If the coverage ratio of pension funds is below 90 percent on December 31, those funds must lower the pensions to get back above that percentage. Civil servants’ pension fund ABP and care fund PFZW were in the danger zone, but recovered again last month. This seems to cut short the job. The funding ratio itself will retire in a few years.
Actually, a pension fund like ABP should lower benefits if the funding ratio falls below a level of around 104 percent. “With a view to the arrival of the new pension system and the corona crisis, this has now been relaxed to 90 percent”, says Kees Goudswaard, professor of economics and professor by special appointment of social security at Leiden University.
The outbreak of the corona crisis initially shocked the financial markets and as a result the funding ratios of the pension funds declined sharply. The low interest rate also has an impact on the funding ratio. “Simply put, if I want to pay out 100 euros in ten years and the interest is 0 percent, then I must already have 100 euros in cash,” says Goudswaard. That would amount to a coverage ratio of 100 percent.
Increasing pensions, also known as indexing, has not been an issue for a long time. With indexation, the pension is increased in line with inflation, so that pensioners do not lose purchasing power. Due to the funding ratios and requirements, this was not an issue for years. “In mid-December, the minister announced that indexation may be resumed from a coverage ratio of 105 percent”, Goudswaard said. “That was above 120 or 125 percent.”
The funding ratio is history with the advent of the new system
This was also agreed in the run-up to the new pension system. “A system in which the pluses and minuses are immediately settled.” The new pension law must be approved this summer. It will take effect in 2022 and the funds can transfer between 2022 and 2026. “Then you no longer build up rights, but personal capital.”
In fact, it works the same as with a share, only a lot less volatile because the risk is still spread over the large group of participants. “And then no actuarial interest is needed anymore”, says the professor, who as namesake and chairman of the Goudswaard Committee was involved in the creation of the new pension system.
Everyone agrees that our current pension system is very complicated. “The new system is still somewhat complicated, but much less than it is now and people will understand better how it works.”
Goudswaard believes that the pension funds will come out of the ‘funding ratio battle’ unharmed this year. “From 2026 we will be definitively switched to the new system and the funding ratio will be a thing of the past.”
The funding ratios of Dutch pension funds vary considerably, depending on the composition of the assets. The larger funds ABP and PFZW were still below 90 percent in October, but just above it in November. ABP will give a first indication of the funding ratio for December on 4 January, which will be definitively announced on 21 January.
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