Pension likely to be higher in new system

Pensions are likely to be higher in the future, according to Netspar research on the new pension system. The money is more likely to reach retirees.

For a long time, the pensions of Dutch people were in a big pot. It was unclear what exactly belonged to whom, and young people wondered whether they would see anything in return from a lifetime of contributions in the distant future. That is changing. Employees will build up their own personal pension assets. The new system will be more transparent and fairer, that is the idea.

Theo Nijman, Sander Muns, and Bas Werker, all three Tilburg-based scientists, investigated for Netspar what effect the new pension system has on pension benefits. Because effects there are.

Pension funds will soon no longer need to maintain buffers to absorb shocks if, for example, things go badly in the financial markets. “The shocks will be passed on to the participants,” says Theo Nijman, Research Director of the Pension Think Tank and Professor of Econometrics of the Financial Markets at TiSEM.

Existence Security

Pensioners are going to notice more directly how their pension assets are doing. This can be better or worse. In a financial crisis, fifty percent of the value on the stock market can evaporate. If a pension fund invests everything in equities, it can only pay out half. In reality, less is invested, but twenty percent lower payouts in a crisis cannot be ruled out according to Nijman.

One year you can eat out, the next you have to go to the food bank. This does not seem very good for the socioeconomic security. Yet according to Nijman, it will not go that far. “In the extreme scenario that there is a twenty percent reduction in payments, it is mainly the well-paid professor who will notice, not the doorman or cleaner.”

Nijman points to the state pension: everyone in the Netherlands has an income for old age. People with higher incomes also have substantial supplementary pensions and are, therefore, more affected by fluctuations in their total pension income.

And that effect can be muted. “Pension funds can choose to spread it out. You don’t have to take a loss all at once, but can spread it out over ten years, for example.” Moreover, gains can be made again during that period, which can cancel out the earlier losses. Then retirees notice very little at all.

It’s about odds. And the probability of a supplementary pension falling by more than one percent in a year is 20 percent, according to the Netspar study. On the other hand, there is a 50 percent chance of an increase of more than one percent. The conclusion? Pensions could well rise once the new system takes effect. The researchers already suspected this, but they have now demonstrated it.

Gift for the next generation

Money that is currently used to supplement buffers will soon go directly into people’s pension assets. What happens to the buffers that have already been built up is still unclear. “That is a political discussion,” says Nijman. Economist Ed Westerhout told Univers last October that a compensation scheme for current pensioners is a possibility. “Due to little indexation, their pensions have fallen behind in recent years.”

Westerhout also predicted that future generations will be somewhat worse off because of the loss of buffers. “That’s right,” says Nijman. “The buffer was always a gift to the next generation.” In the long run, the lack of it may be felt anyway, he says. “But for the next twenty or thirty years it won’t be a factor. There’s a good chance you’ll have a higher pension in the new system.”

Translated by Language Center, Riet Bettonviel

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