Marianne Keestra, a former teacher in the Dutch city of Haarlem, has seen her monthly pension payments cut, and she knows who she blames – her former employer.On Monday, I wrote about how OMERS is considering a proposal to reduce pension payouts. Now Dutch pension funds are considering cutting payouts to deal with their yawning deficits (and France is next in line).
“The government stuck their hand in the pension pot,” says Ms Keestra, 71. “And they never paid it back.”
For years, the Dutch government and many businesses systematically underfunded their employee pension plans, relying on high investment returns to make up the shortfall.
Now, a combination of record low rates, sluggish economic growth and lives that last far longer than anyone imagined even a decade ago have resulted in yawning deficits. At the end of 2012, the funds were €30bn short of what is needed to cover promised benefits.
For the Dutch, the cutbacks are the first ever in a nation which has the second largest “defined benefit” system in Europe. But defined benefit provision, under which pensioners are guaranteed a portion of their salary for as long as they live, is unravelling under the pressure of the financial crisis and ensuing recession.
In April, under orders from the Dutch central bank, 66 of the country’s 415 pension funds started cutting their payouts. The average cut is around 2 per cent of the monthly benefit, but that figure conceals a wide range.
ABP, Ms Keestra’s fund and also the country’s largest with 2.8m participants, has cut payments by 0.5 per cent, but smaller funds such as those for barbers and meat packers are cutting pension payouts by 7 per cent or more.
The loss of income to pensioners has dealt a further blow to a Dutch economy that has already shrunk 1 per cent over the past year and is suffering from record-low consumer confidence levels. Meanwhile, anger over the cuts has bolstered the fortunes of the 50Plus party, which won election to the Dutch parliament for the first time last year on promises to defend the interests of pensioners.
While the woes of Dutch pension schemes are far from unique, the Netherlands stands out because its laws allow employers to cut benefits under certain circumstances.
Dutch pension schemes are among the most tightly regulated of any in Europe or North America. By law, they must hold sufficient assets to cover 105 per cent of promised benefits, unlike those elsewhere allowed to run huge deficits. In addition, they have no leeway in setting the parameters that determine estimates of liabilities, such as expected investment returns or the number of years retirees will draw benefits.
Moreover, unlike the US, UK and many other countries, the Netherlands does not operate a pension insurance scheme to pay benefits to the underfunded schemes of insolvent employers. The fallout from the failure of a company or industry-wide scheme could be devastating, which explains why the rules are so tough.
In 2007, Dutch schemes held assets covering 152 per cent of promised benefits. But that fell to 102 per cent last year due to low interest rates – which have the effect of making liabilities balloon – and sharp falls in stock and property markets.
“The law says that accrued benefits can only be reduced if it is the last resort and if it is needed to meet their minimum requirement of 105 per cent,” says Wichert Hoekert, an Amsterdam-based consultant at actuaries Towers Watson.
But Dutch pension funding requirements are less strict than they once were. Last September the parliament, under pressure from older voters, approved new rules that allow pension schemes to use a higher rate to gauge the pace at which inflation will erode liabilities.
This has lowered liabilities, and funding targets. The sector as a whole now has a coverage ratio of 105 per cent under the new rules, but just 101 per cent under the old rules, according to an analysis by Aon Hewitt.
Some Dutch analysts criticise the new rules as gimmickry that will weaken the plans.“Tweaking the discount rate is just a bookkeeping trick to bring down liabilities,” said Bas Jacobs, an economics professor at Erasmus University. While figures using the new discount rate show the pension sector as a whole has just enough assets to meet its liabilities, Mr Jacobs said he “wouldn’t be surprised if the pension plans actually had a shortfall of €100bn-€200bn”.
There are arguments that employers benefited from schemes, too. Hefty investment returns during the 1990s allowed many to avoid putting any cash in at all for years.
In addition, Dutch tax rules allowed employers to offer early retirement, reducing payrolls and improving corporate profitability. As at 2007, a quarter of Dutch retirees were below the age of 60. Early retirement has proved extremely expensive for defined benefit schemes, especially as longevity has risen sharply. On average, Dutch men aged 65 can expect to live for another 18 years as of 2011, up from just 15.5 years a decade earlier.
As equities markets have improved, the pensions funds’ problems have grown less severe. The funds now have €1.07tn in assets, up from €831bn at the end of 2011, and administrators say that once the current round of cuts is complete at the end of the year every plan will meet its minimum coverage ratio.
But for Ms Keestra, that does not settle the story. “It’s not just the benefit cuts. I haven’t seen a cost-of-living increase in years,” she said.
Resuming full indexing for inflation would require the coverage ratio to rise to 135 per cent, and Dutch administrators are making no promises.
The fact that these once mighty pensions are now forced to consider cutting pension payouts speaks volumes of the ongoing global pension crisis. The Dutch pension system is one of the strongest in the world with some of the largest and best pension funds. Pensions are tightly regulated to make sure the coverage ratio is adequate to meet promised benefits.
A few weeks ago, Richard Evans of the Telegraph wrote a comment, Superiority of Dutch pensions called into question:
Millions of Dutch pensioners – held up as the envy of their British counterparts by campaigners three years ago – have been forced to endure cuts to their pensions because of funding shortfalls in some of their schemes.Despite the pension cuts, I don't question the superiority of Dutch pensions and think that anyone who does is simply ignorant or ill-informed. The Dutch are years ahead of most other countries in terms of providing adequate retirement income to a large portion of their population. Their DB plans are still the envy of the world.
A total of 66 Dutch pension funds have been forced to cut pensions because of funding gaps, figures from the Dutch central bank show. The cuts average 1.9pc.
In all, 2 million active pension scheme members face cuts, on top of 1.1 million who are already receiving their pensions and 2.5 million "sleepers" (members who have changed jobs without taking their pension rights with them), European Pension News reported.
The development has sparked a lively debate among British pension experts about the merits of the Dutch scheme.
In 2010, David Pitt-Watson, a former chairman of Hermes Focus Asset Management, said British pensions "should go Dutch". In an article for The Daily Telegraph, he wrote: "If a typical British and a typical Dutch person save the same amount of money for their pension, the Dutch person will end up receiving at least 50pc more income in their retirement than the Briton. There is no trick here. It's just that the Dutch have an efficient architecture for their savings. We do not."
He said the Dutch system enjoyed economies of scale thanks to large schemes that covered a number of firms. These schemes can pay pensions from investment income instead of relying on annuities.
But responding to the recent cuts, John Lawson of Aviva said: "Dutch charges are not cheaper, nor are equities a one-way bet."
Henry Tapper of First Actuarial said the cuts should be put in "a little perspective". He said: "The Dutch system works rather like the with-profits system. Current Dutch pensions have been shown by David Pitt-Watson and others to be producing about 39pc more than our 'guaranteed pensions' [from annuities] in the UK."
Is their retirement system perfect? Of course not but when you compare it to the alternatives being touted in other countries, it is far superior in terms of providing adequate coverage and it's tightly regulated. Their new rules that lowered liabilities and funding targets are questioned by Dutch academics but those rules are still more stringent than what you see in the rest of Europe or North America.
But there are cracks in the once mighty Dutch pension system and the vultures are circulating. Mark Cobley of Financial News reports that UK insurer Legal & General is preparing to enter the €800bn Dutch pension fund market to buy out schemes from companies that want to close them:
These transactions, known as pensions or bulk-annuity buyouts, originated in the UK, where many companies are closing old-style final salary pension funds to new joiners, and no longer want to run them.It's terrible that companies are looking at closing defined-benefit plans but given the environment of record low rates and sluggish economic growth, pension risk transfers will be a booming business for global insurers. They will profit, companies will breath easier but pensioners will bear the brunt of these changes.
About £30bn worth of such deals have been done in the past five years, involving hundreds of companies and more than half a million UK pensioners, according to pensions advisers Lane Clark and Peacock.
Tom Ground, head of bulk purchase annuities and longevity insurance at Legal & General, said: “We have an existing presence in the Netherlands and all the licenses to write annuity business. It’s our intent to do bulk annuities, but quite when is more questionable. We are still working out our strategy.”
He added: “There is an established market there; quite an attractive market. It is the obvious next market to go to after the UK and Ireland.”
The Dutch pension fund sector is Europe’s second-largest behind the UK, but due to the prevalence of large, industry-wide pension funds still open to new joiners, few buyouts have been done. Deals that have been done mostly involved local insurers such as Aegon.
However, consultants say the appetite of Dutch insurers for such deals is waning, opening the door to foreign players. A recent report on the buyout market from Lane Clark and Peacock said: “There are signs that some of the [domestic] players are reducing their appetite as they look to preserve capital and generate higher profit margins. In contrast, insurers from other jurisdictions are now considering entering the Dutch market.”
Legal & General announced its first non-UK deal in April, taking on a €136m annuity book from Irish life insurer New Ireland Assurance.
This is why I think it's time we expand C/QPP in Canada and address serious deficiencies that plague our retirement system. Our large public pension plans are among the best in the world and we need to bolster them and make them part of the solution to meet the retirement needs of our aging population.
Below, an APG All Pensions Group corporate video. APG and PGGM are global leaders in the pension fund industry and represent what I see as part of the solution to the Dutch and global pension crisis.
APG All Pensions Group corporate movie from Edenspiekermann on Vimeo.