The debate on the pension law will experience a decisive day on Thursday. What criticism will Minister Carola Schouten have to counter in the House of Representatives, and how will she do that?
What does the new law entail?
Under current pension schemes, employees are promised a pension in exchange for contributions. This premium is invested in, for example, shares, real estate and bonds. Because of this promise, pension funds must have large reserves – ‘buffers’ – before pensions can be increased.
In calculating whether they will be able to pay out the defined benefit pensions – the liabilities – in the future, the funds must use the market interest rate. It has been very low in recent years, while the investments on paper yielded a lot of profit. But it was impossible to invest at the low interest rates. For twelve years, most pensions were not increased, sometimes slightly reduced, while wealth increased.
According to the new Pensions Act, this will all change. The pension is based on the premium paid plus the investment profit. As a result, there is no longer a commitment and pensions can be increased earlier. But also down, if there are investment losses. In order to prevent large fluctuations, pension funds create a solidarity reserve to cushion outliers.
Everyone who has paid premiums to a pension fund will receive their own account showing the total premium paid plus the investment profit and the pension achieved or to be achieved. The pension fund calculates with the average life expectancy. Those who die earlier leave their pension money to the fund, which pays pension to those who live longer than average. Pension assets remain collectively invested, although this differs per age group: risky for young people, safer for the elderly.
Critique 1: the pension is not safe in the new system
The new pension is partly dependent on investment results. That is reason for SP and PVV to put it away as ‘casino pension’.
Still, that seemed like a good plan in recent years. Pension funds recorded huge investment gains. But past results say nothing about the future. This year, the funds are taking significant losses. If the new system were to apply now, pensions would have to be reduced.
Or not yet, because according to the bill, pension funds can dampen outliers upwards and downwards with a solidarity reserve. Increases and decreases can be spread over years. Because bad investment years – such as 2001, 2008 – were followed by excellent investment years after a while, the result would be positive in the long run, is the idea. No one can predict whether this will also be the case after the investment disaster year 2022.
Part of the House is nevertheless shocked by the unprecedented high inflation and the poor investment results. An actuary (pension mathematician) has calculated that in the new system pensions would be reduced by 3 percent this year. That resonates in the Chamber. For example, the independent MP Pieter Omtzigt denounces the fact that in all scenarios used by pension funds to date, inflation is never higher than 6 percent. Real inflation is expected to be close to 9 percent this year.
That is why Omtzigt wants to wait for new scenarios to arrive at the end of November. Although he agrees that the current system will also suffer from persistently high inflation. The coalition does not consider waiting necessary because a ‘safety net procedure’ has been agreed in case of unexpected scenarios.
Criticism 2: The distribution of pension assets to individual ‘accounts’ is risky: lawsuits will rain from people who feel deprived
The redistribution is an unprecedented operation. And risky indeed. Soon everyone will compare the pension that is still being promised with the pension that is predicted in the new system. Nobody wants to go backwards. Even if it only happens ten or twenty times in the millions of accounts – those outliers will determine the picture.
Yet that can happen. In the new system, the premium for all employees goes to their own account. That is a disadvantage for the middle-aged, the 40- to 60-year-olds. At present, this group is indirectly subsidized by younger colleagues in pension accrual. That disappears and the secondary needs to be compensated. The pension funds have to decide for themselves how, because the situation differs per fund – one fund has many middle-aged people and few young people, the other the opposite. There are also funds with mainly young people.
Schouten will not tire of explaining on Thursday that each fund must draw up a balanced plan and must be accountable for this to the participants’ councils and to the regulator, De Nederlandsche Bank. That should be the guarantee against unbalanced distributions.
Critique 3: pension savers will soon have nowhere to go with complaints
Anyone who still feels deprived can soon call the pension fund, the participants’ council, the trade union and the regulator. And in court. But how desirable is the latter? Based on advice from the Council for the Judiciary, Pieter Omtzigt foresees a tsunami of lawsuits that could cause the legal system to come to a standstill. Lawsuits up to the European Court because the ownership of the deposited premiums and accrued pension rights is being stolen.
Omtzigt is therefore arguing for a referendum per fund to give participants direct consenting rights. He expresses his skepticism about the entire operation: ‘We do not know how the pension assets will be distributed. We don’t know if the judiciary will be able to handle it. We don’t know if property rights will be violated.’
Schouten in turn will refer to procedures at the funds. It believes that there are sufficient safeguards to limit these. For example, the plan of the fund is checked for balance – no advantage of one group to the detriment of another. This is also done by the regulator, De Nederlandsche Bank.
The individual right of objection at the fund has been replaced by an advisory right of the Accountability Body and an approval right of the Members’ Council. An external disputes committee will be established. And 10 million euros will be made available for the judiciary to settle any proceedings. She will keep her finger on the pulse with the Minister of Justice. ‘It’s workable this way. That is what the Council of State says. Everything we do, we do precisely to prevent it from getting stuck. That remains my commitment, not only when we are discussing this law, but also when we simply continue in the process, when the law is passed’, said Schouten in an earlier debate. The Council of State provides legal advice on every bill.
Critique 4: the timing sucks. It is better to wait with the reform until the pension funds are in better shape
The new law seemed a good solution in the years when there were large investment gains while pensions could not be increased due to low interest rates.
Just when the law has to be introduced, it is the other way around: interest rates are rising this year and the investments on paper are worth much less. The total value fell from 1,800 billion euros at the beginning of this year to 1,440 billion euros at the end of September. Due to the higher interest rates, almost all pension funds are suddenly in good shape on paper.
Schouten can argue that the new system should not be judged by the issues of the day – the storm that is now raging over the financial markets. The system must be able to last for decades, in good and bad times.
The situation can be very different, for better or for worse, when a pension fund ‘transfers’ and that is possible until 2027. Her predecessor Wouter Koolmees, who put the bill in the pipeline, already argued that during the transition pensions would be lower if the fund had less than 95 euro cents per promised pension euro in cash. At the time, that was a realistic situation for many large funds, but not anymore, at most for a single small fund.
Critique 5: This is the largest post-war privatization of public money, just as political and social resistance to privatization grows
This is not right. The funds are administrators of pension schemes drawn up by trade unions and employers as part of the collective labor agreement. Now insurers administer the pension schemes. Nevertheless, part of the opposition, Pieter Omtzigt in the lead, warns against a huge privatization if the ‘mandatory’ expires. Companies that work in an industry that is subject to a pension scheme must participate. Omtzigt fears that the EU could change that. ‘We do not know whether the obligation will remain tenable’, says Omtzigt. Schouten can refute this by asking why it would suddenly be untenable.
Critique 6: the reform costs a lot of money. Can’t that be less?
The conversion of the collective pension assets into individual ‘accounts – shares in the joint pot – requires an enormous amount of work. That is food for highly paid specialists. They are scarce and expensive. Much money has already been spent in the run-up to this debate as pension funds prepare for the new system. Schouten will confirm this but also put it in perspective. Compared to the total capacity, it is at most a single percent.
Critique 7: this amendment to the law unnecessarily disrupts a lot. It is better to leave the current pension system, with adjustments, intact
A number of parties, 50Plus, PVV and SP in the lead, want this by introducing a fixed, minimum interest rate that pension funds can charge. For example, 2 percent.
That is possible, but it is at odds with the system. In recent years, the pension funds would have ‘counted themselves rich’, according to the cautious pension experts: after all, the funds could then have increased the pensions, while there would have been less and less coverage for young people, the future pensioners. The ‘flexible’ among the experts maintain that the actuarial interest rate was constantly so far below the actual return achieved in recent years that it was possible to increase it without any risk.
These kinds of solutions have been argued endlessly in vain in recent years. The solution was eventually found in the Future Pensions Bill (WTP).
A serious option that has been on the table before is to exchange the ‘promise’ of a ‘secure pension’ in the current system for an intended pension. That was the plan in the pension agreement that the trade union movement, employers and the Rutte I cabinet concluded in 2010. That went into the wastepaper basket after the fall of that cabinet in 2012. Because everyone within the FNV fought each other out and chairman Agnes Jongerius was put on the street without mercy, nobody shed a tear.
But the idea has recently come alive again. For example with Pieter Omtzigt: ‘I think that historically we have really missed a boat with the previous pension agreement, which did not go through. If we had switched to a real pension then, I think we would have had fewer problems now.’