With as much as 40% of the Dutch population likely to face retirement benefit cuts of 1-3% from next year, the issue of pension provision has become a top priority in the portfolio of Minister Henk Kamp. He presides over the department of social affairs and labour, "but from the start I have often felt more like minister of pensions". Interview by Mariska van der Westen

Since taking over from Piet Hein Donner in October 2010, Henk Kamp, who previously served as Dutch defence secretary, has seen considerable action on the pension battle field. Last year, after a protracted battle, he signed the hard-fought Pension Agreement with trade unions and employer organisations, a blueprint for a large-scale overhaul of the Dutch pension system which includes linking pensionable age to life expectancy, and, scrapping unconditional guarantees for the second pillar.

Before the pension deal can be signed into law, issues remain, such as the legalities of transforming past accrued pension ‘rights' into future ‘maybes', and the question of whether the deal isn't contravening European rules and regulations.

The new Pension Act will not take effect until 2014. In the meantime, Dutch pension funds have seen their funding rates deteriorate, because the inter-bank swap rate used to value their liabilities remains at record lows. Even after adjusting the discount rate to reflect a three-month average, the Dutch supervisor DNB estimates that 125 out of a total 450 pension funds will have to announce benefit cuts this spring. The Federation of Pension Funds is asking for a "more realistic discount rate".

During a Parliamentary debate in February, Kamp promised pension funds would be allowed to take an outline of the new Pensions Act into consideration - including a new supervisory framework (FTK) and matching discount rate - when finalising benefit cuts at the end of this year. He stressed that a new FTK would not make the current funding shortfall of €200bn "disappear".

According to Kamp, the new regime can't easily be translated to the current situation. "For one thing, the new system no longer has a recovery period but instead allows for a period of maximum 10 years to process financial shocks," he told our sister publication IPNederland. "So in the new system, financial shocks are processed without delay, even though, by spreading the process over time, the annual benefit cuts can likely be limited to indexation cuts. This is different from the system of recovery periods that is central to the current financial supervisory framework."

He is not keen to heed the industry's call for an alternative discount rate to prevent drastic benefit cuts. "The long-term interest rate does show some volatility but has been low for some time," he said. "Now is not the time to draw conclusions regarding the preferred discount rate. Such conclusions will instead be part of a comprehensive package of measures to tackle pension issues. I will present an outline of these measures this spring."

The outline, which is expected to be presented to Parliament in April, will bring the overhaul of the Dutch system closer. However, two trade unions, Bondgenoten and Abvakabo, have announced that they do not consider themselves bound by the terms of the pension agreement and will use their seats on pension fund boards to fight for further concessions. Doesn't this mean that the battle still isn't over yet?

"The social partners are in charge of collective labour agreements. I am assuming they will translate the terms of the pension agreement to the collective agreements," Kamp told IPNederland. "After all, the cabinet, employers and employees all have the same shared interest: to preserve our pension system. And to finance this, it is absolutely vital to continue working for longer. I fully expect Bondgenoten and Abvakabo to be responsible at the negotiating table."

The pension agreement in its original form allowed pension funds freedom of choice with regards to the discount rate (with schemes allowed to opt for expected returns) and the so-called ‘egalisation reserve' (which was supposed to be voluntary rather than mandatory). Both Parliament and the Central Bank (DNB) were quick to announce curbs to all this freedom, championing a discount rate that is market-based, uniform, and prudent much like the current discount rate, and a mandatory egalisation reserve similar to the capital buffers of the present system. But if the new system ends up similar to the old one, one might wonder if a complete system overhaul is necessary. Wouldn't it be better to simply make targeted adjustments instead?

"The freedom of choice that the pension agreement supposedly offers is not as extensive as people believe. The options are limited by the fact that the cabinet and the social partners have agreed that the new pension arrangement must be ‘generation proof'," said Kamp.

"As for the perception that nothing much would change, I disagree. The new arrangement is based on a real, rather than nominal, pension promise. In the new situation, indexation becomes a part of the pension promise and so will have to be accounted for in the financing set-up. Another difference is that employers, as part of the pension agreement, have committed to continue paying contributions at the present high level going forward. So employers and employees won't be faced with sudden contribution hikes, and neither can contributions be lowered in the future, which serves the best interest of older plan participants in particular.

"In the case of financial shocks, pension funds will be forced to take measures immediately. That is in the best interest of younger participants as well, as it means that the bill isn't being passed on to the future generations. At the same time, older participants are spared because measures will not take effect all at once but will be spread over time. This results in a balanced contract for all generations.

"But after all is said and done, the most essential change lies in the fact that life expectancy and financial market developments will impact pensions more directly. This makes for more realistic pension promises and prevents the buck from being passed to the future, allowing us to preserve our system of old age provisions in a sustainable manner."

Even as tremendous efforts are being made to achieve a sustainable pension system, the number of schemes is declining. Experts are sounding the alarm bells because schemes are being wrapped up not in the best interest of plan participants, but to be rid of the ever more burdensome rules and regulations. Shouldn't the supervisor take extra care to make sure that participants' interests are served in the case of plan wrap-ups?

"Your question suggests that there is a contradiction between increased regulations and the best interest of scheme participants. There is no such contradiction. Pension rules and regulations exist to safeguard plan participants and pensioners. That said, I can imagine that the burden of regulatory and governance requirements may become too much for smaller pension schemes to bear. Such schemes must look for alternative solutions such as wrapping up the scheme, or close collaboration with other schemes, including merging with other schemes into a so-called ‘multi-opf'.

"With regards to protecting participants' best interests, cutting back on the rules just to prevent pension funds from being wrapped up would seem terrible."

With an eye towards social and demographic developments, does Kamp believe that the principle of intergenerational solidarity can be maintained?

"Yes, I do. I believe it is important to preserve collectivity, solidarity and mandatory participation as this will allow us to keep a pension system that is affordable for pensioners of today and the future."