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Impact Investing

IPE special report May 2018

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Pensions in The Netherlands: A continuing soap opera

Now that attempts to radically overhaul the Dutch pension system have floundered owing to legal problems, union opposition and politics, efforts to future-proof the second pension pillar have favoured evolution over revolution. But incremental change may no longer be a viable option, as the country’s shift to defined contribution (DC) is accelerating. 

Mariska van der Westen

The saga of Dutch pension reform has turned into a soap opera. Over the past five years, careers have been made and broken, and organisations thrown into disarray as various pension reforms were, in turn, passionately championed only to be rejected. These ranged from nominal guaranteed contracts, to real conditional contracts, to hybrid contracts, and any number of mix-and-match alternatives. US daytime television has nothing on the Netherlands when it comes to second-pillar pensions, including high drama, plot twists and even the occasional deus ex machina – a role generally reserved for the Ministry of Social Affairs and Employment. 

Most stakeholders agree that reform is inevitable. And entertainment value aside, most appreciate the value of consensus politics. But the length of this drama is taking its toll on pension schemes caught in regulatory limbo. So last year, when the Department of Social Affairs and Employment presented its new financial framework for pension funds (FTK), the industry collectively heaved a sigh of equal parts relief and frustration. 

The new framework shelved ambitious plans to redesign the second pension pillar, and delivered schemes from uncertainty, providing clarity on solvency requirements, capital buffers, indexation rules and related issues. However, fundamental reforms were again postponed, and every pension industry expert knows that the need for reforms is getting more, not less, pressing.

The number of Dutch pension funds has halved since the start of the financial crisis, declining from 713 at the beginning of 2008 to just 339 at the end of the second quarter of 2015. At this rate, the total number may well dip below 200 by 2017. Most ‘disappearing’ schemes are being absorbed by industry-wide schemes that are practising a form of collective DC while still bound by defined benefit (DB) -centered legislation. 

At the same time, corporate funds representing assets of €80bn have switched to DC schemes and closed their DB schemes to new participants or new accrual – including Shell, Unilever and ING – while others, including IBM, HP, and Nedlloyd are implementing DC schemes alongside existing DB schemes. These corporate funds are technically DC, but would be improved if they were allowed to implement some DB features, such as collective risk-sharing and the option to continue investing in risk-bearing assets after retirement.

Despite all the years of revolutionary talk, it seems evolution has won. While political, academic and technical discussions took centre stage, DB and DC have drawn closer outside of the theatre, to the point where it seems we might have the best of both worlds.  Provided, that we get the legislative and regulatory part right.

The government is taking steps to accommodate the new reality. Next year, legislation is expected to establish a new pension vehicle (APF) that offers a platform to schemes that can no longer continue operations independently. Admittedly this solution is retrograde considering half of Dutch pension schemes have closed since 2007. In addition, the Department of Social Affairs and Employment is labouring over legislation that would allow DC plan members to continue investing in risky assets, rather than be forced to buy annuities, which is unattractive in the current low-interest-rate environment. The DC legislation is suffering from delays, but will hopefully take effect next year. 

Spot treatments aside, over the past year the ministry has collected feedback from the pensions industry and stakeholders in a series of town hall meetings on the best way forward for the pension system, resulting in a road map for reform. This was published in July 2015. 

The road map contains few particulars: the entire working population (including the self-employed) should have the opportunity to accrue adequate pension savings; insight in individual pension savings and individual choice should be improved and all this based on solidarity and collective risk-sharing as set out in transparent agreements. 

In addition, the government intends to abolish the average contribution method – a hallmark of the Dutch DB system whereby every scheme participant pays the same contribution rate in exchange for the same accrual rate, regardless of age. Younger members’ contributions have a longer investment horizon and should in fact buy a higher accrual, so under this system younger participants are subsidising older colleagues.  This was all well and good in the last century when employees often stayed with the same employer for decades, but with employment mobility on the rise, few workers stick around to be on the receiving end of this mandatory solidarity. That is why the administration wishes to phase out average contribution – but not until 2020, well after the sitting government will have been replaced. 

This autumn, state secretary for pensions Jetta Klijnsma is expected to discuss the main issues in Parliament and produce a more detailed road map. However, Klijnsma has indicated that she intends to push back actual reform until after the next general election, in the spring of 2017. 

Even so, the road map is expected to be debated at length in coming months, with special attention paid to the cost of abolishing average contribution schemes, and the ins and outs of individual DC with risk-sharing features. Considering the stakes, high drama would seem to be guaranteed.

As the OMC song goes: “Want to know the rest? Buy the rights.”

Mariska van der Westen is editor-in-chief of IPE’s Dutch language sister publication PensioenPro

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