Hi Gijs, isn’t it a bad time for pension funds – with a possible economic recession on the horizon – to increase pensions?
‘You have to take a look at this. The enormous influence of rising interest rates is now working. If the interest rate rises, the pension obligations fall, in other words the money that the fund must have on paper to be able to pay out pensions now and in the future. The assets of the funds have fallen due to the falling stock prices, but the liabilities fall more quickly.
“Since the current Pension Act was passed in 2006, funds must use market interest rates when calculating their liabilities. At that time, the market interest rate was more than 4 percent. At the time, no one thought that interest rates could fall, but we have noticed that in recent years. She even went below zero. For the pension funds, there was actually no way to compete with that.
‘At the beginning of this year you saw that image tilt, all the way through the war in Ukraine. The interest rate rises and as a result the liabilities fall.’
So we don’t have to worry about funds cutting their pensions again in a few months?
“As it stands – and that’s a big disclaimer – I say no. Not even if the assets of the funds continue to decline due to falling stock prices. It’s all higher arithmetic. But if interest rates continue to rise, it will be more than offset. The European and US central banks have already said that interest rates will rise further in the coming months. That is a good prospect for the pension funds.
‘The new pension system that the House of Representatives will be debating this autumn is playing in the background. In this, the effect of the interest virtually disappears and the investments in, for example, shares, real estate and bonds become decisive for increasing or decreasing pensions. The pensions will then move more along with the value of the investments.
‘A year ago, the situation we are in today was unimaginable. At the time, the new pension system seemed like a nice solution, because the interest rate has virtually disappeared as the all-determining factor. But that has changed due to rising interest rates and the falling value of investments: funds are now in a much better position in one fell swoop. If you get a recession in the new system, with long-term high interest rates and moderate investment returns, then you have a problem.’
Is the current increase really that noticeable? It lags far behind inflation.
‘It is mainly the symbolism of the break in the trend. It is the first increase since 2008, the first in 14 years. The increase that the pension fund for the metal industry PME is implementing sounds like almost nothing at 1.29 percent. But that is due to the system of that fund. In principle, that fund increases pensions every December at the rate of inflation between July and July the year before. Now PME is implementing last December’s increase, because it was not able to do so at the time. But between July 2020 and July 2021, inflation was still very low.
‘In October, PME will decide on an increase on January 1 next, with the inflation rate of July 1 of this year. That could be a big step. The decisive factor will be whether the interest rate will rise further in the near future, because then funds will have room to increase pensions.’
Will other pension funds also increase their pensions?
‘It differs a bit per fund. All funds have their own standards for increasing pensions. One follows the collective labor agreement wage increase in the sector of the companies they worked for, the other follows a different inflation figure.
‘These four large pension funds have determined the picture in recent years, but there are also funds that have simply indexed in recent years. The fifth major fund, the Social Fund for the Construction Industry, for example, had largely hedged the risk of low interest rates. They have been in much better shape than these four in recent years and have already been able to raise pensions slightly. There are also corporate funds that have always done well.’
Do young people notice anything about this?
‘Not directly. But if the pensions remain frozen year in, year out, the value of the jar of their pension money also decreases. The build-up of workers is much lower than it could have been. They’ll never catch up with that.’