It is a mega operation that affects almost all employees and pensioners: the Dutch are going to save for their old age in a different way.
New distribution rules will be introduced and the large joint pots in which pension funds hold their assets will be cut up. Each employee gets their own pot. The operation involves a staggering amount of approximately 1,800 billion euros: the assets that pension funds now own.
On Wednesday, Minister Carola Schouten (Pensions, ChristenUnie) sent the bill for this to the House of Representatives, with an explanation of more than 360 pages in which the necessity and goals of the new pension are explained. For example, it must become more personal and transparent and offer the prospect of a ‘pension with high purchasing power’ more quickly.
Does this major pension reform meet its own objectives? NRC puts four important goals against the yardstick.
1 Less interest rate sensitive
The declining interest rates for decades have been disastrous for many pension funds. The result: uncertainty among retirees. They have seen their pension standstill for more than ten years and regularly fear a reduction in their benefits.
The explanatory memorandum also mentions interest rate sensitivity as a weakness of the old system. When interest rates are low, pension funds have to hoard a lot of money, otherwise their financial health deteriorates.
This is because pension funds still focus on future benefits. The premium of employers and employees is converted monthly into ‘pension entitlements’: small pieces of a future benefit.
The funds then calculate how much capital they need now to fulfill all those promises for the distant future. If interest rates are very low, they should assume that their investments will appreciate only slowly. So they already need a full greenhouse.
In the new system, which funds want to introduce between 2023 and 2027, no future promises are made anymore. Employees see in their personal pension pot how much capital there is now. However, it is carefully speculated what benefit this could yield, in good and bad scenarios.
This adjustment will indeed make the system less sensitive to interest rates, several experts confirm. But in recent months, interest rates have risen again and pension funds are cautiously recovering. What if interest rates no longer fall back to the very low levels of recent years? “Then our current system would appear in a completely different, more positive light,” says Roel Beetsma, professor of pension economics at the University of Amsterdam. That is quite a conceivable scenario, he thinks. He warns not to just throw the current system in the garbage.
Nonsense, says FNV trade union chairman Tuur Elzinga. “Our system has been out of action for 15 years.” Elzinga was closely involved in the pension agreement in 2019 between the previous cabinet, trade unions and employers’ organisations. That agreement laid the foundation for this bill.
Also read this reconstruction: How a pension agreement is still on the table after nine years (2019)
Employees and pensioners have absolutely nothing to gain from scratching up the pension funds, says Elzinga. “Interest rates now seem to be rising somewhat, but make no mistake: inflation is rising faster than interest rates. So the value of your money continues to decline.” As a result, the purchasing power of pensions continues to be under pressure.
2 Faster prospects for a higher pension
Because pension funds are now making promises about the distant future, the law obliges them to be extra careful: for example, they must maintain substantial reserves. Only when these buffers are large enough can a fund increase pensions to compensate employees and retirees for inflation.
As a result, even in an economy that is recovering, people have to wait a long time for a pension increase. Because their fund first needs time to build up a large buffer. Many funds have not been able to do this for years, as a result of which most pensions in the Netherlands have been standing still for years.
In the new system, large buffers no longer need to be created. As a result, investment gains become noticeable more quickly. This creates a ‘rather prospect of a pension with purchasing power’, as the explanatory memorandum describes it. But negative investment results are also noticeable more quickly if there is no longer a large buffer. The pension is therefore more flexible.
Young employees in particular will soon be able to see their pension pot fluctuate strongly
Beetsma thinks that’s a shame. He is actually positive about the buffers. They have served their purpose, he says, by dampening the effect of all kinds of setbacks since the financial crisis. “Our current system has absorbed those blows relatively well.”
But at the moment there is very little of those reserves left at most large funds. In the current system, the chance of significant pension increases would therefore remain small for the time being.
The flexibility of the new pension will also take some getting used to, says Marike Knoef, professor of empirical microeconomics at Leiden University and director of the pension think tank Netspar. “Pensions are expected to be increased more often than reduced,” she says, “but as behavioral economists we know that a loss is twice as hard emotionally as a gain.”
Young employees in particular will soon see their pension pot fluctuate strongly. For older workers and retirees, pension funds are expected to choose a safer investment profile to reduce the risk of major setbacks. In that case, it is important, says Knoef, to make it clear to young participants that this fluctuation is normal, and that investing paid-in contributions ultimately leads to a higher expected pension.
3 Connection with modern labor market
Anyone who regularly changes job and sector will have to deal with this: you accrue pension with a different pension fund each time. That’s not going to change. However, the distribution rules must be more in line with fast lane changes.
Now young and old employees are promised an equally large amount of future benefit for every euro they invest. While a young person’s investment is worth more: that money can pay off for much longer. In fact, this is a subsidy from young to old.
That works well for those who stay with the same boss for life: in the first half of your career you receive too little accrual, in the second half that is straightened out again. Unless you leave the pension fund halfway through, for example because you become self-employed. Then you have a problem: you are no longer compensated for the years in which you received too few pension entitlements.
Soon, employees will receive the pension balance that is worth their premium: young people more, older people less. This is more in line with the ‘more dynamic labor market’ of the 21st century, according to the explanatory memorandum.
Professor of pension economics Beetsma understands this adjustment. Although he wonders: is such a major renovation necessary?
Yes, say other experts. “If you want to change this, you are already working on a major system change,” says social security professor Kees Goudswaard (Leiden University), who was involved in the preparation of the pension agreement.
The Council of State also endorses “the importance and necessity” of the major revision, in an advisory report on the bill published on Wednesday. The government adviser has only “a number of comments” on these plans, no major objections.
Also read: Young and without pension accrual: can we ever catch up?|
4 Transparent, understandable and personal
The cabinet hopes that employees will soon experience the pension as “more transparent, understandable and personal”, the explanation reports.
A pension fund now has one large, anonymous pension pot. It will be cut up into personal jars. “It gives you a better idea of what has been built up for you,” says professor Knoef. The current collective pots are for most people „a black box“, she says. And that leads to mistrust. “Almost 40 percent of young people think: when I retire there will be nothing left for me. Wrongly.”
Yet no one wants to argue that the system is getting simpler, as the explanatory memorandum reports. Knoef: “It has not become easier for those who want to understand everything under the hood.”
We should not sacrifice quality for simplicity and explainability
Roel Beetsma professor of pension economics
For example, in addition to those personal pots, there will be a limited collective reserve pot to absorb setbacks – with all the complex distribution rules that entails. Technical agreements are also necessary about the question: how do we divide the investment returns over the various pots of participants?
“It’s not super simple,” says Professor Goudswaard. But all that complexity serves a purpose. “By sharing risks in this way, you can better protect participants.”
And is it really important that a pension system is more comprehensible? Beetsma doesn’t think so. “We should not sacrifice quality for simplicity and explainability.” We don’t do that with cars, do we? “A Flinstones pedal car is much easier to understand, but I still prefer my current car.”
Also read: Switching pension funds can pay off – you have to do this
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