Integrating Pension Solidarity And Sustainability: Lessons From The Netherlands And Canada

“Since 2006, the Plan has had a Funding Policy designated to protect promised benefits, while managing through periods of volatility. The Policy prescribes the use of reserves, stability contributions, and          conditional benefits at each of six levels of the Plan’s financial health. The use of reserves and stability contributions supports the desire to treat each generation of members equitably.”

FROM THE 2015 ANNUAL REPORTOF THE CAAT PENSION PLAN OF ONTARIO

Dutch Pension Turmoil

The recent IPE article headline “Dutch funding shortfall rises despite asset growth” captures the current turmoil in the Dutch workplace (i.e., Pillar 2) pension system in seven words. The article noted that 2016 had seen a fall of the average workplace pension plan funded ratio from 104% to 97%. That was the bad news. The good news was that it had ticked back up to 99% in the first two months of 2017, marginally reducing the fear of more pension cuts to come.

Stating the obvious, watching funding ratios bounce up and down on a monthly basis and constantly worrying about pension cuts is no way to run a pension system. By continuing to operate in this environment, the Dutch legislative/ regulatory regime worsens three mutually-re-enforcing problems: 1. An unhealthy over-emphasis on the short-term in investing, 2. An unnecessarily high asset coverage of accrued future pension payments, and 3. A catastrophic decline of participant trust in the often-praised Dutch pension system through recent pension cuts.   

With the formation of a new government now underway, this is an ideal time for the Dutch to liberate their Pillar 2 pension system from these three serious problems. This Letter offers two perspectives on addressing this challenge.