Pensions and pension funds become major issue in Dutch industrial relations
During the 1997/8 Dutch collective bargaining rounds, pensions were a major issue. Pensions and pension funds appear - directly and indirectly - to have a major influence on terms of employment and industrial relations in the Netherlands.
During the 1997/8 collective bargaining rounds, supplementary pensions were a major issue. Negotiations on the Dutch Railways (Nederlandse Spoorwegen, NS) were almost derailed following the introduction of a new early retirement scheme (NL9806187N). Meanwhile, the trade unions in the banking sector stated that their members attach the same priority to pensions as they do to wage increases. In this feature, we take a closer look at the different issues at stake.
More flexible pension schemes - the case of the ports
Since July 1998, employers at the ports of Rotterdam and Amsterdam no longer fall under compulsory supplementary pension fund insurance. On 30 June, following its merger with one of its subsidiaries in the insurance sector, the Pension Fund for Transport and Dock Companies (Bedrijfspensioenfonds Vervoer- en Havenbedrijven) closed its doors.
The insurance company Optas now manages the port pensions. Although pensions were previously based on the principle of solidarity, the new system has been totally individualised. Each employee is allocated a personal pension account into which the employer deposits a predetermined fixed annual payment. Within certain limits, employees are free to invest the funds in the account. This arrangement, the so-called "available contribution" scheme (beschikbare premieregeling), is very popular in the USA but is still rather uncommon in the Netherlands. At the Dutch ports, the old system came under increasing pressure as a result of ongoing rationalisation. The total number of employees continued to decrease, while the average age increased. Consequently, pension contributions rose, which led to increasing labour costs.
Employers are the main proponents of the new system. For them, the main advantage is that the contributions are fixed in advance, thus enabling tighter control over operating costs. Supporters of the available contribution scheme add that it increases the mobility of employees, because the problem of the non-transferability of pension rights ceases to exist: employees can transfer their rights when they change jobs. However, in the past, sector-wide pension fund administrators voiced their doubts. According to them, the available contribution scheme serves to increase too much the level of risk for individual employees.
From final to average wage?
In January 1998, a dispute arose at the Friesland Bank on the subject of supplementary pensions. According to the unions, the bank violated the collective agreement in force because it introduced a pension system based on the average pay earned by employees during their working career at the bank (middelloon), instead of being based on their final pay (eindloon). Similarly, in June 1998, employees at the ABN Amro bank rejected proposals to introduce pensions based on average pay.
At present, most pension systems are still based on final pay. At the end of 1995, 63% of the pensions were based on final pay and only 13% on average pay. Ever more companies, however, support a system based on average pay. Employers favour the average-pay system because it is cheaper. The government has joined them in support of this pension system, partly because it is the biggest single employer in the Netherlands and certainly stands to gain as a result.
In September 1996, the former cabinet proposed basing the fiscal deduction for pension contributions on the average-pay system. This proposal encountered strong resistance from both employers and unions. Not surprisingly, the tripartite Social and Economic Council (Sociaal Economische Raad, SER) also objected to the proposal. Pension funds stated that companies should not be influenced by the government's fiscal policy when opting for the final- or average-pay system.
The employers' organisations and trade union confederations, brought together on the Labour Foundation (Stichting van de Arbeid, STAR), did however, advise the government to modernise the pension system. According to the Foundation, the present system has to be adapted because it is still based on the "breadwinner" principle: the traditional division of roles in which the male earns the family income and has a lifetime job with a single employer. This model applies to a progressively smaller proportion of the population. The Foundation stressed that the system's main objective must be maintained, namely, that a pension should reflect final pay to a reasonable extent.
The dispute between the government and the social partners was settled in 1997. On 9 December 1997, the government, employers and unions signed a covenant on the modernisation of the Dutch pension system. The parties reached agreement on the following points.
- Pension contributions form an integral part of wage costs and changes in the system may not lead to increases in labour costs.
- Employers and unions will strive for a better arrangement for dual-income couples and single men and women.
- The cabinet promised not to implement previously announced changes in fiscal policy directed at trimming the pension system.
- Measures will be taken to make it easier for employers to switch from sector-wide pension arrangements to cheaper alternatives.
- Employers and unions will increase efforts to offer pension arrangements to employees who are not yet covered by the pension system (some 9% of the working population).
Changes in early retirement schemes
Substitution of the existing arrangements for early retirement (VUT) by a more flexible pre-pension scheme (flexibel prepensioen) was a major issue in recent collective bargaining rounds. In the insurance sector, for instance, this issue brought negotiations to a standstill in June 1998.
The main reason for substitution is that current early retirement arrangements are becoming prohibitively expensive. Decreasing numbers of employees have to pay the contributions for an ever-increasing group of people taking early retirement. The switch to the new early retirement scheme will be expensive because it will require the payment of double contributions during the transition period: for those employees still entitled to early retirement and for those accumulating rights under the new system.
A study of 177 collective agreements, covering 90% of all Dutch employees, revealed that 104 agreements included an early retirement arrangement in 1997. Transition clauses were found in 54 agreements, while in 17 others the transition to a flexible pre-pension scheme had been completed. Under the new system, the average pension will be lower, on average equalling 71% of gross salary, compared with 78% under the early retirement arrangement.
The collective agreement for NS is a good example. Under the new system, employees will be allowed to retire at the age of 62. Employees with 40 or more years of service and employees over the age of 55 can still benefit from the former early retirement arrangement until 2015. According to the collective agreement for the hotel and catering industry, covering some 220,000 employees, the sector will switch to a flexible scheme in 2000. Under the old arrangement, employees had the right to retire at the age of 58, retaining 80% of their final wage. Employees will be less well off under the new system: they will be able to retire only from the age of 61 upwards.
Negotiations in the banking sector have not yet resulted in an agreement on this subject. In 1997, the unions pressed for prompt action because of the favourable circumstances. At the moment, there are relatively few older employees. Once the sizeable group of employees of around 40 years of age reaches retirement age, the introduction of a new system will be too expensive. The unions admit that the new system will be more expensive than the present early retirement arrangement, but the longer its introduction is postponed the more costly it will be.
In addition to the pension arrangements themselves, the media have also paid attention to the institutions responsible for administering and paying out the pensions - that is, both company pension funds and sector-wide pension funds.
Representatives of retired employees finally on the boards of pension funds
Until recently, the boards of pension funds consisted of an equal proportion of employer and employee representatives. Now, representatives of the retired employees will join them. At the end of June 1998, employers' organisations, unions and pensioners' organisations agreed to give pensioners more influence over the administration of the pension funds.
In the long run, pensioners' organisations aim for an equal representation of employers, employees and pensioners. With respect to company pension funds, retired employees usually already had some say in the running of affairs, but in sector-wide funds their influence was negligible. Their concerns also relate to the payback of surplus to the company (see below), instead of using it to raise pension levels.
Who gets the surplus?
In July 1998, the pension fund of NS announced that it had a surplus of 188%. Calculations carried out by the investment bank Merrill Lynch reveal that, taken altogether, company pension funds had a financial surplus of approximately NLG 26.5 billion at the end of 1996, taking account of both present and future obligations. The boards of the funds are responsible for the allocation of such surpluses. However, the matter is further complicated by the fact that the allocation of surpluses is not covered by the regulations governing some 80% of these funds.
The parties involved have since submitted claims: the government, pensioners, unions, companies, and so on. Companies were quick to respond to the emergence of surpluses, and not without success: the pension funds of Nedlloyd, Philips and Unilever have initiated the scheduled payment of part of the surpluses to the company. In the course of the next five years, Unilever's pension fund will, for instance, repay NLG 2 billion to the company.
Pensioners claim that they were largely responsible for the surplus, and are therefore entitled to a share. While still employed, these pensioners paid relatively higher contributions from lower wages than is currently the case. For several years now, the senior citizens' organisations have been opposed to the practice of using part of the pension funds' capital to cover redundancy payments during reorganisations, or to contribute towards the switch from the previous pension system to more flexible early retirement schemes.
Merrill Lynch believes that the surplus should be seen as an integral part of the value of the company and that shareholders should therefore also be entitled to at least a proportion of the surplus.
Some of the more wealthy funds, such as those of Shell, Unilever, Hoogovens and Nedlloyd have also introduced a "contributions holiday": as long as the surplus permits, the employer and the employees will be exempt (either in part or in full) from the payment of contributions. Unilever, for example, has already enjoyed a complete "holiday" for eight years. Other companies have reduced the contribution levels: on average 11% is paid, as opposed to the actual calculated level of 16%. As an alternative, pension funds sometimes partly finance the transition from the former early retirement arrangement to a new scheme (see above). Examples of this kind include Unilever, the ports of Amsterdam and Rotterdam and Heineken. Although some experts state that using a pension fund's resources in this manner is improper in principle, employers and unions alike benefit from having extra financial clout during collective bargaining rounds. Finally, in some cases, these surpluses have been used to finance redundancy payments during restructuring operations.
Pension funds and corporate governance
The pension funds have developed into the single most important financier of the Dutch corporate sector. The two biggest funds, the fund for state employees (ABP) and the fund for employees in the health sector (PGGM), together own NLG 300 billion in shares. The joint figure for all the Dutch funds is NLG 740 billion.
Unlike US funds like Calpers, Dutch funds have traditionally not sought to meddle in company matters in their capacity as shareholders, partly because of the lack of power shareholders enjoy in numerous listed companies. However, together with the intensification of the corporate governance debate in the Netherlands (NL9801154F), pension funds have recently opted for a more active stance and demanded that certain takeover barriers be lifted and shareholder rights restored.
The OECD has calculated that the costs of the collective, national state old age pension scheme (AOW), expressed as a percentage of gross domestic product, will rise from 6.1% in 1995 to 12.1% in 2040. In all probability, the costs of supplementary pensions - based on final pay, average pay or available contribution - will also rise as the population's average age increases. As people increasingly regard their pensions as postponed wages, all changes - especially cost increases - have an impact on industrial relations. Rising pension costs lead to higher labour costs, which could adversely affect jobs. Consequently, pensions will remain high on the collective bargaining agenda for many years to come.
However, in addition to pensions, we should keep an eye on the pension funds, especially since both the employers and the unions run them. It will be interesting to see how the pension funds use their new-found power as a major shareholder. To date, they have acted generally in much the same fashion as any other major investor.
Some officials argue that the unions should use their influence on the boards to stimulate investments in environmental protection or housing, to an even greater extent than now. However, union representatives on the boards are opposed to this, and reiterate their commitment to the primary objective of the funds, namely, to guarantee pensions and strive for maximum return on investments.
A major change in attitude is therefore not to be expected. (Robbert van het Kaar, HSI)