Every inhabitant of the Netherlands is entitled to a state old-age pension which provides a minimum income after retirement.
The majority of enterprises in the Netherlands provide a defined benefit (DB) plan in addition to the minimum state income. Many branches of industry have multi-employer plans, participation in which is usually obligatory by law. At the moment more than 80% of the employees with a pension plan participate in a multi-employer plan.
The others usually participate in a single-employer plan underwritten by a pension fund or an insurance company. A relatively small, but gradually growing number of employees (in 2003: 3%) participate in defined contribution (DC) plans.
The general aim is to ensure that retirement income, including the state old-age pension, amounts to 70% of salary. Indexation of current and deferred pensions is not required, but is quite common in the Netherlands, with almost 95% of participants covered. Usually indexation is granted subject to
the condition that the fund can afford it.
Both listed and non-listed companies have to meet the new pension accounting requirements (IAS19 for listed enterprises and guideline 271 for non-listed enterprises). The major change for the Dutch enterprises is that the assets and liabilities of the pension plan will be fully integrated in the enterprises’ annual report.
As of 1 January 2006, pension funds in the Netherlands will be required to calculate their pension liabilities on a more realistic basis. The actuarial assumptions used will resemble IAS19 more closely, but only in relation to legal obligations and generally not with regard to constructive obligations (such as indexation).
The general opinion in the Netherlands is that we have one of the best pension systems in the world with pension funds that are in a relatively good financial health. What will remain of this picture after the introduction of IAS19? Will there indeed be surpluses or will the majority have to cope with deficits?
This is not an easy question to answer. There is no aggregate financial information available about the pension assets and liabilities of the Dutch company pension funds on an IAS19 basis. However, we do have some information and some projections are possible.
The first source of information comes from the fact that a large number of AEX multinationals are also listed on the New York Stock Exchange. Information on the pension assets and liabilities of these companies on a FAS 87/88 basis is publicly available. The US accounting standards in relation to pensions show considerable resemblance to IAS19.
We conducted some research based on the annual reports of the AEX multinationals and have presented the results below. Table I below shows the development of the worldwide pension assets and liabilities on a FAS 87/88 basis for the past five years. All amounts are in euro billions.
The second source of information is the annual reports of the Pension & Insurance Supervisory Authority of the Netherlands on the aggregated assets and liabilities of all Dutch company pension funds. Table 2 shows the development of the pension assets and liabilities on the basis of local funding norms adhered to in the Netherlands for the past five years (typically a 4% discount rate). Again all amounts are in euro billions.
The pension plans of the AEX multinationals on the basis of FAS 87/88 had a funding surplus of e35bn in 1999. This decreased dramatically by e50bn within four years to a deficit of e15bn. However, the AEX multinationals increased the total of the (Accrued)/Prepaid Pension Cost) on their balance sheets from e3bn to e7bn. A total of e22bn therefore has to be written off in the future. It is clear that the pension plans have become a millstone around the neck of the majority of the AEX multinationals.
The worldwide pension assets of the AEX multinationals amount to e122bn. This is not far from the total pension assets of all Dutch company pension funds (excluding the multi-employer plans and the insured plans) amounting to e137bn.
If measured on the basis of norms for funding in the Netherlands, the funded status of all the Dutch company pension funds decreased by e22bn from a surplus of e42bn in 1999 to a surplus of e20bn in 2003. The loss of e20bn is much lower than the loss of e50bn that the AEX multinationals suffered, albeit that both figures are calculated on a totally different basis.
To obtain an idea of how the Netherlands will be affected by the new pension accounting requirements set out in IAS19, we have to make a number of projections.
Typically the enterprises with a company pension fund are also the ones that have to meet the new pension accounting requirements. The new ones that have to meet the new pension accounting requirements under the local standard (guideline 271) are similar to the requirements under the international standard (IAS19). The listed and the non-listed companies will therefore have to adhere to the new rules. In addition to the enterprises with a company pension fund, there are also enterprises with an insured plan. These enterprises are not included in the figures.
To estimate the effect of the new system of pension accounting, we have converted the figures for year-end 2003 for company pension funds calculated in accordance with local Dutch valuation bases to the new accounting requirements.
The relevant economic and
demographic assumptions are as
in Table 3.
Do we need to be worried? Yes!
The estimated level of funding, in accordance with the new pension accounting requirements, shows that Dutch company pension funds have a deficit of e5bn compared with the AEX multinationals’ deficit of e15bn for their worldwide plans. This is based on the assumptions for the year-end 2003. Using the assumptions for year-end 2004 and not altering the valuation date and the accrued pensions results in a deficit of e15bn.
Whether or not one agrees with the financial perspective based on the new accounting requirements these figures should alert everyone who is involved in the pension plans in the Netherlands.
Enterprises with a DB plan should also be alerted to the long-term accounting consequences of such a plan. The AEX multinationals saw their rather comfortable pension plan positions deteriorate within four years by e50bn. This is almost 40% of the average pension assets of e128bn in that period. Facing the same development in the next four years would bring an end to the system.
There are no reasons whatsoever for optimism.
Bob Bunicich is an actuary and principal with Mercer Human Resource Consulting.
The opinions expressed in this article do not necessarily represent the opinion of
every person within Mercer, nor do they represent an official standpoint of the Mercer organisation

Snapshot: Impact of accounting change
In total 17 of the Dutch AEX multinationals have accumulated nearly the same amount in pension assets worldwide as the 740 Dutch company pension funds combined. The funding position of the AEX multinationals fell over four years by e50bn. Their pension surplus of e35bn changed into a deficit of e15bn. If calculated on the same basis, one estimate is that the 740 Dutch company pension funds would have a deficit of e5bn. The pension funds have always been fully separate from the sponsoring enterprises, both for the funding and for the accounting. The fact that for the accounting the pension assets and liabilities should be included in the firms’ annual report is a new phenomenon in the Netherlands.