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Pensions In The Netherlands: A Gordian knot of reform

Rival parties are presenting competing visions for a reformed Dutch pension system, as Leen Preesman finds 

At a glance

• The ongoing debate on the future of the funded pension system continues, although there is agreement on two options for reform.
• These consist of individual accrual and a target contract, both with risk sharing.
• Pensions will be a key topic in coalition negotiations after the national elections in March.
• It is impossible to predict which policies will hold sway.

With national elections this month, the debate about a new, sustainable pensions system has heated up. Some 14 political parties are wrangling to draw attention to their vision on pensions. However, these differ widely and the complexity of the issues has clouded public discussion and made it increasingly opaque. 

The key issue is to determine what form of pensions contract will replace the current predominantly defined benefit (DB) system, which is deemed unsustainable because of its guarantee element. The Social and Economic Council (SER) – the representative body of employers and employees – is offering two alternatives. One comprises individual pensions accrual, while the other is a ‘target contract’ for pensions accrual in real terms, with both sharing some element risk. According to the Pension Federation, both are viable in principle.

So far, politicians only agree that pensions saving must remain mandatory, and that a collective approach and solidarity are beneficial to all participants. Apart from this, they are too divided for any serious prediction based on current opinion polls. The current coalition partners, the centre-right liberals of the People’s Party for Freedom and Democracy (VVD) and the centre-left Labour Party (PvdA), for example, have opposing views. The larger VVD supports the individual contract idea, while the PvdA is keen to keep the current “system of solidarity and collectivity”, perhaps with improvements.

The other smaller parties are divided on the issue or have not yet positioned themselves. The big unknown remains the far-right Freedom Party (PVV) of Geert Wilders. It has shunned public debate after presenting a single-page election manifesto, which merely promises indexation for occupational pensions and to re-instate the retirement age of 65 for the state pension (Algemene Ouderdomswet or AOW). Recent polls suggest the PVV could become the largest party in parliament.

erik lutjens

The cabinet has made clear that it wants to abolish the current average pension accrual system as, in its opinion, it places younger workers at a disadvantage. The cabinet favours age-related ‘degressive’ accrual instead. But, there is no clear majority for this plan, and it would be expensive. Transition costs – largely as a compensation for the affected participants – are estimated at between €25bn and €100bn. The PVV and the centre-right Christian Democrats (CDA) seem to hold the key as they are likely to do well in the elections but have not yet clarified their position on this issue.

Another issue is whether pension fund participants should be offered freedom of choice for personalised arrangements. The VVD and the centrist liberal democratic (D66) present themselves as the champions of additional options. These include the choice of pension provider for both participants and companies; for the level of risk taking on investments; and for taking out part of the pensions entitlement as a lump sum at retirement. 

D66 also favours the freedom to use part of the pension to pay off a mortgage through a premium holiday of five years. The CDA and the small religious right-wing party, the Reformed Political Party (SGP) also promise to include care costs as a justification for a contribution break.

On the other hand, the PvdA is willing to facilitate limited choice. The Socialist Party (SP) does not support additional options as it wants to prevent people from making the wrong decisions under “choice stress”. The SP says it wants a single national pension fund with DB arrangements, which would also be open to self-employed workers.

Several parties’ manifestos include mandatory investment rules for pension funds. The PvdA says it intends to force schemes into investing 20% of their assets domestically. D66 wants “to link government expertise and budget with pension funds’ assets” through a new public merchant bank. The animal rights party (PvdD) would allow participants to switch to a green investment fund in case their pension fund falls short on sustainable investment.

peter kraneveld

Abolishing mandatory participation of companies in an industry-wide pension fund is not likely, as most parties want to retain this. Support of the PVV, however, will be crucial for keeping this obligation intact.

A call from the supervisors DNB (the central bank) and AFM (the financial markets regulator) to cap the amount of mandatory pension saving has been reflected in the election pledges of the PvdA and SGP. They promise a limit of 200% (around €73,000) and 150% of the average salary for tax-facilitated accrual, respectively, with the PvdA retaining the salary ceiling of €100,000. Voluntary additional pensions saving should take place in the third pillar, according to the liberal VVD.

Pensions saving by the million-plus group self-employed workers features prominently in manifestos. Currently, this group – known as zzp’ers – has no obligation to save for retirement and only a minority does. The CDA insists that they start saving a minimum amount to remain entitled to full tax benefits, whereas the PvdA wants mandatory pensions saving for income up to €33,715. The national pension fund favoured by the SP, should also be open to the self-employed, who must participate on a mandatory basis, the party says. D66, on the other hand, opts for flexible and individual saving.

All political parties have a view on AOW, which is the main source of retirement income for many. Several parties, including the PVV, SP and the party for the elderly (50Plus), want to return the retirement age to 65. Others want to stick to the current policy of the pensionable age following life expectancy, or to offer a choice of earlier and later retirement against lower or higher benefits. 

The FNV trade union – the largest in the Netherlands – has also entered the debate. It calls for a flexible AOW retirement age to accommodate workers in physically demanding jobs. Jetta Klijnsma, state secretary for social affairs, however, has already indicated that the cabinet opposes this, “as the higher implementation costs would outweigh the social benefits”.

herman kappelle

In addition, several parties have promised to raise AOW benefits – by 10% (the SP); “considerably” (the green-left party GroenLinks); and “structurally” (50Plus). The VVD wants to help the elderly financially through tax cuts.

As a result of the plethora of opinions, the discussion about the new pensions system is diffuse, even to seasoned observers. “It is terribly complicated and impossible to explain to ordinary citizens,” one student of pensions law recently summarised after a political debate.

If Wilders’ PVV were to gain the most seats in March, the formation of a new government would become very difficult. As several parties have already ruled out co-operation with his party, four or five others would have to work together to form a majority coalition. The required compromises could complicate decision-making about a new pensions system, which is scheduled to come into force as of 2020.

Edith Maat, deputy director of the Pensions Federation, emphasises the importance of improved education for broad support for an updated pensions system. “Many people still don’t understand how the pensions system works and don’t know that investing assets is not the same as gambling, but simply necessary for sufficient returns,” she says. “The same goes for sharing investment risk with current and future generations.”

“Many people still don’t understand how the pensions system works and don’t know that investing assets is not the same as gambling, but simply necessary for sufficient returns” 
Edith Maat

Some legal experts believe the Netherlands should retain the current system. Erik Lutjens, professor of pensions law at VU University Amsterdam and a pensions lawyer at DLA Piper, argues that freedom to choose provider would mean the end of collective pension schemes. 

He notes that the current system already offers many options, and that these could be used more widely. As examples, he cites defined contribution (DC) arrangements, variable benefits and the possibility to pay in additional contributions if annual accrual is short of the tax-facilitated maximum of 1.875%. Lutjens also suggests opening second-pillar and DC vehicles (PPI) to the self-employed.

Lutjens also notes that degressive pensions accrual could not legally be applied to DB plans. In his opinion, average accrual is important for solidarity and not greatly disadvantageous to young participants. “An independent actuarial assessment has shown that a 25-year-old on a €25,000 salary has the same accrual as a 55 year-old with the same income,” he says. According to Lutjens, the option of a lump sum payment at retirement could be introduced through a legal amendment.

Herman Kappelle, extraordinary professor of pension and fiscal law at the VU University Amsterdam, and a legal and tax adviser at Aegon, has suggested splitting current pension funds into schemes for workers and deferred members as well as pensioners. “This could be a relatively simple way of adjusting the current system. This would benefit both groups, as the respective investment profiles could be tailor-made,” he argues. 

Commenting on the situation, Peter Kraneveld, former chief economist for PGGM, says that when politicians discuss the pensions system, dogmas get in the way of efficiency. “The left sees an opportunity to achieve social goals for free, while the right leaves it to supply and demand. The horizon of a politician is limited to the next election, whereas the average time horizon of pension funds’ participants is 20 to 25 years. Moreover, there is the danger of political egos and manoeuvring, which doesn’t take economic efficiency into account.”

In Kraneveld’s opinion, the state’s interest in the second pillar system should be limited to taxing pensions. “Therefore, it would suffice to task the social partners with making sure the system remains viable and efficient, not by prescribing the method to achieve this goal.” 

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