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The Netherlands: Fault lines

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Leen Preesman and Mariska van der Westen read the runes of Dutch politics, which will be the crucial factor in determining the future of the country's occupational pension system

On 12 September the Dutch will elect a new government to replace the centre-right coalition that collapsed on 23 April after just two years in office.

The election comes right in the middle of the nation's largest ever overhaul of its pension system, adding to the uncertainty as to what exactly will be changed about the system and when.

The previous short-lived administration consisted of an uneasy coalition of Conservatives and Christian Democrats (represented by the VVD and CDA, respectively) depending heavily on the support of the far right Freedom Party (PVV), best known for its anti-immigration, anti-Islam and anti-Europe stance. The coalition dissolved when PVV leader Geert Wilders refused to support austerity measures, but the chasm between the two coalition partners VVD and CDA and their confidence and supply partner PVV had been widening for some time, not least on the subject of pensions.

The ruling parties fully supported an extensive overhaul of the Dutch pension system, to which PVV lent grudging support at best. Over the past two years, the cabinet negotiated the Pension Agreement with employer organisations and trade unions, spelling out a way to move forward with changes to the pensions system, including a gradually rising pensionable age and the introduction of conditional pension schemes.

This hard-fought Agreement collapsed when the coalition fell apart. In the aftermath of the government falling, five political parties, citing a dire need for cuts in the face of the European crisis, agreed on a sweeping austerity package, including a decision to fast-track raising the pensionable age.

Both parliament and the senate have endorsed the measures over the summer, providing for the gradual increase of the age of the state pension (AOW) starting next year, reaching 67 in 2023, linking further increases to the life expectancy of 65-year-olds.

Discount rate
One aspect of the Pension Agreement still on the table involves a regulatory framework that allows for conditional pension arrangements offering inflation-linked benefits to co-exist with nominal schemes offering (limited) guarantees. Out-going Labour minister Henk Kamp has offered a legislative outline detailing some of the main points of the supervisory regime that would govern the two types of schemes in the future.

Several aspects of the proposed regulatory framework are garnering a lot of attention, as they suggest possible relief for pension funds facing the prospect of having to implement benefit cuts next year. Dutch schemes are obliged by the Central Bank (DNB) to discount their liabilities at the interbank swap rate, and as long-term interest rates have continued their downward trend, schemes have seen their funding rates drop accordingly. Out-going minister Kamp has suggested schemes be allowed to apply a higher discount rate for longer durations - the ultimate forward rate - and possibly use a 12-month average coverage ratio, rather than the year-end ratio, as a reference point to decide on benefit cuts this December.

Just exactly how, and to what extent, pension funds might be allowed to apply the new discount rules is unclear. Kamp is expected to present a comprehensive package of pensions-related measures to parliament in September, including guidelines detailing the extent to which pension schemes will be allowed to apply a new ‘ultimate forward rate' (UFR) discounting method to determine whether they need to cut benefits in 2013.

Applying the new discount method may help stave off some of the most extensive cuts, although the Dutch umbrella organisation of pension funds, the Pension Federation, has warned the public not to get its hopes up. "There is no reason to assume benefit cuts that were announced earlier are now off the table," it said. "On the contrary - considering the current adverse economic situation, the Pension Federation believes benefit cuts may in fact be so extensive that it would be desirable to spread them over a number of years."

The measures to be presented in September were set to be hammered out in more detail over August, when Kamp was due to meet with the Pension Federation and representatives of trade unions and employer organisations. But already opinions are diverging along party lines. During a parliamentary debate before the annual summer recess, the Christian Democrats stressed that any change in the discounting method should be prudent. The Socialist Party, meanwhile, is strongly in favour of a less volatile, higher discount rate and a 12-month average funding measure, while the liberals insist that any pain (or gain) should be distributed fairly across generations.

Party programmes
At the time of writing it was still unknown whether the pension measures will be presented before, or after, the election on 12 September. It seems clear, though, that the election will affect the pensions debate. Recent polls show the Socialist Party (SP) tied with the conservative-liberal VVD of incumbent prime minister Mark Rutte, each winning between 31 and 34 seats of the 150 seat parliament. The latest poll has the SP ahead, beating VVD by three seats.

While the VVD minister Henk Kamp has championed wholesale pension reforms, the SP pursues a different agenda altogether. As the socialist pensions specialist Paul Ulenbelt told our sister publication IPNederland, their main priority must be to prevent benefit cuts, "as they would affect people who had no part in the crisis, yet would be asked to foot the bill".

As parties jockey for position ahead of the elections, differences in the area of pensions are becoming more pronounced. The Socialist Party is opposed to raising the pensionable age until at least 2020 and insists that those with long employment histories, or whose jobs require heavy labour, should be able to retire at 65, even after 2020. The smaller Labour Party (PvdA) prefers to stick to the now obsolete Pension Agreement, which provides for the pensionable age to be raised to 66 in 2019 and to 67 in 2023. The centrist and right-leaning parties D66 and VVD, by contrast, have announced their intention to raise the pensions age even faster than recently agreed; D66 wants to raise the pensions age to 67 by 2021, while VVD aims for a pensionable age of 67 as early as 2018.

The PVV does not want to raise the pensions age at all and prefers to keep it at 65, but wants to create a possibility for people to take early retirement or, conversely, to work beyond retirement age, in exchange for a lower or higher state pension. Pension funds should be allowed to discount liabilities at a ‘realistic' discount rate of 4% "so that massive benefit cuts will no longer be an issue", according to the party.

The CDA believes it should be possible to take flexible retirement between the ages of 65 and 70 and intends to remove obstacles preventing people from working beyond retirement age. Anyone who has worked 45 years should be eligible for a state pension, according to CDA - an opinion shared by the Groen Links (Green) party. In addition, the Greens want to ‘modernise' the pensions system by allowing young people to fast track their pension savings and encouraging pension schemes to implement pension accounts per age cohort. Groen Links is of the opinion that pension schemes should not invest in ‘risky' derivatives and should, instead, invest in a green, sustainable economy, while participation in an employers' pension scheme should no longer be mandatory.
 

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