Preparing for the fight ahead
Dutch trade unions are in for a fight. Ongoing changes within the Dutch pensions sector, largely focusing on new rules for pension funds, corporate governance issues and changes towards overall pension contributions, are putting union officials, and their backbenchers, on an edge. The centre-right Dutch government, CDA-VVD-D’66, is planning to introduce major changes affecting not only pension funds themselves but also the subscribers to the systems, the employees.
In a dog-fight to control the potentially disastrous changes to the well-regarded Dutch pension system, the corner-stone of the
welfare state, trade unions have to engage all parties in discussions to set new rules and implement new frameworks to address current and future threats. Current focus of the government to address only the negative impact of the international financial markets, share investment portfolios and growing government deficits, are not seen by the trade unions as the holy grail, which expose Dutch
pensioners’ future to the end of the welfare state.
Issues such as corporate governance, premiums or a total revamping to the defined contribution(DC) system are considered to be the hot topics. A more active role of trade unions in the so-called social partners’ negotiations is another issue which will be prominent the coming years.
Still, the dream of a financially secure old age could be at risk. Leading trade unions have been asked to give their own opinion on current threats to the pension system, with respect to the role of pension funds, the government and overall union strategies.
Therese Schets, senior adviser pensions of the Federation of Trade Union FNV Bondgenoten, says that FNV Bondgenoten, as a private sector trade union, is currently supporting the defined benefit(DB) system. The union will actively resist a possible implementation of the DC system, as this is regarded as not appropriate. Also, more attention will be given to the growing need to implement necessary frameworks to set up a system more viable for families where both partners are working.
Changes, such as currently in the DB system are needed and promoted. Costs of the overall system, Schets says, need to be reduced. The latter is also based on changes in the so-called franchise system, which results in more financial leeway for additional incentives in the CAO negotiations. FNV Bondgenoten is only partly happy with the ‘midden-loon’ scheme, based on the average of earnings of a potential pensioner. This system is very positive for people which have so-called ‘pension-breaks’, due to leave of work, unemployment or maternity leave.
The pension gap, which is caused by these work-breaks, will not have such a huge impact on total pension contributions. As with the other unions, FNV Bondgenoten will not support the DC system. The overall extra risk to be taken by subscribers is too high, to reach the same level of pension contributions to private insurers are much higher. As has been stated by the Netherlands Scientific Council for Government Policy (Wetenschappelijke Raad voor het Regeringsbeleid - WRR), pension funds reach higher yields in general than private schemes.
Several threats are occurring to the Dutch pension system, according to Schets. One of the most pressing issues is that contributions should be totally cost effective, meaning sufficient to cover current and future liabilities of pension funds. This has not always been the case. Increased premiums are not a sine qua non for the union, but need to be discussed and decided between the social partners. If employees (trade union members) are agreeing with possible premium increases, this will not be seen as a problem at all.
Schets is also positive about the current role of the Pensions and Insurance Supervisory Authority (PVK). In her view, the PVK did its work according to the rules. However, one point of criticism still exists, as according to FNV Bondgenoten, the very strict interpretation by the PVK of the coverage ratios of the pension funds is out of order. The latter issue has at present only partly been solved, due to the agreement by all parties of the so-called 97.5% level.
One of the hottest items for all Dutch trade unions is the indexation issue, says SchetsThis should be almost 95% in the next 10 years. Possible other levels will only be agreed upon by the union if no other effective measures can be taken to prevent financial problems of the pension funds.
As is being supported by most other trade unions, a further integration of pre-, post-pension and the so-called lifecycle scheme (levensloopregeling) is regarded as positive by FNV Bondgenoten. The strict interpretation of the current 65 years rule is open for discussion too. If an employee takes a ‘levensloop’ leave from work (study, maternity or other) this should result in a later pension date. For employees who want to work longer than 65 this should be possible, but only will result in a pension of not more than 100%.
FNV Bondgenoten foresees still more problems related to the implementation of international accounting standards(IAS). If these will be implemented, the union foresees that more premium risks and costs will be put on the shoulders of the employees, while employers will try to withdraw themselves. The new Financial Reference Framework (Financieel Toetsingskader) also presents a problem, but is not yet seen as a major stumbling block for the future. If however a very strict interpretation will prevail, stating that all liabilities need to stated at market prices, this will lead to fluctuations in premiums on possibly monthly basis.
Regarding future issues, many problems could arise within the memberships of the trade unions. The latter need to address the new changes, insecurities and risks, and possible financial results to their own people in a more direct way. Not only should the union give more information about the current and future state of pensions to their own members, but the latter also are demanding a more active role of the unions within the pension funds themselves. FNV Bondgenoten expects a more active role of unions on issues of transparency, corporate governance and shareholders meetings of pension funds and corporations the coming years. Growing European integration is not seen as a direct threat. The new directives are still largely Dutch orientated and individual EU members are still able to decide for themselves where they want to go with their own systems.
Arend de Groot, chairman of the Union for Management and Staff Employees in the Metal Sector, VHP Metalektro, follows the general theme of the Dutch trade unions too. When asked what he perceives as the major issues threatening the Dutch pension system, current instability of the financial markets comes up as the first. With several years of negative share market performance, pension funds have been shaken to their foundations. However, for a year, change has been visible. At the same time, 2000-2003, that the share market crashed, salaries have increased. This has resulted in increased problems related to back service liabilities of pension funds. This will be needed to be solved without any delays.
One of the best options, according to de Groot, is a change in the overall pension system, but a DC system is out of order. Even that the VHP Metalelektro’s membership is largely middle and higher level employees; a defined benefit system is preferred. To support current pension system requirements, de Groot sees the necessity to increase overall yields of the pension funds.
The role of the PVK is a point of criticism. In the light of the current role of the regulator, the VHP is a real critic of the PVK. According to de Groot, the PVK has caused too much panic in the sector. As the recovery is going much faster than was expected, the 125% coverage ratio as stipulated by the PVK will be possible for most pension funds to be reached within the given period. Still, it needs to seen what the real situation will be around 2013, the deadline given by the PVK. Nobody at present will be able to state total confidence in overall situation at that time.
In de Groot’s view, premium increases will be necessary the coming years. If this is not done, indexation will not be possible. Even though the VHP Metalektro does not support the implementation of a DC system at present, it is expected that in the next 10 years this system will become increasingly important. In general, current pension discussions are seen as positive, market forces have changed and future threats need to be addressed.
Another union under pressure is the VBM-NOV, the Dutch Union of the Armed Forces and Civil Servants of the Department of Defence, which not only has to deal with pension troubles, but also with ongoing job losses within the Dutch armed forces due to expenditure reductions by the government. Jan Witvoet, vice chairman of the VBM-NOV, says that there should be no discussion on the theoretical background of the Dutch pension system. A good and financial viable pension system is a requirement, which should be available to all people in the Netherlands.
In his view, the current discussion related to the DB system is on non-issues. He believes that a possible implementation of a DC system will not be discussed or supported by the VBM-NOV. With the current fluctuations in the financial markets, which have resulted in decreased coverage ratios of the pension funds, Witvoet sees the necessity of addressing the
possibilities of a renewed but viable and payable pension system. The latter will result in possible adjustments to premium levels, not only based on the fact that they need to be cost effective, but additionally give some extra leeway to cover increased ageing.
Financial performance of share markets is in his opinion not to be seen as the major threat to future investment performance of the Dutch pension funds. As he puts it, the real threat lies in the extreme (historically) low long term interest levels internationally.
The ongoing discussion concerning the Commission Staatsen report, which is still stirring up emotions in the Netherlands, Witvoet says that the whole report and its recommendations are going much too far. He agrees with the fact that pension funds should keep to their fundamental core business, but still should be able to address all available means to reap the highest rewards of potential investment opportunities.
Pension funds also should be given the opportunity to take part in non-core areas, such as mortgages, lending, or individual insurance and pension schemes. If taking part in non-core areas, the only real requirement should be that pension funds should take part according to normal market requirements. Entering mortgage or insurance sectors by giving better deals than possible competitors should not be possible. In the view of Witvoet, trade unions will support pension funds non-core activities as long as this is in the light of reaching the highest levels of yield for pension security.
In the light of corporate governance issues, VBM-NOV is already taking part in the discussions at the pension funds at present. Still, the union will keep an eye on the overall performance of the pension funds in general, as is needed. The current discussion focusing on the strict interpretation of the pension age of 65 is another issue of concern. VBM-NOV is against changing the current age limit of 65 to possibly 67 years. This is out of the question. Still, a more flexible approach of the overall issue, giving employees the possibility of more flexibility, which should be the personal choice of the employee himself, is possible. VBM-NOV is a proponent of a further integration of the pre- and post –pension system, giving the individual the possibility to take his pension when he chooses.
Major issue of concern however, with respect to all the above, according to Witvoet is the rising level of premiums. In the view of VBM-NOV there are still certain levels of premiums which cannot be crossed. Current panic related to financial market performance is not at all necessary. Financial markets will recover in the near future, giving more leeway to pension funds. According to Witvoet, possible premium increases in 2005-2006 should however be expected. The social partners will however play a decisive role in this the coming years.