Despite appearances to the contrary, a compromise on a future retirement system may be close
- The social affairs minister has given a spring 2018 deadline for parties to reach an agreement
- The target date for a new system has been set for 2020
- There is agreement on the key elements of the new system
- Key issues include intergenerational sharing and the degree of choice within personal pensions
The debate on the future of the Dutch pension system that started in 2014 is well and truly alive. Media headlines can give the impression that a solution is still far off. It took months for the country’s political forces to form a government after the last election, which delayed action on the reform. But the discussions continued in the background, and the government that eventually came into power in October last year seems intent on carrying out the reform.
Completing the transformation of the country’s pension system by 2020 was part of the government’s agenda. This sounds ambitious, which is probably why social affairs minister Wouter Koolmees wants the social partners to reach an agreement by spring this year.
Despite the obvious stumbling blocks, the parties involved in the debate agree on the key items. Jacqueline Lommen, DC pension strategist at SSGA and a trustee on several pension fund boards, says: “There are more issues on which stakeholders agree than those they disagree on. Judging from how the debate is taking place in the public domain, it may look like the reform will be postponed again. However, there are a lot of positive discussions behind the scenes and I believe these will eventually lead to a compromise being reached.”
There is no substantial debate on the need for the major risks linked to pensions – interest rates, inflation and longevity – to be borne by pension fund members as well as sponsors, according to Lommen. The result is, inevitably, an overall shift towards DC pensions. In fact, the number of DC pension fund members is growing in the country. This is partly thanks to a reform in mid-2016 that removed the obligation to collect pension payments as annuities. The reform paved the way for ‘variable pensions’, where pensioners keep their pot invested after retirement.
Lommen adds that there is broad support for the idea that the reform should be retroactive. This means that defined benefit (DB) pension funds will be changed into DC ones. It will be a markedly different process compared with other countries, such as the UK, where DB pension fund have been closed and new DC ones opened.
The third key element on which there is consensus, says Lommen, is collective risk sharing. This is exemplified by the provision that funds accrued by deceased pension scheme members stay within their scheme, once their insured spouses are provided for. “That’s a very fundamental kind of risk sharing that everyone takes for granted. Either way, keeping an element of collective risk-sharing is necessary so that every stakeholder keeps their influence and their role,” Lommen adds.
There still are a few sticking points. One is whether collective buffers can be negative. That is to say, stakeholders disagree on whether pension funds can be underfunded for a period of time. Assuming that saving into a pension fund will give rights to an individual pot of money as well as a collective one, the question is to what extent underfunded pension funds should be able to tap into individual pension pots.
Theo Nijman, professor of econometrics and finance at Tilburg University and scientific director of Netspar, the Dutch pension think tank, says the problem depends on whether pension schemes bear significant discontinuity risk due to their sponsors. If a pension scheme sponsor goes bankrupt, and the funded pension scheme finds itself without a stream of future members, then the scheme has no option but to delve into the members’ pockets.
Nijman says: “There is a trade-off between the welfare gain of intergenerational risk-sharing versus discontinuity risk. The other counterargument is the simplicity of the contract. Some argue that introducing complex buffer rules will render the pension contract simply too complicated and opaque.”
Another stumbling block is the complexity of the reform process itself. There is a variety of views even within the same stakeholder groups. FNV, the country’s largest trade union, wants to tackle several issues at once. As well as intergenerational risk-sharing, the union wants slower rises in retirement age and pensions for the self-employed. Other unions offer more flexibility.
There is, according to Nijman, an issue that is ignored. He says: “Stakeholders overlook the advantages of moving towards a pension contract that is much more tailored to the characteristics of the individual. The same decisions on many issues are currently taken without regard for the personal circumstances – subjective and objective – of the individual. But some decisions can create a clear conflict of interest between members. In the new system, we can take major steps towards more tailor-made pensions, without adding pressure on members.”
The outlook is positive, says Lommen, because the reform has garnered support over the years. “We need the reform, and people are aware of it. Furthermore, the minister is a believer in the new concept,” she says.
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