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ABP unlikely to grant indexation for next two years

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Dutch civil servants are facing several years without inflation compensation, Corien Wortmann-Kool, the new chair of the €345bn pension fund ABP, has suggested.

During her first public presentation on Tuesday, she said that ABP would not be granting indexation either this or next year.

ABP’s decision came on the back of what Wortmann – a member of the European Parliament’s Economic and Monetary Affairs Committee while she was MEP –  called “the unfortunate timing of the introduction of the new financial assessment framework (nFTK)”.

Stricter rules for indexation had coincided with ever-decreasing interest rates – the criterion for the discount rate for liabilities – and were having a detrimental effect on pension funds’ coverage ratio, she pointed out.

Since 2008, ABP’s 2.8m participants had incurred indexation in arrears of 10%.

Under the nFTK, pension funds can start increasing pension rights no sooner than a funding ratio of 110%, rather than 105%.

At December-end, ABP’s coverage ratio was 104.7%, but this level is likely to drop. The scheme is to publish its new funding figures later this week.

However, in Wortmann’s opinion, the good news was that the nFTK had also reduced the possibility of rights cuts. Under the new rules, discounts are only inevitable if a pension fund’s coverage has been lower than 105% during five consecutive years.

Responding to Klaas Knot, president of supervisor DNB, who recently suggested that people were saving too much, Wortmann warned against a further reduction of tax-facilitated pensions accrual.

She argued that punishing saving would be “dangerous”.

”In 2040 the ratio of workers to pensioners would have been halved to two to one, while care costs would have risen significantly in the wake of ever-increasing longetivity.”

Commenting on the nationwide debate about a new and sustainable pensions system, Wortmann said that ABP would prefer individual pensions accrual combined with collective arrangements.

However, she also made clear that the civil service scheme was not ready yet to choose between defined benefit and defined contribution arrangements as the future solution.

“We advocate innovation and improvement of both,” she said, “to enable the social partners to make a choice, or to combine the best elements of improved DB and DC”.

According to Wortmann, an ABP survey had suggested that 80% of its participants wanted to have choices for their pension, and that they preferred the option of a temporary additional contribution to a temporary premium reduction.

Participants also wanted a say in when their benefits should start or whether to take a part time pension, she added.

The ABP chair further announced that “open and honest” communication about what ABP’s participants could expect about indexation perspectives would become a top priority, “as this was crucial for their confidence in the scheme”.

She added that ABP would offer its participants “solid and transparent standard choices without complexity”, adding that the pension fund would also provide a better insight into the consequences of individual choices.

The planned intensified communication would include the use of simple and clear language, stressed the new chair, who indicated that, for example, ABP’s 126-page explanation of how the pension plan worked needed to be simplified.

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