After about ten years of discussion, with several false reports of white smoke, the social partners and the cabinet succeeded in signing a pension agreement on 5 June 2019. The agreement on the details followed about a year later, and we are currently working hard on all legislation to switch to a new pension system by 1 January 2027 at the latest.
The transition to this is complicated and takes a lot of time. It is therefore not surprising that we encounter unexpected new obstacles along the way. One of these comes from PvdA MP Gijs van Dijk, who already wants indexation. But indexation when funding ratios are too low is nothing more than a grab in the coffers of young people by the elderly, who see their rights indexed without the resources being available.
Originally, the transition phase to a new pension system would start on 1 January 2022, with a choice between the so-called Flexible Pension Agreement, with personal funds without risk sharing, and the Solidary Pension Agreement (SPO), with personal funds with investment and longevity risk sharing. Participants and funds that opt for the new SPO model can therefore opt for a transitional supervision framework anticipating this and could already make use of this relaxation in anticipation of the more relaxed indexation rules in that new system. However, the delay in the legislative process prevents this. The PvdA has now seen its chance and is now threatening to withdraw support for the pension reform if pension funds with a funding ratio above 105 percent cannot index as of 1 January 2022.
Gijs van Dijk writes on the PvdA site: “Companies are making huge profits and the economy is doing well. Then it is only right that people who have worked all their lives will also see that reflected in their wallets.”
This all sounds noble, but Van Dijk conveniently ignores the fact that pension assets are built up over a long period of time by means of contributions and investments. Since the size of the pension pots is a given at any time, more indexing of the current pensions means that there is less left for the other participants: a cake does not get bigger if you divide it differently.
It is a fact that many retirees suffer from long-term non-indexation. What is also a fact is that large groups of pensioners have benefited in their accrual from too low premiums in the past. The low contributions have contributed to the fact that their pensions have not been funded and that the costs of their increasing life expectancy are passed on to the active participants when indexation does take place. The active people are now sighing under sky-high premiums and declining accrual percentages.
Also read: This is what the pension agreement means for you
The policy funding ratios of the current system are below 110 percent and on average are not even sufficient for partial indexation, while the very largest funds are even still with funding ratios below 100 percent and therefore cannot even deliver on their nominal commitments. A funding ratio of 100 percent covers the accrued future benefits in euros, but does not cover the effect of a decrease in purchasing power due to inflation.
If you want to cover this effect (with 2 percent inflation and an average duration of the obligations of 15 years), you need a coverage ratio of approximately 130 percent. So we are far from that. Under Van Dijk’s proposal, part of the pension assets that belong to young people will be transferred to the elderly without any legal basis.
It is true that younger participants in the SPO will on average receive a higher pension, because they will be allocated a larger part of the investment return. However, this is compensation for the higher risk that they will also run in that new system: if the return is negative, they will also be allocated a larger share of the deficit. Free lunches do not exist: someone will always pay a price for indexation at the current funding ratios that are too low.
A version of this article also appeared in NRC Handelsblad on 11 November 2021
A version of this article also appeared in NRC in the morning of November 11, 2021