Tilburg's Netspar given high profile launch
The Netspar pensions research network has been formally launched at Tilburg University, with a gathering of the leaders in Dutch pensions, plus the country’s Prime Minister, Jan Peter Balkenende, all of whom endorsed the project wholeheartedly.
The network, which is dedicated to research in the area of pensions, social insurance and ageing, is the brainchild of Tilburg academic Lans Bovenberg, who dedicated the e1.5m Spinoza prize he was awarded last year by the Dutch National Science Foundation to set up Netspar.
Netspar – Network for Studies on Pensions, Ageing and Retirement – will bring researchers from different universities to work on theses areas, he said at the launch.
“Netspar plans to build links within the pensions and insurance sectors,” he said. “By allowing various participants to network with each other and to discuss longer-term strategic issues, Netspar intends to strengthen mutual trust, open communication channels and build common visions.”
He also said Netspar had a role in strengthening the presence of the Dutch pensions and insurance sector in the European debates on pensions reform.
Bovenberg described Netspar’s three-pillar approach as “fundamental research, education and knowledge exchange with partners in the public and private sectors”.
The core research team consists of about 40 experienced researchers, plus 12 associate professors and 12 PhD students. There are 20 foreign scientists involved as international fellows.
Among those supporting Netspar is the Foundation Institute GAK, which supports research in social insurance, with a donation of e1.5m. Bovenberg paid tribute to the role played by Dick de Beus, then executive director of PGGM, the Dutch health care pension fund. “Dick welcomed the idea – to put it mildly.”
Roderick Munsters, chief investment officer of ABP, the pension fund of the Dutch civil servants, also welcomed the formation of the network. He advised Netspar to start from a “broader than usual perspective on pensions research. There are communication and marketing issues as well,” he pointed out.
He suggested that one aim should be to put Dutch pensions in an international perspective. “There are still numerous lessons we can learn from pensions abroad.”
Of the numerous areas to be tackled, Munsters outlined four in particular. First, looking for a better match between the duration of liabilities and the investment horizon of retirement savings. Second, research into the possibilities of combining a country’s public finance needs in the long run, with pension funds’ desire for real long-term returns.
Third, the effect of accounting and regulatory rules on the price and quality of retirement arrangements and fourth, the effects for the pension industry of benchmarking and herding on long-term investment returns.
Welcoming the establishment of Netspar, Prime Minister Balkenende used the opportunity to speak out strongly against early retirement.
“We cannot accept that people in their 30s and 40s continued to contribute to generous early retirement schemes for people in their 50s,” he said.
He added: “Society should stop having to foot the bill for the poor maintenance and premature writing off of human capital.” A new form of solidarity was needed with a new balance between the rights and duties of different generations.
The generation currently in their 30s and 40s needed more attention than before, he urged. He pointed out that during their working career between “the ages of 30 and 55 the burden often rises sky high”.
About one-third of Dutch pension costs are now spent on schemes for early retirement, Balkenende noted. “61% of people in the 55 to 65 age group don’t work at all.”
He said: “The introduction of a life-course savings scheme levensloop marks a crucial change of direction. The scheme represents a radical new approach. We are now longer on a train to nowhere. But on one that offers good future prospects.
“Schemes that promote early retirement will be limited. Instead tax incentives will make it easier to combine work, care and study. With the life-course savings scheme we are back on the right track.
“How can we make sure that the scheme delivers optimum results in the future? Someone who makes full use of the scheme will be able to take a year’s time out three times during their working career while receiving 70% of their salary.
“But people first need to save. Suppose you start saving when you are 25 you can then take time out when you are 32, for instance if your first child is born. And then you will have to save again before taking more leave. For young families this is not always easy to plan.
“It should be attractive for people in their 30s to make use of the life-course savings scheme. And for people in their 50s to continue working longer in a way that meets their wishes. Why do we end our working career so suddenly when we reach a certain age? Why hasn’t a part-time pension been introduced? Payment of part of our pension could be brought forward while we continue working longer – as was agreed with the social partners last autumn.
“We could work fewer hours, but until a later age. Even beyond the age of 65 if we want to. In other words those in work would take longer to stop working altogether. All of us would gain.
“I would call on employers and employees to think carefully about life-course plans and to bear younger people in mind. You pledged to do so last autumn and now it’s up to you to fulfil your pledge. I can’t help noticing that pay talks still focus heavily on early retirement while what is really needed is good life-course agreements.”
After his speech Balkenende engaged in a 45-minute unscripted debate, in English, with five Tilburg students who put a series of unseen pension-related questions to him.
During the day a number of academics active in the pensions research arena gave presentations. These included James Poterba of the Massachussetts Instiute of Technology, who gave a keynote address and was nominated as the xx, Axel Borsch-Supan of the University of Mannheim and Olivia Mitchell of the Pension Research Council at the Wharton School at the Universty of Pennsylvania.
In her talk on the US pension system, drawing on experience of the Pension Benefit Guaranty Corp, Mitchell commented that the UK is making a “terrible mistake” with its new Pension Protection Fund.
The troubled PBGC is a reinsurance company run by the US government to protect defined benefit plan promises. Its liabilities have been put at between $300bn (e233bn) and $1trn.
“The Brits have decided to put in a guarantee scheme which I think is a terrible mistake because of the problems that come up when designing the insurance scheme,” she said.
Over time the US premium structure had been changed from a flat per capita charge only to a flat and variable one that is a function of the degree of the plan’s underfunding.
“The problem is that all it shows is how underfunded the plan is. It does not look at the asset mix, or at the match between the assets and the liabilities.” Nor does it look at the credit rating of the sponsor, she added.
“Every plan still has a moral hazard opportunity.” The situation encouraged sponsors to go for a high-risk asset strategy, she said.
She pointed out that people were just beginning to realise that the benefits are not fully insured. “They are only insured up to a cap of $46,000 annually, but you only get that when you retire at age 65. If you retire 10 years earlier it is actuarially reduced, so airline pilots are getting $25,000 annually when they had expected $125,000.
“There are some very unhappy retirees who thought their benefits were insured. This year the Bush administration says it wants to do something about the PBGC problem,” she said. “They want to double the flat premium from $19, people accept this as necessary.”
But there was a contentious proposal to hike the variable premium, not just on the degree of underfunding but also on the strength of the sponsoring company.
“So if you have a junk, or lower-level credit rating, you will have to pay a much higher premium because the probability is much greater that the government will have to take over the plan.” This will be politically very sensitive, she said.
The government also wanted underfunded funds not to offer any new benefit accrual. “This is sensible, you need to make good on your old promises before you make new ones.”
The unions in the auto sector were very upset about this, she added. The stopping of lump-sum withdrawals was causing a lot of discussion “This should have been done a long time ago.”
The effect of ageing on western economies could mean dramatic changes in job structures, said Axel Borsch-Supan of the University of Mannheim. Labour demand due to changing of the age profile in Europe could mean that every sixth job would be affected in the next 20 years or so. “Health care’s demand for labour could increase by 7%, while the transport sector is predicted to decrease by 5%.”
He said that those over 70 no longer have to commute to work, which is a significant element of transport demand. The move from the “rocking horse to the rocking chair society” would mean that labour would need to be retooled. He also predicted regional differences within Europe.
He discussed whether there would be a future meltdown of assets as older people released their retirement assets over time but said there was not enough knowledge. This would happen at a time when society needed less capital.
There would also be a decline in savings ratios. There is evidence that the savings ratios do fall after retirement but do not fall to zero.
The Dutch funded system could be associated with actual dis-saving as retirement assets were liquidated but he felt that overall this would be a smooth transition.
Borsch-Supan saw the EU accession and Turkish economies doing well from investment from the developed European economies rather than the tiger economies of Asia. He regarded this as a mutually beneficial development in the relationship between the younger and the older economies.
Some of the leading Dutch pension funds and financial institutions have backed the newE25m Netspar pension research institute.
More than 20 parties have given support to the new institute, such as PGGM, ABP, SFB, MN Services, the Social Insurance Bank, ING and Achmea. With a budget of around E25m, Netspar will be focusing on intra-sectoral pension issues, with emphasis on the long term.
The institute was set up to assess current and future changes in the sector, to conduct long-term research into the effects of ageing, pension systems and saving behaviour. But it will not only provide research and advice, but master-level pension degree courses.
Netspar will work s to: increase long-term research of pensions; support human capital development and; support the exchange of knowledge between all pension sector pillars.
The network will be managed by Professor Lans Bovenberg of the Faculty of Economics and Business Administration Bovenberg, who has put the E1.5m awarded to him as the Spinoza Prize into the scheme – which has been doubled by the GAK Foundation.
Other sponsors of Netspar are the Tilburg University with around E7m, other Dutch universities (E6m), while the SVB, pension funds and insurers have put in around E9m.