Indexation is very welcome
Given high inflation, indexation of pensions is of course very welcome and is why indexation of some 9.93% was applied on 1 January 2023. That’s quite high but is still not full indexation. Where does that leave you and how will this indexation affect you?
The TNO Pension Fund reserves haven’t grown enough since the financial crisis in 2008. As a result, in recent years pensions have mostly not been indexed or have been indexed to a very limited extent. For instance, indexation in 2020 and 2021 was 0%. We were able to index last year and can do so now too. This is very welcome and, who knows, we may even be able to grant full indexation later in the year, as the government may extend the temporary relaxation of indexation rules. However, we’re not there yet.
Figures, statutory regulations and balanced consideration
We need to present various figures to explain indexation properly. We can’t avoid that. Setting indexation is also subject to all kinds of rules. And rightly so, because if pensions can be indexed, you don’t want to go back on that a few years later, which would result in you suddenly getting less. The Pension Fund’s financial situation needs to be healthy enough. That’s why legal rules apply to indexation. At the same time, indexation must also be affordable in the future. Indexation is therefore based on the future-proofing index. The Board then sets the indexation level, i.e. how much your pension rises along with the rise in prices. On 1 January 2023, this amounted to 9.93%. This applies to everyone. How fair is that?
No full indexation unfortunately and here’s why
The price increase last year was 16.93% (CPI derivative October - October). The TNO pension fund Board has awarded indexation of 9.93%. That means that your pension won’t grow entirely in line with price increases. While it’s true that the policy coverage ratio stood at 130.0% at the end of 2022, indexation must also be future-proof. For this future-proofing index, the policy coverage ratio must be even higher, namely 144%.
How will this indexation affect you?
If you are retired, your pension payment will be higher as of 1 January 2023. This will be paid retroactively from 1 March. This means you’ll get an increase in your pension in March with a back payment. After that settlement in March, you’ll see that your April pension is higher than the February pension.
If you have not yet retired, your total accrued pension will increase by 9.93% as of 31 December 2022. So suppose you have accrued 10,000 euro of retirement pension by the end of 2022. This amount will increase: 10,000 + 993 = 10,993 euro. The 2023 pension accrual will then be added to this. You’ll see that when you receive your pension statement about the 2022 figures during the course of the year.
It’s perhaps good to know that we’re changing the reference date of your statement from 31 December 2022 to 1 January 2023, so indexation is visible in the figures straight away.
What can we do?
Actually, not that much. Unfortunately, we cannot make things look rosier than they are. Adjusting the investment strategy is not a solution either. That would mean that we’d have to take higher risks when investing and we don’t think that’s desirable. There’s a chance that higher risks could lead to a higher pension, but this also increases the risk of reductions. You’d then have to surrender pension and we don’t want that. So the options are very limited. We want a pension that retains its value at a reasonable cost and with acceptable risk.
We also don’t expect that we’ll be able to fully index your pension in the coming years. We have to be realistic about this. The policy coverage ratio (the average of 12 months) would then need to be higher than 144%. But you can be certain that our ambition is to make your pension grow with price increases so that you have an index-linked pension. We will do our very best for that.
Perhaps...
We may at some point still be able to award full indexation retrospectively. Indeed, in December 2022, the minister announced the extension of the governmental indexation decree until the effective date of the new pension system. Once the precise content of the governmental decree during the course of the second quarter is known, the Board will, of course, consider whether additional indexation is desirable.
The impact of indexation on our figures
Pensions and pension accrual increased by 9.93% with effect from 1 January and that is clear from our figures. Indexation requires us to have more cash available to meet our pension obligations in the future. This means that our financial position deteriorated in January. That was no surprise. Read more about this in the newsletter.