Netherlands: Pensions should be a 'good deal'
Miranda Schoutsen spoke to Kees Goudswaard, the author of the report ‘A Strong Second Pillar'
His is not an easy message and of this he is well aware, admits Kees Goudswaard, who in daily life is a professor of applied economics and has for the past several months served as chairman of the committee charged with determining whether the Dutch pensions system is ‘future proof': the Committee on Future Sustainability of Complementary Pensions. "To further stabilise the pension system, choices will have to be made."
The present system of complementary, ‘second pillar' pensions is increasingly coming under pressure. It would be a mistake to think that the recent recovery of pension fund solvency ratios means that our troubles are over, says Goudswaard. As the population ages, the second pillar pensions system becomes increasingly vulnerable to financial market volatility.
How to balance pension ambitions, required level of certainty and cost in a way that can be sustained into the future? This is the central question that needs to be answered, according to the Goudswaard Committee. "Our impression is that the system is stretched to the limit in terms of premium contributions. And this impression is widely shared, as became apparent in conversations with industry representatives." This means that the so-called ‘social partners' - employers and employees whose representatives negotiate collective employee benefits, including retirement schemes - will be faced with tough choices. "The social partners will have to consider lowering their pension ambitions, or changing the way they handle risks, or some combination of these considerations."
Several possible solutions that have an immediate effect include capping pension benefits, maximising pensionable salary and indexing to price rather than wage inflation. In addition, the committee has high expectations of changing the way risks are allocated. If more risks are shifted to scheme participants, a larger part of the pension can be characterised as conditional or ‘soft' pension rights. Goudswaard: "This can be achieved, for instance, by linking retirement age to life expectancy." The committee proposes to adjust the Pensions Act on this issue. "Soft rights allow pension funds greater flexibility," Goudswaard continues. "Hence, if they should enter the danger zone they won't have to resort quite so quickly to measures that will subsequently hamper their recovery."
The committee also proposes to differentiate among groups of participants. The chairman has no fear that this might mean the beginning of the end for the current system of solidarity. "On the contrary, we aim to preserve solidarity. But to do so, the system needs to remain attractive to everybody. And at present it's not. Consider, for instance, an employee who becomes an independent contractor after twenty years of employment. For all of those years he has been paying an aggregate normal contribution, but he has accrued relatively few pension rights. The current aggregate normal system works fine as long as people remain with the same employer their entire working life. But as employment and career mobility increase, greater flexibility is required. Therefore we say: look into the possibility of a degressive structure, allowing younger participants to accrue more pension rights. And let's also look into the possibilities of higher risk investments for the young. That would allow them to benefit from windfalls while they still have ample time to recover from setbacks. Young participants in a greying scheme are not getting a good deal if funds are invested defensively."
Besides, although at present it may seem as though everybody is equal in pension funds, this is not actually the case, Goudswaard believes. "Just look at the measures pension funds have had to take following the credit crisis. Indexation was put on hold and contribution levels were raised. One would think that these measures hurt everybody. But in fact, the income effects are most significant for pensioners and people with the highest accrued rights," the chairman stresses. "In short, there is no equal treatment in the current situation either; let's be clear about that and make it explicit."
When complementary work-related pensions fall into step with the intended retirement age hike to 67 of the so-called ‘AOW age' - the year people become eligible for a state pension - this will result in considerable savings, Goudswaard concedes, although they will not be enough. "If the accrual of new pension rights isn't adjusted till 2020, it will take forty years for the measure to have an effect in the second pillar. That is why we propose to automatically hitch pension age to life expectancy."
Whichever measures social partners decide to adopt, clear communication regarding expected benefits - and their level of certainty - is essential, Goudswaard says.
"Many plan participants were not aware that a fully inflation-resistant pension is not one hundred percent guaranteed. When people are aware of the uncertainties involved, they can take them into account and anticipate. Pension funds are putting a lot of effort into communication, but there are still improvements to be made."