Cabinet opts for balanced approach to pension problems

Pension funds will be given additional opportunities to avoid large pension reductions and make pension plans more future-proof.
Today, the Cabinet is presenting a package of measures enabling pension funds to put their financial position back in order in an accelerated and responsible manner. The effects of the measures, as calculated and confirmed by the Netherlands Bureau for Economic Policy Analysis (CPB), are neither beneficial nor detrimental for one specific generation. The macro-economic effects are positive.

The measures will prevent an unnecessary increase in pension contributions next year and enable pension funds – subject to strict conditions – to spread inevitable pension reductions across several years while capping reductions at a maximum of seven per cent per year.

This is not to say that the reductions previously announced by pension funds have been called off. “The package means that for 2013 curtailments can be restricted to what was announced at the beginning of this year,” writes State Secretary Paul de Krom, who is currently standing in for the Minister of Social Affairs and Employment, in a letter to the Dutch Lower House of Parliament.

The measures were discussed and agreed with De Nederlandsche Bank (DNB), which supervises pension funds.

  • DNB will adjust the actuarial interest rate for pension funds. From 30 September 2012, an amended method using an ultimate forward rate will be applied to determine the value of the liabilities of pension funds in twenty to sixty years’ time. This will make the interest rate less sensitive to fluctuations in the financial markets. Insurers have been required to apply a similar method since 30 June 2012.
  • In 2013, pension funds with a funding shortfall may deviate on a once-only basis from the requirement that the pension contribution must underpin the pension fund’s recovery. Pension funds that do not meet the criteria for this respite, may ask DNB for a customized solution
  • Pension funds will be given the opportunity to spread inevitable pension reductions across several years and cap these reductions at a maximum of seven per cent per year.

Funds that opt for a gradual pension reduction and those that want to use the customized solution with the respite for the increase in pension contributions are required to change their pension plan in three respects, as stated below. The aim is to make the plans more robust and to bring them into line with the imminent rise in the retirement age and the further increase in life expectancy. 

  1. The year in which the standard retirement age is raised from 65 to 67 should be brought forward from 2014 to 2013.
  2. Further increases in life expectancy must be factored into existing pension entitlements.
  3. Starting from next year, pension funds that are currently allowed to increase pensions if their funding ratio is above 105 per cent will only be allowed to apply indexation when their funding ratio exceeds 110 per cent. 

These adjustments will lower the costs for pension funds and also anticipate a previously announced adjustment of the statutory financial requirements imposed on pension funds within the Financial Assessment Framework. Pension funds are permitted to implement the measures with immediate effect. No legal amendment is required for this purpose.

“The measures put pension plans on a more manageable and balanced footing,” writes State Secretary De Krom. “This helps to foster the necessary trust among both young and old to preserve a collective and solidarity-based pension system for future generations.” He stresses that the effect of the measures should not be disproportionately beneficial or detrimental to specific groups of stakeholders.  “The bill should not be passed on to young people or future generations.”

In his letter to the Dutch Lower House of Parliament, the State Secretary points out that while the government can lend a helping hand, it cannot be expected to resolve the pension funds’ structural financial problems. Unlike the AOW state pension, the supplementary pension is an employee benefit and, as such, primarily the responsibility of social partners and pension funds.

De Krom: “It is important that pension funds and social partners themselves take responsibility for solving the financial problems. The funding of current pension benefits and accrued pension entitlements is inadequate due to the continuing rise in life expectancy and the sustained low interest rates in the financial markets. For many funds with a shortfall recovery in 2012 came to a standstill or evaporated entirely. These problems cannot be solved by the government. Most funds will have to have eliminated their shortfalls no later than by the end of 2013, also in order to retain the trust – of young and old – in the pension system. For this, curtailments cannot be avoided, but should be applied no more than necessary.”

State Secretary De Krom concludes that the package of measures will have a beneficial impact on purchasing power, macro-economic developments and the funding ratios of pension funds. However, differences exist between individual pension funds. “Funds that are in very poor financial shape will probably have to make further curtailments after 2013. The extent of these curtailments will differ from fund to fund and cannot be indicated at this juncture.”