Clock ticks louder as Netherlands’ pension crisis intensifies
The Netherlands’ transport system was hit by a 24-hour national strike on Tuesday as train, tram and bus drivers protested at pension reforms that could mean a higher state retirement age and uncertainty over income in old age. Public sector workers and employees in other industries then joined a second day of protests after a national call for action by Dutch trade unions.
At the heart of the unrest is the prospect that thousands of retired Dutch workers face cuts to their pensions as early as January, which places enormous pressure on the government, employer representatives and trade unions to thrash out a solution to the nation’s looming retirement predicament.
“It would be disastrous for trust in the retirement system if cuts to pension payouts have to be introduced,” said Jacqueline Lommen, a senior pensions strategist at State Street Global Advisors, the US asset manager.
The Dutch strikes are a warning to other countries as they struggle to ensure the sustainability of pension systems due to the growth in the number of retired workers and the retreat by companies globally from generous defined benefit schemes that guarantee retirement incomes.
Many policymakers are monitoring the reform debate in the Netherlands which ranks as the world’s strongest pension system, according to the annual Melbourne Mercer report, the most comprehensive global assessment.
Dutch workers currently can look forward to more generous pensions than employees in other advanced economies. Gross pensions for Dutch workers, on average, almost match their earnings in employment, according to the OECD, the Paris think-tank.
But nearly two-thirds of Dutch citizens are not confident they will be able to retire when desired or maintain their standard of living in retirement, according to a survey by State Street last year. Workers in the Netherlands also tend to significantly underestimate their future pension payout, assuming they will have to make do with just a third of their current income.
“Dutch pensioner retirees reported a much rosier reality, living on two-thirds of their working income in retirement,” says Ms Lommen.
Trade unions in the Netherlands are campaigning for the state pension age to be frozen at 66 while the government plans to raise retirement to 67 by 2021. Unions also want employees who do heavy manual work to be able to retire early and for state pension payments to rise in line with inflation.
Gerard Riemen, general director of the Pension Federation (Pensioenfederatie), hopes that a high-level agreement will be reached, possibly as early as this week, by the government, unions and other social partners.
“It really is now or never as we need to reach an agreement before July 1 to freeze the retirement age temporarily at 66 years and four months. Otherwise we potentially face years of renegotiation,” said Mr Riemen.
Most Dutch employees also belong to industry-wide defined benefit pension schemes where retirement incomes are based on a measure of lifetime average earnings.
Assets held in occupational [second pillar] pension funds have more than doubled to €1,400bn over the past decade. But the funding ratio of most large pension funds has remained at between 100 per cent and 104 per cent because pension funds are required to use a highly conservative discount rate to calculate future liabilities.
“This has meant that pension funds have not been able to deliver the improvements in retirement incomes that people need and expected. The new pension agreement can help solve these problems,” says Mr Riemen.
Under arrangements scheduled to come into place next year, occupational DB pensions will be replaced by defined contribution (DC) plans, where retirement incomes will depend on savings pots accumulated by individuals through their working lives.
Shifting to a DC system should make Dutch occupational pension funds less vulnerable to fluctuations in interest rates as well as ending the requirement to maintain solvency buffers.
However, the reforms also mean that the risk of having an inadequate pension in old age will sit more fully with individual savers.
“Pension providers need to be clear in telling savers that there is a trade-off in the new agreement. If savers take slightly more risk, then they can achieve a higher pension as well as a slightly higher risk of benefit cuts. But if they want certainty, they will probably end up with a smaller pension,” says Mr Riemen.
Rob Bauer, a finance professor at Maastricht University, is critical of the proposed reforms.
“The view among international pension experts is ‘why do this to the number one ranked retirement system in the world?’ It would be advisable to have a much more gradual transition if there has to be a move towards individual pensions, perhaps stretching over two or three generations, to manage the risks.
APG, the €487bn financial services provider, has pioneered the development of personal pension pots. This initiative should be more widely adopted as it can better accommodate the needs of self-employed workers and provide all savers with more flexibility when making pension contributions, says Ms Lommen.
“Personal pension pots give more control to individuals and help to improve levels of understanding and trust in pensions,” she adds.
The government has also proposed that pension funds introduce lifecycle investments with risk profiles matching the specific needs of younger and older participants, rather than the usual uniform collective investment mix.
The Pension Federation believes the decision whether to introduce lifecycle investments should be left to individual pension funds.
Ensuring intergenerational pension fairness so that younger workers do not lose out to older employees or vice versa in the transition to a DC remains one of the thorniest questions.
“Younger people don’t feel their concerns have been properly represented in the discussions which have been dominated by the unions and employers looking after the interests of older workers.
“Young people don’t like the current system but many of them don’t realise they may end up losing out if the Netherlands moves to a system of individual pension pots and they are exposed to international asset managers selling expensive investment products,” says Mr Bauer.
Questions also remain over the valuation framework that will be used for converting assets in existing DB funds into DC schemes.
The Dutch government has indicated that it is willing to provide financial support, including tax changes, to ensure a smooth transition and to minimise any uneven effects across age cohorts and different groups of scheme members. Costs have been estimated at between €25bn and €100bn.
“Whether the transition to the new pension arrangements will be paid for by the government, employers or workers or some combination of all three remains unclear,” says Ms Lommen.