In the third quarter of 2023, Dutch pension funds saw their funding ratios improve relative to the second quarter, as the decline in the value of their investments was less pronounced than the decline in the value of liabilities.Read more
Our present pension system
Our pension system consists of three pillars: a basic General Old Age pension (AOW), the pension that employees build up through their employer and voluntary individual income provisions. The present pension system has a number of vulnerabilities, which is why we need a new system. The Dutch Senate and House of Representatives have passed a bill to amend the Pensions Act.
The first pillar: General Old Age Pension (AOW)
The first pillar is the state pension under the General Old Age Pensions Act (AOW). Every person living or working in the Netherlands automatically builds up AOW under this government state pension scheme. Every year, the government adjusts the AOW level in line with the development of the minimum wage. When the scheme was introduced, everyone received an AOW pension from the age of 65. Now the statutory retirement age is connected to the life expectancy of Dutch pensioners, which means it is rising. For everyone born after February 1957, it has been set at 67 or over. The average life expectancy is likely to rise further over the years, and the statutory retirement age will rise with it. Changes to the statutory retirement age are announced five years in advance. In 2028, for example, the statutory retirement age will be raised to 67 years and three months.
The second pillar: employment-related pension
Most employees also build up a supplementary pension through their employer in the second pillar. Both the employer and the employee contribute to this pension, which is usually administered by a pension fund. The pension fund invests the contributions received from employers and employees in for example equity, real estate and bonds and uses the accumulated assets to pay out pension benefits in the future. Changes to the pension system concern this second pillar.
The third pillar: individual supplementary pension
Some people also build up an individual supplementary pension in addition to their AOW pension and – if applicable – their employment-related pension. They can do this through life insurance or a bank saving scheme. Self-employed persons and other entrepreneurs can also choose to build up a pension in this way, since they do not build up employment-related pension through an employer.
Our role in the supervision of pension funds
In our supervision of pension funds, we look at three things:
- Financial position
Do pension funds comply with the statutory financial rules and regulations? For example with respect to investments and contributions, and when increasing or decreasing pension benefits.
- Operational management
Do pension funds have their administration in order?
- Board members
Are a pension fund's board members suitable for their job, and is their integrity beyond doubt? Proposed board members need our approval before they can be officially appointed as such.
How many reserves do pension funds need to hold?
A pension fund's funding ratio reflects its financial position: it indicates whether the fund holds enough reserves to pay out pension benefits, now and in the future. The funding ratio is calculated based on the actuarial interest rate. Pension funds use this to calculate the reserves they are required to hold. The higher the actuarial interest rate, the less reserves they need. The lower the actuarial interest rate, the more reserves they are required to hold.
Why do we need a new pension system?
The present pension system has a number of vulnerabilities:
- Pension funds make promises about the amount of pension benefits they intend to pay out to the fund's members. Pension funds invest to build up the necessary reserves to pay out the benefits they promised. However, making investments brings risks: if returns are lower than expected, pension funds cannot live up to their promises. If that happens, this damages people's confidence in the pension system.
- More importantly, the promises that a pension fund has made to individual groups of members are backed by the collective reserves it holds for all of its members. This could lead to discussions about which part of the reserves are paid out to whom, for example between younger and older groups of members.
- By using collective reserves for all member groups, younger and older members are largely exposed to the same investment risks, while the younger members, who are further away from retirement, could bear a larger part of these risks compared to the older members.
- People no longer stay with the same employer their whole working lives. However, the pension system still presumes they do. Employees who leave the pension fund halfway through their career to start their own business, for example, build up insufficient pension compared to the contributions they have paid. In other words, the current pension system no longer matches the changing labour market.
Because of these vulnerabilities, the Dutch Senate and House of Representatives passed a bill to amend the Pensions Act and create a more transparent and personalised new pension system.
Pension funds are holding such large amounts of reserves. Why don't they raise pension benefits?
While it is true that pension funds hold large amounts of reserves, they also have liabilities or payment obligations. Pension funds are required to hold sufficient reserves to pay out all pension benefits, now and in the future. Their funding ratio indicates whether their reserves are sufficient to do so. This ratio is calculated on the basis of the actuarial interest rate. The lower this rate, the larger the reserves they need to hold to be able to meet their payment obligations in the future.
Why can't De Nederlandsche bank set a higher actuarial interest rate, so that the pension funds could raise pension benefits?
The actuarial interest rate depends on current interest rates, which are set in financial markets. These market interest rates are rising, and so is the actuarial interest rate.
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