Pension Agreement with a bitter after-taste

BeFrank
17 Jun 2020

While it is of course a good thing that a pension agreement has been reached after 10 years of bickering, the champagne ultimately turned out to be rather flat. Nearly one and half million Dutch people and tens of thousands of employers with defined benefit schemes will not actually see any benefit. While the agreement was supposed to benefit everybody.

Defined contribution schemes have been the norm in all the free sectors and companies, that is those sectors and companies not obliged to affiliate to industry pension funds, for a long time already. This is a transparent scheme that suits a flexible labour market and is better suited to individual needs. It is no surprise that this type of scheme has become much more common over the past 10 years. Under the pension agreement, the pension funds will also join this new world. In the past 10 years, it has become clear that past ‘guarantees’ were nothing of the sort and that scheme members are still simply dependent on the fund’s investment return. The current defined contribution schemes generally use age-related scales, with the contribution increasing as members get older. This system has existed for many years already, and has never been the subject of much debate among the political parties either.

The problem
Under the new agreement that has been reached, it is decided that everyone will move to a defined contribution scheme with a level contribution. Very practical for the pension funds for which the unions and employers collectively can negotiate a percentage of the contribution for a particular industry. But very impractical for all employers and scheme members in an already existing defined contribution scheme. The contribution for younger members will immediately be higher, while the contribution for older members will immediately be lower. This is fine for the younger members, but not so fine for the older ones. Compensation will have to be provided by the employer, with the costs of the transition to the new system estimated at more than € 7 billion. And who ultimately will pay this?

An unhappy outcome
This problem was already considered in the pension agreement negotiations, however the ‘solution’ that was found is really not a good one. The agreement states that existing employees should continue to accrue pension according to the former contribution scales, and that new members should be placed in a second scheme with a level contribution. This means that the contribution for existing younger employees will in practice be lower than for their new young colleagues. How is an employer supposed to justify this? If the aim was to make pensions more transparent and comprehensible, this is not a step in right direction.

What will happen now?
The first question is: why is it necessary to change the current system for defined contribution schemes at all? The government’s idea and hope is that the new level contribution will also be set for defined contribution schemes at a level at which all Dutch workers can attain a good pension later on. However, there is now a threat that the average employer will be stuck with an old scheme that it will not be able to get out of without paying compensation. To make this financially feasible, employers will at least consider completely dismantling their pension scheme, making it less attractive for employers to retain older employees. It will also not be easy for these employees ever to make the transition, quite apart from the double costs for pensions administration and the communication nightmare that all this will cause in the decades to come. This cannot have been the intention of any of the parties to the negotiations.

Conclusion
We are sincerely pleased to see that a good and new pensions system is coming to the Netherlands. But if the political aspiration is really to have the whole of the Netherlands move to a level contribution scale, we believe that there absolutely has to be ‘adequate compensation’ for the employers and employees that are likely to lose out. In the pension funds, this is will be in the form of a yet to be decided reallocation between different generations, which by definition will not benefit everyone equally. The solution for transparent defined contribution schemes still needs work if we are to have a system that is really future-proof for everyone.