NETHERLANDS - The changes enacted in the Dutch Pensions Agreement will not be enough to keep the country's pensions system afloat, according to Capgemini Consulting.

Marco Folpmers, financial risk consultant, said the contribution level had to be increased to 35% or the pensionable age raised by five years to 70 as "soon as possible".

These changes would be combined with an increase of the labour participation of over 65s to at least 8%.

A three-strong team of financial risk consultants at Capgemini used the dynamics of the second-pillar pensions system for a computer model inspired by Palmnet, the system applied by the pensions regulator (DNB) to develop projections for pension funds' coverage ratios, as well as indexation and premiums policies.

The model employed a coverage ratio based on a financial reserve needed for partially indexed benefits payments.

It also applied Statistics Netherlands' most recent figures for population ageing and life expectancy, according to Folpmers.

He said the model considered the €800bn of combined assets in Dutch pension funds as a single defined benefit scheme, with a coverage ratio of 98% at year-end.

Under the Pensions Agreement, the pension age will rise from 65 to 66 in 2020 and subsequently to 67 in 2025.

The DNB and the ministry of social affairs are currently looking into the possibility of increasing the 2.6% discount for liabilities, currently linked to the forward curve.

Furthermore, the participation of older workers will be increased, and the automatic rise of pension contributions - currently 24.5% of the pensionable salary on average - will end.

Folpmers said: "If we don't change anything, the model of the Pensions Agreement is not sustainable.

"Indexation will be very low at best, and a very high premium level is needed to have a funding ratio that is only slightly above 105% until at least 2050.

"As a consequence, pension value will be reduced by inflation and, for example, a 20-year-old worker will see his pension decreased by 59% when he retires at 65."

Folpmers' research also suggested that a reduction of pension rights by, say, 5% might provide initial relief but would prove insufficient in the longer term.

However, he stressed that a decrease of the yearly pensions accrual had a significant positive effect on a pension fund's coverage ratio.

But he noted that the disadvantage would be a lower replacement ratio, while the contribution level remained unchanged.

Folpmers found that a "Swedish scenario" - an immediate rise of the pension age to 70, in combination with a labour participation of over 65s of at least 8% and a premium level initially allowed to increase to 35% - offered the best scenario for sustainable pensions.

At the same time, the yearly pensions accrual of 2% needs to be decreased to 1.8%, and the current discount rate for liabilities must be increased to 3%, up from the current 2.6% of the forward curve, he said.

In the Swedish scenario, the premium level can be lowered after 20 years, when a sustainable coverage ratio of 125% has been reached, he said.

Topics