The market instability in 2020 has been painful for lots of investors, but many people might have considered that their pensions would be shielded from much of the trauma. That may not be the case and there could be some unwelcome surprises in store for holders of a Dutch pension fund.
Recently, the Dutch government, trade unions and pension providers came to an agreement to amend the pension system. The new rules (to be fully implemented in 2026) are designed to cut deficits and improve funding levels. This might sound strange considering that the existing Dutch ‘3-pillar’ system is widely considered one of the best in the world and has been consistently ranked by the WEF (World Economic Forum) as one of the most stable arrangements for investors, workers and pensioners. However, the fact is that despite its relative strength, the system in the Netherlands is not immune from the crisis in pension funding levels that have plagued the industry worldwide in recent decades.
The new rules, when they are fully applied, may offer some pension holders more flexibility and the opportunity for higher growth in their retirement savings, but potentially at the cost of some of the security and guarantees that have long been the hallmark of the existing structure.
To further dent the confidence of pension-holders, the recent crash due to Covid-19, the 2020 oil crisis and the resulting drop in already rock-bottom interest rates and bond yields, only served to increase the deficits of the already-straining pension funds. As a result, the Employment and Social Affairs Minister for the Netherlands announced in June that the pension coverage ratio required by law will be reduced next year from 100% to 90% in order to prevent collapse of some of the largest workers’ retirement funds in the country. It is estimated that the reduced coverage rate will affect as many as 7 million pension holders whose industries’ retirement provisions have been worst affected.
Of course, this is good news for pension funds as a whole and may shore up the system in the short-term, but a 10% drop in retirement provisions is significant to many workers and retirees. Worse than this, several of the larger pension funds are struggling at funding levels below 90% and so their deficits may continue to grow even with the reduced coverage requirements. Another market crash, lockdown period or other external impactor could force further action or could prompt pension trustees to try to implement the 2026 rules earlier in a bid to limit the longer-term liabilities. The prevalence of defined benefit (DB) schemes in the Netherlands is an outlier among developed countries and will surely move towards the defined contribution (DC) or collective defined contribution (CDC) schemes that are now the norm for workers in other countries.
So, if you are contributing to a pension in the Dutch system, should you be worried?
Well, it really depends on a number of factors. There are still some pension funds that are well-funded and can meet their liabilities at present. You can check the status of your own industry scheme or corporate arrangement through the Dutch national bank (www.dnb.nl) and learn more about the system as a whole through the Dutch Pension Federation (www.pensioenfederatie.nl) if you want to understand your situation a little better. You may be one of the fortunate ones who is unaffected by the recent changes, but it is important to be aware of how, if at all, your retirement plans may be affected.
Don’t let anything come as a surprise to you with your long-term financial plans. Your financial advisor can help you with an appraisal of your current circumstances and how they relate to your specific goals for retirement and other projected costs. Make sure you provide your advisor with some details of your existing pension allocations (www.mijnpensioenoverzicht.nl) and go into any retirement conversation armed with some clear ideas about when you plan (or hope) to be in a position to stop work, how you envision spending your retirement and what sort of income you might need to fund that goal. In the event that your pensions are not sufficient to cover your future expenses, your financial advisor can help you to put in place some additional financial arrangements to cover or mitigate any shortfalls that could otherwise affect your financial well-being in later life.
Most importantly, don’t put it off. Whether retirement for you seems just around the corner or a long way off, making necessary changes or improvements now can save a lot of difficulty in the long-run. Speak to your advisor now or feel free to contact us at [email protected] for more information or to arrange an appointment to see how we can help personally.