Contribution-free funds fade away
Contribution-free pension funds, which were often established in the past as a way of tying workers to a company, are slowly disappearing. Companies are quietly beginning to introduce contributions for employees
The industrial action at the refineries of Shell Netherlands drew the attention to the phenomenon last autumn. The Shell workers went on strike because the company wanted not only to raise the retirement age from 60 to 65, but put an end to the ‘contributions holiday’ as well.
Part of the compromise in Shell’s new collective labour agreement CAO, which ended the strike after a couple of days, is that the workers on a salary of less than €70,000, start paying 2% contributions. Staff on a higher salary had already been paying 8% over the surplus.
“It’s the story of the ageing. Decreasing numbers of young workers need to finance the pensions of the growing numbers of pensioners,” says Henk Bonder, spokesman at Shell Pensioen Fonds. The scheme, which has a coverage ratio of approximately 135%, has 10,600 active members, but almost 18,700 pensioners.
Figures from the pensions regulator DNB show that in 2001 25.8% of the over thousand pension funds in the Netherlands offered a contribution-free scheme. This fell to 23.8% - covering 32.2% of the active members - at the end of 2004. The real figures may be much lower, since there is no consensus about them in the pensions industry.
The bulk of the contribution-free schemes used to be company funds in the banking and insurance sector. However, ABN AMRO is nowadays the only bank to have kept such a scheme under a new CAO for the next two years. “It has already been ABN AMRO’s wish for three years to shift premium payment to its workers. In order to keep up the contribution-free scheme, we had to give up the unconditional indexation this time,” explains negotiator Huug Gorter of union FNV Bondgenoten. He expects that the contribution issue will be on the negotiating table again by 2010. “We must ensure that we can trade it for other attractive conditions of employment by then. But contribution-free pensions will probably die out.”
“We can’t confirm that we will phase out the premium-free pension in the future,” says a spokeswoman of the bank’s pension fund, which has 27,000 working and 17,000 retired members. The scheme’s funding ratio is 113%, based on the mark-to-market rate, required by the new financial assessment framework FTK.
Ironically, the 1,700 employees of pensions watchdog DNB will loose their contribution holiday as well. During CAO negotiations at the end of last year, DNB’s scheme and the unions agreed that the staff will start contributing as of next year. The amount will be gradually raised by one percentage point each year to a maximum of 5%. The pension fund of the regulator has 1,100 pensioners on its payroll. Its funding ratio in 2004 was 123%.
Of all the 51 pension schemes implemented by Interpolis, only two smaller company funds still pay all the contributions for their workers: biscuit rusk producer Bolletje and financial service provider Van Spaendonck, who have 350 and 143 active workers, and 195 and 98 pensioners respectively. Their coverage ratios are 122% and 127% respectively. “Quite a few schemes, eg, the glass manufacturing, bread-making and meat-processing industries, have introduced premiums during the last five years”, a spokeswoman said. By providing for the old-age pensions of 2.9m people, Interpolis’ insurance branch is one of the larger players in the market.
Rabobank introduced contributions of 6.7% for staff joining the company after January 1 2004. The other employees keep their premium-free pension until 2014. By then, their contribution will rise in two yearly steps to the full amount in 2016.
The pension funds secretary Anton van den Brink refers to the ageing as the general reason for the worker’s contribution. “A bonus was that we had the employer’s part of the tax-friendly premium savings-scheme at our disposal, when it was abolished by the government,” he explains. The Rabobank pension fund has almost 49,000 active members and 8,600 pensioners. Its coverage ratio is approximately 140%.
This year ING has introduced a comparable scheme. Newcomers need to pay their full contribution of 7.5% immediately, while the premiums for the other staff will rise gradually over six to eight years. If the contributions need to rise over 10%, the difference will be split equally between the company and the workers. ING’s new scheme is still based on final salary, although the official retirement age has been raised from 62 to 65.
“I can’t say whether contribution-free pension schemes will disappear. But I do notice decreasing numbers, which is mainly due to financial feasibility. More and more money is needed to funding the pensions,” says Peter Borgdorff, director of the Association of Industry-wide Pension Funds VB. “And since the generous yields on investments of last century haven’t returned yet, the contributions have to rise.
“Who is paying the contributions doesn’t really matter. It’s about the total labour costs for the company. The money they pay as pension premiums, isn’t available any more for salary rises or leave. So it’s actually up to employers and workers what they agree on the employment conditions.”
Only three of VB’s 88 members were offering their staff a contribution-free pension in 2004. All VB’s members combined account for three-quarters of the assets in the Dutch pensions sector.
Loek Sibbing, chairman of the Corporate Pension Funds Association OPF, agrees with Borgdorff. “Contribution-free pensions can remain in theory, but I’m not sure they will stay. Partly because of the new International Financial Reporting Standards, there is a growing focus on pension risks and costs, which companies tend to translate into either a more frugal scheme, or the introduction of employees’ contributions. And sometimes the employer asks for it as a concession for the company’s contribution to a levensloop, or life course, scheme.”
Sibbing sees no direct link between ageing and the abandoning of contribution-free pensions.
According to Sibbing, who is also director of Unilever’s pension fund Progress, not more than a couple of dozens of OPF’s 365 members are paying the full pension premiums. “Several of them are in negotiations on the introduction of workers’ contributions, and most of them want to put the subject onto the bargaining table,” he says.
“The tendency towards workers’ contributions will continue,” predicts Jan Kune, professor of pensions science at Amsterdam University. Apart from the ageing, he sees a growing awareness of costs’ transparency among employers as a trigger. “From an economic point of view, the introduction of employees’ premiums doesn’t have any significance,” he says. “It’s just a matter of salary. A proper negotiator will take it into account during discussions on a new CAO.” Earlier, he described the old pension arrangements at Shell as ‘very grand’.
In Kune’s opinion, pension contributions for workers is a positive development. “It visualises the costs, and it will raise pension awareness amongst employees. That’s why salaries should be raised, in order to allow workers to pay the pension contributions themselves.”
“The main reason for the introduction of worker’s contributions is costs-cutting,” says Rob Bakker, the outgoing director partner contacts at the pensions network Netspar of Tilburg University. “Over three-quarters of an employer’s costs are labour costs, of which between 15-20% are pension expenses. So it pays off to decrease the company’s share of the contributions.”