Dutch pensions under pressure

More than 4.7 million Dutch run the risk that their pension fund will have to lower the pensions it pays out in the coming years in order to avoid collapse.

This concerns (former) employees and pension recipients from large industry pension funds, such as the fund for the metal working sector, the pension fund for civil servants and teachers and several company pension funds.

Social affairs minister Piet Hein Donner extended the term last week in which pension funds must get their position in order. Normally they have three years to do so after they run into trouble, as they have because of the economic crisis, that has now been extended to five years. The sector fears that even this is not enough time. Trade union confederation FNV, which is represented on the boards of dozens of large industry pension funds, is calling for more time to avoid draconian measures.

In the Netherlands, pension funds are required by law to have assets of at least 1.05 for every euro of committed pension. Pension experts say that the danger zone is from 0.90 euros and downwards – what the sector calls a coverage ratio of 90 percent (or lower). “With 90 percent or lower, an average fund cannot manage to reach 105 percent in five years’ time without taking drastic measures, like raising premiums or lowering the amount of pensions paid out to recipients,” says Dennis van Ek of consultancy firm Mercer.

Bankrupt

The banks and insurers that finance minister Wouter Bos has spent billions of euros to bail out over the past months were all financially healthy, but the pension sector is in essence bankrupt.

“Many pension funds” had a shortage of assets at the end of 2008. “There is a problem of solvency,” social affairs minister Donner wrote to Dutch parliament. Numerous pension funds are in a position where their obligations exceed their assets.

Regular companies that have an shortage of assets and can no longer raise capital simply go bankrupt. But pension funds are different. They are like piggy banks in the Netherlands, holding a total of 600 billion euros. Capital is the least of their problems. Creditors such as pension recipients may try to have their pension funds declared bankrupt, but it is doubtful whether a court will actually do that. As the pension world and minister Donner have repeatedly assured us: the payment of pensions is not in danger.

Shelter

“A few hundred funds” are facing problems, Donner writes. That is half of all funds. For the sake of comparison: in the pension crisis of 2001-2003, about 200 funds were involved, a quarter of all funds at the time. That crisis thinned out the number of funds: smaller funds have since sought shelter at larger funds or at commercial insurers.

In the 2001-2003 crisis, in the wake of the internet boom, the financial position of the pension funds was poor, but not as poor as it is now. The ratio of investments to pension obligations, the coverage ratio, was at a low point for the pension sector as a whole at 99 percent (on 31 March 2003). The average coverage ratio is currently between 90 and 95 percent, Donner writes, with a few exceptions above and below this range. He is not giving any exact figures.

Stock market

The low point of the last pension crisis was at the end of March 2003. The Dutch stock market index AEX hit 218 points. The index has hit that same point several times over the past week. The fall in the interest rate causes further headache, since it pushes up the current value of the pension obligations: with a low interest rate, funds now need more money in order to pay pensions later. Pension funds can insure themselves against this risk and some have done so effectively.

There will not be any large-scale premium increases as during the previous crisis. Pension premiums are currently at maximum, cost-covering levels. Moreover employers are in fact cutting their costs and are not prepared to increase these with extra pension premiums.

Pension freeze

Freezing pensions is currently the most common solution for the short term. That is also a form of economising, as in the last crisis. Minister Donner has suspended the period that pension funds are given to recover before they have to lower the pensions they pay out. For pension funds with a coverage ratio of less than 90 percent, it will be a tough upward struggle to reach 105 percent within five years.

The price of recovery is a freeze on pensions for several years. That means a fall in the purchasing power of the elderly and a standstill to the pension growth of workers. Pension funds that expect that they will not reach the 105 percent will have to quickly take drastic measures, such as lowering pension entitlements. The FNV union therefore wants to give the funds more than five years’ time.

Tenability

Union related funds with an ageing workforce are more vulnerable to setbacks than funds with many young people who will continue to pay premiums for another few decades. At the same time as the solvency crisis, the minister wants to discuss with the sector “the tenability of the pension system in the long term.”

A painful revelation for politicians and for the sector: the pension legislation from 2006 presupposes there will be a crisis once in forty years. The reality is now once in six years.