Many consider the Danish and Dutch pensions systems to be among the best in the world – understandable, given that the Mercer’s Global Pension index this year ranked them first and second out of 18.
So it seems entirely appropriate that the €140bn Dutch pensions provider PGGM and the €26bn Danish provider PKA last year reached an agreement to co-operate and share expertise. At the time of the agreement, the two funds said they aimed to create common projects on membership involvement, deepen research and fact-finding on risk management and create joint investment opportunities and benchmark selection.
At a recent meeting in Brussels, both schemes, which serve pension funds in the healthcare sector, indicated that they would like to share the best features of their respective pensions systems with their peers across Europe.
Else Bos, chief executive of PGGM, and Peter Damgaard Jensen, her colleague at PKA, says the multi-pillar set-up of their respective systems, mandatory participation in the second pillar and ongoing reforms all fit well with the European Commission’s agenda in its 2012 White Paper on pensions.
“So far, we have been exploring the main options for co-operation, such as on asset management,” says Bos. “As we each have our own methods – for example in private markets – we have spotted opportunities for sharing knowledge and working together.”
The two funds expect to launch concrete projects next year. Both managers cite “joint opportunities” in improving communications with participants and cost-effectiveness through benchmarking, as well as through providing solutions for flexible retirement, and helping people to remain in employment longer.
According to Bos, PGGM is looking into incentives to facilitate later retirement, and how to increase the effectiveness of employers’ HR initiatives. “We are also analysing both the Dutch and Danish labour markets in the care sector,” she says, adding that results of joint research are due later this year.
Bos and Damgaard Jensen say they also aim to develop solutions for groups such as self-employed workers or employees on flexible contracts, who tend to have low pensions savings rates. Bos estimates that there are around 1.8m people in this category in the Netherlands; PKA’s chief executive reckons the equivalent figure to be as much as 15% of the Danish working population, or around 400,000.
However, both CEOs agree that the biggest challenge to the development of multi-pillar pension systems across Europe will be new regulations and additional administrative costs, as well as pressure on fiscal incentives. “Even the threat of new regulation that might impose extra conditions for an effective second-pillar system slows down its development,” Bos says. “We have already received these signals from Germany, where a lot of effort has been put into developing second-pillar pensions.”
Damgaard Jensen notes that the public discussions about pensions reforms in the Netherlands and Denmark are quite similar, but that they differ in timing. “In a dialogue with our regulator, we have already made sure that the 10% of older employees with a guaranteed pension are not financed by their younger colleagues. However, the issue was easier to handle over here, as Denmark has always had a defined contribution system, rather than the defined benefit schemes that dominate in the Netherlands.”
PKA has already decreased the level of guaranteed future benefits, by convincing its participants that the initial promise, based on a yearly return of 4.25%, was no longer feasible. “Since 2008, approximately 65% of participants with high guarantees have switched to a product with a lower guarantee, but with the promise of a potentially higher return, as we take more risk with investments,” PKA’s CEO explains. “Despite the crisis, most participants who changed their arrangements saw their pension increase by between 5% and 10%. The new system is very sound today.”
As PKA already invests 20% of its assets in Denmark, there is no public call for an increase of domestic investing as there is in the Netherlands at the moment, even though Dutch pension funds invest around 14% of their assets locally. “Some years ago, there was a debate urging pension funds to take a stake in ventures and start-up companies in Denmark,” says Damgaard Jensen, noting that Danish pension funds also moved to market valuation of liabilities a decade ago, before the Netherlands.
Denmark has also raised the retirement age for workers born after 1954 from 65 to 67 years. As a link to life expectancy has also been agreed, Damgaard Jensen says he expects a new
government will decide within five years to a further rise to 69 in 2025 or 2030. “The extended working career, in combination with a contribution increase to 15%, will ultimately entitle participants to a pension of up to 75% of their final salary, an increase of approximately 10%,” he says.
Under a new scheme for flexible retirement, PKA’s participants can now opt for 50% of their pension benefits while working 50% of the available time. In addition, pensioners can also opt to rejoin the workforce, after the government facilitated such a move through changes in tax legislation.
According to Damgaard Jensen, quite a lot of pensioners have shown an interest for a return to work. However, he is not yet sure about how many will take the actual step. “It depends, for example, on the kind of work, and whether employers can create suitable positions for them,” Damgaard Jensen points out. “We think it will take some time before it really takes off.”
According to Bos, PGGM and PKA are also seeking help to find a solution for the application of Solvency II rules to pension funds. “With the support of PensionsEurope and InsuranceEurope, it must be possible to find common ground between pension funds and life insurers on the issue,” she says. “Therefore we need to further explore the definition of ‘a pension guarantee’.”
Under the new Dutch pensions contract, the defined benefit guarantee of pension rights will become a target, which can be adjusted during economic headwinds, or in case of a windfall. PKA’s defined contribution plans already offer partially guaranteed pension rights. “We are already living with Solvency II rules,” concludes Damgaard Jensen. “However, we need clarity for the future, now that the European Commission has postponed the implementation of pillar one of the revised IORP Directive.”