NETHERLANDS - Allowing shortfalls for a prolonged period will jeopardise the continuity of the entire Dutch pension system because young workers will try to escape the present pension contract if they must foot a disproportionately large part of the bill, according to pension supervisor De Nederlandsche Bank (DNB).
During the annual DNB meeting with pension funds, Joanne Kellerman, director of pensions, said: "Risk-bearing by participants is inherent in a pension fund, but we must also protect future generations against rising shortfalls."
She described the present situation - a coverage ratio of 95% on average - as "worrying" and told the schemes' boards they must start making extensive contingency plans, including communication with their participants.
Despite the volatility on the financial markets, "we can't keep on waiting to take measures", she said, indicating that pension funds could not afford to wait for a rise of long-term interest rates that might not materialise.
In Kellerman's opinion, there are only two options for reaching a sustainable balance - by lowering pension expectations through a lower accrual or through a life expectancy-dependent pension, or by decreasing certainty through a shift to defined contribution arrangements.
The DNB director said the 14 pension funds facing rights cuts must show they could avoid a discount by proving before 1 November they could raise their funding ratios to the required minimum of 105%.
She reminded the representatives that all pension funds with a recovery plan must assess whether they were still on the mapped-out route to recovery at the end of this year, and then decide to take additional measures, which must be implemented by 1 April 2012.
However, Kellerman said the DNB has proposed the introduction of a waiting time of nine months as a default for submitting a recovery plan in the case of underfunding.
During the meeting, social affairs minister Piet Hein Donner indicated that the financial assessment framework (FTK) needed adjusting to allow a life expectancy-dependent pension, as well as a pension based on economic developments.
Frans Prins, director of the Foundation for Company Pension Funds (OPF), responded positively to Donner's promise to involve the pension funds in defining balanced risk-sharing, acceptable risks and a matching FTK.
"If we can agree in time on how to deal with the increased longevity, the market valuation of the liabilities and the assumptions for future returns, the pension funds hopefully don't need to announce wholesale rights cuts for 2012," he said.