For years, the Dutch government and many businesses systematically underfunded their employee pension plans, relying on high investment returns to make up the shortfall.
Now, a combination of record low rates, sluggish economic growth and lives that last far longer than anyone imagined even a decade ago have resulted in yawning deficits. At the end of 2012, the funds were €30bn short of what is needed to cover promised benefits.
For the Dutch, the cutbacks are the first ever in a nation which has the second largest “defined benefit” system in Europe. But defined benefit provision, under which pensioners are guaranteed a portion of their salary for as long as they live, is unravelling under the pressure of the financial crisis and ensuing recession.
In April, under orders from the Dutch central bank, 66 of the country’s 415 pension funds started cutting their payouts. The average cut is around 2 per cent of the monthly benefit, but that figure conceals a wide range.
APB, Ms Keestra’s fund and also the country’s largest with 2.8m participants, has cut payments by 0.5 per cent, but smaller funds such as those for barbers and meat packers are cutting pension payouts by 7 per cent or more.
The loss of income to pensioners has dealt a
further blow to a Dutch economy that has already shrunk 1 per cent over the past year and is suffering from record-low consumer confidence levels. Meanwhile, anger over the cuts has bolstered the fortunes of the 50Plus party, which won election to the Dutch parliament for the first time last year on promises to defend the interests of pensioners.
While the woes of Dutch pension schemes are far from unique, the Netherlands stands out because its laws allow employers to cut benefits under certain circumstances.
Dutch pension schemes are among the most tightly regulated of any in Europe or North America. By law, they must hold sufficient assets to cover 105 per cent of promised benefits, unlike those elsewhere
allowed to run huge deficits. In addition, they have no leeway in setting the parameters that determine estimates of liabilities, such as expected investment returns or the number of years retirees will draw benefits.
Moreover, unlike the US, UK and many other countries, the Netherlands does not operate a pension insurance scheme to pay benefits to the underfunded schemes of insolvent employers. The fallout from the failure of a company or industry-wide scheme could be devastating, which explains why the rules are so tough.
In 2007, Dutch schemes held assets covering 152 per cent of promised benefits. But that fell to 102 per cent last year due to low interest rates – which have the effect of making liabilities balloon – and sharp falls in stock and property markets.
“The law says that accrued benefits can only be reduced if it is the last resort and if it is needed to meet their minimum requirement of 105 per cent,” says Wichert Hoekert, an Amsterdam-based consultant at actuaries Towers Watson.
