Lowering pensions is unfair and has its legal complications. According to University of Groningen professor of Social Security Law Gijsbert Vonk, it would actually be against the law to immediately lower pensions, which Minister Donner has announced will happen. Vonk is an advocate of reforming the pension system by introducing a solidarity fund set up by employers and employees.
Such a fund would make lowering pensions avoidable in future.
Actually lowering pensions is without historic precedent, Vonk emphasizes. ‘Lowering pensions is a severe and far-reaching measure and should be avoided,’ the professor feels. ‘In the first place it’s unjust for those involved: fate has dealt them a bad hand. Lowering pensions is also contradictory to the pension system’s ultimate goal, which is to guarantee all Dutch citizens a certain standard of living once they reach retirement age.’ There are also legal obstacles, Vonk explains. ‘The minister is much too optimistic when he states that the pensions can be lowered one month after making the announcement. Pensions constitute property rights within the meaning of the European Convention for the Protection of Human Rights. According to the principle of legal certainty, if the one-sided decision is taken to lower pensions, there has to at least be a proper transition period. The relevant jurisprudence already exists.’
Pressure created by the ageing population and the economic crisis have led to serious pension fund deficits. Almost all the pension funds have sunk below the minimum allowable coverage ratio of 105 percent. The situation is so dire for some pension funds that not only have they raised premiums and frozen indexation, they are now also considering lowering pensions already being disbursed. Agreement had been reached with trade unions and employers’ organizations that lowering pensions would only be on the cards if the situation in April 2011 called for it, unless an interim evaluation were to show that coverage ratios hadn’t improved sufficiently. This is indeed the case for fourteen pension funds. The insolvent pension funds have been issued a warning by Donner - before the end of the year they shall have to decide in consultation with De Nederlandsche Bank whether they must lower their pensions.
The unsurpassed surpluses the pension funds had in the late 1990s are certainly a thing of the past. If no change is made in how pension capital is collected and disbursed in the Netherlands, pensions will have to be lowered more often in future due to the ageing population, Vonk claims. ‘This is because the number of pensioners will increase drastically beginning in 2010, while the number of Dutch working will drop. Increasing life expectancy must also be taken into account.’
In order to maintain the desired profitability, the pension funds will have to become more dependent on riskier investments. The chances that pension funds will end up in trouble will increase as a result. To avoid people falling victim to pension lowering in future, Vonk proposes setting up a solidarity fund or guarantee fund to assist pension funds in difficulties. ‘That would of course mean higher premiums and lower pensions for everyone. But that would naturally be preferable to a pension system where unpredictable, insecure pensions rise and fall according to the related risks.’
The fund would have to be filled by employers and employees. Countries such as Switzerland and Canada already have such a guarantee fund, as does the new German pension system. A guarantee fund is preferable to state support for pension funds in difficulties, Vonk adds. ‘Our supplementary pension scheme works on the assumption that employers and employees can look after themselves, while the state will see to the general old-age pension. The state’s role regarding supplementary pensions is only a regulatory and supervisory one. A mutual guarantee fund would increase mutual pressure among pension funds to perform well.’
Vonk also sees an important role for private citizens in the future pension system. ‘Alongside the first two pillars - the general old-age pension and the pension funds - there is also a third one comprising the private saving schemes people can choose, such as life insurance schemes and private pension schemes. The general pension system must be a safe system. If private citizens want to gamble, they should do so with their own money.’
Professor Gijsbert Vonk (1960) has been professor of Social Security Law at the University of Groningen since 2006.
Contact: Gijsbert Vonk
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