The Dutch Senate has finally given the go-ahead to the largest-ever pension reform in the Netherlands, cementing a switch from defined benefit (DB) pensions to a defined contribution (DC) system.
The new law will come into force on 1 July 2023. Pension schemes will have to complete the switch to DC by 1 January 2028, after a four-and-a-half-year transition period.
On Tuesday night at 22.30, the Dutch Senate wrote history by voting in the law on the future of pensions (WTP) after a long day of deliberations, with 46 votes in favour, 27 against and two absentees.
The Senate was expected to vote in favour of the law as the parties that supported the switch to DC in the country’s Second Chamber also enjoyed a comfortable majority in the Senate.
The government was adamant to vote on the pension law yesterday as the new incoming Senate, which was elected yesterday after provincial elections in March, is less supportive of the pension changes.
The parties in favour of the WTP still retained their majority in the new Senate, however.
Responding to concerns from senators, pensions minister Carola Schouten already promised last week to extend the deadline for pension funds to make the transition to the new system by a year to 1 January 2028.
Still, the passing of the law yesterday was not a foregone conclusion as opposing senators believed they had found a way to block the switch to DC by claiming it required a two-thirds majority.
Three professors of state law supported their point of view in a letter they sent to the Senate on Monday (see box).
Two thirds majority required?
Senator Tiny Kox of opposition party SP shook up the debate about the pension law in the Senate last week with his claim that the law should be passed with a two-thirds majority in both Chambers of Parliament because the constitution says that any laws that make changes to the pensions of politicians can only be passed with such a majority.
Pensions minister Carola Schouten had countered Kox’s argument by noting that the pensions of politicians were not included in the pension reform anyway but would be dealt with in a separate law.
After state law professor Paul Bovend’Eert had sided with Kox in an interview with IPE’s sister publication Pensioen Pro on Friday, Kox and two fellow opposition senators asked Bovend’Eert and two fellow state law professors to communicate their views about the constitutionality of the pension reform to the Senate.
The three said in their letter that, in their view, the law required a two-thirds majority because the decision not to include politicians in the pension reform also affected their pensions. They therefore recommended Schouten to retract the law as it had not passed the required hurdle in the Second Chamber.
The State Council, a body that reviews all new laws proposed by the government, had previously made no such objections. Because of this, a majority of senators decided a simple majority was enough to pass the law, ignoring the professors’ plea.
The Senate did, however, later unanimously pass a motion asking the government to work out an arrangement so that the pension reform will also cover pensions for politicians.
Yesterday’s vote was the culmination of a 15-year debate about the future of the second-best pension system in the world, according to Mercer, and the largest pension sector in the EU in terms of assets under management (€1.4trn at the end of 2022). Politicians and regulators first started thinking about the need for reform as funding ratios plunged to all-time lows in the aftermath of the 2008 financial crisis.
As interest rates failed to recover to pre-crisis levels in subsequent years, most Dutch pensioners would not receive any indexation for more than a decade.
A first attempt to tie pension benefits to developments on financial markets failed in 2011, as it was dismissed by the country’s largest trade union as a “casino pension”.
Interestingly, political parties that oppose the current reform are against it for exactly the same reason: they fear pension benefits will fluctuate a lot more under the new DC system, even though one of the two types of contract includes a solidarity buffer to absorb financial market shocks.
Necessary reform
But pension regulator DNB, the Dutch central bank, has thrown its weight behind the changes, which it has deemed “necessary”. Policy director Tjerk Kroes said earlier that the regulator welcomed the change to personal pension pots as this would bring and end to the conflict between generations inherent to the current system whereby liabilities of pension funds depend on interest rates.
In practice this meant that any increase in interest rates or a temporary relaxation of funding requirements to prevent funds from having to cut pensions, as happened repeatedly over the years, were a transfer of funds from young to old in much the same way as the low-interest-rate environment of the previous decade that restrained indexation benefited the young.
Pension providers in the country also welcomed the passing of the new pension law, with APG hailing the reform as making “the pension system more future-proof and better suited to the current labour market, in which people change jobs more frequently”.
The Dutch pension federation was also satisfied with the reform finally having passed both Chambers of Parliament. President Ger Jaarsma said: “We are happy with the result of this lengthy and painstaking political process. Renewal is necessary, the old law was not fit for purpose anymore. The new law fits this century better.”
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