Public sector pensions in The Netherlands
On 12th January 2010 the chairman and officers of LPFA met with representatives from the board of ABP (the joint public sector pension fund for the Netherlands) and APG (the outsourced administrator and asset manager of the fund).
Key Facts
The ABP pension fund consists of;
4000 employers
1.1M active members
750,000 pensioners
850,000 deferred members
€173 billion in fund assets (of which 49% equities and alternative investments
45% fixed income investments and 6% other investments)
The purpose of the meeting was to understand the structure of Dutch public
sector pensions provision and in particular the relationship between government
and the amendment and adaptation of scheme rules to challenges such as
increasing longevity.
The conclusion of a very useful meeting was that there are a couple of important
aspects of the Dutch system which could be used to provide an affordable and
sustainable Local Government Pension Scheme.
The Pensions Chamber
Unlike the UK system where the pensions ’deal’ is governed by regulations made
by government the Dutch system has a Pensions Chamber.
The Chamber which consists of an equal number of employer and member
representatives plus and independent chair operates as a statutory body and is
responsible for agreeing the pensions deal which includes:
• The target level of pensions
• The share of contributions between members and employers
• The ambition for indexation
Although the Chamber determines the pensions deal central government can
influence the debate in two ways – firstly there is a representative of the finance
ministry (the ultimate scheme sponsor) on the Chamber and secondly through
fiscal policy (pension contributions tax relief on pay up to certain levels).
The deal agreed by the Chamber is ‘costed’ by ABP by determining the total
contribution rate required. The rate will take into account the benefit structure,
longevity expectations, indexation, return on investments and the make up of the
membership in much the same way as an LGPS valuation does. ABP can impose
an increase in contributions but would normally inform the Chamber in order to
give it the opportunity to amend the deal should the increase be unacceptable.
This structure allows for adjustments to be made to the deal without regulation
and in direct response to prospective contribution increases. For example the
chamber could choose to alter the benefit structure, change the ration of
employer/employee contributions or increase the retirement age in response to
increasing costs.
Conditional Indexation
The second aspect of the Dutch system which differentiates it with the LGPS is
conditional indexation. Whereas in the LGPS indexation for pensions in payment
is determined by Inflation and indexation of benefits by salary increases Dutch
indexation is determined by fund performance.
This works as follows;
The fund sets a range of solvency targets to determine indexation, for example
<=105% solvency equals no indexation up to >=130% solvency equals full
indexation (wage increases). A sliding scale operates between 105 and 130.
As the benefit structure is CARE the indexation applies to both pensions in
payment and benefit accrual thereby sharing the effect between active and
pensioner members. This is arguably much fairer than the UK system where
deficits can be funded only by future contributions.
Also as the determining factor for indexation uses asset formula there is not the
subjectivity that can apply in other forms of conditional indexation.
Conditional indexation removes a good deal of the uncertainty over future
liabilities (LGPS valuations have to contain assumptions for pay increases and
inflation) enabling assets to be matched more effectively.
Versions of both of the above aspects, the Pensions Chamber and conditional
indexation could be considered in the debate to provide a fairer and more effective
structure to deal with the challenge of an affordable LGPS.