This is apparent from this year’s half-year figures of the four largest pension funds and from an overview of the Pensioenfederatie, the lobbying umbrella organization for pension funds.
This has turned the pension paradox, which has already led to so much debate in recent years, by 180 degrees. Pension funds posted generous investment gains on paper, but interest rates fell below zero. The falling interest rate had a disastrous effect, because it means that the funds have to calculate how their assets relate to their obligations, the pensions promised to workers and retirees.
The outcome of that calculation is the funding ratio, the percentage that indicates the extent to which the commitments are covered. In recent years, it was impossible to invest against the effect of the extremely low interest rates. The funding ratios were low, pensions were not increased, sometimes decreased.
Coverage shoots up
This year is the situation is thus reversed. In the first half of the year, the investments have become much less valuable. But that is offset by rising interest rates. Now that the funds are allowed to charge with that higher interest rate, they are suddenly in much better shape.
For example, at the largest pension fund, the ABP for civil servants, the investments were worth 66 billion euros less this year. But due to the increased interest, the fund needs to have 103 billion less in cash. As a result, the funding ratio will rise by 12 points this year to 122.7 percent at the end of June. This already includes the increase in the pension accrual of workers and the benefit to retirees by 2.39 percent as of 1 July. The same phenomenon occurs with other funds.
The so-called policy funding ratio, the average funding ratio over the past twelve months, rose at the ABP from 110.6 at the end of 2021 to 111.6 percent. The policy funding ratio determines whether the pensions are increased. This usually happens at the turn of the year.
But this year the rules have been relaxed. Funds that have a policy funding ratio of more than 105 percent on 1 July may increase their pensions immediately if they promise to switch to the new pension system that may be introduced by 2027
An overview from the Pension Federation shows that many funds use this for millions of workers and retirees with small increments – often the first increases in twelve years. But they are in stark contrast to inflation, which is now about 8 percent.
New system on the way
A new system is now underway. It is now before the House of Representatives for consideration. In that system, the decisive role of the interest will no longer be necessary and pension accrual and survivor’s pension will also be modernised. The pensions will move along with the investment results. If there are investment gains, pensions will increase, if there are losses, pensions will be lower. However, buffers have been built in to limit these fluctuations.
The bill, based on an agreement between trade unions and employers, is an attempt to break the old pension paradox. In recent years, this has led to a discussion between ‘flexible’ and ‘precise’. The flexible members of SP, PVV and 50 Plus believe that a fixed, minimum interest rate should be used. The elderly are ‘robbed’ by freezing their pension for years. As a result, they have lost more than 20 percent purchasing power. This also applies to the pension accrual of working people, who had to pay an increasingly higher premium.
The precise think the market interest rate is the only correct measure to calculate the obligations. This follows from the Pension Act of 2006, which was then unanimously passed by parliament. Back then, no one could have imagined that interest rates could sink very deeply. The interest rate at that time, more than 4 percent, was considered low at the time. Those who are precise argue that an artificially high actuarial interest rate would put young people at a disadvantage in the long run. In the end, a conversation between the two camps was not possible. The bill settles that discussion.
The reversal of the pension paradox – falling assets but an improved funding ratio due to rising interest rates – has not yet led to a reopening of the discussion in The Hague. The bill is supported by the coalition (VVD, D66, CDA, CU) and PvdA and GroenLinks. However, the pension discussion in the trade union movement FNV, a prop under the pension agreement and the bill, has flared up again. This could have consequences for the attitude of the two opposition parties after the summer, especially now that the purchasing power of the elderly is under pressure due to high inflation.