Cabinet steadies reforms
Leen Preesman looks at the measures the government is taking to stabilise the pension system
At a glance
• Average pensions accrual is to be replaced with age-dependent build-up.
• Individual pensions accrual combined with collective risk-sharing and collective conditional defined benefit arrangements to be elaborated as potential future pension plans.
• Adopting new pension contract will not be mandatory.
• New pensions system to be extended to self-employed and temporary workers.
With the presentation of its so-called ‘perspectives note’, the Dutch government has outlined the route towards a new and sustainable pensions system. The cherished principles of collectivity, solidarity and mandatory participation of the current structure – designed in the 1950s – are to remain key.
In the memorandum, Jetta Klijnsma, state secretary for Social Affairs, outlined ways to improve the connection between second pillar pensions and the labour market, with people retiring later, changing jobs more often and increasingly becoming self-employed. The scope of the system is to be extended from employees – who collectively accrue pension rights on a mandatory basis – to self-employed and flexible workers, who often fail to save enough for their pension.
The cabinet wants to encourage this large and increasing group to set aside sufficient money for later. Although, it is not specific, it said it could include the introduction of mandatory saving.
It also made clear that it would stick to its initial plans to offer workers more choice. The government outlines, for example, options to reduce mandatory pensions accrual for those who do not need a full pension because of other available assets. Another new option would be taking out a lump-sum at retirement.
What will definitely change however, is pensions accrual. It has decided that the average pensions accrual system is to be replaced with a degressive one, one in which young workers accrue proportionally more pension rights than their older colleagues.
In the cabinet’s opinion, this form of accrual is fair to all generations and crucial to keep support of young workers for a collective pensions system. Under the current average premium – a fixed percentage of the salary – young workers pay proportionally more than older ones, because their contribution needs to generate a higher return over time.
However, transition costs to age-dependent arrangements are high and have been estimated at between €25bn and €100bn. The cabinet has indicated that it is willing to temporarily extend tax-facilitated pensions accrual for the over 45s, who would be most affected by the changes. It said it is prepared to contribute up to €40bn to the conversion costs. For now the necessary transition period has been estimated at 25 years, but an investigation will establish whether this can be reduced to 10 years.
Under current legislation, degressive pensions accrual is impossible. But, according to the cabinet, adjusting the legal rules would be easy. A transition complying with EU legislation will be more complicated.
After assessing alternatives, the government said it will flesh out two variants of a future pension contracts to replace the predominantly defined benefit schemes: one with individual pensions accrual combined with collective risk-sharing, and another comprising a collective ‘conditional defined benefit’ plan. Both alternatives will contain extensive risk-sharing, including a collective financial buffer. Contrary to the classic defined benefit arrangements, neither of the concepts promise certainty on future benefits.
Citing a survey by the Netherlands Bureau for Economic Policy Analysis, Klijnsma said that extensive risk-sharing could increase pensions by 7% over time. However, it noted that this risk-sharing with future generations requires a stable inflow of new participants. It will also come at the expense of transparency of the pension system.
Earlier, economists warned that financial buffers – favoured by unions and pension funds – are likely to cause ownership problems. The regulator, De Nederlandsche Bank, made clear that the scale of the buffers should be limited. Opinions among experts are divided about which risks should be shared. The same goes for increased options for participants for tailor-made arrangements. Opponents argue that people would not understand the consequences of their choice, and will pick the default option.
Klijnsma made clear that the new pension contract will not be mandatory. It will be up to the social partners of employers and workers to decide whether they adopt new agreements, she said.
The government’s aim is to introduce the new pensions system by 2020, and that the main decisions will be made by a new cabinet. Ahead of national elections in March 2017, the state secretary wants to elaborate the most favourable concepts, their legal and fiscal framework as well as the consequences for supervision.
She will also scrutinise the effects of a transition to degressive accrual for pension funds and insurers. Meanwhile, the Social and Economic Council – an advisory and consultative body representing employers, trade unions and independent experts – is to assess the position of self-employed in the new system.
The Pensions Federation – representing Dutch pension funds and their members – said it would analyse the consequences for participants and pension funds. Its focus would be on a simultaneous transition to a new pensions contract and age-dependent pensions accrual. Together with the Actuarial Society and the Netspar think-tank, it would map out the pros and cons of the financial and legal aspects, as well as the consequences for communication and implementation. The industry group said it aimed to complete its analyses by the autumn, allowing political parties to take its conclusions into account for their election manifestos.
The feasibility of a new pensions system is expected to depend on political decision-making as well as support of workers and employers. Responding to the cabinet’s memorandum, the union FNV said it was not ready to throw its weight behind an expensive transition to degressive pensions accrual, whereas the association of insurers said it was in favour of such an approach. Union CNV, warned against “too many” choices for participants, and said it opposed the government’s suggestion that participants should be allowed to take out part of their pension as a lump-sum at retirement.
Over the last two years, the Dutch parliament has already taken several measures to improve the sustainability of its pensions system including:
• Raising the retirement age for the state pension to 67 in 2021. From then, developments in life expectancy will be the criterion for further increases of the official retirement age.
• Introducing a new financial assessment framework (nFTK), which allows funds to spread financial shocks over a 10-year period, rather than a one-off rights cuts.
• Introducing a new low-cost pensions vehicle, the general pension fund (APF). It enables small company schemes to continue under a single board, while their assets remain ring-fenced. The APF can accommodate all existing pension arrangements.
• Introducing legislation which allows taking out part of accrued pension rights in annuities under a defined contribution plan at retirement. This option enables retirees to avoid the negative effects of the current low interest rates on their benefits.
• Introducing legislation to improve pension fund governance as well as the communication between pension funds and their participants.
• The cabinet is currently preparing legislation to replace the workers’ right to buy out a small pension from the pension fund they have left following a job change. In future, the scheme must transfer the value of the remaining rights to the employee’s new pension fund.
• The government also says to will look into how mandatory industry-wide pension funds could be temporarily allowed to co-operate while their assets remain ring-fenced, before a new cabinet takes over next year.