This week the House of Representatives is discussing the Future Pensions Act. The most important changes are not explicitly stated in the law, it is difficult to see what we are losing. It is also worrying that many politicians feel bound by the previously concluded Pension Agreement. This law is a consequence of that, but this bill itself did not yet exist at the time. Alternatives have not been submitted to the House.
Guaranteed and solidarity
The Future Pensions Act concerns the second pillar of our pension system, the pension funds. In these pension funds, participants and employers pay contributions, with which they collectively save their pension and at retirement age they receive a (within a bandwidth) guaranteed pension.
This is the essence: a guaranteed pension benefit. The legal system is based on protecting the worker against unwilling employers and on solidarity between workers and pensioners, between the long-lived and the shorter-living.
About the author
Marjolein Quené is a historian and business administrator and a former board member of the National Pension Register Foundation.
This system is a capital backed system. The pension fund must have the accrued pension obligations of all participants and retirees in cash. Nevertheless, there are various buttons to turn: the premiums for employers and employees, the indexation of the pensions and the calculation rules to determine whether all obligations can be met.
Savings creates capital. Currently more than 1,500 billion euros. If the invested savings capital is successfully invested, there is financial scope for higher indexation of the pension or lower premiums. After all, the return on the investments provides additional income.
Uncertain future
In the Future Pensions Act, the current secure pension benefit is replaced by an uncertain financial product: everyone saves for themselves and the pension benefit depends on the return on the investments. In the new system, the outcome is not guaranteed, but the premiums are fixed.
This means there are no more knobs to turn. The premiums are fixed, calculation rules and indexation decisions are not necessary. The outcome is determined by the return on the investments.
Fixed premiums are primarily in the interest of employers. The wage bill of a company is then unambiguous and contains fewer uncertainties. This is in accordance with the Anglo-Saxon system. A company is then more attractive as an investment object and it is easier to attract international capital. Investors do not like the Rhineland system in which employees also have a say, even if only in the management of a pension fund.
Employee risk
Under the Future Pensions Act, employees are extradited to the international capital markets in three ways.
Firstly, the employer no longer contributes to a possibly necessary increase in the premiums, if the pensions become too low. Secondly, the employee becomes completely dependent on the returns from the investments. All risks lie with the employee. Thirdly, he also becomes dependent on the people who will make these investments for the pension funds.
The collected pension funds now receive about 40 billion a year in income from premiums and pay 35 billion a year in paid pensions. The additional costs are already exorbitantly high. At least 10 billion a year is spent on execution and asset management. That is a quarter of the premiums.
This shows who the other stakeholders in the Future Pensions Act are: the pension sector itself, the financial sector, the people who receive the bonuses, private equity, hedge funds, investment funds.
Privatization pension system
The political discussion is now mainly about the way in which individual investment products will be made (the ‘sailing in’ of that more than 1,500 billion euros) in ten million individual jars, or about mitigating measures to dampen major differences between the old and new system.
But the principle is: each individual pension becomes dependent on the volatility of the financial markets.
The Future Pensions Act is in fact the privatization of the collective pension system in order to make it more in line with the logic of the financial markets. The pension system was specifically intended to prevent employees from being or becoming dependent on individual financial products.
Counterbalance Chamber
The House of Representatives could provide a counterbalance with its legislative task. Limit the costs of implementation and asset management, draw up different calculation rules, increase the circle of solidarity by making it possible for self-employed workers to participate. Maintain protection against unwilling employers and against the capriciousness of the financial markets, if necessary opt for a different, Scandinavian system.
It is important that the House of Representatives acts as a legislator and that it does not follow the reasoning of the financial sector.