Eliminating interest as a determining factor in pensions seemed like such a good plan. For years, the ever-decreasing interest rate blocked the increase in pensions. Dissatisfaction among pensioners grew steadily. It therefore seemed better to link the pensions to the investment returns of the pension funds by means of a system change. They have been great in recent years. However, in the law currently in force, this did not outweigh the effect of the ultra-low interest rate.
After many years of negotiations, most of those involved agreed on the change of course. But just when the new system has to be approved, everything is suddenly different. Interest rates are rising, which means that pension funds are suddenly in a much better position. At the same time, the value of pension fund investments is falling. At the beginning of this year, they were worth more than 1800 billion euros, now they have fallen to just under about 1500 billion, according to the House of Representatives. At the moment, that doesn’t matter, because the effect of rising interest rates is much greater. But if soon the investment returns start to weigh more heavily, there is immediately a problem again.
The pension paradox: interest rates rise, assets fall
This is the pension paradox faced by the cabinet and the House of Representatives. Interest rates have not even risen that much, but the funds are already in better shape than after twelve years of frozen and sometimes even reduced pensions. For many funds, these could be increased slightly in the summer for the first time in twelve years. In the autumn, pension funds will decide on an increase as of 2023. If the interest rate remains the same or rises further, this could become a full indexation.
Under that constellation, the House this week started the debate on the bill for the new system. The plan is still supported by the government coalition – VVD, D66, CDA, CU – including the PvdA and GroenLinks. These two opposition parties, together with the trade union FNV, received a series of concessions from the cabinet in exchange for their support. Think of a temporary early retirement scheme, disability insurance and better pension accrual for self-employed persons, a reduction in the rate at which the state pension age is raised and pension for employees who are not yet building up a pension. Much of this remains to be worked out and the left parties want more.
However, there are now widespread doubts as to whether the new system is so sound. This is mainly due to the blow to the investments of pension funds this year. Value drops of more than 10 percent are no exception. The assets of the largest pension fund, ABP, fell from 552 billion at the end of 2021 to 486 billion at the end of June: 66 billion euros less.
If pensions depend mainly on investment income, as the new system envisages, then the pensions of the elderly and the accrual of workers would fall sharply this year. Dampers are of course built into the new system, but the downward direction is unmistakable.
That threatens to become an obstacle to the forthcoming reform. With the transition to the new system, the assets of each pension fund must be divided among the individual accounts of all participants: the elderly, workers and ‘sleepers’, people who once built up pension with the fund. This division is based on the value of the investments at that time. At the beginning of this year there was 1800 billion euros to be distributed, now less than 1500 billion euros, while pensions are being increased in the meantime.
Money shortage threatens for new pensions
The big risk now is that all those individual pension accounts will soon end up with less money than belongs to that higher pension. In the transition to the new system, this could mean a reduction in the pension or the pension prospects. That is not an attractive scenario.
That uncertainty is slowly permeating into the debate, which will take many hours in the coming weeks. To begin with, the opponents of the new system (all parties outside the coalition, PvdA and GroenLinks) now first want to see calculations and scenarios in order to get an idea of the consequences of the transition to the new system. How tenable is this if inflation remains high, if investments continue to disappoint and at the same time interest rates remain ‘high’? The government has already set up a committee for this purpose, which is to submit a report in the course of the autumn.
Whether that advice helps is the question. The situation could be different ‘tomorrow’ – or next year – as developments in interest rates and investments have shown this year. That is the dilemma that the House of Representatives is now wrestling with. None of the parties that support the new system has changed their mind and got used to it. But little is left of the initial confidence that a solution to pension uncertainty is finally in sight.