With concern about demographic changes across Europe growing, the Netherlands offers a pensions model that many feel should be used as a blueprint. The market itself is the second largest in Europe, valued at $470bn (e547bn) at the end of 1998. Typically, Dutch funds are keen on foreign investment and have a far higher percentage of their portfolios invested in equities than their continental counterparts.
First-pillar provision is similar to many other countries, but at first sight seems to be set at a lower rate than one would imagine. The rate for married couples is set at the level of the legal minimum wage, whilst single pensioners receive 70% of that amount. The minimum wage itself is linked to average wage increases within the private sector. The main reason the basic state pension is set so low is that occupational pension schemes are so popular that they cover around 85% of the working population, making it the largest occupational pension industry in the Euro-zone. It is this high uptake which other governments are keen to emulate.
The vast majority of workers are members of industry-wide funds while 0.6m are covered by company funds. The remainder are members of collective schemes underwritten by life insurance companies. Participation in the former is often compulsory, and these funds are among the largest in the world. New legislation provides, for the first time, the option for funds to opt out of industry-wide pension arrangements from next year. The company funds, meanwhile are usually single-company non-insured funds. Most schemes are defined benefit arrangements, with a pension target of 70% of final salary, including the basic state pension.
The government’s view is that responsibility for pension provision should rest with the employer-employee partnership, but second-pillar pensions are protected by the Pension and Savings Fund Act (PSW). Over the past few years legislation has been introduced to facilitate reform of the system, with the principal aim of offering more choice, and creating opportunities to voluntarily accrue extra pension provision. As of 1 January 2001 all pension plans which provide spouse’s pensions must make similar provision for single employees. In the case of defined benefit schemes one concern is that they may become more expensive unless the employer is able to alter the scheme conditions.
At the same time as this proposal was drafted, the government also proposed that schemes should give each member the choice of opting for a survivors’ pension or a higher, or earlier, old age pension. The terms of this contract were to be equal, irrespective of civil status or sex. In particular, the issue of equality of the sexes is clouded by the fact that women still tend to live longer than men. This may mean higher premiums for women than men. Consequently companies would have to calculate contributions on the basis of unisex mortality tables. Employers’ and employees’ associations were concerned that this could result in retirement capital “fleeing” the Netherlands in favour of other EU countries. When the legislation reached the Dutch second chamber earlier this year the problem was recognised and the government was advised to postpone this part of the proposals until 1 January 2005.
The question of unisex tables is on the agenda for the European Commission, and the Dutch government has urged it to consider introducing unisex mortality tables by 2005.
The strong partnership between government, employers and employees’ organisations means that pension provision remains high on the political agenda in the Netherlands. And although the market is well developed and well resourced, it suffers the same stresses created by a growing elderly population as other countries. With an estimated 28% of the population set to be of retirement age by 2020, the Netherlands is facing one of the biggest problems in the developed world. When that is coupled with increasing life expectancy, expected to increase the costs of social security pensions by 2% in the medium term, it is clear that the social partnership cannot be complacent. Hence the on-going review of pension legislation.
As mentioned above, one major concern is cost efficiency. The most recent draft legislation was set to tackle this problem, focusing on the twin problems of increased costs due to life expectancy and increased numbers of members, and secondly the worry that modernisation of the system will automatically lead to increased costs.
One of the most important issues has been the question of tax deductibility. Since 1990 the social security contributions payable by all residents have not been tax deductible, while the employers’ social security contributions remain fully tax-deductible. In the case of a final pay plan contributors cannot accrue more than 2% old age pension per year of service. Currently most schemes adopt an annual accrual rate of slightly less, 1.75%, with a maximum pensionable service period of 40 years. In the case of an average pay plan the maximum percentage is 2.25%. Although the normal retirement age is 65, over the past two decades early retirement plans have become commonplace in the Netherlands. Where plans have adopted a more flexible approach, retirement payments may be up to 85% of salary, while the plans continue social security payments. This pension is paid until the age of 65.
The employees’ right to change their accrued survivors pension for a higher or earlier old age pension must be enshrined in the pension plans by the 2001 deadline. The right is not be retrospective, however, as failure to take account of past service could lea to a “hole” in some pension plans. Consequently many pension plans have given the right retrospective effect. In some cases this has led to a change in the entire plan, with survivor pensions disappearing altogether.
It has been suggested that if schemes fail to comply with the 2001 deadline, the government may simply ban the final payment system in favour of average income schemes and enforce a maximum salary limit for pensions schemes. It could do so quite simply, by altering rules on tax deductability with respect to final pay schemes. Past experience suggests, however, that a compromise will be found by the parties concerned. Clearly the government is keen that the reform of the tax system it is implementing, the main result of which will be lower income tax rates, should go hand-in-hand with the reform of the fiscal basis for pension funds, and the gathering of pension taxation under one fiscal umbrella.
The regulatory process will also witness changes. Pension fund board members will be tested by the Insurance Supervisory Board, and funds must have a code of conduct based upon minimum requirements published by the board.
There is little doubt that the Netherlands is a good model for other countries, with its balanced pay-as-you-go and funded sectors. Many members of the Euro-zone are keen to emulate the success of the Dutch social contract between government, employer and employee. Their difficulty will stem partly from a lack of expertise – mutual funds have existed in the Netherlands since the eighteenth century – and partly from lack of planning.
The pension reforms set for 2001 are part of a wider package of reforms, and have been thought through to fit with those reforms. Furthermore, although the government is keen to embark on a privatisation process, it is allowing the pension industry to contribute fully to the debate. This should mean that Dutch pensions remain a model for other observers.
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