reins to ‘the pros': "I do not think things will necessarily be better if we only hand these things to experts."
In this respect he also warns that is a mistake to assume that smaller funds do less well than the big ones. "Of course we will ask the question of whether we should move towards a greater consolidation of pension funds. But even as we create the legal conditions for further consolidation, it remains primarily a choice for the funds themselves to take. And you have to be very careful when it comes to the argument over big versus small funds, because there are many funds run by amateurs rather than professionals, and they are doing just fine at the moment."
Diversity and participation are contested issues in pension fund governance It is important to consider that a pension arrangement is no longer simply a contract between the employer and the employees that specifies everything in terms of ever-lasting certainties, Donner argues. "A pension scheme increasingly implies a certain risk sharing arrangement. This begs the question of whether the decision-making process is still suited to the way risks are allocated."
But that doesn't mean that the solution must be to include pensioners in the board of trustees. "Perhaps you'd do better to put more specialists and experts on the board. How are pensioners better served: by giving them a representative in the board or participation body, or by strengthening internal auditing so the fund's continuity and its liabilities are safeguarded above all?"
On this issue, too, the minister argues that the decision "to a large extent" lies with the pension funds themselves. "When it comes to safeguarding the interests of pensioners, I do not believe that direct representation on the board of trustees is the best or only way of doing this. There are different models and we are not aiming for one. However, we will insist that pension funds choose and explain their reasons."
Thanks to mandatory employee enrollment, around 80% of employees in the Netherlands are members of a work-related pension plan. As the trend towards greater individualism and freedom of choice is gaining traction, mandatory enrollment is coming under fire. With this in mind, would Donner have introduced mandatory enrollment if such a system hadn't already been in place?
"I think I would. In the Netherlands we have a two-pillar system that prevents older people from having to go on welfare by means of the Old-Age Pension Act, while offering additional security by means of a complementary pension based on employment history. Given this structure, I would still opt for mandatory scheme membership," he says. "With the understanding that enrollment is mandatory only indirectly, resulting from a generally binding provision in a collective labour agreement."
The Dutch complementary pension system has a broad reach and offers people - whether via classical defined benefit schemes or via modern variants like collective DC - clarity regarding the pension they can expect. These are two aspects to be proud of, and Donner would like to preserve them for future generations.
The primary challenge this decade is finding a way of preserving the positive features of this pension system for the future, Donner believes. "The discussions we are having now are about the next 20 or 30 years. The key question is how to offer pensioners a reliable income in a way that finds an acceptable balance between the security they demand and the risks that are inherent in the structure and financing of the system."
Will the Dutch system still exist in 10 years' time?
"Undoubtedly. Don't worry about that."
Some of these articles appear in the February/March issue of IPE's Dutch sister publication IPN