Dutch pension funds get a reprieve
Retirement savings is a touchy issue. The Dutch government has announced a postponement in the reduction in pensions planned for 2020, in reaction to complaints from trade-unions and retired persons. In a letter to Parliament, the social affairs minister has given pension funds whose benefit coverage ratio is below 90% one more year to restore their financial situation.
The Dutch retirement system is based on two main group pillars. A public pillar (a minimum old-age benefit) and pension funds, whose assets total €1,500bn. “The pension fund system is very important in the Netherlands and covers most employees” says Marcel Klok, economist at ING. “Each sector has its own pension fund.” The problems is that part of the system does not have enough assets to match its liabilities.
Although it is considered the world’s best managed, the Dutch system has fallen further into deficit in recent years for structural reasons, including the ageing of the population and longer life expectancies, as well as market-related reasons, such as low interest rates. This affects the pension system through the discounting of its liabilities – the lower interest rates are, the higher the liabilities. But it also takes a toll on the asset side, by lowering the yields on bonds in the portfolio. The largest pension funds, ABP (public sector) and PFZW (the healthcare sector) are also those with that are the most underfunded, with coverage ratios of 93.2% and 92.2% respectively at the end of October. “The average weighted coverage ratio is 98.1%”, says Piet Rietman, an economist at ABN Amro. In one year, the coverage ratio has fallen from 110.3% to 98.1%. A 0.5% decline in interest rates and a 5% decline in the equity markets would result in an average decline of more than 6 points in this ratio, according to CPB.
The one-year reprieve will limit the number of persons affected by possible declines in pension payments. “In 2020 and 2021, some pension funds will have to submit recovery plans that include either a freeze on pensions, or a reduction in benefits, or an increase in contributions”, says Marcel Klok. Four will be affected, compared to 27 prior to the announcement of the postponement. “Only 700,000 persons, employees or retirees, will be affected, vs. 7.7 million if there had been no reprieve”, says Rietman, adding that if the economic environment remains unchanged and if there is no new reprieve in 2020, pension payments will have to be reduced.