Pension Agreement details agreed

| Door: Michiel Evers

The key new elements of the agreement are contribution stabilization, the linking of the retirement age in supplementary pension schemes and the Dutch state’s old-age pension scheme to life expectancy, and the possibility of absorbing financial shocks in pension rights.

Following consultation with the government, the social partners presented the details of the Pension Agreement of June 2010 on June 10, 2011. This detailing is intended to serve as a framework for decentralized parties to agree new pension schemes. As has been made clear by media reports, the detailing referred to is still a hotly debated topic within employees’ organizations, particularly within the Dutch Trade Union Confederation (FNV). The key new elements of the present agreement are contribution stabilization, the linking of the retirement age in supplementary pension schemes and the Dutch state’s old-age pension scheme to life expectancy, and the possibility of absorbing financial shocks in pension rights.

The Pension Agreement in a nutshell

Central to the agreement is the retention of the Dutch pension system based on three pillars and retention of the essential characteristics of group pension schemes, namely collectivism, solidarity, and mandatory participation. A number of elements will be added to the current contract for that purpose.

In the context of the second pillar, that of supplementary pension, the contribution owed may no longer be automatically increased as a result of exogenous developments with respect to life expectancy and developments in financial markets. This aspect is referred to in the agreement as contribution stabilization.

An important step taken in this regard is that all contracts will be conditional and adjustable in relation to life expectancy. In addition, decentralized parties will be able, if they so choose, to translate developments in the financial markets more directly into pension accrual and pensions that have entered into effect. A possible translation of the kind referred to can be achieved through a discount on indexation.

As regards life expectancy, the retirement age under the General Old Age Pensions Act and the target retirement age in the second pillar will be linked to life expectancy. For a participant, this will be noticeable as of January 2013, when the target age with respect to supplementary pensions will increase to 66. The retirement age under the General Old Age Pensions Act will increase to 66 as of 2020. Both retirement ages specified will increase to 67 as of 2015 and 2025, respectively. The need for a further increase will thereafter be reviewed every five years, for the first time in 2020. At the same time, the old-age pension will increase each year by 0.6% until 2028 for current spouses and elderly persons’ tax credits and the current allowance under the General Old Age Pensions Act will be phased out.

The conditionality in the contract means that, more than was previously the case, the targets and risks must be properly defined and communicated to participants. As regards pension rights already accrued, the recommendation is to make them conditional and include them in the new contract. The conditions under which doing so is possible are still being investigated by the Ministry of Social Affairs and Employment.

As stated, the agreement constitutes a framework and decisions regarding the precise detailing of the new contract must be made at decentralized level.

Regulatory framework

The current Financial Assessment Framework (FTK-1) will be tightened and remain open to new buildup. For the new type of contracts as described by the Labour Foundation (STAR), a new Financial Assessment Framework (FTK-2) will be introduced that will no longer be based on a security criterion to determine the buffers. Funds are advised to maintain an equalization reserve to attenuate the effects.

Assuming a nominal, firm commitment, a risk-free interest rate remains the starting point within FTK-1. The starting point within FTK-2 is conditional rights according to choice within a nominal or real framework. In addition, the framework does not have to be valued on the basis of the risk-free interest rate. The maximum expected portfolio return can be used instead. In the case of a contract based on a reality based framework, the indexation target must be deducted from this expected return. It is reasonable to expect that regulatory authorities will impose further requirements in terms of supporting policy in order to counter excessive risk-taking for the purpose of increasing the expected return.

Process

The agreement as it now stands is being presented, on the employees’ side, to labor union members for a decision, possibly to be made by means of a referendum. Tension is particularly high between unions affiliated with the Dutch Trade Union Confederation, since the largest union, FNV Bondgenoten, is the only one against the agreement. The Dutch Trade Union Confederation’s council, in which all unions are represented, will arrive at a final opinion on September 12.

Assuming a positive final opinion, the retirement target date will, as stated, be increased to 66 with respect to supplementary pensions as of January 1, 2013. A number of matters must still be studied before new contracts can be drawn up. The Ministry of Social Affairs and Employment is therefore carrying out four studies. Two of these studies are exploring ways in which existing rights, group and individual, can be included in the new framework. The Netherlands Bureau for Economic Policy Analysis (CPB) has been asked to identify the generational effects of the new contract. In addition, a check will be performed to determine consistency with Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision (IORP Directive). These studies are expected to be completed in February 2012. Only after completion of the aforesaid studies can the Pensions Act be reviewed and amended in the Lower House and Upper House of the States General, the bicameral legislature of the Netherlands. The responsible ministry expects the legislative process to be completed at the end of 2013.

APG’s first impression

We consider it a good thing that, in keeping with the recommendations of the Goudswaard Commission, which was tasked with investigating the viability of the Dutch pension system, a step is being taken toward more complete and transparent contracts. The new agreement provides for the explicit inclusion of shocks in the financial market and the dimension of life expectancy in a contract, and also makes it possible, to a limited extent, to spread those risks over time. This will make contracts more future-proof and preclude the possibility of pension liabilities being passed on to successive generations.

Moreover, it is a good thing that the coverage ratio of funds will becomes less volatile. In combination with the choice for a reality-based framework, this means better control possibilities with respect to long-term targets, including indexation. The choice for group-based inclusion of old rights is important from the perspective of implementation and also for participants, since it is only in this context that risks can be optimally shared.

In terms of introduction and communications to participants in this regard, it must be noted that the introduction times specified are not consistent. Coordination between the social partners and the Ministry of Social Affairs and Employment to establish a uniform time frame would very much be to everyone’s benefit. In our view, the aim must be to make the switch to a new contract with a new regulatory framework and associated parameters in a single move so that this step and its consequences can be unequivocally communicated to all parties concerned, particularly participants.

Michiel Evers,
Corporate Strategy & Policy
(michiel.evers@apg.nl)

Datum: 14-07-2011

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