The pension world is going to change
Kostijn and Hans explain why
The pension world is going to change
Kostijn and Hans explain why
A new pension system is going to be introduced in the near future. We still don't know precisely what this is going to mean. However, all pension funds – including TNO Pension Fund – will certainly be affected by the new system. It's important that work on the new system continues.
Kostijn van Gerven, TNO Pension Fund's Managing Director, and Hans Veltman, Deputy Director and Integral Risk Manager, explain why. They are not going to use all kinds of complicated calculations, but they will give you an insight into the changes. Interest rates play a crucial role.
Kostijn: ‘Interest rates have been falling for 30 years. Something has to be done.’
‘Just take, for example, the mortgage interest rates of 30 years ago,’ Kostijn begins. ‘Mine was 9.7%. Mortgage interest rates are now much lower, much lower than 2%. The West is awash with money, so money is ‘cheap’. It's an economic law that continues to be valid – and it's detrimental to pension funds. We need an incredible amount of money to meet the pension system's requirements,’ Hans continues. ‘We have to take account of the interest rates of today and the pensions of the future. In the meantime, interest rates continue to fall. That means that pension funds need continually increasing assets to pay their member's future pensions.’ Moreover, money must still be available, as new members will have joined in the meantime. In other words, we also need to take account of the pensions of future colleagues.
Kostijn also explains that the Dutch pension model is fairly unique. ‘The design of the Dutch pension system is very different from the systems of other countries. Employees in many other European countries pay the pensions of the pensioners: the pensions are funded on a pay-as-you-go basis. The Dutch pension system is different, in that the system is based on saving for the future. It enables us to share and absorb the risks.’
This means that the Netherlands has a very strong model, although the continually falling interest rates are putting pressure on the current system. Hans tells us why this is so difficult to explain to others. ‘The pension pot has doubled in value since the crisis in 2008. Even so, things are not going well for Dutch pensions. Foreigners often find that odd – which is understandable. The low interest rates also play a role in this problem. We need more and more money to meet future pension commitments: in other words, pension funds need enormous assets.’
Hans: ‘We simply can't take great risks. A pension fund is a very specific investor.’
‘We obviously wish to achieve adequate returns, but the risks must be acceptable. We feel responsible for the future income of our members,’ Hans explains. ‘We simply can’t take great risks. A pension fund is a very specific investor.’ ‘TNO Pension Fund's investment policy is actually focused on protecting the base,’ Kostijn adds. ‘This means that we don't take great risks, to ensure that we aren't confronted with unexpectedly large losses.’
Kostijn: ‘This choice puts TNO Pension Fund on the right side. The probability of us having to reduce pensions is low at the moment.’
‘Many funds are in a worse position to make the switch to a new pension system. Nevertheless, the persistently falling interest rates are causing problems for all pension funds, including our fund. There really have to be some changes. This is also why we want to see the work on a new system continue,’ Kostijn emphasises. Hans agrees. ‘The low interest rates are making pensions increasingly expensive, which is also apparent in the determination of the contributions for 2021. Either pension contributions need to be much higher or pension accruals have to be lower.’
‘This change is particularly important for the younger generations,’ Kostijn says. ‘The Dutch have deliberately implemented a stringent policy and require pension funds to maintain large assets – this is all for the coming generation. We simply cannot gamble with their pensions. However, it is going to be difficult if nothing changes, because pensions will otherwise become very unappealing. A new system won't solve the low interest rate problem, but the opportunity to pay out achieved returns on investments earlier will make the system more robust.’
The pension world is going to change, but how quickly?
Hans and Kostijn explain that pursuant to the formal time schedule, the system is to be introduced in 2022. Attention will not only need to be given to the development of the new system, but also to the transition to this new system. ‘Support in the form of regulations will be an enormous help in the transition to the new system, although customization will still be necessary,’ Kostijn explains. ‘We will focus on a smooth transition and a balanced weighing of interests. We'll be working with TNO's social partners and the Accountability Body. However, we are going to have to wait for the time being. Obviously, we'll keep you informed of the news.’