1. Country update The Netherlands
Technical Training Day – October 2011

2. Topics Pensions reform Developments for pension funds
Country update The Netherlands

3. Pensions reform Pensions reform includes changes in: Key issues
The state old age benefit (first pillar)
Occupational pensions (second pillar)
Private pension provisions (third pillar)
Key issues
Increase of retirement age
Life exptancy mechanism
Financial shocks mechanism
It has taken a long time, but it is now a fact! (I think...)
Country update The Netherlands

4. First pillar
Retirement age for the state old age benefit (AOW) will increase to
Age 66, per 1 January 2020
Age 67, per 1 January 2025
And maybe further, on the basis of the life expectancy mechanism
And will become flexible
The AOW can be taken out earlier (or later) at the cost (or benefit) of an actuarial reduction (or increase) of 6.5% per year
The benefit will be raised by an extra 0.6% per year
On top of regular inflation compensation
For a single: EUR 13,000
For an individual of a couple: EUR 9,000
Country update The Netherlands

5. Second pillar
Retirement age for occupational pension schemes will increase to
Age 66, per 1 January 2013
Age 67, per 1 January 2015
And maybe further, on the basis of the life expectancy mechanism
Accrual per year remains at the same level
2% per year in final pay
2.25% per year in average pay
Equivalent of 2.25% per year in DC
Country update The Netherlands

6. Third pillar
Fiscal facilities for private pensions provisions are reduced, in line with the increase of the retirement age:
Annual addition to EET old age provision for self employed
11.7%, per 1 January 2013 (now: 12%)
11.4%, per 1 January 2015
Annual premium for qualifying EET annuities
16.5%, per 1 January 2013 (now: 17%)
16%, per 1 January 2015
Further reductions if retirement age is raised again
Country update The Netherlands

7. V = (L-/-18,26) – (P-/-65)
The retirement age for the state old age pension and occupational pension plans depends upon life expectancy:
V = (L -/- 18,26) – (P -/- 65)
With
V = increase of retirement age
Not higher than 1, not lower than 0 (so, it’s irreversible!)
(L -/- 18,26) = difference in life expectancy at calculation date and the current life expectancy
(P -/- 65) = difference between the actual retirement age and 65 at calculation date
V will be determined every 5 years.
Country update The Netherlands

8. New flexible contract Stabilizing premium
No increase due to increased life expectancy
No (automatic) increase due to financial developments
Yield parameters and investment policy
Current risk free yield curve can be abandoned, funding ratio based on expected return
Investment policy must support ambition (in real or nominal terms)
Accrual rate, offset and indexation
Average pay and offset linked to state benefit
Indexation linked to wages while accruing
Indexation linked to prices while retired
Country update The Netherlands

9. Objections Funding ratio based on expected return
Riskier investments improve funding ratio (casino pension)
Pressure on pension fund boards
Incentive to take higher risks
Implicit transfer of value from the young to the old
The effect will be much stronger under poor economic circumstances or in a mature pension fund
Transfer of accrued benefits into new contract (not) possible?
Requires change in Pension Act
It goes against the European Convention for the Protection of Human Rights and Fundamental Freedoms
Country update The Netherlands

10. Life expectancy mechanism
When life expectancy increases
For accrued benefits: the drop in funding ratios will be offset by a reduced indexation over a period of maximal 10 years
For new accruals: the increased costs will be offset by increasing the retirement age
The net effect will be absorbed by adjusting the accrual rate or indexation. A plus can also be used to fill buffers and improve certainty (financial shock absorption mechanism)
Country update The Netherlands

11. Financial shocks mechanism
Funding ratio in real terms
< 100%: reduced indexation aimed at recovery in 10 years
Mechanism ensures fair and equal treatment for all stakeholders
Funding ratio in nominal terms
> Warning level: full indexation
< Warning level: reduced indexation aimed at recovery in 10 years
Warning level is the funding ratio that is required to maintain the intended certainty standard
< 100%: reduced indexation aimed at recovery in 5 years
Equalization reserve
To absorb financial shocks
With upper limit, surplus is for the benefit of participants
Country update The Netherlands

12. (Some) outstanding issues
Issue #1: accrued pension benefits
Transfer of accrued benefits into new contract (not) possible?
Requires change in Pension Act
Contrary to European Convention for the Protection of Human Rights and Fundamental Freedoms
Issue #2: transfer of risk
If contributions can not be increased, employees assume all risks
Issue #3: employment participation for elderly
How to keep the elder employees employed?
Issue #4: day-to-day volatility in funding ratio
Moving average for yield curve
Valuation misbalance in balance sheet
Country update The Netherlands

13. Pensions reform Pensions reform deemed necessary
Increased life expectancy
Financial markets
Contributions have become a blunt instrument and have reached maximum
Employers and unions have come to an agreement
Increase retirement age
Nominal pensions require more funding
Flexible contracts
Pension will flex with increases in life expectancy and funding ratio
Parliament has approved of the necessary legal changes
Country update The Netherlands

14. Funding ratio for pension funds
Country update The Netherlands

15. Our (?) goal is 100
Country update The Netherlands