Despite heavy opposition resistance against “breaking down the world’s best pensions system”, the Dutch parliament agreed yesterday to the switch to a new defined contribution (DC) contract which includes a lifecycle system and personal pension pots. However, many questions on implementation remain.
The debate in parliament last night followed the agreement on the new pensions contract between the Dutch cabinet and social partners last month.
During the debate, several opposition parties introduced motions calling on the pension reform to be scrapped or delayed, which were defeated.
Referring to the Melbourne Mercer Global pension Index 2019, which places the Netherlands as the world’s best pensions system, Léon de Jong of the populist Freedom Party (PVV), the largest opposition party, said: “It’s a huge scandal this reform is not improving the world’s best pension system, but is instead doing away with it.”
De Jong also pointed out a lot of uncertainty around the implementation of the new contract still remains. It is still unclear what method will be used to convert existing defined benefit (DB) pensions to the new contract, and whether further pension cuts can be averted until 2026 when the new system is expected to be in force.
Most large pension funds currently have funding ratios far below the required 100%. Social Affairs Minister Koolmees refused to rule out pension cuts during the transition phase to the new contract, which will last until 2026.
In principle, pensions must be cut if funding ratios are below 100% for more than five consecutive years. For this year, this limit was temporarily reduced to 90%.
Solidarity reserve
The real purpose of the so-called solidarity reserve, a rainy-day buffer that was introduced in the new contract to please trade unions, is also still shrouded in mystery. It is supposed to be filled using excess returns and a maximum of 10% of annual pension premiums.
Two pension experts told the daily De Volkskrant this week they suspect the solidarity buffer will “most likely” be used to provide indexation to pensioners, potentially flaring up the conflict between generations the pension reform was supposed to end.
According to the reform outline published last month, pension funds have discretionary powers on the rules on how to fill and use the solidarity reserve.
While Koolmees was not able to shed any more light on the issues that remain, he promised to investigate the potential consequences on the labour market of one of the most contentious elements of the pension reform: the decision to allow current DC schemes to continue operating plans with progressive pension premiums for existing employees, while introducing equal contribution plans for new hires.
MP Pieter Omtzigt of coalition partner CDA noted this could possibly have “enormous effects on the labour market”, as it discourages older employees who currently enjoy high pension contributions from their employers from switching jobs.
On the other hand, the proposed set-up incentivises young workers to quit their jobs and be rehired to profit from higher pension contributions from their employer, Omtzigt added.
Koolmees conceded the chosen set-up was “not ideal” as it could make it less appealing for the one million or so affected workers to change jobs. “But people should realise changing jobs could affect their pension too,” he said, adding that his chosen solution is “the least bad option”.
Fossil fuel divestment
Separately, an opposition motion to ask Dutch pension funds to divest from fossil fuels was narrowly defeated. The motion was supported by coalition parties ChristenUnie and D66, the party of minister Koolmees.
The minister, however, said he believed pension funds were already “doing enough” to reduce investment in fossil fuels.
The Cabinet will now resume drafting legislation to implement the proposed pension changes, which will be put to parliament early next year and expected to come into force on 1 January 2022. In the meantime, Koolmees will have to find answers to at least some of the questions that remain.
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